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Monday, June 24, 2013

Sales tax audits on the rise for 2013

Examining taxes
The Marketplace Fairness Act allows states to enforce online sales tax collection
By Tyler Braun

States are facing higher and higher revenue shortages. California, for example, is facing a shortfall of approximately 16 billion in 2013. Several cities in Arizona have increased the number of sales auditors on the payroll, finding that hiring one auditor can result in millions of found revenue. States nationwide are turning to the sales tax audit as a way of meeting budgetary needs.

Sales tax basics

Sales tax is assessed on retail sales, such as the purchase of goods at a store. It can also be assessed on some services. Forms of sales tax are applied to hotel stays, restaurant meals, fuel purchases and other items.  Sales tax is applied equally to everyone, and is thought of as a "negative tax," because it impacts the less fortunate much more than the wealthy, as a greater percentage of their income is spent on taxes.

Certain organizations are exempt from paying sales tax, such as charitable non-profit organizations, churches and other religious organizations, schools, fraternities and other qualifying organizations under state statute.

Why is sales tax targeted?

In the past decade, states have shifted away from collecting property taxes. This shift has caused a revenue shortfall. Add the economic woes of the last six years, and states and cities are in more need than ever of additional sources of revenue. However, this is also a time when lawmakers do not want to raise taxes, no matter how much the governmental entity needs the funds. The remaining option is to ensure that they are properly receiving all tax revenue that should be collected.

In the same time frame, Internet sales have grown exponentially.  Some experts estimate that states lose as much as $23.2 billion annually to internet sales. In 2012, at least five states entered into an agreement with Amazon to collect sales tax on sales in 2013. Those states include California, New Jersey, Arizona, Virginia, and Massachusetts.

What can you do now to prepare?

If you collect sales tax as part of your business, you can start to prepare now to prevent hours of frustration if you are audited.  Start by organizing your sales tax records and storing them in an easily accessible place.  You also want to review the sales tax exemption policy with your employees. When an organization attempts to purchase goods without paying the sales tax, they are supposed to submit documentation to the retailer that certifies their status as an exempt organization.  You, as the retailer, want to be sure that all of your employees are aware that you will only grant the exemption if the certification is completely filled out.  If you have incomplete certificates in your sales tax records, the state may look to you to make up any shortfall.

Review your sales tax collection procedures with your bookkeeper, accountant or attorney.  You will want to review the states and cities in which you do business. Remember to consider the location of any sales people, as well as the locations to which you have delivered goods. Audits can find a sufficient enough relationship to require you to collect sales tax in more than one jurisdiction.  This relationship is called a nexus.  If you aren't paying in both jurisdictions, you should start now. Your other option is to cease operations and business ties with the other jurisdiction in order to limit your future liability for sales tax in this area.

About the author: Tyler Braun is a freelance financial writer. He loves providing tax help for a variety differing businesses. After receiving a big tax refund, he consulted with the professionals at www.texanroofinginc.com/roofing-katy-tx to enact a total home roof rennovation.

*  Image license: Juan Carlos Arniz Sanz; CC BY-SA 2.0