Sales tax audits: what auditors check and how to respond

Expect requests for filed returns, sales journals or point-of-sale reports, bank statements, federal income tax returns, exemption and resale certificates, and purchase invoices for fixed assets and supplies. Auditors reconcile reported gross sales with federal returns and deposits; differences become the starting point for questions. Each state sets its own audit procedures, so your state sales tax page links the agency where we could verify it.

• Exempt sales without documentation. A missing or invalid exemption or resale certificate can make an exempt sale taxable.
• Untaxed purchases. Equipment and supplies bought without tax are assessed as use tax.
• Under-reported sales. Deposits or federal gross receipts higher than reported sales.
• Wrong rates or locations. Charging the wrong local rate or sourcing sales to the wrong jurisdiction.

For businesses with many transactions, states commonly audit a sample period and project the error rate across the whole audit period. If records are incomplete, the state may estimate the tax using indirect methods such as markups on purchases or bank deposits. A projection based on an unrepresentative sample is one of the most frequently challenged parts of an audit.

States generally give a deadline to request an informal conference, a redetermination or an administrative appeal after the audit report or notice of assessment. Missing that deadline usually makes the assessment final. Gather certificates and records that rebut specific findings — certificates obtained after the audit are accepted by some states and not others.

Ask the agency about payment plans and penalty waivers, and estimate the cost with the sales tax payment plan calculator. If the audit uncovers exposure in other states, consider voluntary disclosure there before those states contact you. The free business tax relief assessment includes an "audit open" option.