States Increase Corporate Sales and Use Tax Audits

Wednesday, August 10, 2011 Print Email

States are coping with revenue shortfalls by getting rid of sales tax holidays and ratcheting up their audits of corporate sales and use taxes, according to new research.

A report from the Aberdeen Group’s Financial Management and Governance, Risk & Compliance research practice discusses the implications of revenue shortfalls at the state level. The state of Illinois, for example, recently announced that there would be no tax-free incentives for buying school supplies this year. On the other hand, Massachusetts recently said it would have a back-to-school sales tax holiday on August 13-14. Other states are trying to compensate for the drop in revenue by increasing audits of sales and use taxes by corporations.

“Eliminating tax-free holidays for consumers is just the tip of the iceberg,” said Aberdeen senior analyst William Jan, who wrote the report. “The larger issue applies to corporations that are under tight scrutiny by state revenue departments for their tax practices. We are seeing acceleration in government audit activities in an effort to compensate for state revenue shortfalls.”

Aberdeen's data found a sharp increase in government audit activity in the past 12 months. The cost of negative audit results remains high, with companies continuing to struggle with compliance with various jurisdictional requirements. However, companies that leverage real-time sales and use tax management processes and technologies are able to reduce their audit cost and penalties by nearly 33 percent.

Aberdeen found that sales and use tax compliance often receives less attention than other business taxes, such as corporate income tax, within organizations. “What is troubling about this feedback, in light of the state revenue turmoil, is that governments obtain 30 percent or more of their revenue from sales and use tax,” said Jan. “Thus, they are becoming more motivated to increase their audit activities around this tax segment, in hopes of obtaining more revenue. To reduce their risk, companies must proactively manage sales and use tax, seek expert advice regardless of whether or not they are being audited, and be prepared with an effective tax management and audit control solution and process in place to counter potentially high fines and penalties.”

Separately, a new report from IBISWorld predicts that back-to-school sales will rise again this year after falling in 2009 and 2010. The company forecasts spending to increase by 2.6 percent during 2011 as consumers return to making necessary purchases that they may have put off throughout the recession.

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