Why Businesses Get Audited Regarding Sales Taxes

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Bill Flick - Managing Partner EisnerAmper Advisory Services, LLC

Although the presumption in an audit is underpayment of taxes and taxes owed, there are a number of reasons why many sales tax audits result in refunds.

When you consider the EBITDA of most companies is around 6% to 10%, sales tax overpayment recovery, can be meaningful.” - Bill Flick, Managing Partner, EisnerAmper Advisory Group, LLCPHILADELPHIA, PA, UNITED STATES, October 30, 2024 /EINPresswire / -- Virtually every businessperson knows what a tax audit is. However, relatively few are aware of the growing number of sales tax audits that states are conducting these days.

According to Bill Flick, Managing Partner of EisnerAmper Advisory Services,“Many CFO's and CEO's assume that sales tax compliance is virtually automatic – that their company simply gets billed for sales taxes and they pay the bill . . . what could the issue be?” According to Flick, the sales tax issue merits attention as it could be worth as much as six or seven figures to a company.

In the wake of the landmark Wayfair Supreme Court decision, states have sought to raise additional revenue by establishing more relevance of nexus between their state and companies, especially from those companies located out of state. Sales tax nexus is defined as the connection between a company and a local jurisdiction. At one time, nexus was established by a company's physical presence in a state.

However, post-Wayfair, nexus can be defined as the amount of business a company does in a state, whether or not it also has a physical presence there. Influenced by the Wayfair decision, there has been a significant rise in the number of sales tax audits undertaken, as states attempt to push the limits of nexus and then identify more companies underpaying sales taxes.

What are some of the main reasons companies get audited for sales taxes? According to Flick, selection for a sales tax audit can be triggered because:

-a company is randomly selected.

-one's industry could be targeted.

-there is a large discrepancy between a company's gross sales and sales taxes paid.

-the taxing authority's research shows that an out-of-state company is doing significant business in a particular state.

-or other reasons.

Although no one likes an audit, Flick's experience has shown that a sales tax audit doesn't always mean that a company owes more money. There is a reasonable chance that a company might actually receive a tax refund for overpayment. Flick outlines some of the most common reasons companies can overpay sales and use taxes, where an audit might lead to a refund:

- Vendor invoices often charge a sales tax on everything and a company's
bookkeeping staff just assumes the full sales tax is correct and pays
whatever tax is charged.

- The payables staff is focused on the product or service cost on an invoice
and not the sales tax, and just pay the invoice.

- A company's financial team has overconfidence in the company's internal
audit software used, which may not be updated frequently nor accurately.

- There have been recent changes in the definition of nexus in a state or
recent updates in a jurisdiction's sales tax laws that have not yet been
accounted for.

- There is a disconnect between the internal local bookkeeping team and the
national one where exemptions are overridden.

- Sometimes there is the misapplication of exemptions and charges. For
example, in some states hard goods are taxed but the labor contributing to
the process may not need to be, such as janitorial services.

- There is lack of oversight of the reselling process. Often reselling
certificates can fall through the cracks at large companies resulting
in missing or out-of-date resale certificates.

- Simple human error becomes embedded in the process.

- Sometimes a company's tax group is knowledgeable about sales tax
exemptions but they don't have oversight of accounts payable.

- and other factors.

Said Flick,“When a forensic sales tax expert digs into a sales tax audit or review, they can often find overpayment areas leading to significant refunds.

When you consider the EBITDA of most companies is around 6% to 10%, sales tax overpayment recovery, can be meaningful.” Flick advises not to wait for a government audit to conduct one's own internal sales tax audit, since it can provide the company with information to identify valuable potential refunds sooner than later.

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ABOUT: EisnerAmper Advisory Group

EisnerAmper, one of the largest business consulting groups in the world, is comprised of EisnerAmper LLP, a licensed independent CPA frim that provides client attest services; and EisnerAmper Advisory Group LLC, an alternative practice structure that provides busines advisory and non-attest services in accordance with all applicable laws, regulations, standards and codes of conduct. Having recently joined the EisnerAmper family, FM Cost Containment is one of the leading forensic tax recovery firms in the United States, specializing in tax confirmation and recovery of overpayments of sales and use taxes, as well as tax audit defense, utilizing proprietary research and knowledge of little-known technicalities in the tax laws of each of the 50 states, including over 10,000 tax entities throughout the United States.

For more information, please contact:

Bill Flick
EisnerAmper Advisory Group LLC
40 Lloyd Ave.
Suite 308
Malvern, PA 19355

Phone: 484-580-8907
Website:
LinkedIn:
Twitter:
YouTube:@FMCostContainment



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