For years, many small businesses have grown
lackadaisical toward inquiring about and obtaining exemption certificates from customers.
Filing and paying use taxes on out-of-state purchases is also a practice that many
companies widely neglect.
Since states use the same cost-benefit type ratio that
companies use to help determine where they focus their resources, there's little wonder
that audits are on a substantial rise.
Most states have historically concentrated
their auditing efforts on the "big fish" (companies with hundreds of millions in
sales), but they are now finding that the smaller companies with fewer resources available
for tracking and monitoring transactions are highly profitable targets as well.
Many companies are finding that the audits aren't always
"fair" either. Even though your customer may be tax exempt, the state may
still assess you for the uncollected taxes if you do not have the exemption certificate on
There have also been many cases across the nation where a state has assessed
both the vendor and the customer for uncollected taxes along with penalty and
The auditors are also taking aggressive positions on the types of
goods and services that are subject to the tax. Most states consider services to be
exempt from the sales tax, but the rules are sometimes nebulous at best and must cover
thousands of different types of transactions.
Since the rules are so vague, many companies actually pay more in
sales taxes than they should. Guess what? Your friendly sales tax auditor will
not likely look for or inform you of any instances of overpayment.
definitely be informed of any underpayments, however in the form of an assessment with
penalty and interest. The audit period will generally cover prior years as well, so
the penalty can be quite substantial.
What You Can Do Now
If you feel that your company has some risk in terms of sales tax
compliance, the time to act is now. By being proactive, you can avoid much of the
anxiety and potential liability that comes with an audit.
Obtain exemption certificates now for those customers that are
exempt. Go through your own records in detail and list any purchases or sales where
you feel you may be at risk or where you suspect you may have overpaid.
If you are
uncertain, call us. The state is much more likely to be lenient if you file amended
returns now instead of waiting for the tax man to knock at your door.