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Most Common Sales and Use Tax Audit Adjustments

Most Common Sales and Use Tax Audit Adjustments

Jan 24, 2017

Sales and use tax audits are common these days and on the rise. More and more states are hiring auditors to find unreported taxes. What could you expect during a sales and use tax examination?

During the course of a sales and use tax audit, there are a variety of items the auditor may identify upon review and include in a list of proposed adjustments. It really boils down to maintaining proper records, not only for the current year, but for past years as well. Following are some of the most common sales and use tax audit adjustments we see.

Exemption Certificates

A properly and fully completed exemption certificate provided by the customer relieves the seller of any sales or use tax liability. However, a common issue identified in audits is the lack of an exemption certificate or the acceptance of an incomplete exemption certificate. When accepting an exemption certificate from your customer, a fully completed certificate should include the following elements: name, address, tax ID number, signature of the purchaser, the reason for the exemption, and the purchaser’s type of business. If just one of these items is missing, the certificate could be held as incomplete, and the seller could be held liable for the sales tax if discovered in an audit. An auditor may allow the company to secure a new exemption certificate, but this takes up valuable time and resources. In some states, if the certificates are received more than 60 or 90 days after the transaction, the auditor may be able to question the validity of the exemption claimed.

Credit Card Purchases

Business credit card statements are reviewed by state auditors because of a high rate of error, based on a lack of documentation to support the purchases on the statements. There is also a high probability of tax not being paid because a majority of credit card purchases are made from out-of-state sellers who may not be required to charge your state’s sales tax. It is important to keep the invoices with the credit card statements in order to show the auditor that sales tax was paid on taxable purchases. If purchasing from an out-of-state seller, invoices should be reviewed to verify tax was paid. If it wasn’t, use tax should be accrued. A state auditor generally takes the position that a purchase is taxable until proven otherwise. It becomes difficult to prove sales tax was paid to a vendor when a receipt is not on hand.

Services

Generally, services in Illinois are not taxable. However, specified services in Wisconsin and Minnesota are taxable. When providing a service for a customer, be sure to charge tax if you are aware the service is subject to tax in the state in which the service is performed. When purchasing a service, check the invoice from the seller for the correct tax treatment. Multi-state service providers are not always aware that the services they are providing are taxable or not taxable.

Sales of Business Assets

When selling an asset previously used by you, it is important to charge tax to customers unless they can provide a fully completed exemption certificate. Sales of capital assets should be invoiced and taxed just like any other sale you make. When selling a motor vehicle in Wisconsin, sellers are required to collect tax on the sale if they hold, or should hold, a Wisconsin sales permit. In Illinois, only dealers are required to collect tax on sales of motor vehicles. In Minnesota, the purchaser pays the sales tax directly to the Department of Public Safety’s Driver and Vehicle Services Division.

Out-of-State Purchases

Out-of-state purchases of goods that are brought back into your home state may be subject to your state’s use tax. If the original sale was not taxed, use tax is owed in your state upon entering the state, unless an exemption applies. This is generally one of the larger areas of adjustments we see when clients are going through an audit. An out-of-state retailer is required to charge and collect your state and local sales tax only if they meet certain criteria. If no state or local sales tax is charged on the purchase of tangible personal property or taxable services, the responsibility to pay and remit the tax falls to the purchaser. These types of adjustments result in not only additional tax owed, but also interest and potential negligence penalties.

Purchases Made From In-State Vendors

Oftentimes, a state auditor will identify purchases made from in-state vendors that were not properly taxed, which can lead to sizable adjustments. When putting a system in place to identify and remit use tax to state taxing jurisdictions, make sure to review invoices from in-state vendors as well. Generally, a state will go after the party it finds first when imposing tax. It is unfortunate, when making purchases that are not properly taxed from in-state vendors, to have to pay not only the additional tax, but also any assessment interest on the purchases.

A sales and use tax audit can include three, four, or maybe more years depending on the state that is conducting the audit and whether you are filing the correct returns. Having the proper documentation on file will often streamline your sales and use tax audit and help you complete it in a timely manner. Adjusting your procedures or putting the proper procedures in place can help minimize audit exposure issues in the future. Wipfli has dedicated sales and use tax specialists who work with state auditors on a regular basis. If you have questions about the sales and use tax procedures your business may or may not currently have in place, Wipfli can help.

Author(s)

Tara Johnson
Tara T. Johnson
Manager
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DeMoss_Austin
Austin DeMoss, MBA
Senior Consultant
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