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How Manufacturers Can Get in Shape for a Sales Tax Audit

Dumbbells.jpgI was a sales and use tax auditor for the state of Georgia for thirty years before joining Windward Tax as a state tax advisor. I’ve conducted more than 700 audits. Based on my experience, most audit assessments result from three mistakes:

1) Outdated or missing documentation
2) Misunderstanding of sales and use tax regulations
3) Poor communication among sales tax decision makers

I recommend following my three-step audit shape up plan to get your manufacturing location ready for a sales tax audit.

Before you decide to put this plan on the back burner, keep in mind that states are sending out more audit notices, and auditors are more aggressive when looking for assessments. In my experience, most manufacturers fall into one of two categories when it comes to audits.

1) The manufacturer that is audited regularly, approximately every 3 years
2) The manufacturer that has not been audited…yet

Preparing for an audit is a smart move for any manufacturer. Why?

• Your audit experience will be less time consuming
• Audit assessments will be lower
• Your daily sales tax processes will improve

So here is my three step audit shape-up plan for manufacturers:

Step 1: Organize and update audit documentation

  • Understand which documentation is usually requested by the auditor

Exemption certificates
Customer invoices
Purchase orders
Tax returns
Direct pay permits
Capital project contracts

  • Review these documents

Are they on file?
Are they valid?
Are they correct?

  • Organize the documents

Know where they are located
Update as needed
Create a filing system

Step 2: Get up to speed on sales tax laws in your state

  • Which sales tax manufacturing exemptions and rate reductions apply to you?
  • What are the requirements to qualify?
  • Are you overpaying or underpaying any tax?
  • Who will be responsible for applying these tax exemptions?
  • How will legislation and court cases be monitored?

Step 3: Identify your sales tax decision makers and train them to work together

  • Include purchasing, accounting and operations representatives
  • Consider including sales, marketing and IT representatives
  • Train the group on why and how to work together

Smart sales and use tax decisions are made when key players are armed with the information they need to make cost-saving decisions.

Example 1: No one can make taxability decisions if they are not told where and how a purchase will be used at the facility. A purchase order should include an explanation of use.

Example 2: Accounting needs to know if a sales initiative includes contracting with sales agents in new territories. Sales tax nexus may be created, but go undetected, resulting in interest and penalties.

Often, a manufacturer benefits from sales tax coaching to help get in shape for an audit. Coaches should be sales and use tax experts with experience working with manufacturers. Sales and use tax consultants, such as Windward Tax, can review your sales and use tax processes, recommend improvements and help set up procedures that will save your company sales tax dollars now and reduce assessments when the auditor arrives.

How do you get this audit shape-up program started? Here’s a webinar entitled, 13 Scariest Sales Tax Audit Nightmares. Take a look. If these nightmares are too realistic for you, contact Windward Tax to find out how your company can get in shape for your next audit.

webinar - audit nightmares


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Lauren Stinson, CMI
Written by Lauren Stinson, CMI

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