When State Auditors Head out of State

Auditors are on the move. While most businesses expect (i.e., dread) to be audited by their home department of revenue, it often comes as a surprise to learn that state tax authorities routinely send auditors to, or hire auditors from, other states to capture unreported sales and use tax revenue. Some states go so far as to have remote offices.

For example, the Texas Comptroller has audit offices in Los Angeles, New York City, and Tulsa, Oklahoma. California has field audit offices in Chicago, New York, and Houston. There are Missouri Department of Revenue offices near Chicago, Dallas, and New York, while the Florida Department of Revenue has offices in Atlanta, Chicago, Dallas, Houston, Los Angeles, New York, and Pittsburg. The Utah State Tax Commission doesn’t specify where all it has sales and use tax auditors but notes that they “spend a majority of their time at taxpayers’ offices looking at detailed sales and purchase transactions” and “travel to locations all over the United States to perform their work.”

Field auditors employed by the Washington State Department of Revenue may audit businesses in multiple states. The Department divides the country into several sections: an Out-of-State North District (Eastern Iowa, Illinois, Indiana, Michigan, Minnesota, Ohio, Western Pennsylvania, and Wisconsin), an Out-of-State South District, and so on. Field audit offices develop and implement audit programs to optimize accurate tax reporting and payment by businesses located throughout the target area.

What do auditors in other states do?

Auditors frequently examine sales by companies that are headquartered in other states but have nexus (a connection strong enough to trigger a tax collection obligation) in the auditor’s home state. Yet a company doesn’t have to be registered with a state to be targeted by that state’s audit division. While many audits are selected by a random sampling of registered businesses, auditors knock on the doors of unregistered businesses whenever evidence suggests that they may owe the state tax revenue. This is true both in-state and out.

Many states have increased audits since the Great Recession, hiring new auditors as needed. New Mexico’s Audit and Compliance Division has added approximately 62 FTE employees since economy plummeted. And in 2015, the Wisconsin Department of Revenue announced that it needed 102 additional auditors and 11 additional agents to help uncover what was estimated to be approximately $80 million in unpaid tax revenue. Many of the new hires are focusing on businesses based in other states.

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States work together

In addition to sending auditors to other states, state tax administrators frequently work together. Regional information-sharing agreements between states, such as the following, can greatly help facilitate audits:

  • NESTOA, North Eastern States Tax Officials Association (Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont)
  • SEATA, Southeastern Association of Tax Administrators (Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia)
  • MSATA, Midwestern States Association of Tax Administrators (Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, Wisconsin)
  • WSATA, Western States Association of Tax Administrators (Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Texas, Utah, Washington, and Wyoming)

There are other sorts of information-sharing agreements as well. New Mexico shares information with — and receives information from — three tribal governments. And the Multistate Tax Commission Joint Audit Program for member states “provides obvious economies of scale to the states” and “relieves the taxpayer of the burden on multiple ongoing audits.”

Oklahoma to base auditors in other states

Oklahoma doesn’t currently base auditors in other states. Like Utah, it sends auditors to various out-of-state locations as needed, and between 2014 and 2017, it conducted more than 460 audits of remotely based businesses. But a recently enacted law will soon enable the Tax Commission to develop a stronger presence out of state.

HB 1427 authorizes the Oklahoma Tax Commission to create and maintain an Out-of-State Tax Collections Enforcement Division. It enables the Commission to “employ full-time, unclassified, out-of-state tax auditors or full-time-equivalent contracted auditors” to enhance the following:

  • “Sales and use tax collections related to sales or transactions involving residents of Oklahoma and out-of-state vendors with a nexus to the State of Oklahoma”
  • “Collections of any other unpaid taxes owed the State of Oklahoma by out-of-state individuals, firms, and corporations”

The Tax Commission may audit any individual or business it believes may owe tax revenue to Oklahoma. The law takes effect November 1, 2017.

How would your business fare during an audit?

Get your free copy of the Sales and Use Tax Audits Uncovered report to learn more about audit triggers, how to avoid them, and how to protect your business against unnecessary tax compliance risk.


Permission to reprint or repost given by Avalara. Content previously published at www.avalara.com/blog.

Growth Activities That Can Be Life (And Tax) Changing

Growth isn’t a one-size-fits-all approach. In fact, companies expend a great deal of energy and resources deciding which pursuits will move the needle the furthest toward achieving specific goals, and where to prioritize their time and investment.

Oftentimes sales and use tax gets left out of this equation, especially when it doesn’t appear to directly correlate to the task at hand. Certain growth activities, like adding new locations, products, or sales channels, instinctively signal a need to alter sales and use tax compliance practices. With others like financing rounds, acquisitions, or technology platform changes, tax implications aren’t as obvious and therefore are more likely to be overlooked. Yet these are often the situations where compliance strategies can have the greatest and most lasting impact.

growth tax

Below is a brief glimpse of how sales and use tax compliance can come into play for 3 business growth activities that can be life (and tax) changing: financing events, M&A, and technology platform integration projects.  Here’s what you should be aware of when going through these processes.

Financing events

For any financing event, public or private, investors look closely not only at how you plan to grow the business, but also how you are managing it now. Poor sales tax management practices or unfavorable audit outcomes can impact valuation, jeopardize funding, or even nullify deals. High visibility events like funding rounds and IPOs can also bring your business to the attention of state auditors looking to draw in more tax dollars.

Mergers and acquisitions

The meshing together of people, assets, systems, and processes is no simple feat. So, it’s not surprising that business integration issues following M&A transactions are one of the biggest things keeping company execs up at night.  Between due diligence, integration, accounting/financial reporting, and post-acquisition compliance, who has time for the minutia of sales tax? It can be easy to overlook tax obligations or liabilities, which can raise red flags with investors early in the process, or with auditors later.

Technology platform changes, consolidations or upgrades

During change events, it’s good practice to evaluate your financial systems and fill any gaps with new solutions or functionality that can advance your growth objectives. For example, tax automation software that unites critical transaction data from disparate systems and processes can alleviate compliance issues during post-merger integrations, reducing audit risk and avoiding delays in closing the books.

Download the complete whitepaper for further insights from leading industry leaders.


Permission to reprint or repost given by Avalara. Content previously published at www.avalara.com/blog.

Risky Business: 5 Industries that Raise Audit Red Flags

States target certain businesses for sales tax audits according to data.

For most companies, the mere idea of a sales tax audit is a daunting prospect, and “fingers crossed we don’t get picked” is a popular strategy. But for certain types of businesses, just doing what you do can be enough to attract the attention of the state auditor. According to state departments of revenue data, certain industries are at a higher risk of being audited simply based on how sales and use tax regulations impact their business. The more complex the rules, the higher the odds that errors or oversights will happen. These mistakes can be costly – both for states that are missing out on tax revenues and the companies that fall short on compliance.

sales tax audit

The Audit Process Uncovered

Unless you’ve been through an audit before, you likely have no idea what to expect, never mind why the state is looking at you or why your business has been selected for an audit. Sometimes, companies are chosen at random. But more often, something you are doing (or not doing) in your business has raised the red flag for state auditors.

Sales and Use Tax Audits Uncovered, a new report by Avalara and Peisner and Johnson, aims to set the record straight on why some businesses get audited more than others and the behaviors driving these trends. Analysis compiled from real audit data from two of the four Big Four states, Texas and California, and findings from more than 64,000 audits conducted over a 27-year period went into the writing of the report. Some interesting patterns emerged from this data on the types of companies that tend to get audited, the reasons why they get audited, and what activities make them more vulnerable to an audit.

For example:

  • 60% of audits target only four industries
  • One-third of audits are now conducted out of state
  • The two most frequently identified audit errors are improperly managing exempt sales and out-of-state purchases

Lax Tax Practices are Red Flags

The study found that certain factors, such as audit history and having a high ratio of exempt sales to total sales, led to a higher risk of being audited. While these seem straightforward, other characteristics like industry type are less understood. What exactly is it that puts these businesses in the state auditors’ crosshairs when it comes to tax compliance?

For starters, certain tax practices can put any business at greater risk of audit. According to the California Board of Equalization, the top three most frequently seen problems are:

  • Not charging tax on out-of-state sales
  • Recorded versus reported difference in taxes collected and remitted
  • Not properly documenting tax-exempt sales

Which Industries are a Target?

According to audit data, the industries targeted most by auditors are Retail, Food Service, Manufacturing, Wholesale (/Distribution), and Construction. These were ranked in the top five in both California and Texas. It’s likely that these industries attract attention based on the types of compliance errors auditors uncover when auditing these businesses. For example, sales tax nexus was a common hurdle shared among all five of these industries. Not surprising, given that states have vastly changed the definition and thresholds for nexus beyond the physical presence standards.

Beyond nexus, audit triggers were more specific to the tax complexities experienced by each industry. For example, product taxability can be especially burdensome for retailers, wholesalers, and food services, especially given how differently states tax different products and services. Use tax and exempt sales tend to trip up manufacturers and construction companies. And drop shipping can complicate compliance for distribution companies. These and other audit triggers are covered in more depth in the report, along with audit profiles and outcomes for each of the high-risk industries.

The report also reveals that states are getting more serious about sales tax audits — especially in recouping lost revenues from e-commerce sales — hiring more auditors and focusing greater efforts on audits conducted out of state. What exactly does being caught in non-compliance cost nowadays? According to Wakefield Research, small to mid-size businesses are out approximately $114,000 in taxes, fees and penalties if auditors find problems. It can be nearly four times that amount for larger firms.

Reduce risk with sales tax automation

While you may not be able to head off a sales tax audit forever, you can make the process far less painful by managing tax compliance more efficiently. This starts with having a clear understanding of your tax obligations and a reliable way to ensure you can comply with them — now and should they change. Tax automation software like Avalara can provide this assurance.

Get your free copy of the Sales and Use Tax Audits Uncovered report to learn more about audit triggers, how to avoid them, and how to protect your business against unnecessary tax compliance risk.


Permission to reprint or repost given by Avalara. Content previously published at www.avalara.com/blog.

Get Ready for New Changes to Sales and Use Tax in 2017

In 2017, when it comes to sales tax, states are taking stances on everything from soda to streaming content, tobacco to tampons. The New Year will also bring renewed efforts by states to implement internet sales taxes and continue the legal battle to overturn existing legislation.

Here is a summary of 2017’s most newsworthy federal and state sales and use tax changes:

The Great Nexus Debate

The push by states for online sales tax revenue will likely continue in 2017. Oklahoma created new reporting obligations for remote sellers starting in November of this year and Tennessee implemented a new economic nexus policy that takes effect on July 1, 2017. A new use tax notification requirement for remote sellers is also set to take effect on July 1, 2017 in Louisiana.

States are also busy challenging existing precedent. Attorneys general in 11 states called for the U.S. Supreme Court to overturn Quill Corp. v. North Dakota — the 1992 decision that established that states cannot impose a tax collection obligation on businesses lacking a substantial physical presence in the state.

And four pieces of online sales tax legislation continue to languish on Capitol Hill; three look to impose tax on remote sellers: The Marketplace Fairness Act, the Remote Transactions Parity Act, the Online Sales Simplification Act, and one, the No Regulation without Representation Act, aims to prevent it.

Product and Services Tax Changes

Soda tax

Several states, cities and counties and the Navajo Nation impose higher taxes on sugary drinks like soda, which have “minimal-to-no-nutritional value food.” Philadelphia joins the ranks on January 1, followed by Boulder, Colorado, Oakland, California, and Cook County, Illinois on July 1.

‘Tampon tax’ exemptions

A number of states enacted so-called “tampon tax” exemptions in 2016. More are likely to follow suit starting with Illinois where the exemption for feminine hygiene products takes effect on January 1, 2017. Connecticut’s exemption doesn’t take effect until July 2018.

Streaming services

Streaming services such as those provided by Netflix, Hulu, and HBO Go will be subject to sales tax in Pasadena, California beginning January 1. Other cities in California may follow suit. Chicago, Illinois imposes a similar tax.

Tobacco, e-cigarettes and vaping

California is extending cigarette and tobacco taxes to e-cigarettes and similar vaping products starting January 1. The tax rate on tobacco products will also increase significantly once Proposition 56 takes effect in early 2017.

State Sales and Use Tax Rate Changes

California’s sales and use tax rate will drop from 7.5% to 7.25% under Proposition 30 (which temporarily increased the rate by 0.25% through December 1, 2016). The state rate decrease also affects certain partial state tax exemptions.

New Jersey’s sales and use tax rate in New Jersey will decrease from 7% to 6.875% on January 1, 2017 to offset a recent gas tax hike. It will drop further in 2018.

North Carolina use tax will apply to businesses storing tangible personal property or digital property in the state for any period of time. This expansion of use tax is due to the enactment of Senate Bill 729.

Missouri sales and use tax will not be expanded to any currently exempt services in 2017. On November 8, voters approved prohibiting the expansion of sales tax to any services not taxed as of January 1, 2015. It will be interesting to see if Missouri legislators attempt to capture additional sales tax revenue another way.

Tax exemption changes

Ohio will once again exempt investment bullion from sales and use tax beginning January 1.

Maine is expanding the sales tax exemption for products used in certain commercial activities as of January 1. Additional information will soon be available from the Maine Revenue Services.

North Carolina will exempt certain service contracts sold by or on behalf of motor vehicle dealers, in addition to certain sales of food, prepared food, soft drinks, candy, and other items of tangible personal property at school sponsored events. Certain sales of repair, maintenance, and installation services that are part of a real property contract will also be exempt.

Georgia terminated a temporary exemption for tangible personal property used for or in the renovation or expansion of qualifying aquariums in Georgia effective January 1, 2017.

North Carolina will no longer exempt retail sales of tangible personal property, certain digital property, and taxable services by certain nonprofits from sales and use tax as of January 1. Purchases by a manufacturer of fuel or piped natural gas used solely for comfort heating will also no longer be exempt.

Local sales tax changes

Several states have announced local sales and use tax rate changes, effective January 1.

More details on all of these changes, including a state-by-state breakdown, can in Avalara’s newly released 2017 Sales Tax Changes report.

Automation can simplify sales tax

Understanding how these sales tax changes impact your business is important, but can also be overwhelming, especially if you are obligated to register, collect and report tax in several states. Automating sales and use tax compliance in your accounting system, ERP or e-commerce system can alleviate much of this strain. Avalara’s tax management software ensures accurate tax calculation (including current changes), proper management of tax exemptions and streamlines the remittance and filing process for sales tax returns in every U.S. jurisdiction.

Get a free copy of the 2017 Sales Tax Changes report.

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Permission to reprint or repost given by Avalara. Some content was previously published at www.avalara.com/blog.

Sink or Swim: A Guide to Surviving Sales Tax in 2017

Businesses may feel out of their depth as states look to test the waters on tax compliance in the coming year.

Sales and use tax compliance can be a complex problem for many businesses. It almost feels like you need a bowie knife to cut through the regulatory red tape, although knowledge may be a better weapon in this case. So stay sharp with Avalara’s 2017 Sales Tax Survival Guide.

Published every year to help businesses better understand the challenges they are up against when it comes to complying with sales and use tax regulations in the U.S., Avalara’s latest Survival Guide is refreshed for 2017 with insight into what’s new and what’s changed at the state and federal level, common challenges around sales tax compliance, and tips for staying on top of your tax obligations.

sales tax

States are testing the waters in 2017

States are facing budget deficits and they need revenue from taxes. Sales and use tax is one of the largest generators of this revenue, but collecting it has become more difficult as how Americans buy, sell and consume goods and services has evolved beyond what’s defined by state tax laws. For example, Congress has yet to act on outdated federal internet sales legislation; services now outpace goods in consumer spending but aren’t taxed with the same consistency; and digital delivery of software, books and other media and streaming services have states perplexed when it comes to setting standards for taxability.

This has led many states to get aggressive – hiring more auditors, expanding nexus definitions (a connection with a state that triggers an obligation to collect and remit sales tax to that state) to target out of state sellers, implementing use tax reporting policies, increasing state and local sales tax rates, and extending sales tax to more products and services.

Survival of the fittest

While not every aspect of managing transactional tax causes pain for every business, it’s pretty certain that at least some areas will pose a challenge given how quickly the rules changes.

The 2017 Sales Tax Survival Guide walks you through 10 critical compliance challenges, from determining nexus to managing exempt sales to understanding the implications of drop shipping on your business and dealing with audits and lawsuits. Each section is also buoyed with best practices for overcoming these challenges, and links to addition information should you need to go more in depth on a topic.

It’s a must-read reference for anyone who is responsible for tax compliance in their business. And it’s available for download here.

Shore up compliance

As helpful as it is, no guide is a replacement for good practices. The most valuable takeaway from the Survival Guide is a greater awareness of just how burdensome tax compliance can be on a business – large or small. Trying to keep up with ever-changing state tax rates and rules puts a strain on accounting and finance teams in terms of the research and due diligence required.

You can remove that burden with tax automation software like Avalara AvaTax. Much of the work that goes into proving sales and use tax compliance – calculating tax rates, verifying customer information, updating taxability rules, applying exemptions, remitting sales tax and even filing tax returns – can be handled easily and efficiently in your accounting system with little to no manual work required. It’s easy to set up and use, guaranteed accurate, and budget friendly. Avalara is a preferred provider of tax software for more than 500 e-commerce, shopping cart, ERP and accounting systems and used by more than 20,000 companies worldwide. Talk to your system or application provider about using AvaTax to manage transactional tax.

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Permission to reprint or repost given by Avalara. Content previously published at www.avalara.com/blog.

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