This particular sales tax "fiction" brings to mind a certain auditor’s “high”, his self-satisfied pleasure mixed with a hint of superiority and how quickly it changed to sober discouragement. About 15 minutes earlier, he had quite confidently informed me that my company was facing a substantial use tax assessment on the cost of product withdrawn from inventory and donated to various charitable organizations. He was oblivious to the law his state had enacted, providing a use tax exemption for product donated to certain charitable entities. He remained smugly disbelieving until I presented him a copy of his law, at which time he shook his head and muttered, “Humph, with all the budget shortfalls, auditors were not provided with recent law changes.”
How about the time when a single auditor was sent to conduct a field audit for 17 states for an MTC Sales Tax Joint Audit? Let that sink in. Then, imagine the look on my face when the auditor listed all sales of “baseball caps” on her audit schedule for a state that exempts clothing from sales tax. She adamantly argued that the state’s exempt list of clothing said “hats” and not “caps”. Therefore, caps were taxable. The argument seems silly but the number of hours I spent getting it removed from the assessment was not trivial.
Then, there is the more common situation when an auditor reviews a purchase invoice and doesn’t understand exactly what the purchase is. Rather than ask for clarification or additional information, many auditors just include the invoice in taxable purchases and lay the burden of proof on the taxpayer to support the position that the purchase was not subject to tax. If an invoice is erroneously left in a sample, it could have a significant impact on the final assessment.
Conversely, I have had the pleasure of working with many fair, intelligent and professional state auditors. Regardless of the auditor’s competence, though, always be wary, as incorrect application of state-specific laws can happen in any audit when the auditor may not understand your facts as well as you do.
Fiction: Just because the auditor included it on the assessment does not mean it is necessarily taxable.
Fact: You must question every audit adjustment to ensure that each truly represents sales or use tax your company owes.
- Know the sales and use tax laws affecting your business and industry.
- Always err on the side of caution and thoroughly review items on an audit assessment for accuracy, including taxability of purchase invoices assessed. Small invoices can add up to large assessments when part of a sample.
- Use the opening conference to provide the auditor with facts about the company operations that they will need to conduct a fair and accurate audit.
- Communicate with the auditor throughout their review to avoid potential confusion.
What stories do you have? Let’s hear them!
Other recent “Fiction and Fact” posts by Alison Manning, CMI:
- Sales Tax Staff Do Nothing But Collect and Remit Tax... Yeah, Right!
- It's on the Sales Tax Assessment, so it MUST be Taxable!