© 2012 Financial Operations Networks LLC Sales & Use Tax Compliance: Be Prepared for Aggressive Audits: 4 Steps to Take NOW to Minimize Your Audit Liability

About Your Presenter Ned Lenhart President of Sales, InterstateTax Strategies Ned has focused on sales and use tax analysis and consultation for over 25 years. He started Sales Tax Advisors in 2003 after serving as a Firm Director for Deloitte in its Atlanta office. Prior to joining Deloitte in 1994, Ned was a Sr. Manager with Arthur Andersen in Kansas City, Missouri. Ned also worked for the Missouri Department of Revenue where he was the Director of the Compliance Division and led the state's civil and criminal tax enforcement efforts. He also served as Deputy Director of the Division of Taxation and Bureau Manager for the Compliance Division. Ned is a CPA licensed in Georgia and Alabama. Ned is a frequent speaker at local and national tax and business conferences. He is a member of the AICPA, the GSCPA. He holds an MBA from Minnesota State University-Mankato and a BS from Iowa Wesleyan College.

Presentation Overview Significance of sales tax as revenue source Goal of sales tax audits Sales tax audit risks Industry specific issues Audit management Questions

Sales Tax In Perspective Some believe $12 billion a year in sales tax goes unremitted ( fraud, mistake, internet sales, erroneous exemptions, etc) In 2011 $208 billion collected in sales tax Personal income: 51% 51% Sales 42% 40% Corporate Income: 8% 9%

Sales Tax Audit Goals 1.Collect under reported tax revenue 2.Educate taxpayers for enhanced future tax remittance 3.Gather information about other businesses for audit 4.Gather information about emerging business issues and trends that could impact future tax revenue 5.Challenge existing tax policies by forcing taxpayers to appeal audit issues in court

Sales Tax Audit Procedural Risks Procedural Risks  Failing to properly prepare for audit  Providing auditor with unnecessary information  Improper sampling agreements  Not controlling communications with auditor  Failing to educate auditor on business and procedures  Requesting extensions without valid reasons  Failing to follow protest procedures Procedural Risks: Actions or events that can prolong the audit or result in assessments that are not representative of the true liability

Sales Tax Audit Substantive Risks Substantive Risks  Not properly registered in states  Not having valid exemption certificates for exempt sales  Not charging tax on otherwise taxable sales  Not paying use tax on taxable purchases  Invoices are not prepared properly resulting in under taxation  Failure to accrue tax on taxable intercompany transactions Substantive Risks: Errors made by the taxpayer that can lead to assessments of tax, interest, and penalties

Audit Management 1.Educate the auditor on what your business does 2.Don’t hesitate to postpone if needed 3.Be cautious about signing statute waivers 4.Prepare refund claims if overpayments are suspected 5.Insist on opening and closing interviews 6.Understand protest rights and procedures 7.Get help as soon as you need it 8.Get everything in writing 9.Know the auditors supervisor and alert them if things start going wrong 10.Audit preparation begins before you receive audit notice

Industry Specific Audit Issues Each industry has unique issues on which auditors will focus during their review. Knowing these issues in advance will help sharpen your focus in preparing for these audits. Manufacturing Technology related (software, hardware, services, data processing, information, etc.) Contractors and Repair Services Service Providers Wholesale and Distribution

Manufacturing Missing resale exemption certificates Untaxed purchases of supplies and services not qualifying for exemptions Purchase of items for mixed use Real property repairs and improvements

Technology Companies Maintenance Contracts Parts and supplies purchased for consumption Unregistered business doing business in state Improper taxation of bundled transactions Failure to have documentation to support nontaxable sales

Contractors Use tax on materials purchased from out of state Credit for sales taxes paid to other states Tax on material provided by non-profit clients Possible flow through exemptions for contracts with governments

Retail Not taxing otherwise taxable services Improper invoice language Untaxed supply purchases Service Providers Possible reclassification of services from nontaxable to taxable based on “true object” test

Wholesalers Missing Exemption certificates for direct sales Improper registrations Missing exemption certificates for 3 rd party drop shipments Mixed sales

Questions? ?

We Disarm Sales Tax Ticking Time Bombs Preparing for Aggressive Sales Tax Audits NED LENHART, MBA CPA , office , mobile

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