A 2022 survey of business that had been audited in the last 18 months revealed just how much businesses stand to lose on sales tax audits, why they are audited, and the most likely state to get an audit notice from.
Why?
The top reasons why sales tax audits occurred:
- Use tax not being self-accrued
- Missing resale certificates
- Not charging tax on taxable products
- Missing sales tax permit
- Calculating tax incorrectly
Where?
Prior to the Wayfair case in 2018, the chance of receiving an out-of-state audit notice were quite rare. Now, this script has been flipped. 41% of businesses surveyed were audited by their home state, while 45% of businesses had an audit from out-of-state.
In particular, seven states made up 60% of out-of-state audits:
- California
- New York
- Alabama
- Arizona
- Colorado
- Georgia
- Texas
The top in-state audits were:
How Much?
Unfortunately, many business owners tend to bury their head in the sand until it is too late. Many don’t realize just how expensive an audit can be until their in the midst of one, with the average sales tax audit costing a business $114,147! This is from having to pay the original sales tax out-of-pocket, paying a failure to file fee, paying a failure to pay fee (yes, this is addition to the failure to file fee – crazy, right?), and interest on the amount due – not to mention the time and money spent on having to redirect efforts of business owners and employees focusing on addressing the audit.
A quick example: Let’s say you have sales tax nexus in California and made $100,000 in taxable sales on which you failed to collect, file, and remit. On average, if the tax rate due is 9%, you’d owe $9,000 in back tax, plus $900 for both the failure to file and pay fees (10% each), plus interest (10%) which can compound and accumulate quickly, bringing the total to $11,700.
But for many businesses, the amount can be much worse. Why? Because many businesses have sales tax nexus in multiple states, going back several years, resulting in more tax, more fees, and more interest.
Solution?
By doing preemptive work, you can avoid all of this headache, out-of-pocket money, and time. You should always register for sales tax where you have nexus. Leyton can assess your business’s nexus footprint and risks, and come up with action plan to suit your current situation.
