What is your sales tax auditor thinking?
Once upon a time, I worked as a state auditor in Texas. Part of my job was to evaluate a random sampling of San Antonio small businesses and ensure they were maintaining sales and use tax compliance.
One day I walked into a local recording studio. Someone was singing. I found the owner.
“I’m here to audit you and make sure you’re collecting, paying, and remitting taxes correctly,” I said.
He handed me a box of files. It took me three days to sift through it, complete my analysis, and hand him assessment.
It was for $25,000. In 1994.
“I’m going to have to shut down,” he said. “I don’t have that kind of money.”
It was the look of shock on his face that I’ll never forget. Handing over that assessment hurt me as much as it hurt the taxpayer.
I later went on to audit Fortune 500s in New York. The fees and fines were still astronomically high, but I never again had to face the inevitable pain that occurs when the findings of an audit could result in a company going out of business.
Here’s what I learned as a state auditor:
A few missing or incomplete documents can quickly turn into tens of thousands of dollars — or much more for big businesses.
Throughout my time as an auditor (and later, as a retail tax manager) I saw firsthand the difficulties companies face when attempting to achieve sales tax compliance. It always seemed to be the exemption certificates that caused the most trouble.
So often there was very little documentation simply because exemption certificates were low on the priority list. Employees didn't know what or when to collect from exempt organizations, so they avoided it altogether.
This is where most problems began and why many penalties were assessed.
And that’s just sad, because in most cases it’s completely avoidable.
So without further ado, I’d like to share a few of the most common struggles I witnessed during my time as an auditor. Hopefully these insights will help you avoid similar noncompliance issues at your company.
#1. Most companies have no idea what their liabilities will be.
It’s astounding how many companies wait and react. Instead of proactively preparing for a potential audit, they postpone collecting sales tax exemption certificates — either until they have the time or are forced to follow up.
As an auditor, I almost always expected to find missing documents. Now I know that 48% of accounting professionals do, too.
If you’ve never experienced a sales tax audit, you may not realize just how costly and painful it can be for a company that’s not prepared. Get comfortable with exemption certificates and you may never face the headache of a hefty fine or fee.
#2. Every customer is accountable.
I can’t tell you how many times I’ve had to explain that, yes, federal employees must provide documentation, too. It’s easy to assume that all purchases made by the U.S. government are exempt from sales tax. That’s simply not true. An auditor will still ask for proof that the products are in fact being used for an exempt purpose.
Any time you make a decision to exempt a buyer from sales tax when you’d normally charge it, you must get a certificate on file. There are truly no exceptions to this rule. Whether you’re a big box retailer or a small seller of handmade crafts, the requirements are the same.
This is why it’s so important to get a clear understanding of when to collect exemption certificates.
#3. Auditors are not out to get you.
They simply want to ensure businesses are doing everything they can to achieve and maintain compliance.
The reality is that many states have increased audits in recent years to ensure compliance and generate revenue.
Here’s the secret:
If you make things easy on your auditor, there’s a good chance he or she will return the favor.
The more prepared you are, the more time you’ll save everyone. As an auditor myself, I was always happiest when I could walk into a business and then quickly walk right back out — rather than sit there for years digging through documents and handing over hefty bills.
What about you?
How will you respond if your company is audited? Most states don’t do a great job of explaining how to prepare. Are you doing everything you can to ensure you’re not overlooking exemption certificates?
When I left the auditing and tax management world, it was to create CertCapture. I wanted to remove the mystery from exemption certificates and make it easier for companies to achieve and maintain compliance.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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