State tax exam information requests are increasingly becoming more comprehensive and demanding. We’ve noticed a disturbing trend with our clients who maintain their records electronically. States, in their information document requests, are requesting that those businesses supply all transaction data for the entire period covered by the exam; i.e. data regarding every transaction, every check paid and complete general ledger detail.
During a recent sales tax exam, one of our clients received an information document request that contained a written notification that the State’s tax provision governing what constitutes adequate books and records required that a taxpayer under exam provide “complete electronic sale and purchases data in a standard record format for all transactions nationwide.” This notification indicated that such information included, but was not limited to, “accounts payable, accounts receivable and journal entries” for the entire three year period covered by the exam.
After we reviewed the statute the State cited in its request, we found that it did not, in any specific way, require nationwide data to be provided to the State. In addition, the State’s external publication and Taxpayer’s Bill of Rights did not require the Taxpayer to provide the State with nationwide data. Nevertheless, at the start of the exam, the State was emphatic that since the Taxpayer’s records were stored electronically, they wanted all of the information.
The State’s insistence on gathering all nationwide transactional information for the entire period under exam was unexpected and disconcerting. To provide nationwide data is not only time consuming and burdensome upon a taxpayer’s Tax and IT Departments (not to mention unnecessarily invasive), but in many instances a state may not have adequate statutory support for the state’s demand for such information. Equally troubling is an increasing predisposition by states to attempt to require that taxpayers agree to statistically determined samples based on all of the data in lieu of the much smaller block samples that have been the standard for many years.
Appreciating how aggressive state exam information document requests are becoming, it is more important than ever that you and your tax advisors plan now for pending or potential exams. Extensive preparation is critical to any state tax exam. Becoming aware of what is required to be provided to the state prior to your initial meeting with the state tax examiner should be an essential part of your prep. You need to review the state statutes, state examination guidelines and taxpayer bill of rights early in the exam process, ideally before your initial meeting with the state.
New York State has issued several Publications that may provide excellent insights to how the State will approach a sales tax exam:.
Publication 131 – Your Rights and Obligations Under the State Tax Law
Publication 750 – A Guide to Sales Tax in New York State
Publication 132 – Computer-Assisted Audits
In addition, New York State has issued Technical Memoranda, commonly referred to “TSB-M’s” addressing sales tax documentation. The following TSB-M’s may assist in preparing for a New York Sales tax exam:
TSB-M-81(9)S, Records Required to Be Kept by Sales Tax Vendors
TSB-M-85(5)S, Vendor Responsibilities in the Collection of Sales Tax
Armed with the knowledge of what information the state is entitled to – and more importantly, what it may not be entitled to, you should be able to successfully challenge some of these requests, and potentially avoid spending unnecessary time and effort complying with arbitrary information requests.