Over the past few years, companies doing business in New York have noticed that the state has been much more aggressive and successful at finding companies with sales & use tax delinquencies. New York has been at the forefront of sales tax discussions dating back to 2008 when legislation was passed that started the “click-through nexus” laws that many states have adopted in one form or another. This alone has resulted in online retailers remitting hundreds of millions of dollars in sales tax and a corresponding increase in sales & use tax audits.
Cognizant of just how much is potentially at stake when it comes to sales tax, more states are demanding to collect what is lawfully theirs. Companies that have been subjected to a sales & use tax audit may consider it as bad luck, however the New York Department of Taxation and Finance (“Department”) has taken a much more structured approach to identifying potential offenders and securing payment. New York has increased its audit staff, an action that other governments and private industries were hesitant to do, in order to be able to handle these new found leads.
Sales Tax Audit Process
Referrals – After a sales tax audit is completed, auditors submit a referral based on the findings for the completed audit. Typically, this is a vendor or a customer of the company that was just audited. Activity that was uncovered during the audit may raise a flag for further review.
Whistle-blowing employees – In the past, major leads for conducting audits at certain businesses came from whistle-blowers and disgruntled employees. Historically, these types of submissions were efficient and effective, as a lot of the work surrounding obtaining documentation had been handled from the inside.
Amended returns – In general, when a return is amended, some degree of review regarding the change will take place. If there is anything questionable a follow-up is very likely.
Inconsistencies – Sales tax returns will undergo comprehensive analyses that will compute certain ratios, and if the results are not consistent with industry standards then it could raise a red flag and may later be addressed by the Department. An example would be if purchases subject to use tax are expected but unreported.
Reducing the Risk of a Sales Tax Audit
There are a variety of other reasons why a company may get audited. What’s important to understand is that while states are facing greater budgetary constraints, more software programs are being established to identify delinquent taxpayers. The Department has much to gain from increasing the number of audits it conducts – additional revenues can result even if settlements are made.
Auditors are able to learn about the current market trends of various service and retail companies that better enable them to select and perform even more effective and efficient audits as they go forward. Better knowledge about the trends enables the auditors to share their findings with lawmakers who can then better address and legislate about what is occurring in the marketplace. Here are three pieces of advice to consider in order to reduce the risk of a sales tax audit:
- file your sales tax returns on time
- avoid inconsistencies in reporting items such as gross sales and exempt sales
- handle other state audits in a quick and efficient manner in order to avoid “referrals” to the sales tax department
As is usually the case, more states will adopt the programs, procedures, and strategies that they see effectively working for New York. This copy-cat approach will likely increase the frequency of sales & use tax audits across the country.