What Do Auditors Look for in a Sales Tax Audit?

Sales tax audits can be stressful, but understanding what auditors focus on can help you prepare and stay compliant. Their primary goal is to ensure that businesses have accurately calculated, collected, and remitted sales tax. Here are the key areas they typically review:

Accuracy of Sales Tax Calculations

Auditors will examine whether sales tax rates were applied correctly based on the jurisdiction where the sale took place. Errors in applying local, county, or state tax rates can lead to underpayments or overpayments, which may trigger penalties.

Proper Collection and Remittance

They will verify that the correct amount of sales tax was collected from customers and subsequently remitted to the appropriate tax authority. Any discrepancies or missed payments can result in penalties and interest charges.

Exemption Certificates

If your business sells goods or services that are exempt from sales tax, auditors will want to see valid exemption certificates. These certificates must be properly filled out and up to date. Missing or invalid certificates can lead to retroactive tax assessments.

Classification of Taxable vs. Non-Taxable Sales

Auditors will review how you classified sales as taxable or non-taxable. Misclassifications are common, especially in industries with complex rules, and can result in additional tax liabilities if not handled correctly.

Record-Keeping Practices

Maintaining comprehensive and organized records is crucial. Auditors will assess whether your records are sufficient to substantiate sales, exemptions, and remittances. Poor documentation can lead to unfavorable audit outcomes.

How to Prepare for a Sales Tax Audit

• Conduct Internal Audits: Regularly review your sales tax processes to identify and correct errors before an official audit occurs. Use checklists to ensure compliance with all applicable rules.
• Organize Documentation: Ensure exemption certificates, sales records, and tax remittance receipts are easy to access and well-organized. This can help speed up the audit process and reduce stress.‍
• Consult a Tax Professional: Working with a tax expert or accountant can help you identify compliance issues, improve record-keeping, and minimize potential risks. Professionals can also represent you during the audit process, which can ease communication with auditors.