The complexity of rules, regulations and product taxability make sales and use tax compliance extremely challenging. If sales tax compliance can reduce a seller to tears, negative audits can do worse, creating real financial consequences.
What are the biggest audit issues coming up in sales/use tax audits?
This is a broad question and its answer depends largely on the states and industries involved. Industries vary in audit importance by state, although there are some commonalities (construction and repairs, for example, are a notable source of audit revenue in most states).
Individuals and businesses should obtain advice about specific situations from legal and tax experts. That said, read on for a peek into what several states look for during audits.
California generates most audit revenue from two areas of noncompliance: unpaid use tax on out-of-state purchases, and improperly maintained resale certificates. Internet sales tax is an additional area of focus: in 2012 the Board of Equalization announced it would hire 100 new auditors to help collect online sales tax after a change in the law. Accounts in California are generally subject to audits every three years. Check out BOE Publication #76 for more information about audits in California.
The Florida Department of Revenue routinely audits businesses to verify that state and local taxes were correctly reported and paid. The following industries have specific guides to help taxpayers with sales and use tax compliance:
- Aircraft dealer
- Boat dealer
- Commercial rentals
- Construction / real property contractor
- Convenience store
- Hotel / transient rentals
- Repairs of tangible personal property
- Restaurants and bars
- Retailers / wholesalers
Common causes for amending returns in Minnesota include:
- Advertising: Sales or use tax is improperly applied to advertising materials sent out of state or published in in exempt publications.
- Agriculture: Sales tax is incorrectly applied to materials, packaging supplies, or short-lived accessory tooling consumed in agricultural or industrial production.
- Exempt organization/federal government: Sales tax is incorrectly applied to a charitable, religious or educational organization.
- Farm machinery: Sales tax is charged at an incorrect rate or tax applied to exempt repair parts or farm machinery.
- Interstate, intercity, or intercounty commerce: State or local sales tax is charged on items shipped out of the state or local taxing area.
- Resale exemptions: Sales tax is charged on items that are leased or resold by the purchaser.
- Use tax accrual errors
- Utilities: Sales tax incorrectly applied to utilities for consumers who are exempt for agricultural or industrial production, or residential use
The South Dakota Department of Revenue periodically publishes a list of the top ten errors discovered during audits, which includes the following:
- Under-reporting sales, use and/or excise tax due to poor record keeping
- Not remitting consumer use tax on goods and services purchased and used, or taken out of inventory and used
- Not remitting use tax on equipment brought in from out of state
- Exempting sales to taxable customers, such as churches and 501(c)3 entities
- Not have valid exemption certificates on file
- Municipal tax reporting errors
- Contractors and repairmen
- Oil and gas well servicing
Last year, the Wisconsin Department of Revenue announced it would hire more than 100 new auditors (102, to be exact). The Governor recommended adding the auditors to “enhance nexus identifying activities and to improve tax collections.”
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