There are many reasons a sales tax audit might not go as expected. Missing or invalid documentation, poor preparation and disorganized filing systems are all common reasons.
If your company’s been taken by surprise with a costly assessment, does it mean there’s nothing left to do but immediately pay it in full?
In this post, we’ll take a look at one of the most common causes of high sales tax audit risk—exemption certificates—and outline a course of action you can take to get back on track and remain compliant moving forward.
If you’ve received a costly assessment, there’s a good chance exemption certificates are a culprit.
Exemption certificate audit nightmares
In this webinar, Mike Fleming, Director at Peisner Johnson & Company, shares a case study he witnessed while working with the Texas subsidiary of national company. After being audited by the state, the subsidiary was handed a $4 million assessment. In fact, $2 million of that assessment was related to missing or invalid exemption certificates!
A few states over in New Jersey, a manufacturing company had major audit nightmares when the accounting department’s plan for collecting exemption certificates wasn’t followed through on the ground at its various plants.
There was a multitude of problems. They collected certificates on taxable jobs, but didn’t collect certificates on tax exempt jobs (until years later). And, their invoices were being short-paid. If the accounting department had greater visibility at the plants to ensure the processes they had set up were being followed, it’s possible these problems could have been avoided.
If you don’t know how many certificates you have on file, haven’t stored them digitally or aren’t aware of how many are missing, it’s very likely that a lack of organizational procedures are to blame. If those aren’t big issues for your company, it simply might be a matter of having far more invalid and expired certificates than anyone at the company realizes.
Even one missing certificate can impact an audit
If the auditor found missing or invalid certificates, you may be able to recoup them and bring the assessment down.
State auditors will often offer grace periods of 30 to 60 days when you can work to retroactively retrieve missing or expired certificates.
For example, the Texas subsidiary I mentioned earlier was able to track down the majority of missing certificates. As a result, the original assessment went down to about $17,000.
This didn’t resolve every issue, however.
The company sold a piece of equipment to a reseller and were not able to locate that certificate. As Mike Fleming explained, the tax on that one certificate was only $8,000, but when it was extrapolated and applied to the population, the assessment was $280,000, plus the $17,000.
As you can see, even one certificate can have a major impact in an audit.
Hear even more audit case studies from Mike Fleming in this webinar, How to Improve Sales Tax Compliance and Reduce Audit Risks.
Reduce your audit risk moving forward
There are several key steps you can take:
- Digitize your forms and store them in a secure digital environment. If you need to scan some certificates to get them in digital form, do so.
- Make sure all certificates can be viewed easily from within one central platform. Better yet, index all your certificates so they can be searched and extracted effortlessly.
- Do regular spot checks to ensure certificates are being collected. Your tax team’s best-laid plans won’t work if frontline employees aren’t implementing them.
If you’re facing a costly assessment now, there’s a good chance you’ll see an auditor again as the state works to ensure you’re doing your due diligence to be compliant.
Looking for additional audit prep steps? I highly recommend taking five more minutes to review another post in which I outlined the nine essential steps to prepare for an exemption certificate audit.