Following up on Part 1 of this blog entry, published last week, Part 2 highlights three more significant measures states are taking to deal with the revenue crisis:

• Another tactic used by states to increase revenue is increased enforcements.  This comes in the form of increased audits, more aggressive positions being taken by the auditors and more reliance on taxpayers to defend inappropriate assessments.  Not only are the states performing more audits, but municipalities have increased their audit of home rule sales and use taxes AND business licenses as well.  These localities are sending audit notices and desk assessments to businesses that have customers in their jurisdiction.  This doesn’t necessarily mean you have a business license requirement, so it is critical to evaluate the registration requirements and make sure you are registered appropriately.

• Audits are also starting to include areas which auditors may have previously passed on or only performed a cursory review – particularly if it hadn’t been an issue in the past.  Areas where taxpayers have seen auditors take much more aggressive positions include requesting exemption certificates for every exempt transaction and being unwilling to check to see if the entity has a valid exemption; requiring receipts that reflect the sales tax on procurement card transactions regardless of invoice amount (including from restaurants); and the reconciliation of gross sales from income tax returns to sales tax returns resulting in assessments for any differences.

• Taxpayers are experiencing shorter and sloppier audits.  Historically auditors would request waivers for six months to a year.  However, as states are anxious to collect every penny owed them, waivers are not as easy to request.  In fact, auditors are rushing through audits and issuing assessments that have not been reviewed by the taxpayer.  This shifts the burden of proving any exceptions from an audit activity to an administrative hearing activity.  These hearings are being dragged out indefinitely – forcing a number of taxpayers to make payments against the audit for the items they agree with to reduce the interest costs.  States are also conducting more desk audits – requiring the taxpayer to do much more of the work.  This saves the state travel dollars and auditor time as the taxpayer now not only gets to pay the bill, but also do all the work.  There is usually no offset of the liability for the taxpayer’s efforts.

What can businesses do to help minimize assessments during the audit process?  This is a good time to make sure all your tax rates are current and that you have valid exemption certificates for your exempt customers.  With shorter audit cycles, there is less time to obtain these certificates once an audit begins.  Also, if you are in a service business, keep in mind that if you travel to perform services at your customer site, you have likely established nexus and could be subject to not only sales tax, but also income tax.  As states look to service activities as new sources of revenue, it will be critical to monitor the laws in the states where you have customers.  Conduct a nexus study to determine if you have a liability and, if you do, take advantage of amnesty programs offered by the states.  After an amnesty program closes, the state usually steps up its enforcement efforts to identify potential taxpayers that didn’t come forward.  Also as companies look to decrease their costs and streamline processes, automation of sales and use tax functions is a logical step.  Using providers like SpeedTax to help improve your calculations and remittance can help you protect your company against the aggressive efforts of the states.

Diane L. Yetter
President, Yetter Consulting Services, Inc.
dyetter@ycstax.com

About the author: Diane L. Yetter is the founder and president of Yetter Consulting Services, Inc. and the Sales Tax Institute, its training division.