TaxCloud, as a Certified Service Provider (CSP), has a contractual relationship with the Streamlined Sales and Use Tax Agreement states that allows them to audit our records to ensure we are calculating, collecting, and reporting the correct amount of tax. These audits typically occur on a three-year cycle, though not every state will necessarily audit us every three years. To be clear, it is our business, not the businesses that use our service, being audited. The state auditors will work with us directly and will not contact you unless you have reached out to them with a specific inquiry, they have a belief that a retailer has committed fraud, or if we are unable to provide them with specific information about some of your transactions. Requests for information on specific transactions will come to us first and we will make every effort to respond with data that is available to us. However, if questions arise where we need additional information from you, we may ask you for items such as exemption certificates or invoices. Even though these are usually minor requests, we understand they can be an inconvenience to your business, and we will avoid making such requests whenever possible. This article is meant to outline some tips and business practices that can decrease the likelihood of us having to request any additional information from your business during an audit.
First, it is helpful to understand how these audits work. They begin with the state notifying us of the audit and assigning an auditor who then provides us with a list of transactions in question. Typically, these transactions represent instances where the auditor thinks tax was either under collected or over collected. It is important to note that these states do not hold us or you responsible for errors in the tax calculations if those errors were caused by erroneous data provided by the state or certified by the state (the states all periodically review our systems and certify that they are working properly).
So, what can you do to avoid any inconvenience to your business? The short and simple answer is to be as diligent and detailed as possible when setting up your online store. The most common type of transaction auditors ask us about is one in which no tax was charged but the product either appears taxable or it is unclear to the auditor what the product is. Below is some advice for steps your business can take to make these audits go as smoothly as possible for all parties involved:
Product Mapping: Our software utilizes Taxability Information Codes (TICs) which represent categories of products. It is your responsibility to map the products that you sell to the appropriate TIC. We work with each state to make sure that the tax treatment of each of these categories of products is correct for the delivery location. This is particularly important because of differences in sales tax laws across states, counties, and even municipalities which are always subject to change. Because of this, assigning products to the correct TIC is very important. The TICs “0” and “99999” are general TICs and, while they can be useful in select instances, it is best to avoid using these and assign more specific TICs whenever possible. Because they are so general, an auditor will have no idea why the products might be exempt.
Typically, a significant portion of the sample of transactions we receive during audits concern transactions involving these general TICs. TaxCloud can provide you with the resources and tools to help you complete the mapping process.
Product Descriptions: When the auditors are reviewing transactions, they frequently use the product description field. This is a 65-character field you should populate with a simple description of the product. From an auditor’s perspective, having a clear and useful description of the actual product sold can be very helpful. These product descriptions can also help us to answer questions from the auditor without needing to contact you. Providing an understandable product description upfront can preclude the need for providing invoices or product descriptions during an audit.
Addresses: Making sure your online store is collecting accurate and complete address information is another way to avoid requests for additional information. If auditors can’t see the address of a purchaser, they can’t confirm if tax was charged correctly which oftentimes means we will have to request an invoice (more information on these below) or other additional information from your business. However, if when setting up your online store you make sure you are collecting accurate and complete address information on every purchase then we can likely resolve any address related issues internally, without needing any additional information from you.
Exemption Certificates: A common reason that tax isn’t due on a sale is because it is either sold to an exempt entity or sold for an exempt use. To qualify for these exemptions, the purchaser usually must fill out a form and get a certificate to confirm they are exempt. If you’re selling to exempt entities, you can use our exemption management system to help charge tax correctly for transactions with these entities. However, auditors will often question these transactions because they represent instances where no tax was collected. So, keeping exemption certificates easily accessible can help save you time in the event we do have to request them from you.
Invoices: Like exemption certificates, auditors will occasionally request invoices to confirm whether tax was charged on a sale. Keeping these well organized and easily accessible can also save you time in the event we need to request them from your business.
Returns: We keep records of returned items, but sometimes these records won’t satisfy the auditors request and they will ask for further confirmation that an item was returned. Like exemption certificates and invoices, keeping track of returned items can be useful in the case we do need to provide the states with additional documentation.
These practices can either reduce the chances of us needing to request information from you, and, if we do need to request information make that process as easy as possible. Please be assured that we are always working internally and with the states to simplify and expedite these audits so that you can focus on the success of your business.