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Tips for Retailers to Survive Sales Tax Audits

Tips for Retailers to Survive Sales Tax Audits

Tips for Retailers to Survive Sales Tax Audits

There are more than 11,000 jurisdictions within United States for sales tax. Each of these jurisdictions have their own set of rates, rules, regulations and forms. it can be a nightmare for a small to mid-size business who have to traverse these treacherous grounds, especially when they are tagged with sales tax audit to be conducted by any of these agencies. It is especially true for IRS, since it is the largest among them all and operates on the federal scale with most authority.

There are many ways to survive a tax audit, but the best one among them is to avoid an audit in the first place.
Small and Middle-sized business owners should learn the following points of the Sales Tax Compliance Checklist. These are simple tips for retailers;

Know Your Nexus:

Nexus, also called ‘Sufficient Physical Presence’, is a term which is used to determine whether a business which sells products in different states is liable to collect sales and use tax in said states. Determination of nexus is necessary before a jurisdiction can impose their taxes on relative business. It is absolutely necessary for the businesses which operate in multiple locales, especially the e-commerce businesses to determine in which states do they have a sufficient enough presence to be regarded as in their nexus.

The physical presence can be determined by a business having office space, employees, warehouse, inventories, shipping and affiliates in a state. The rules vary everywhere. In some states, just having a billboard on the side of the road counts as having a nexus.

Obtain or Maintain Sales Tax and Business Licenses:

It is vital for a business to obtain sales tax and business licenses in a jurisdiction where they wish to operate. If they already have the necessary documents and licenses, they must be regularly maintained and watched carefully to be renewed before their expiration dates pass.

Every state requires the retailers to have a license or registration before they give their permission to operate in their territory, therefore, there acquiring must be a top priority.

Knowledge of the Tax Rates:

Knowing the correct tax rates in a state or a jurisdiction where a business has a nexus prevents it from over collecting or under collecting the sales tax for retailers. Different jurisdictions demand different tax rates. If the business, which operates in multiple jurisdictions, mixes them up, their audit will cause them a lot of problems.

Proper Understanding of Product Taxability Rules:

Most products sold in the market are considered Tangible Personal Property (TPP). They are taxed at the standard tax rates. However, that is not always the case. Some jurisdictions have different rules for different products. For instance, heavy duty construction machinery may be taxed under TPP in many places, but depending upon their use, or the socio-political state of the area, could be either completely exempt from taxes, or have a much more than usual increment in it.

Origin vs. Destination:

You must understand how different jurisdictions charge taxes based upon origin or the destination of the product. In several states, such as, Pennsylvania, Arizona and New Mexico, the taxes are charged in accordance with the area in which the product originates from. On the other hand, in states such as New Jersey and Louisiana, taxes are charged based on the area in which the product is sold i.e. destination. It is not an easy system to traverse but if your business demands it, you must do it.

Exemption Certificates:

The sellers can issue exemption certificates to the buyer for a number of reasons. These reasons can be varied from the resale of a product, such as a car, to the issuance of an exemption form under 501(c), such as cancellation of income tax for humanitarian aid by a nonprofit organization. Different rules exist in different jurisdictions for issuance of such certificates. It is necessary for the buyers to store and maintain these certificates in case they are ever audited.

Charging of Proper Tax Type:

Interstate transactions and Intrastate transactions vary in what taxes are to appropriately applied to the products. Sales tax relates to the intrastate transactions and may one rate throughout. On the other hand, Seller’s use tax is applied to interstate transactions and could have different rates altogether. Based on the tax types, it is necessary for business owners to know which kind applies to a particular transaction and how to properly apply it while filling the form for tax remittance.

Know the Risks on Returns:

There are sales tax-specific returns, seller’s use tax specific returns and consumer use tax specific returns. Finding, using and properly submitting these forms is a daunting and headache inducing task filled with potential error and risk. Electronic filing and payments add more risk and work to the already difficult process. Therefore, it is necessary for business owner to take precautions beforehand and keep such returns in mind when conducting related business. A customer who bought something from an online retailer that does not have a nexus and fails to charge tax may be liable to pay consumer use and sales tax for online retailers on said purchase.

Avoiding Audit Triggers:

A significant percentage of exempt sales, significant increments or decreases in the sales tax, late filings; all of these factors are among those which can induce a triggering of a red flag among tax authorities, and may push them to take a closer look at your operations though a tax audit. You must make sure to avoid all such triggers as much as you can.