How sales tax management services handle audits

Congress is currently considering legislation to allow states to require online retailers to collect sales taxes. The bill that was passed by the Senate in May, the Marketplace Fairness Act, has raised concerns about how it could affect the way businesses are audited.

At TaxCloud, we handle not only sales tax calculation and collection but also filing and audits for many of our merchants. While we don’t know exactly what future legislation may say about audits, here’s what our experience dealing with audits has been like.

First, a little background: The 24 states that have designated us a Certified Service Provider (CSP) have agreed not to hold our merchants liable for any tax calculation errors, and in the event of an audit, these states deal first and primarily with us, not the business itself. So how does this work?

When one of our merchants is audited, the state begins by contacting us. We act as the intermediary between the state and the merchant. The state lets us know that it will be reviewing the merchant’s transactions and conducting an audit beginning on a particular date, and we in turn notify the seller.

The merchant doesn’t need to provide any additional information at this point, as long as we have complete transaction data. If there is transaction data that we don’t have, the merchant needs to supply it.

During the audit, the state sends any information or document requests directly to us. Occasionally we may need the seller’s help to respond. For instance, if an item was classified as tax-exempt but it’s not clear in the transaction records exactly what the item is, we’d ask the seller to provide a description of the item. The state contacts the merchant directly only if there is evidence of fraud.

If future legislation follows this pattern for audits, it’s good news for businesses: It means that states will go to sales tax management services for data that businesses have traditionally had to supply, so businesses won’t be faced with hosting an audit.

3 Responses to How sales tax management services handle audits

  1. Any additional contact with you or another state regarding my accounting and books is too much contact. Even if you ask me to identify an unclear transaction even once…it is too much interference with my business. Will I be reimbursed for my time? No. This is not good news for business. I have been in business for 14 years and have never had to face an audit becasue I only have to collect taxes for one jurisdiction. If this law goes into effect states will be asking all the time to review my sales. I most likely have $400,000 to $500,000 in tax exempt sales. I think I would be a prime target for overly aggressive states trying to pay their bills. Bills that they incurred because they could not manage their money properly.

  2. Rick says:

    This rosy scenario is for a level 1 company with total and complete end to end integration with all systems. That doesn’t exist for even our simple scenario of a well-known cart (supported), order processing system (not) and Amazon (not). So we’d be “level 4″ (all others not qualifying for 1-3). None of your assertions are true for this probably MOST common scenario small businesses will face. And even this best-case scenario is too much for up to 46 audits in any given year.

    • FedTax says:

      Thank you for your comment.
      As we said in our more recent post:
      “If your e-commerce platform doesn’t support TaxCloud yet, then call them and ask when TaxCloud will be available—TaxCloud is free for platforms as well.
      Thanks again,

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