A use tax audit is a review of a business’s compliance with use tax laws. It can be a daunting process, but with proper preparation, its impact can be minimized.
What is a Use Tax Audit?
Use taxes are imposed on the storage, use, or consumption of tangible goods purchased outside a state but brought into the state for personal or business use. A use tax audit is an examination of a business’s records to determine if use taxes have been reported and paid correctly.
Why Are Use Tax Audits Conducted?
State tax authorities conduct use tax audits to ensure that businesses are paying their fair share of taxes. They may target businesses that:
- Operate in multiple states
- Purchase goods online
- Have a history of non-compliance with tax laws
How to Prepare for a Use Tax Audit
- Understand Your Nexus: Nexus is triggered when a business has a physical presence or sufficient economic activity in a state, subjecting that business to Sales & Use tax requirements in that state. Nexus rules vary markedly by state, so determining your business’s nexus footprint can be difficult, making it an important step in preparing for a use tax audit.
- Maintain Accurate Records: Keep detailed records of all purchases, including the date, vendor, purchase price, and shipping address.
- Calculate Use Tax Correctly: Ensure that use tax is being accurately calculated on all taxable purchases made out of state.
- File Returns Timely: Submit your use tax returns on time and accurately.
- Implement a Compliance System: Develop a system to track your use tax obligations and ensure compliance.
Engage Tax Professionals like Source Advisors: A qualified tax professional can streamline your compliance efforts, monitor legislative changes, and represent your business during audits.
Explore Automation Options: Investigate sales tax automation software solutions, like Avalara, to automate calculations, filing, and reporting processes. This can significantly reduce the risk of errors and save time.
Seek Help from a Professional
If you’re unsure about your use tax obligations or need assistance preparing for an audit, it is advisable to consult with a tax professional experienced in this area of tax law. Such professionals can help you navigate the audit process while protecting your business interests.
An awareness of use tax audits, what they are, why they occur, and taking proactive steps to prepare for them forms part of a robust strategy that minimizes the stress and financial ramifications of such an audit.
