If you asked me to name a top issue I see in fuel excise tax audits, I wouldn’t hesitate to answer:
In fact, many tax professionals agree that—when it comes to managing audit risk— ensuring that you capture license and exemption documents for excise tax transactions is critical. And just capturing them is not enough—you need to be able to easily retrieve them in an audit.
(Case in point: Remember when Spirit Airlines became liable for $9.3 million in back taxes and was subsequently hit by a 5% drop in shares? Missing, inaccurate and incomplete tax documents can have the same compounding effect if left unaddressed for years.)
Once you understand which taxes need to be collected and how to monitor them as they change, it’s time to focus on compliance documentation. If you’re looking for the key to preparing for audits in the complex world of excise fuel tax, this is it.
Licenses and Exemptions
Each state has different licensing requirements for how fuel can be bought, sold, transported and taxed throughout the supply chain. A lack of proper licensing can make your company liable for taxes in states where you’d otherwise be exempt. Worse yet, failing to document a vendor’s licensing status can make you liable in an audit.
Likewise, if you don’t have a valid certificate on file for every transaction in which an exemption was claimed, you run the risk of becoming liable for those taxes. And if you have it, but can’t produce it in an audit, the result is the same.
What would your company do today if an auditor were to show up and ask to see all diesel transactions for the the past three years?
Would he or she discover tax-free sales to licensed distributors or local government agencies? If so, could you quickly access the corresponding certificates to prove the buyers were in fact exempt from paying excise tax?
The moral in the example above is this:
Taking someone’s word for it won’t suffice in an audit. Whether it’s an exemption certificate or fuel license, having the actual document on file for each and every transaction is critical.
True, many states (such as Texas and South Dakota) maintain searchable databases that an auditor could use to identify licenses for questionable transactions. But what will happen when a state website search reveals that a vendor you’ve been doing business with was licensed one year and not the next?
This is where having a system in place—ideally an automated one—can greatly decrease your audit liability as you solicit, validate, store and update excise tax license and exemption documents.
Managing Audit Risk with Automation
Staying up-to-date on the constantly changing rules and rates of fuel excise tax is challenging enough. Add compliance documentation to the mix and managing audit liability can become downright maddening.
Keeping tabs on exemption certificate and fuel license expiration dates in a file cabinet might be manageable for companies that do business in just a few states or who don’t do much tax-exempt business. But, this won’t work if you’re working in numerous jurisdictions or sell to typically tax-exempt industries like agriculture or government.
Because every jurisdiction has its own set of tax laws, rates, reporting and document retention requirements, it’s critically important to track, calculate, file and document taxes accurately.
To help, we’ve put together a library of resources specifically for fuel excise tax managers looking to minimize audit risks. You’ll find an array of helpful guides, infographics, case studies and more at fuel.avalara.com.