How to Avoid a Sales Tax Audit
Regardless of the size of your company, there is always the possibility that you will face a sales tax audit at some point. This is certainly a hassle that you’d rather avoid, and while there are no ways to guarantee you won’t be audited, there are a number of steps you can take to make that eventuality much less likely.
One of the easiest ways to run afoul of state sales tax laws is to fail to register with the appropriate jurisdictions when you have a nexus there. While the broad outlines of what constitutes a sales tax nexus are relatively consistent from one state to the next, there are also some small variations that can make all the difference depending on the nature of your business.
For instance, some states set a threshold for how often employees or other agents acting on behalf of your company can be working in the state before they trigger a nexus condition, while others stipulate that you have a nexus there if you ever have an employee or other agent present in an official capacity. Different definitions of what’s taxable, particularly when it comes to services provided as part of a sale, such as installation or assembly, also can impact whether or not you have a sales tax nexus in any given state.
Adapting to Changes
Even when you think you know what your status is in all of the states you do business, you need to be aware that changes in state law or in your business relationships can alter that nexus status under the right set of circumstances. For example, a change in the drop-ship vendor or fulfillment company you’re using can impact where your goods are stored, and so where you’re considered to have a nexus.
Creating or expanding your affiliate program is another way you can create a nexus for your business where you didn’t have one before. While this isn’t a reason not to explore ways to grow your business, you do need to keep track of these types of changes to ensure you’re registered to collect and remit sales tax anywhere you have a nexus.
Another category of items that can draw the attention of auditors is exemption certificates. That’s why it’s essential to make sure that any sale you record as free from sales tax is accompanied by a valid exemption certificate. You need to make it a habit to periodically review those exemption certificates you have on file as well to see if any have expired or need to be updated.
Filing on Time
Late filing or payment is a good way to attract an auditor’s attention, and that’s always what you want to avoid. Using a sales tax software designed to automate the recording and filing process is a great way to address this issue, and it also eliminates another source of potential trouble, which is filing manually.
When you fill out a paper tax return by hand, you open yourself up to making any number of avoidable mistakes, including mathematical errors that would not occur if you used a computer program. You also have to make sure everything you write is perfectly legible, or simply the act of trying to read your handwriting could cause an auditor to scrutinize your return more closely. Even when you do use a computer to file, however, you need to double check your figures yourself and make sure you wait until all income is properly and thoroughly accounted for before submitting your return.
Dealing with Holiday Returns
Any time you have an order cancelled or have to process a return, it’s important to document it so that you can show why you no longer owe sales tax on that purchase. This can be a particularly grueling task during and just after the holiday shopping season.
If you’ve already filed the applicable sales tax return, you’ll generally have two options for how to recoup what you’ve overpaid. The one that’s often popular with retailers is to simply apply the overpayment as a credit towards your next regular sales tax payment. Doing this too often, though, or with large sums may attract the type of attention you don’t want. That’s why it’s often a better idea to file an amended return once you’ve accounted for the bulk of your returns.
Along these same lines, it’s a good idea to only list deductions that you have receipts for and that don’t seem unrealistic. It can be tempting to push the boundaries in some of these categories, and while you may sometimes get away with it, the consequences and hassles that can result due to the extra scrutiny your return will get as a result makes these things often not worth it in the long run.
Even if you don’t wind up paying extra after an audit, the simple fact of having to go through the process can be a significant burden to you as you’re trying to keep your business running smoothly.