How sales tax management services handle audits

July 8, 2013

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.