At-a-Glance: Cross-Tax Exposure and Sales and Use Tax Risk
State tax authorities are becoming increasingly sophisticated in identifying potential sales and use tax audits. One emerging trend is the use of data from various tax filings, not just sales tax returns, to identify indicators of unreported or underreported liabilities.
Tax authorities are taking a broader, data-driven approach, comparing information across multiple tax types, including income tax, gross receipts taxes, franchise taxes, and sales and use tax.
As states continue to enhance their use of data analytics, businesses should expect greater scrutiny and more targeted audit activity. Maintaining alignment across all tax filings is a key step in minimizing risk and reducing potential exposure.
Why States Compare Tax Filings to Identify Sales Tax Risk
Tax returns, whether income, franchise, or gross receipts-based, often contain detailed financial and operational information about a business, including:
- Total revenue
- Apportionment factors
- Gross receipts sourced to a specific state
- Business activities and entity structure
- Property, payroll, and operational presence
This information provides tax authorities with a clear snapshot of a company’s economic activity within a state.
When states compare that information to sales tax registrations and filed returns, discrepancies can surface. These mismatches may trigger:
- Sales tax nexus questionnaires
- Audit inquiries
- Notices requesting additional information
- Full sales tax audits
As states invest more in data analytics and cross-tax data matching, these comparisons are becoming increasingly routine.
Common Sales Tax Audit Triggers Identified Through Cross-Tax Analysis
Revenue Reported but No Sales Tax Registration
One of the most common red flags occurs when a company reports significant in-state receipts on an income, franchise, or gross receipts tax return but has not registered for sales tax. This discrepancy can prompt a nexus inquiry from the state tax authority.
Large Gaps Between Revenue and Reported Taxable Sales
Even when a business files sales tax returns, other tax filings may reveal substantial differences between total revenue and reported taxable sales.
While many transactions may legitimately be exempt, large discrepancies can raise questions such as:
- Were taxable transactions incorrectly classified as exempt?
- Were certain revenue streams overlooked when reporting sales tax?
- Are exemption certificates properly documented?
These mismatches often place businesses on audit selection lists.
Nexus Indicators Disclosed on Other Tax Filings
Tax filings frequently disclose operational details that can establish sales tax nexus, including:
- Employees or payroll in the state
- Property or equipment located within the state
- Warehousing or fulfillment activities
- Ownership in related entities operating locally
If a business indicates these activities on any tax filing but is not collecting sales tax, the state may determine that nexus exists and pursue compliance action.
Industry-Specific Risk Factors
Certain industries face heightened scrutiny when filings show substantial in-state revenue but minimal sales tax reporting, including:
- SaaS and technology companies
- Professional and technical service providers
- Manufacturers selling equipment and parts
- E-commerce and marketplace sellers
In many cases, tax filings provide states with early visibility into potentially taxable activity within these sectors.
How Businesses Can Reduce Sales Tax Audit Risk
Companies operating in multiple states should take proactive steps to ensure that their filings are aligned across tax types:
- Reconcile Revenue Across Tax Filings
Revenue reported on income, franchise, or gross receipts tax returns should be consistent with positions taken on sales tax filings. - Document Non-Taxable Revenue
Maintain clear documentation for revenue streams that may not be subject to sales tax, such as:- Service revenue
- Resale transactions
- Out-of-state sales
- Exempt customers
- Review Nexus Positions Regularly
Changes in operations, remote employees, or economic thresholds may create unexpected sales tax obligations. - Conduct Periodic Sales Tax Reviews
Regular reviews can help identify discrepancies before they become audit triggers.
Concerned About Potential Sales Tax Audit Exposure?
If your business operates in multiple states, it is important to evaluate whether your tax filings across all tax types align. Early identification of risk can help you avoid unexpected assessments, penalties, and interest while giving you confidence that your sales tax obligations are being handled correctly.
Our team specializes in identifying potential exposures and helping businesses resolve issues before they become costly audits.
Contact Thompson Tax today to schedule a Sales Tax Risk Review and ensure your business remains compliant. We are Your Trusted Tax Advisors.