As states have become more comfortable with their expanded sales and use tax policies, many have turned their attention to enforcement, using quite a few effective tactics to find inattentive businesses.
Analytics. State revenue departments are digging into their databanks, using group taxpayer data, sales tax exemptions, local tax filings and other data to identify non-compliant businesses. Armed with analytics on transaction data, states are targeting out-of-state companies that likely exceed annual thresholds with notices and requests for information leading to jeopardy assessments and/or audits.
Cross referencing. States use business payroll accounts, income tax filings, sales tax returns, 1099 reporting, and other data to cross reference sales and use tax requirements for red flags. Companies with abnormal percentages and income returns but no sales tax returns are targeted. Extreme variations in reporting can also invite scrutiny.
Business registrations. When you buy a business or the assets of a business, you typically inherit all liability associated with that business or its assets. This concept known as successor liability is a gold mine for tax authorities.
Sales tax permit checks. Some states send roaming teams to trade shows and county fairs checking vendors for sales tax permits. Others require trade show promoters to report the names of all exhibitors to the state. The state follows up by sending the exhibitors a nexus questionnaire.
Information sharing. The IRS and U.S. customs share information with states, including import documents and personal or corporate tax returns.
Buying or selling a business. Typically, when a business is sold, a final sales tax return is filed and the permit closed. The new owner of the company or assets then applies for a permit. This process notifies the state that a transaction is occurring, and in many instances, the state will follow up with an audit.
Spot checks. States creep companies online as well. By putting items in a sales cart, tax authorities can see if a company is properly adding tax.
Mobile inventory. Tax authorities with local tax policies may snap photos of commercial trucks within their city and verify that the companies are registered to do business in the city. Companies that aren’t may get a notice.
Whistle blowers. Disgruntled employees and competitors may tip off the state to questionable state tax practices. States often offer rewards to whistleblowers.
Hotline calls. Calling the state sales tax hotline is no longer anonymous with caller ID, LinkedIn and Google. Today, it may be safer to use an intermediary such as an accounting or law firm to make third party inquiries.
Interested in shoring up your sales and use tax practices?
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Judy Vorndran can be reached at jvorndran@taxops.com or 720.227.0093.
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