The late, great Glenn Frey’s song, “The HEAT IS ON”, accurately describes what many companies are experiencing when it comes to sales tax exams this summer.
As I noted during a recent Webinar (and confirmed by attendees themselves), sales tax compliance and exams are hot topics for many companies. Equally important, the extensive information document requests (“IDRs”) and the demands that such IDRs place on multistate taxpayers, appear (like the summer heat) to be dramatically increasing.
Pre-Initial Sales Tax Exam Meeting Considerations
Our recent experiences with sales and use tax IDRs indicate that the breadth and scope of these IDRs warrant additional preparation and analysis by multistate taxpayers and their advisors.
Want to beat the heat? Here are some areas worth addressing in your preparation for a sales and use tax exam:
- How thorough and self-contained are the workpapers and reports that support the sales and use tax reports subject to the exam?
- If the Company under exam relies on exemption certificates:
- Does the Company have all of the exemption certificates for those sales treated as exempt for the State examining the Company?
- Has the Company reviewed the exemption certificates on file for completeness and accuracy; i.e. date, signature, state sales tax vendor number, and Company name.
- Can the Company readily access all exemption certificates?
- Has the Company verified that it has the appropriate exemption certificate; e.g. if selling to both manufacturers and other non-end users in Texas does the Company have Manufacturer Exemption Certificates for those sales to manufacturers and Re-Sale Certificates for other non-end users such as wholesalers and retailers
- Does the sales per the sales tax returns reconcile to the Company’s sales ledger for the state in question?
- Has the Company reviewed its expenses to identify if it has self accrued use tax for those taxable purchases for which no sales tax was charged by the vendor?
- Has the Company reviewed the Fixed Assets acquired during the exam period to determine if proper sales tax was paid or use tax was accrued and paid?
In addition to the above, many state sales and use tax IDRs now require that the taxpayer provide:
- Copies of General Ledgers and Trial Balance
- Copies of Federal returns. Be prepared to reconcile total sales per Federal return to any sales documentation used to support the Company’s sales tax returns. Does the Federal return total sales reconcile to the Company’s sales ledger or other report used to support the Company’s sales tax returns?
- Copies of the examining State’s Corporate or Flow Through entity income or information return – be prepared to reconcile the state receipt factor sales amount for the state in question to the sales amount indicated on the sales tax returns for the period under exam.
Finally, some states have expanded their sales tax IDRs to include questions regarding state payroll tax and state unclaimed property report filings.
BE PREPARED – Pre-Exam Self Review
I am increasingly reminded of the Boy Scouts motto, “BE PREPARED” when it comes to sales and use tax exams. Don’t be lulled into complacency by success in past examinations. Remember, sales and use tax is a transactional based tax that is ripe for procedural challenges by the state examiners.
Finally, documentation and exemption certificates are invaluable in establishing the proper sales and use tax liability owed to the state. Like the summer heat, sales and use tax exams can be most demanding – best to prepare in advance for the worst.