Fall/Winter 2018-2019 | BWD 5
By Michael Bannasch, CPA, MST
Four reasons a
state sales tax audit
could be costly for your business
Imagine your business has received a notice that it
has an upcoming tax audit, but you get to choose
between two types of audits. You can choose an
IRS income tax audit, requiring you to verify the
completeness of your income and legitimacy of your
expenses, along with ensuring these items have
been recorded in the proper tax year. Or you can
have a state sales tax audit by a state from which you
generate 30 percent of your annual revenue. Which
audit would you choose?
While your risk in either audit depends on the specifics of
your business (what you sell, to whom you sell, profitability,
etc.), many businesses would choose the state sales tax audit,
thinking that sales taxes are “easier” than income taxes or
that an audit by any one state couldn’t be more damaging to
the business than an audit of the entire business by the IRS.
Based on the changing landscape of sales taxes, this choice
could bankrupt a business. Let’s consider what could go
wrong in a sales tax audit.
1) Nexus – Sales tax nexus has long been determined
by physical presence, but a recent U.S. Supreme Court
decision held that physical presence is not necessary
for a state to require a business to collect sales tax. Now
nexus determinations need to be reconsidered in light of
both physical presence and various economic threshold
tests. Further, even under the historical physical presence
standard, many businesses were not aware of the myriad
ways that physical presence could exist.
2) Taxability – With increased nexus comes an increased need to
understand whether what you sell is taxable in a particular state.
States have different definitions of what things are, whether they are
taxable and on which party the tax falls. This is especially true in the
construction industry and for sellers of software as a service.
3) Tax base – It is common to have issues with whether shipping costs
are in the tax base or excluded. Also, the way a business invoices
customers can drastically affect how much of the invoice is included
in the tax base.
4) Exemption certificates – These are required from customers
in any state in which a business has nexus if the business does not
charge sales tax. Failure to have these timely and/or completely filled
out can cause otherwise exempt transactions to be subject to tax.
Now is the time to review your business’s compliance with sales tax
laws. The expanded nexus standard approved by the Supreme Court
will allow states to come after businesses they never could have touched
before, and those states will be looking at all the above issues. A
financial advisor can work with you to get ahead of the states, to make
sure that any sales tax due comes out of your customers’ pockets instead
of your own.
ABOUT THE AUTHOR
Michael Bannasch is a state and local tax (SALT)
senior manager, providing consulting services to help
clients minimize tax and manage risk. These services
include structural and operational strategic planning,
audit representation and appeals, nexus studies and
reverse audits. Contact him today at
[email protected].