Make certain you are prepared for one of these. A large and broke west coast state actually has 100 employees in Manhattan running around the area doing audits of out-of-state companies in search of revenues. For most urethane manufacturers it is a matter of obtaining the resale certificates from each and every customer and having them organized properly, particularly in states where the producer has nexus. As the article explains, each state has different rules so it is a complicated burden.
Over the past two years, many of my
clients have been subjected to sales and use tax audits. Since states
are broke, audits have become an important revenue generator. The hot
spots have been fixed asset purchases, internet purchases and
services. Generally speaking, the rule is if you don’t pay sales tax on
a taxable purchase or service, you must remit use tax. Additionally, if
your client’s applicable state rate is higher than the sales tax rate
paid, the difference should be remitted as use tax. Unfortunately, CPA’s
cannot oversee every transaction that their clients engage in, so there
is almost always some type of exposure. Hence, the increase in audits.
So what advice should we provide to
our clients to either head off an audit or minimize the exposure? First
and foremost, file sales tax returns. Even if they file zero returns,
start the statute to limit the years available for audit. With regard to
their fixed assets, keep all fixed asset purchase invoices in a
separate file. Auditors always want invoices for every fixed asset
purchase in the audit period. I think it would be advisable to have your
clients discuss their fixed asset purchases with you, maybe not all of
them but large expenditures to determine if they are taxable and if use
tax has to be remitted. Open lines of communication are your best
defense against large assessments.
Also bring it to your client’s
attention that the majority of internet purchases that they make will
not have sales tax charged unless the vendor they are buying from has
nexus in the state. Internet purchases always have to be scrutinized.
Computer equipment and office supplies are frequently purchased over the
internet without sales tax being charged.
Another area under scrutiny is the
payment for services where the vendor did not charge sales tax. In a
large number of states, services are subject to sales tax. For example,
if your client has a cleaning service come in and that service is
subject to tax, the cleaning service should be charging sales tax. If
the cleaning service is not familiar with the law and does not
charge sales tax, your client is liable.
One of the most difficult aspects of
sales tax compliance is that it is state specific and
transactional. Each state has the ability to tax transactions
differently and this makes it extremely difficult to advise clients. The
majority of my clients are multi-state, multi-jurisdictional and
staying abreast of their sales tax exposure is daunting. I would
advise every CPA to review the sales tax laws in your state, speak with
clients about exposure and operate as if they will be selected for audit
because chances are- they will.