3 Sales Tax Audit Trends Every Ecommerce Sellers Should Know

0:36 What a sales tax audit is

So what exactly is a sales tax audit? Well, in a nutshell, it's when the state comes looking at your business and sales records for a certain period of time in order to ensure that you've been meeting all of its sales tax requirements.

It's going to be looking for some main things. For registered sellers, they want to know, did you cross the nexus threshold before you registered? And if so, how long did you have nexus before registering? If you are an unregistered seller, how long ago did you cross nexus? This is typically determined with a pre-audit or business questionnaire or survey that often precedes these audits. That information will determine the audit period.

And lastly, did you collect the correct amount of sales tax on your taxable sales into the state for the time period that we're talking about? They're going to dig into all of your sales, marketplace, wholesale, exempt, taxable, everything, to make sure that it all adds up.

1:28 Trend one, audit task forces

So what are some of the current trends in sales tax audits? Well, actually, this is where it starts getting really interesting. Recently states have been turning up the heat on online sellers. It's been about six years since the Wayfair decision, and that leniency that some states were showing, yeah, that is pretty much gone now. They're cracking down, and here are some of the trends that we're seeing.

First up, audit task forces. States are hiring more and more auditors, especially in high population states like California, Florida, and Washington. These task forces are on a mission to find non-compliant businesses. And yes, that even includes businesses that are not registered in the state yet.

2:04 Trend two, pre-audit questionnaires

Next, like we mentioned earlier, we've got periodic questionnaires, business activity questionnaires. There's several names for them. It's becoming more and more common for states to send these out to businesses, even those that haven't registered yet. They're asking for up to three years of sales data, and ignoring these notices, yeah, that is not a good idea.

Responding quickly and accurately can actually help you by showing your compliance or how close you are to the nexus thresholds, but without triggering a full audit. Not responding, or doing so poorly, is an almost guaranteed way of getting audited. We did a video about these questionnaires recently, and you can find that link here or in the description below.

2:38 Trend three, states sharing data

And then there's the increased collaboration between states, and this is actually a big one. Many states belong to a multi-state tax commission that shares business data. So if you're not compliant in one state, you may get caught by being found out by another state. This is a domino effect, and it's starting to catch lots of businesses off guard. We wrote an article about this with a lot more details, and you can find that link in the description below.

3:01 What triggers an audit

Now, what's triggering an audit? Well, there are actually several things that can put you on the state's radar. First of all, failing to register and remit sales tax is a big one.

But even if you're already registered, there are other things that can put up red flags. For instance, if you report high amounts of sales tax immediately after registering. Another one is that maybe you're just connected to other vendors or customers that are being audited. Sometimes it's audit by association. Maybe you're going through some significant business changes that can trigger an audit. And if you've been audited before, well, sorry, now you're on their list and you're more likely to get audited again.

3:34 Penalties, protection, and next steps

So the key takeaways here, states are not playing around anymore. The penalties for non-compliance are steep, and they're only getting more aggressive. How steep, you may ask? Well, as an example, Washington's penalties are a whopping 39% of taxes owed. Ouch.

So what can you do to protect your business? Well, first off, don't delay. Once you cross the nexus threshold, register and start filing immediately. If you're already in too deep, consider a voluntary disclosure agreement to help you reduce your liability and get back on top of things. We did a video recently about how VDAs work, when you should consider getting one, and a bunch of those details. You can find that link here or in the description below.

And if you need help navigating all of this, that's what we're here for. Schedule a call with our sales tax experts today. Let's find a way to help you get your business compliant and audit ready. Don't wait until the state comes knocking. By then it's too late. The costs of waiting are too high, and you've worked too hard to risk it all. So let's get on top of this together.

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