Sales & use tax audit notices are never a great letter to receive in the mail. But, by following the steps outlined in this article, they may not be as bad as they seem.
Whether you are running a service or product-based business, it does not take much for sales & use tax laws to become relevant. Sales & use taxes are a complex beast. Businesses need to:
- Pay sales tax to vendors when they purchase taxable goods or services
- Accrue and pay use taxes when they were not charged sales tax at the point of sale on taxable goods or services
- Collect sales taxes from their customers on taxable sales
- Remit the collected sales taxes to the state
There can even be the requirement to notify customers of their requirement to accrue use tax in instances where, as a result of specific circumstances, you are not required to charge them sales tax at the point of sale.
To make matters even mirkier, this works on a state by state (often county by county) basis – where rules vary markedly in each jurisdiction. Complicated, right?
Receiving an Assessment Notice
Being that sales & use tax is as complex as it is, it should not come as a surprise when a state comptroller or department of revenue sends a business an assessment notice.
A sales or use tax assessment notice is a communication received from the state or county (generally by mail) that requests documentation pertaining to a company’s purchases and sales activities.
The notice will have a due date for which the documents must be sent to the assessor.
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Upon review of the information, the assessor will likely notify the business that it has been delinquent in its sales & use tax filing or payment requirements, and outline the estimated amount of unpaid taxes, penalties, and interest that the company owes.
This notice will be accompanied by a request for additional information, and another deadline.
All this communication from the state or county can be daunting and difficult to digest – especially when the figures provided are high, and the business owner’s knowledge of the subject is limited.
Here are five steps to follow if you find yourself in this predicament.
1. Don’t Worry, You’re Not Alone
First things first – breathe. The notice may seem dauting, and you may be caught off guard, but it likely seems like a bigger deal than it is.
These notices are quite common, and they are based on assumptions and generic data that is unlikely to align with your business’s exact fact pattern.
The key is not to react or fret. There is a process to follow, and the outcome is almost always going to be less harsh than the assessor may originally make it seem.
2. Request an Extension
In almost all cases, and deadline provided by an assessor is flexible. It is important to be aware that you have the ability to ask for more time.
Be reasonable, though. What you are looking for is some time to digest the information, review your circumstances, and seek advice before responding.
3. Keep Communications Limited
Outside of requesting an extension, communication with the state should be limited. Every document, email, or phone call you have with the state can be interpreted in different ways, which can result in confusion and heartache down the line.
4. Enlist the Help of an Expert
There are people out there with a wealth of experience in navigating these notices – and diligent business owners will take the first opportunity they get to seek out assistance from such practitioners.
A CPA is generally not a sales & use tax expert (unless the CPA firm has a sales & use tax specialty arm. Experts are specialists in this area of tax law and are best placed to work with a CPA in gathering information and providing responses.
Enlisting this assistance comes at a cost. However, the cost is almost guaranteed to be paid back in spades, as experience enables these specialists to negotiate reductions in assessments amounts, penalty abatements, and so on.
5. Consider Your Other Sales & Use Tax Liabilities
Receiving an assessment notice provides the opportunity for business owners to consider their potential exposure in other states that are not under audit.
Getting ahead of the curve is important, as dealing with exposure prior to receiving an assessment notice costs the business far less financially and enables the company to sidestep the disruption that audits typically cause.
Multi-state businesses can use the one assessment notice as cue to review their affairs in other states and put mechanisms in place to avoid the same scenario occurring elsewhere.
