7 often overlooked sales and use tax audit triggers
And recommendations on how to avoid them.
The 2018 U.S. Supreme Court decision in South Dakota v. Wayfair – which confirmed that states could charge tax on purchases made from out-of-state sellers even if the seller didn’t have a physical presence in the state – should’ve been “the shot heard ‘round the sales and use tax world.”
Five years later, its echo still rings. Yet many businesses continue to be ensnared by sales and use tax audits that could be avoided with an eye on the right triggers – and an application of the right strategies to avoid audits in the first place.
Sales tax and use tax: What’s the difference?
First, a quick grounding in common terminology. Though sometimes the terms are used interchangeably (or in combination), sales tax and use tax technically differ.
Sales tax is imposed on intrastate transactions and relates to the sale of a product or services. It’s also typical a pure pass-through tax: Whoever sells collects, and the buyer is responsible for paying the tax (meaning that there’s a “dual liability” or “dual obligation,” which is true in all states that collect sales tax except for Hawaii and Arizona, which put that liability exclusively on the seller). To make everything a skosh more complicated, sales tax can also go by different terms in different places, or relevant industries, being called a “privilege tax” in some jurisdictions, “general excise tax” in others, or “communications tax” for communications service providers industry, “lodging tax” for hotels, and etc.
Use tax, on the other hand, is applied when you, as the buyer, make a purchase from someone out of state and ship it back to your state; in other words, it’s a tax imposed on the use, storage, or retention of a product in a state.
In most cases, effectively calculating and remitting sales and use tax involves consideration of physical and economic nexus (please note your organization can be a subject of other types of sales and use tax nexus. Learn more about sales and use tax nexus). The former, as its name suggests, is established when your business has a physical, tangible presence in a state – a retail store, warehouse, etc. The latter is applied when you hit certain sales thresholds, such as a specific number of transactions or a total amount of sales revenue in a state with no physical presence. (By example, the law that triggered the South Dakota v. Wayfair decision covered sellers whose annual sales in the state eclipsed either 200 purchases or $100,000.)
The bottom line? With apologies to Shakespeare, a “tax is still a tax by any other name,” and being aware of audit triggers can help make you better prepared when a state department of revenue comes calling. Download this checklist to:
- Gain a clear understanding of what auditors are likely to be looking for, thereby, helping companies prepare for the audit
- Understand how you can reduce the duration of an audit
- Get recommendations that a company should take going forward to reduce or even eliminate future sales and use tax audits