Retailers are facing new obligations for collecting state sales taxes (State Sales Taxes- Where do I need to collect?). As these obligations expand, you may be worried about your potential liability associated with charging, collecting and remitting these taxes. Worse, what happens if I get audited? This article will discuss how state audits work in this new world of sales tax administration.
How a state sales tax audit would work depends primarily on three things: 1) do I have a physical presence in the state, 2) does the state that is conducting the audit provide special protections and processes for retail audits, and 3) am I using a state certified software provider, such as TaxCloud, to manage my sales tax compliance?
Physical Presence- in a state where you have a presence (nexus in tax terminology) a state may compel you to collect their sales tax and may audit you at any time. The state will generally contact you directly with compliance questions or for the purposes of an audit. There are many things you can do to prepare for a possible audit and to manage the process if you do get audited (Direct Audits – What to know).
If you do not have a physical presence in a state, state audit procedures can differ.
State Provided Liability Protections- the 24 Streamlined Sales Tax states (List of Streamlined States) and the State of Pennsylvania have adopted protections that significantly lessen the audit risk for remote retailers (a retailer making sales into a state where they have no physical presence).
- These states provide liability relief for collecting the incorrect amount of tax if the error was the result of reliance on incorrect data provided by the state. Information provided by these states includes the taxability of certain products, rate information covering all state and local jurisdictions, and address data that assigns individual street addresses to the correct taxing jurisdictions.
- They also provide liability relief for the tax calculations made by TaxCloud (see discussion below).
The remaining states with a sales tax provide varying levels of information and liability relief related to the collection of sales taxes. TaxCloud can provide additional information about collecting sales tax in these states.
Using TaxCloud’s “Certified “ Software- the 24 Streamlined Sales Tax states (List of Streamlined States) and the State of Pennsylvania have also certified TaxCloud’s tax management software and provide additional liability protections for retailers using our services.
- Each of these states have tested and certified our tax compliance software and provide protections if the system returns an incorrect tax amount. Our system utilizes Taxability Information Codes (TICs) which group products into categories and apply the tax treatment of each category by state (TaxCloud TICs).
- TaxCloud utilizes state provided rate, jurisdiction, and taxability information to take advantage of the liability relief available for the use of state provided data.
- The Streamlined States have adopted a uniform standard for what constitutes a physical presence for the purposes of making collection services free for remote merchants. (Explanation of Streamlined Services). These services include audit support.