Sales and Use Tax Audit Trends

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1 TEI Audits and Appeals May 21, 2015 Michele Borens Todd Lard Sales and Use Tax Audit Trends

2 Agenda Aggressive States and Auditors Locality Audits Third Party Auditors Class Action Concerns/Considerations Documentation and Sampling Methodologies Unknowledgeable or Unsophisticated Auditors Delayed Audits 2

3 Aggressive States and Auditors Certain states have become aggressive or notoriously continue to be aggressive in their audits of taxpayers. These states include: New York Arizona Texas Michigan Louisiana These states have taken more aggressive positions on the taxation of services, digital property and software. 3

4 Aggressive States and Auditors Many states have experienced an increase in turnover of state auditors in recent years. Experienced auditors have retired in many states or states have had significant layoffs of audit staff. This has led to new inexperienced auditors being utilized, delays in audits and a lack of consistency in audits and issues. 4

5 Locality Audits Several states are still considered home rule states which allow their local jurisdictions to separately impose local sales and use taxes and to separately audit taxpayers for these taxes. Home rule states include: Arizona Colorado Louisiana Alabama Often localities in these states will employ and use their own auditors to audit taxpayers. 5

6 Locality Audits Having numerous localities auditing a taxpayer can create inconsistent locality treatment within a specific state and administrative challenges and burdens. Localities may also employ fewer auditors that are responsible for more audits which can lead to delays and other similar problems. 6

7 Third Party Auditors Many home rule localities also utilize third party auditors to help facilitate and conduct audits. This can create additional complexities and administrative burdens for taxpayers. Taxpayers should always ensure that third party auditors have authority to audit on behalf of the state and any information or documentation that is provided to the auditors will be confidential and subject to the same protections as information provided to the locality. 7

8 Third Party Auditors Third party auditors may be compensated on a flat fee or contingency basis and may have less of an interest in maintaining good relationships with taxpayers. Auditors that are compensated on a contingency basis will be more motivated to find assessment issues and propose a larger assessment. Third party auditors generally do not have authority to issue assessments, but will provide their work-papers to the locality to issue the assessment. 8

9 Class Action Concerns The number of sales tax class action cases that have been filed in recent years has increased dramatically. These cases have resulted in more publicity surrounding sales tax issues and more scrutiny by state auditors on certain issues: Sourcing Taxability Use of coupons Refunds of sales and use tax 9

10 Class Action Concerns In addition, the increase in class action cases has resulted in taxpayers taking very conservative sales and use tax collection positions which will ultimately need to be addressed under audit. Auditors may not be experienced enough to address more complex sales and use tax issues. This can result in inaccurate assessments and delays. 10

11 Documentation and Sampling Methodologies Increase in state requests for information and documentation has increased substantially in recent years. State sales and use tax auditors frequently request voluminous amounts of sales data that may be too cumbersome for some taxpayers to pull. State auditors are often resistant to requests to reduce the documentation request. 11

12 Documentation and Sampling Methodologies Auditors have been increasingly resistant to varying their sampling methodology or revising their sampling methodology. Depending on the size and time period of the sample and the issue being examined by the auditor, the sample can produce skewed results. 12

13 Unknowledgeable or Unsophisticated Auditors Changes in audit staff or retirement of more senior auditors has resulted in inexperienced and unknowledgeable auditors in some states. New auditors may not understand or have knowledge of audit history or issues. New auditors may be trying to validate their role and be overly aggressive in audits. Unsophisticated or inexperienced auditors may not understand changes in technology and new types of e-commerce services. 13

14 Delayed Audits In recent years there has been more incidences of auditors not being responsive during an audit: Send an audit notice, but no follow-up No communication Stopping and starting audits Taxpayers often struggle with how to handle these disappearances - particularly if there are audit exposures. 14

15 Questions? Michele Borens Todd Lard

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