Understanding Sales Tax Audit Statute of Limitations

By John SerdarSeptember 23, 2019

A sales tax audit can be a very challenging and stressful event. Unfortunately for most businesses, it’s not a question of if, but a matter of when your business will get audited. When your business receives an audit notice, your first instinct other than being irritated may be to quantify the potential exposure and scope of the audit. One way to better estimate this is to be aware of the statute of limitations pertaining to sales tax audits.

generally most states are in alignment with the federal statute of limitations, which is 3 years

Statute of limitations in the context of sales tax audits refers to state laws that set specific limits on the maximum amount of time that can pass after an event for which legal proceedings based on that event may be initiated. While amounts vary by state, generally most states are in alignment with the federal statute of limitations, which is 3 years except in the case where the tax liability is understated by 25% or more which gives the state 6 years to go back.

So now that you know the general period, one may ask whether it’s possible to time and delay audits so that certain periods may fall outside the statute of limitations. Unfortunately, if it was that easy everybody would be playing the timing game. This false timing game originates from the belief that the statute of limitations pertaining to audits can’t be tolled, which in a legal context can mean that a state is “paused” while a certain condition exists. However, in the context of a sales tax audit the statue of limitations can be tolled so that it doesn’t immediately begin. Furthermore, in certain egregious circumstances states can also go back further than the usual period of the statute of limitations.

If you refuse to sign this agreement, you may find yourself in even a deeper hole

You may then wonder, what happens if I request an extension or an audit is delayed by an auditor? Regardless of who’s at fault for the delay, an auditor can then request that you sign a “waiver” of the limitation statute which would limit your ability to run out the clock. If you refuse to sign this agreement, you may find yourself in even a deeper hole. While each individual case is different, this refusal will generally result in the auditor conducting an audit with estimated or limited records. When this happens, you may find that an auditor may provide an estimated “conservative” assessment which maybe significantly higher than what you were expecting.

In addition to dealing with “conservative” assessments, refusal may also hint to the auditor that you may be hiding something or that you may be acting in bad faith. This may negatively impact you when it comes to negotiating the final audit assessment and you may find that the auditor has taken a much harsher stance than they would have normally otherwise. While this may happen, there are certainly times when refusing to sign the waiver may be beneficial. In cases where you may be missing resale or exemption certificates, refusal may provide for more time to remediate the situation. Also, there are certain scenarios where an auditor’s assessment may end up being lower than the totality of the circumstances.  

Now that you’ve learned a little bit about timing games, ultimately the best way to minimize your tax obligation is to ensure you collect and validate all of your tax exemption certificates accurately and renew them on time. Consider partnering up with a tax service provider who fits your business needs in terms of usability, cost and commitment.

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Sales tax rules and regulations change frequently. Although we hope you'll find this information helpful and informative, this blog is for informational purposes only and does not provide legal or tax advice.