Use Tax Audits on the Rise

AAFCPAs would like to make clients aware that there has been an increase in the number of use tax audits being conducted in various states. As jurisdictions look to increase tax revenue, use tax audits may be considered a simple way to drive revenue through tax collections, penalties, and interest.

What is use tax?

While many are familiar with sales tax, fewer people know about use tax. Use tax is the counterpart to sales tax, i.e., tax that you remit to departments of revenue for goods used within a specific state for which you were not appropriately charged sales tax.

Vendor obligations to charge sales tax depend on several factors. Typically, larger suppliers are more likely to comply with sales tax regulations. However, not every vendor engaged in multistate commerce is required to charge and remit sales tax in every state in which they conduct business. Ultimately, if you did not pay the appropriate sales tax on a purchase, you will be held liable.

What to Expect

Consider whether your organization purchased tangible goods from out of state vendors. Also, did you use SaaS within a state where it is taxable? Are you verifying proper sales tax charges? By addressing these considerations, you can begin to identify potential use tax liabilities to ensure compliance with state regulations. Being proactive in tax management helps mitigate the risk of penalties and interest due to non-compliance.

It is worth noting that states generally establish an audit period that spans several years. Within that period, each state will choose audits from select transactions. If the state finds that you owe use tax for the period sampled, it will extrapolate that tax liability to the entire audit period and attach penalties and interest. If you are audited and disagree with the assessment, you may enter an appeals process, which is often lengthy and time consuming.

How We Help

AAFCPAs provides State and Local Tax (SALT) support including compliance solutions for multistate corporate income tax, sales and use tax, personal property tax, marijuana retail tax, and gross receipts tax. This includes helping clients identify DOR audit risks. We also help clients streamline processes and scale for continued growth.

If you have questions, please contact Kelly Zack, MST, Director, State & Local Tax at 774.512.4001 or kzack@nullaafcpa.com—or your AAFCPAs Partner.