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Sales Tax Audits: Expert Strategies for Successful Compliance

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Tal Bar David

Sales tax compliance is a critical aspect of running a business, but as every small business owner and entrepreneur knows, it can be overwhelming and complex when done alone. And one of the last things any business owner wants to encounter is a sales tax audit notice.

Sales tax audits can be complex, time-consuming, and costly. Not to mention scary.

That’s why we’re going to show you how to make proactive compliance a part of a business’s operations so you can minimize the risks of an audit and be ready if it should come along.

But before we get to simplify sales tax audits, we first need to understand what the sales tax audit procedure entails and what triggers it.

Understanding Sales Tax Audits

A sales tax audit is an examination conducted by state tax agencies to verify whether a business has correctly reported and paid the appropriate amount of sales tax. During the audit, a tax agent scrutinizes a company’s sales records, financial documents, and tax returns to assess compliance with state tax laws.

Sales tax audit triggers can stem from various events, including the following:

  • A customer of the business was audited and a red flag came up surrounding the audited customer’s sales tax payments to your business.
  • A vendor of the business was audited and it was found that the vendor did not charge sales tax correctly.
  • The size of a business along with the volume of its sales has flagged it for a compliance audit.
  • The business has a questionably high volume of exempt sales.
  • The business has previously filed returns with errors or filed returns late on a continuous basis.
  • It’s a new business.

So it’s clear that even when you’ve done everything in your power to avoid a sales tax audit, you may still be singled out for reasons outside of your control.

The Importance of Sales Tax Compliance for Start-ups and Small Businesses

For start-ups and small businesses, maintaining sales tax compliance right from the start is vital to avoid the pitfalls of non-compliance. Even a minor mistake in sales tax reporting can lead to sales tax audit penalties, hefty fines,, and potential damage to the business’s reputation.

With reliable sales tax software, a thorough understanding of the business’s sales tax nexus and obligations, and a proactive approach to compliance, start-ups and small businesses can make compliance a welcome part of their operations without breaking the bank on sales tax outsourcing.

By prioritizing compliance from the beginning, start-ups and small businesses can establish a solid foundation for growth and success.

Go-to Strategies to Mitigate Audit Risks

Sales tax audits are generally conducted once red flags of one sort or another have been identified. To ensure that your business doesn’t send up any of those red flags come audit season, make sure to follow these strategies:

Calculate and charge accurate sales tax

This is where compliance begins. Charging and remitting the right sales tax amount in each state you have a sales tax nexus in has to be at the top of your compliance to-do list. Utilizing automated sales tax software can also help to ensure accuracy and consistency in tax calculations and reporting.

Maintain accurate sales tax records

But once you’ve collected and remitted the correct state sales tax, keeping accurate and well-organized sales tax records is the actual foundation of compliance. With a well-documented compliance trail, you’ll have no trouble appeasing even the staunchest of auditors.

Stay updated on sales tax laws and monitor your sales tax nexus

Continuously monitor your economic and physical nexus as well as changes in sales tax laws so you can update compliance procedures accordingly. To do this, it can be helpful to regularly consult with tax specialists or use specialized sales tax software that monitors a company’s nexus and states tax laws automatically.

Conduct periodic internal audits and follow robust compliance protocols

Perform periodic internal audits to identify potential compliance issues. Review exemption and resale certificates to ensure their validity and completeness. Promptly address any identified issues. Developing comprehensive sales tax compliance processes and controls also helps to define roles and responsibilities within the organization so that compliance becomes a collaborative effort.

Key Steps in Handling a Sales Tax Audit

Okay, so now that we’ve covered how to minimize the risk of an audit, let’s look at what you need to do if an audit does come your way.

Step 1: Respond to the notification and start the document preparation

Upon receiving an audit notice, businesses should respond promptly and gather all the necessary records and documents for the audit. The earlier the preparation starts, the smoother the sales tax audit process will be. As you review the collected documents before the audit, you should identify potential exposure areas and seek guidance from outside advisors if needed.

Step 2: Engage with your auditor and stay in the loop of your audit

Maintaining a respectful and professional relationship with the auditor is crucial. Designating a single point of contact for communication can streamline the process and ensure clear communication throughout the audit. If you stay part of the process, any queries that could delay the audit can be resolved much quicker.

If you follow these two steps, your audit should be over in no time. Unfortunately, getting through Step 1 and the preparation of documents can be a grueling process for many businesses if transaction records, exemption certificates, and remittance proof haven’t been managed effectively from the start.

Fortunately, sales tax automation software makes all of that a lot easier.

How does Complyt simplify sales tax audits?

With Complyt, sales tax audits are just one more thing your business never has to worry about, along with every other element of sales tax compliance.

Complyt helps you manage your sales tax compliance automatically from one central location that’s integrated into your business’s infrastructure. From transaction records to proof of remittance to HR tools, Complyt integrates with your entire operational landscape to make sure your compliance journey covers every element of your business.

With features like real-time tax rate calculations, nexus monitoring, exemption certificate management, and automated filing, sales tax automation software eliminates the risk of human errors and saves valuable time and resources for businesses ranging from start-ups to enterprises.

Learn more about Complyt’s features and how we can help your business scale its compliance journey with tailored sales tax software.

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