Under a TX sales tax audit?
Texas regularly audits businesses that are required to charge, collect and remit various taxes in the state. Unless you have experience as to how to handle a state tax audit, how can you trust the state? How can you tell when to provide documents or when to push back? In our view, controlling the audit is paramount to the limiting exposure and shaping the results. If your business collects or should collect sales and use tax, hotel occupancy tax, public transportation assistance tax, vehicle rental tax, or employer withheld personal income tax, you are on the Texas Comptroller’s audit radar. Therefore, you should likely hire or at least consult a state and local tax professional to assist your business along the audit journey.
IS MY BUSINESS SUBJECT TO TX TAXES?
As a starting point, in order to be subject to the tax collection requirements imposed by Texas, your company must have nexus, or a connection, with the state. Texas takes the position that having a physical location in the state creates nexus, as does having an employee resident or present in the state, tangible personal property (owned or leased), or delivery of goods using property owned by the company.
Effective October 1, 2019, Pennsylvania adopted an economic nexus standard, similar to many states. Under the new law, if a business sells over $500,000 into TX over the last 12 months, then it is treated as having nexus and it must register, collect tax on its sales.
If a company has nexus and sells a product or service subject to Texas tax, it can be audited. In general, Pennsylvania taxes sales of tangible personal property, digital products, and certain services.
Receive an Audit Engagement Letter
Many audits begin by a call out of the blue from an auditor from the Texas Comptroller. Shortly after the call, your business will receive an audit engagement letter, which indicated you were lucky enough to be chosen for a state tax audit. To being preparing for the impending audit, it is likely a good time to get a state and local tax professional involved.
From there, the auditor will conduct pre audit research, conduct an entrance conference and eventually request records. During a sales tax audit, the auditor will request a wide range of documents. For example, on a Texas sales tax audit, the auditor will first determine whether all sales, or gross sales, were reported on your sales tax return. Often times the auditor will compare your sales tax return to a control document like bank statements or your federal tax return. This will allow them to make sure all sales were reported. The TX tax auditor will also make sure you can provide proof on your exempt sales. The slightest error on a type of transaction, when multiplied over three years, can add up to a considerable amount of sales tax liabilities. Often times a sales tax audit can be driven purely by simply not having the correct paperwork can result in a huge assessment.
On the use tax side, the auditor generally checks to make sure you properly paid tax on items used by the business. Despite publications to the contrary, if a business buys an item online without paying tax, the business has an obligation to remit use tax to Texas. Along with untaxed purchases of equipment, this can result in shocking results for the unsuspecting taxpayer.
Upon completion of the audit, there will usually be an exit conference with the auditor. The purpose of the exit conference is to review the workpapers. It is advisable to have a Texas tax professional present during this meeting. Eventually the audit will culminate in an audit report.The purpose of the audit report is to provide a clear basis of the assessment. While it may be cause for panic or concern, the receipt of the audit report can actually help the taxpayer by illuminating the road map to resolve the case.
Disagree with the Audit?
Following the audit, if you disagree with the adjustments cannot be resolved with the auditor, the assessment is filed. The business or its state and local tax professional can file an appeal, called a redertmination hearing, with the Comptroller’s office.
Texas Sales Tax Helper is focused on Pennsylvania Sales and Use Tax.With over 100 years of cumulative experience in Sales Tax representation, we are the right choice to represent your company. Since 1991, our firm has defended companies in virtually every industry in a sales and use tax audit; giving us the experience and know how to not only analyze any areas of exposure you might have, but to also paint your company in the most favorable light.Even for companies with little or no exposure, a sales tax audit can be an unnerving and stressful experience.
Our team of attorneys, CPAs, and former auditors know what the state’s auditors are looking for in each particular industry and we will work with you or your accountant or other professional to analyze areas of potential exposure. Wouldn’t you rather the audit be performed at one of our offices, eliminating disruptions to your business?
Texas Sales Tax Audit FAQs
You inadvertently waived a red flag or your company landed in the small percentage selected for a random Texas sales tax audit. These red flags include: cash-based businesses, prior audits that resulted in owed sales tax, your sales reported to the state didn’t match what you reported to IRS, a high volume of exempt sales, filing a refund claim or a high number of credits. There’s also a possibility that your business happens to be in an industry that your state suspects rampant under-reporting. Often times, they will target industries effected by complex sales tax laws. Learn More
1. RESPOND to the notice
2. Get organized
3. Identify/Hire your audit manager
4. Notify your auditor of who they will be corresponding with
5. Compare your sales tax returns against the federal tax return
6. Test at least one month of exempt sales
7. Reconcile your sales tax payable account versus your sales tax payments
8. Review your fixed assets purchased, did you pay sales tax on them?
9. Review your purchases on your key expense accounts to ensure tax was paid on your purchases
10. Look at our complete list that explains these steps in more detail: here
Audit duration can vary dramatically from state to state and from business to business. Waiver issues aside, an audit generally takes 3-7 months to complete. Surprisingly, some audits can drag on for a few years. Time factors usually swing on the size of the company, the ability to produce reliable and organized documentation, and the level of sophistication of the business.
We all enjoy the occasional DIY project especially when it saves us money, am I right? Before opting to go that route, consider the risk vs. rewards involved. Avalara recently conducted a study and found that the average sales tax audit costs around $115,000. When facing a sales tax audit it is beneficial to have the expertise of the financial implications on your side. That is where Sales Tax Professionals such as SalesTaxHelper can save you a lot of heartache and money by avoiding a few missteps. Learn More
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