How Are Sales and Use Tax Audits Different?

Companies are selected for sales tax audits in a variety of different ways but the one thing I want to highlight is that the state has very limited resources in terms of which companies it chooses to audit. Sales tax audits in particular are tremendously resource consuming activities, so the state has to be very careful about which companies it selects for audit and which it doesn't. So for example the way

the process works is headquarters will identify certain accounts. It will forward those accounts to the district where the taxpayer resides and then at the district level, the district makes the decision on which of those accounts it's going to audit based on available resources and which ones it's not. So why do people get audited? Well people get audited for a variety of reasons. There could be a whistleblower complaint. For example, they could get a tip, they could get a tip from another state agency or from a federal agency. In some cases they can have a change in their data so a lot of times when there's a dramatic drop or increase in sales in any given year and more specifically over a three-year period, which is when they look at for sales tax audits, that could be something that can get you audited. Bad math can get you audited. If they see mathematical errors on the return, that's a high likelihood that there's an error in the way that you're reporting sales tax. In addition you can also get audited for things like a high amount of exempt sales. Your company's exempt sales relative to its taxable sales and related to its total sales, obviously depending on how those ratios work themselves out, that can be another audit red flag for sales tax. Then finally you can look at something like an industry. So there's certain industries that get targeted more frequently. Industries that deal with a lot of cash such as bars and restaurant industries, those with a lot of taxable purchases such as in the construction industry, healthcare gets audited quite frequently, car dealerships get audited quite frequently and so on and so forth. So the state is very familiar with what industries generate the most yield from it in terms of what the error is between reported sales tax and actual sales tax owed so it picks on the same groups of people over and over and over again. So it could be any combination of those factors, it can be any one of those factors but you can be assured that when you're audited for sales tax, there's a reason that they're coming after you.


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law