Sales Tax Audit Survival Guide

● Webinar will last one hour

● One CPE credit available

● Ask a question any time

Agenda

● Founded in 1992

● Registered CPA firm

● State & local taxes only

● Former state auditors

& other professionals

● Consult in all states &

Canada

Who Are We?

Poll Question

Andrew H. Johnson, CPA

@AndyJohnsonCPA

General Tax ConceptsDifferences between sales and use tax:

● Sales tax applies to transactions wholly within a

state

● Use tax applies to cross border transactions

● Different exemptions for use tax

● Local tax

Fundamentals

Tangible Personal Property (TPP)

Only CERTAIN services are taxable

How States Find YouFour basic classifications of companies under audit:

1. Large, multi-state, audited every three years

2. Red flags – large gross sales, non-taxable sales,

fluctuations, non-filers

3. Prior audit deficiencies

4. Random

*Leads – Auditors, leads, informants

Audit

● Notification letter

● Managed audit possible?

● Why it could be good for

you

Sampling Issues

● Carefully evaluate sample method

o Block sample, statistical sample, stratified

● Difficult to change later

● Tip: watch out for samples that…

o Are not representative of the population

o Have extraordinary purchases

o Also, make sure to address how to treat credits in the sample

Poll Question

Fieldwork Begins

Setting Parameters

● Contact Person is key

● Understand tax law & policy

● Understand your business

● Facilitate information gathering

● Maintains message consistency

● Review list of errors and fix quickly

Setting Parameters

● Auditor letter

● Office policies

● Office hours

● Request a copy of all

docs auditor makes

Working with the Auditor

● FAQ: what’s the best

strategy for working with

the auditor?

● Don’t go overboard either

way

● Be assertive with things

that matter

What will auditors want to review?

● Fixed assets

● Expenses

● Use tax accruals

● Sales tax returns

● Federal tax return

What will auditors want to review?

● Sales

● Resale and exemption

certificates

o Low hanging fruit

o Inflate

assessments

Communicate

Did your vendors:

Pay through audit?

Did your customers:

Pay through audit?

Remit as use tax?

Have an exemption

certificate?

Exemption Certificates

Exemption Certificates

Are Low-Hanging Fruit

Credits & Refunds● Auditors don’t automatically

look for refunds

● Most auditors consider

credits the taxpayer’s

responsibility

● You should review your

purchases to determine if

you overpaid tax during the

audit period

● Deficiency interest is higher

than credit interest

● Second set of eyes

● Great tool anytime, but

especially after notice of audit

or during the audit

● Looking at potential exposure

as well as missed credits and

overpayments

Outsourced Refund Review

Auditor Negotiations● Discuss with auditor

what has been found

and why

● Request copy of law for

items that you do not

agree with or

understand

● TIP - “Extraordinary”

items may be removed

from the sample

What If I

Don’t Agree

with the

Audit?

The Appeals Process

● Exit conference with

auditor

● Meeting with auditor

supervisor or manager

● Independent audit review

● Official protest

● Mediation

● Administrative hearing

Penalty & Interest Waiver● Interest waiver rare

o Extraordinary delay

o Written documentation

of erroneous advice

● Penalty waiver not as rare

o First audit

o Tax collected not

remitted

o On-time filing

Statute Waiver

What should you do if

an auditor asks for a

statute waiver?

POP QUIZ

Perform Self Audit Appeals Process

Penalty Waiver

Certificates!

Look for Refunds

What Should You Do?

Pre-audit Mid-audit Post-audit

If You Don’t Have the Time or Resources to Do a Self Audit

We have:

● A rates database

● Sampling expertise &

software

● The necessary tax

experience

● The time

● Relationships with the state

● More cost effective for

PJCo to do this for you

● Under Audit

○ Ok to take aggressive

positions

● Not Under Audit

○ Be conservative

○ Aggressive positions can

lead to the greatest

tragedy in sales tax

Important Points

The Greatest

Tragedy in Sales

TaxPaying tax, plus penalty and interest, out of your own

pocket that you could have collected at the time of the

transaction.

Common

Mistake

Not Currently

Under AuditWhat should you do?

● Nexus

● Refund review

● Use tax accrual process

● Exemption and resale certificate management

● Auditing your customers

● Information sharing with other

states

● Special task forces

● Leads

o Former employees

o Competitors

How do states find you?

Exemption & Resale Certificates

● Have a system in place

prior to audits

● Be proactive in acquiring

certificates

● Consider outsourcing

Use Tax Accrual Process● Out-of-state purchases

generally will not have

tax charged, auditors

know this, can be large

dollars

● An automated system

may be needed when

there are many

transactions to be

accrued

Five Costliest Mistakes● Resale and exemption

certificates invalid or missing

● Missing invoices

● Audit rights and remedies not

known

● Auditor negotiation mishandled

● Use tax not accrued

The Document

You Should Not

Give an Auditor at

the Start of the

Audit

PeisnerJohnson.comWebinars

SALTsource newsletter

Blog

Charts and white papers

@PeisnerJohnson

#PJCo

●Text

How Can We Help You?

State tax refund reviews

State tax audit defense

Nexus determination and mitigation

Compliance services

● GoTo Webinar control panel

● Follow up email

CPE Credit

Webinar Survey

Making sales tax less taxing.

Avalara’s capabilities continue to grow

Expanding IntegrationHundreds of integrations on all

major commerce platforms

Improving TechnologyAdded support for Lat/Long, new

REST API, UPC taxability, and

high-availability cloud deployment

Avalara ServicesExpanded offering to customers with

related applications

Making sales tax less taxing.

Let Avalara’s suite of products

be your in-house tax expert

Never sleeps

Never vacations

Extremely accurate

Incredible tax expertise

Allows you to focus on

growing your business,

not calculating tax

Starting salary $99 per

month

Making sales tax less taxing.

Avalara provides an end to end sales tax compliance model via

automation. Instead of researching rates, building tax tables and

implementing tax processes, companies simply install a software

connector that links their accounting and EPR system to Avalara’s web

service. As a cloud software, it continuously updates tax rates, rules

and boundaries automatically.

About Avalara