Sales Tax Audit or Information Request: What States Ask For

What do I do first when a state sends a sales tax audit letter or information request?

A state sales tax audit tests the returns you already filed against your records. Each state sets its own deadlines, so the dates on your own notice control. Read three things first: the tax and periods it covers, what it asks you to send, and the date it wants an answer. Washington's audit also covers business and occupation, use and public utility taxes (Washington DOR), and New York may widen an audit to other taxes (Publication 131), so ask which taxes are in scope.

The letter may be called an audit notice, an information and document request (IDR), a questionnaire or a records request. Texas mails a notice with a questionnaire (Texas Comptroller), New York usually sends a letter asking for information (New York Tax Department), California usually calls first (CDTFA Publication 76), and a Washington auditor contacts you to set an appointment (Washington DOR). These four states show the usual pattern; for another state, read the rights and deadlines on its notice and on its revenue department's audit page.

A letter that only asks whether you do business in the state, or asks you to register, is a different notice from an audit; Washington lists a business activities questionnaire and a notice of audit as separate kinds of contact (Washington DOR). If you never registered, start with catching up on uncollected sales tax.

Before you answer:

1. Calendar the response date, and ask in writing for more time if you need it. New York grants most requests to extend the due date (New York Tax Department), and California normally allows two or three weeks to prepare. Texas gives 30 days to produce records it lists in writing; on a reasonable request the auditor may add another 30 days or a reasonable time up to 90 days, and a second extension request should be granted only for a hardship beyond your control. If records are not provided in time, the audit is estimated (Texas notice of routine audit).
2. Keep every record for the audit period until the audit and any appeal end (Texas; California).
3. If you file an amended return with a payment after the account is assigned for audit, California treats the amended return as an additional record and credits the payment to the audit, which stops interest on the amount paid (Publication 76).

A records request on one state's returns that tie to the books can often be answered in house. A case needs professional judgment when sales reach several states or run through marketplaces, the returns do not tie to the books, a period has no return or no registration, certificates are missing, tax was collected but not sent in, an owner may be personally liable, the response date is close and the books are not ready, or the state asks you to accept a sample or sign a time-limit waiver.

Gather the notice, every return for the periods named, the sales journal or invoice export, payment-processor and bank statements, certificates, purchase invoices and the federal return.

How far back will a state audit my sales tax?

A state usually audits about three to four years, but the usual window is not the legal limit, and a period with no return can be reached further back. The table shows four states; yours may differ.

A business that began two years ago has only those periods to review. The exception is a period when it should have been registered or should have filed: see when you must collect sales tax and filing sales tax returns.

Which records will the sales tax auditor ask for?

Auditors ask for the records that show what you sold, what tax you charged, what you reported and why any sale was untaxed. The lists are similar across states, and the auditor can ask for more.

Sources: Washington DOR, Texas Comptroller, New York Tax Bulletin ST-770 and CDTFA Publication 76.

California's auditor may test by comparing total sales in your books with sales on your sales tax returns and on your income tax returns, tax collected with tax reported, and claimed resale sales with the resale customers (Publication 76). Run those comparisons yourself first. For retention periods, see how long to keep business records.

What if my records or resale certificates are incomplete?

A state that cannot verify a sale from your records may estimate the tax or treat the sale as taxable, so tell the auditor early what you do have.

• Texas: failing to keep or provide records can lead to an estimate of the tax or suspension of the permit, and sales without a kept resale or exemption certificate are presumed taxable in an audit (Texas Comptroller).
• New York: the state may estimate sales tax only if you have no records or yours are inadequate (Publication 131). It lists daily summary tapes, summary reports and unnumbered invoices among the inadequate ones (Tax Bulletin ST-770).
• California: you may have to reconstruct records, sometimes from what suppliers or customers hold, or the auditor may estimate; inadequate records that cause extra tax can bring a negligence penalty (Publication 76).
• Washington: the seller must prove a sale was wholesale, and one without the usual permit or certificate may still prove it from facts and circumstances under department rules (RCW 82.04.470).

Texas sets a fixed window. A deduction that needs a resale or exemption certificate is disallowed unless you hold the certificate within 90 days of the Comptroller's written notice requiring it, or a later date you agree with the Comptroller, and a certificate delivered after that cannot support it (Tax Code 151.054(e)). Once the audit is billed and you timely request a redetermination hearing (the formal review of the bill), the Comptroller's rules also give 90 days from its written request at that stage (Texas Comptroller rule changes). Request missing certificates as soon as the notice arrives. Which certificates count is covered in exemption certificates from customers.

Will the auditor check every sale, or a sample?

An auditor may examine every transaction, a test period, or a sample, and an error rate found in a sample can be projected across the whole audit period. Texas and California both test part of the records first and go deeper if errors appear (Texas notice of routine audit; Publication 76).

In a typical sample audit, the auditor tests a slice, such as one month or a random set of invoices, and finds the share taxed wrongly; the state may apply that share to all sales in the period, then add the tax rate, interest and penalties (Texas notice of routine audit).

Texas notifies you of a sample and explains how errors are projected (Texas Comptroller). California and Washington discuss the sampling plan with you (Publication 76; Washington DOR). New York may use a detailed audit, a test period or a statistical sample (Publication 131), and its guide to computer-assisted sales tax audits says that with complete books and records the state needs your consent before assessing from an audit not done in detail (Publication 132).

Records that tie out make a detailed audit possible: New York says records that cannot be reconciled to the books and returns may be treated as inadequate, and another method such as sampling may be used (Tax Bulletin ST-770). Overpayments count too. California and Texas both say they look for tax overpaid as well as underpaid (Publication 76; Texas Comptroller), so keep support for exempt sales and tax charged in error.

Some states let a business do part of the audit itself. California's Managed Audit Program charges interest on tax found owed at half the usual rate, and the state decides whether to accept the request (Publication 53). Texas requires a managed audit request within 60 days of the date on the audit notification letter (Texas notice of routine audit).

How do I prepare for a sales tax audit?

Preparing means showing that your returns match your books and that every untaxed sale has a reason. In order:

1. List the periods. Pull every return filed for the periods in the notice, zero returns included, with the workpapers (the schedules and notes) behind each.
2. Build sales by state and period. From invoices, the point-of-sale system or an order export, total gross, taxable, exempt and marketplace sales, and the tax charged.
3. Tie three totals. Match sales in the books to the state returns and to gross receipts on the federal return, and explain each gap. Marketplace sales are a common one: see filing sales tax returns for how they appear on a return, and keep the marketplace's records, which Texas requires for all marketplace sales for at least four years (Texas marketplace FAQ).
4. Tie tax collected to tax paid. Match the tax charged on invoices to the liability in the books and to what each return reported and paid.
5. Tie deposits to sales. Match bank deposits and processor payouts to recorded sales; payouts arrive net of fees and refunds. See reconciling sales and payouts.
6. Match certificates to untaxed sales. List each sale made without tax, attach its certificate, and request missing ones now.
7. List purchases made without tax. Washington and California check purchases of equipment and supplies for use tax (Washington DOR; Publication 76). Use tax is what you owe when you bought a taxable item without paying sales tax; see use tax on business purchases.

If the tie-out shows tax was under-reported, whether and when to amend a return is a decision to make before the response date; California's treatment of an amended return filed after assignment, in the first section, is one example. If the books are too far behind for steps 2 to 5, rebuilding them comes first. Keep a list of everything you hand over; California gives a receipt for records left at its office (Publication 76).

Should I sign an agreement that extends the audit time limit?

A time-limit waiver, also called a consent or statute waiver, is your written agreement that the state may assess tax after its normal limit. It gives the audit more time and keeps more periods open.

• Washington: the department may assess after the usual four years if the taxpayer signed a written waiver, which also extends the period for a refund or credit (RCW 82.32.050).
• California: the auditor may ask for a waiver of limitation for significant delays. It extends the deadline for assessing more tax and, for most programs, lets you claim a refund for the period it covers (Publication 76).
• New York: the state may not audit beyond three years without your written consent, and you and the department may agree in writing to extend before the limit expires (Publication 130-F; Publication 131).
• Texas: the auditor should not request a waiver before the audit starts unless you ask for an unusually long delay (Texas notice of routine audit). Later, an independent audit review conference, an informal meeting with a Comptroller reviewer who was not on your audit, is unavailable if it cannot be held in time and you decline to sign a waiver (Texas contesting audits).

Before signing, settle which taxes and periods it covers, how long it runs, and whether the delay is one you asked for or one the state needs. The right answer turns on how close the periods are to their limits, how ready the records are and whether refund claims exist, so this is a point where professional judgment matters.

What happens if the audit finds I owe sales tax?

An audit can end with no change, tax owed, or a refund of tax you overpaid (New York Tax Department). When tax is owed, the state first shares its findings, then sends a bill showing tax, interest and penalties. You can usually pay all or part early to stop interest on that amount.

Texas audit waivers are usually limited to periods originally filed on time, and a disagreement with the decision can go to a redetermination hearing (Penalty Waivers). New York usually allows installments if you cannot pay in full, though interest and possibly penalties continue (Publication 130-F).

Heavier penalties apply in some cases. California adds 40% when tax was knowingly collected and not sent in, subject to a minimum size test (R&TC 6597), and 25% for fraud or intent to evade (R&TC 6485). Washington adds 50% of the additional tax for intent to evade (RCW 82.32.090). Texas adds 50% for fraud or intent to evade, and also for altering, destroying or hiding records to affect an audit (Tax Code 111.061). New York has its own fraud penalties (Tax Bulletin ST-805).

Sales tax you charged customers and did not send in is treated more strictly than tax you never charged. The voluntary disclosure programs in Texas and Washington normally limit how far back you pay, but set no limit on tax already collected (Texas; Washington), and New York calls a registered seller a trustee holding that money for the state (Tax Bulletin ST-770). A sole proprietor owes it directly. In an entity, each of these four states also has a rule that can make an owner, officer or other responsible person personally liable for it, on conditions that differ by state (Washington; Texas; New York; California). See catching up on uncollected sales tax and filing sales tax returns.

How do I disagree with a sales tax audit, and how fast?

Raise each disagreement with the auditor first, then appeal the bill within the deadline on the notice. The formal deadline is short and in some states cannot be extended. A petition, statement of grounds or written appeal is your formal written disagreement; the notice says which your state calls it.

If you miss the deadline, the route changes. Washington requires you to pay and then petition for a refund, and Texas allows a refund hearing request within six months of the final date once the full liability is paid (Washington DOR; Texas Comptroller). In California the route set by statute is to pay in full and file a claim for refund, though CDTFA may, in its discretion, accept a late appeal as an administrative protest if the notice may contain an error (Publication 17). New York says its appeal time limits are set by the Tax Law and cannot be extended (Publication 130-F).

A jeopardy determination, issued when the state believes delay would put collection at risk, runs on a shorter clock: Texas treats it as final 20 days after it is issued, and California allows 10 days to petition with a security deposit (Texas Comptroller; Publication 17).

A Texas statement of grounds must list the disputed items, individually or by category, give the factual basis, and cite legal authority if you disagree with the state's reading of the law. Use the deadline printed on your own notice, not the one in this guide.

Can I still use voluntary disclosure now that the state has contacted me?

Generally not for the tax and periods the state has contacted you about. Disclosure programs are built for businesses that come forward first.

• Multistate Tax Commission and Texas: both require that the state has not audited you or contacted you about the tax obligation or liability (MTC Nexus FAQ; Texas Comptroller).
• New York: the applicant must not be under audit for the tax type and years it is disclosing, and must not have received a bill for those taxes (New York VDP).
• Washington: a business contacted for enforcement purposes in the last four years plus the current year may not qualify, and a notice of audit or a request to complete a business activities questionnaire counts as contact (Washington DOR).

Each program words its test by its own state, and the programs read here do not say whether contact from another state matters. Ask each program about its order of steps before registering or filing. In an open audit, some states offer a managed audit, a penalty waiver request or early payment; each has its own conditions and deadline. Programs open before contact are in catching up on uncollected sales tax.

Do I need someone to speak to the auditor for me?

None of these four states requires a representative, and each lets you choose one. Texas says professional representation is a business decision (Texas Comptroller). New York gives you the right to designate a tax professional (New York Tax Department). California asks you to say at first contact if an accountant or bookkeeper will handle the audit (Publication 76). Washington allows the audit at a representative's office (Washington DOR).

Put the authority in writing: New York requires Form POA-1 for binding decisions, and Texas requires a power of attorney or other written authorization with a statement of grounds sent by a third party (Texas Comptroller). The decisions that matter most are what is handed over, whether to accept a sample, and whether to sign a waiver.

A business with one state, complete records and returns that tie to the books may choose to handle the audit itself. Outside help is worth weighing when the books and returns do not tie, several states or marketplace sales are involved, or the state asks for a sample, a waiver or a payment before an appeal deadline.

Example

These examples are illustrative. All amounts are in US dollars, and the rates are assumptions, not a state's published rates.

Texas seller with no resale certificates

A Texas online seller has US$400,000 a year of sales and a four-year audit period. About US$100,000 a year of those sales were delivered to business customers in Texas, and the seller kept no resale certificates for them. Texas presumes sales for delivery in the state taxable in an audit unless a certificate is accepted. At an illustrative 8.25% combined rate, that is US$8,250 a year and US$33,000 over four years, before penalty and interest. Valid certificates delivered within the time the state allows can support those sales as untaxed; later ones may not.

New York retailer and a one-month test

A New York retailer has US$3,000,000 of sales over a three-year audit. The auditor tests one month and finds 5% of that month's sales were untaxed. If the state applies 5% to the whole period, US$150,000 of sales is treated as taxable. At an illustrative 8% combined rate the bill is about US$12,000 plus interest and any penalties.

Washington audit report and the 30-day clock

A Washington audit report assesses US$20,000. The seller agrees with US$12,000 and disputes US$8,000. It pays the US$12,000 and files a written petition within 30 days of the notice. Interest keeps running on the disputed US$8,000 until it is paid or the dispute ends. If the seller files on day 45, the petition is late: it must pay the full US$20,000, plus the higher penalty for tax unpaid after the notice's due date, and then petition for a refund.

Different for you?

• You should have collected sales tax and did not, and no state has contacted you: voluntary disclosure may still be open. See catching up on uncollected sales tax.
• You are unsure where you must collect: see when you must collect sales tax.
• Your certificates are missing or incomplete: see exemption certificates from customers.
• Returns are missing, or you filed zero returns: see filing sales tax returns.
• Payouts, fees and refunds do not match your sales: see reconciling sales and payouts.
• The IRS, not a state, is auditing the business: see IRS audit of a small business.
• An investor's review found uncollected sales tax: see sales tax exposure found in due diligence.
• A state auditor has asked for records and your books do not tie to the returns you filed: what to hand over, whether to accept a sample or sign a waiver, and who speaks to the auditor are the first decisions. Gather the notice and the returns for the periods named, then see bookkeeping help.
• Several states, a marketplace, a payment deadline, or tax collected but not sent in is involved, including an owner's possible personal liability: gather the notice, returns and sales history for a bookkeeping review.