Targeted industries – error prone or opportunity for the state?
Certain industries tend to put themselves at risk of an audit in two ways.
The first is based purely on how the industry operates. For example, bars, restaurants, grocery and liquor stores are all cash-based businesses, and auditors are all too aware of how cash goes unreported. However, while cash-based businesses routinely put themselves in compliance risk, the effort to find the errors might be too high for many auditors to even bother investigating, especially if it’s a small operation.
The second main reason auditors target certain industries is that historically they don’t adhere to regulations. State and local sales and use tax laws are complex and ever-changing. It takes internal accounting and finance teams a ton of research and due diligence to keep up with.
There are many ways a company can make a mistake in their compliance, but as the data from the California BOE indicates, the following account for the majority of errors (see Figure 1):
- Untaxed purchases from out-of-state vendors
- Unsupported sales for resale
- Additional sales based on markup of cost
In the 2013-2014 fiscal year (according to the CA BOE report), the top three industries (see Figure 2) found to have large assessments were Retail, Food Service, and Manufacturing.
Interestingly, the data told a slightly different story in Texas. While retail and manufacturing remained high, like California, Texas also targeted the construction industry and wholesale/distributors (see Figure 3).
It boils down to this: the State views everything you buy as being subject to tax. In other words, you’re guilty until proven innocent. We all know not everything is taxable, but you have to be able to prove all of that to an auditor. Your best bet is to keep the auditor from scheduling items in the first place. It’s easier to keep it off the auditor’s schedules than to get it taken off later.
In many cases, using an expert advisor to help will ensure you get the best results. However, it’s also possible for you to handle much of this process yourself. Below you'll find links to 8 chapters of audit help as well as a download link to our full guide about navigating audits.