Sales tax is no small matter for state governments, it accounts for nearly a third of their revenue. So it’s no surprise that sales tax auditors go to great lengths to ensure businesses are complying with tax laws.
In fact, sales tax auditors are often incentivized based on how much unpaid tax they recover. This creates a powerful motive for auditors to dig deep, think creatively, and cast a wide net in search of non-compliant businesses.
Here are 10 of the most strategic and sometimes sneaky tactics auditors use to identify businesses that may owe sales tax:
Interstate Information Sharing
While not always legal, states sometimes exchange information about audits.
A business flagged in one state may suddenly face questions from another. It’s a quiet but effective way to extend the reach of audits.
Reviewing Contractor and Employee Data
Hiring out-of-state contractors or employees can trigger tax obligations in that state.
Auditors use tax forms like W2s and 1099s to track where businesses operate and look for those without the required permits.
Monitoring Trade Shows
Auditors regularly review exhibitor lists from trade shows, both in person and online.
Simply exhibiting could trigger a requirement to collect sales tax, depending on state regulations.
Tracking Digital Advertising
If your digital ads reach consumers in a certain state, auditors may argue you’ve established a sales tax nexus there.
Even without physical presence, ad exposure can put you on the radar.
Watching Website Rankings
Popular websites often indicate high sales volume. Auditors cross-check web traffic with sales tax permit records and may reach out if they see a mismatch.
Checking Warehousing Records
If your inventory is held in third-party warehouses like those run by Amazon, it can trigger sales tax obligations.
Auditors request records from logistics providers and use this information to flag businesses for audits.
Investigating Complaints or Tips
States sometimes rely on tipsters, competitors, customers, or even lawyers pursuing a share of the recovered taxes under “qui tam” laws to flag potential non-compliance.
Monitoring Business News and Acquisitions
Public attention or acquiring another business can attract scrutiny. Acquisitions, even of assets only, can transfer sales tax liabilities, especially if the previous owner had compliance issues.
Scrutinizing Customer Audits
If one of your customers is audited, your invoices might be reviewed too. If something doesn’t line up, like missing tax charges or resale certificates, you could be the next in line for an audit.
Targeting Specific Industries
Certain industries are considered higher risk for non-compliance. Auditors use NAICS codes provided at the time of business registration to focus on sectors more likely to have uncollected sales tax.
Sales tax compliance is complex, and auditors are only getting smarter. Businesses need to stay ahead by maintaining thorough records, understanding where they have nexus, and keeping up with evolving rules.
Whether you’re selling across state lines, advertising nationally, or outsourcing logistics, make sure your tax strategy keeps up with your growth.
Need help navigating sales tax compliance? Reach out to our experts to help prepare your tax strategy!
