Most contractors in the Northwest deal with sales and use tax at some point. While Oregon doesn’t have sales tax, all of the surrounding states do. This means Northwest contractors could be subject to sales and use tax audits. These audits determine if a contractor has correctly collected and remitted the sales and use tax to the tax authority. They involve a detailed review of a company’s financial records, including transaction data, to determine if tax has been assessed and collected correctly.
AccountingToday came up with this list of the top 10 sales and use tax audit triggers, which we’ve customized for contractors in the Northwest.
1. Prior audit liabilities
If your company was previously audited for sales and use tax and owed significant amounts of money after the audit, you’re more likely to be audited again. Auditors are looking for companies who haven’t reported correctly, and if you haven’t done it correctly once, you’re more likely to repeat, so auditors will come back. Audits are a moneymaking venture for states that have sales and use tax, and finding additional funds provides a significant ROI.
2. An irregular pattern of tax filings
If you have late or irregular sales and use tax filings, you are more susceptible to being audited. Auditors look for irregular patterns of tax filings as a sign that you may not have paid all you owe. They also look for large differences in revenue and purchases from month-to-month or year-to-year. If your business has an irregular pattern of work and income, you may be audited.
3. High volume of exempt sales
If you are reporting a high volume of tax-exempt sales, as opposed to ordinary sales, in the course of your business, this may be a red flag. In the Northwest, Oregon is the only state without sales and use tax, so a portion of your sales may be going there. But if you’re making sales in Idaho, Washington, or California and claiming those sales are exempt from sales and use tax, you may be audited.
4. Work in the construction industry
Unfortunately for contractors, due to the complicated nature of the sales and use tax rules, construction is one of the most audited industries. The complexity of the calculations that most contractors must provide leaves lots of room for errors. Most contractors can expect to be audited at some point in regard to their sales and use tax returns, regardless of how much income they made.
5. Business entity type
Small businesses, such as those structured as sole proprietorships or partnerships, are most commonly targeted by auditors. States recognize that these businesses don’t have the necessary resources to track sales and use tax rates, monitor rule changes, and correctly collect and remit taxes as required. So, if you are a small business, you have a high chance of getting audited.
6. Law changes
Any time there is a change in the tax rates, rules, or new interpretations from the Department of Revenue, there tend to be more errors in tax calculations, which leads to more potential audits. Stay abreast of rule and rate changes by checking with the local tax authority on a regular basis.