What are Common Causes for a Sales Tax Notice?

This blog was last updated on June 13, 2023

We’ve previously discussed key things to keep in mind if your business receives a sales tax notice, but what could potentially cause your organization to receive one? Knowing the common causes for a sales tax notice won’t guarantee that your business will never receive one. However, being able to prepare for receiving one can help ensure a smooth recovery process.

Four common sales tax notice causes are:

Data or technology mishaps

Updated sales tax rates and/or rules can be extremely difficult to keep track of, especially if businesses are relying on manual updates. States could make changes to their sales tax holidays, adjust their economic nexus requirements or have varying jurisdictions within the same state. Not having the right technology in place to keep track of those changes could create problems for companies.

For example, integration of any software solution requires that it be integrated properly in terms of product/service mapping. Even if your tax engine is accurate and working with your software, it needs to apply the right tax logic to the right products.

Exemption certificates also must be filed correctly, but it is important to make sure that each exempt invoice is associated with the correct certification. Exemption certificates may also need to be updated when necessary.

New or changing filing requirements

Businesses must also ensure they are properly registering and remitting sales tax where necessary. A filing frequency change that went unnoticed could also lead to a notice, as well as failure to account for any pre-payment status needs being overlooked.

Filing and remittance errors

As previously mentioned, manual processes lead to a greater risk of human error. Organizations may face late, incomplete or incorrect data on returns. The actual tax due versus the payment amount not matching up could also cause a sales tax notice being sent to a business.

Physical nexus, economic nexus changes

Post-Wayfair, companies are not necessarily required to have physical presence in a state for nexus. However, physical presence can still create nexus. Employees, inventory, kiosks, offices, stores, trade show attendance, warehouses and other physical ties to a state could all create physical presence nexus for an organization.

Meanwhile, economic nexus is created through a certain number of sales and/or transactions occurring in a state or through a marketplace facilitator.

After you understand the cause of your notice, determine action steps needed to respond to the notice. For filing status changes, be sure to update internal records and/or processes. With filing errors, submit any additional information, provide proof of payment/filing, re-submit the return(s) and amend the return(s) if necessary.

Don’t be afraid to lean on advisory expertise for addressing a sales tax notice. This could include your company’s legal and/or tax departments or a sales tax partner. Finally, be sure to resolve notice(s) with the individual states.

Hopefully, sales tax notices will not be a regular part of your business’ operations. But knowing how to prepare for them and what to do after the fact will go a long way towards helping you to bounce back quickly.