FOCUS 

Oklahoma’s Sales Tax Audit 

 

               

t’s no secret that many businesses in Oklahoma never hear from the Oklahoma Tax Commission (OTC) while others cannot seem to get away from them. Te audit selection process in our state has always had the appearance of a random beast with arbitrary targeting of taxpayers based on unknown leads, reasons or purposes. In truth, however, the reality is a lot more planned and specific than what is commonly assumed. Tere is a method to their madness and business professionals who stay abreast of the trends can prepare themselves and their clients to minimize the risk of exposure in a future audit.

What is difficult for taxpayers is that the

OTC isn’t public about who they are targeting, and taxpayers, therefore, often get blindsided. Te euphemism of “special projects” is often thrown around, and the focus of these programs drifts from industry to industry at the whims of the administrator at the time. Often the focus is based on perceived trends or systemic issues within a certain industry or a group of similar transactions. Tis can be from an audit lead, an anonymous tip or on observation made in the field. Te focus is obvious only as taxpayers within the targeted industries find themselves being audited. In the past, the OTC set its sights on transfers

of ownership for oil and gas lease holders. Tis was initiated based on an assumption that producers were making sales of tangible personal property by transferring a percentage of ownership when equipment moved between lease locations. Ten the emphasis changed to a focus on cash-heavy sole-proprietorships that filed a schedule C on their federal returns. An audit program was designed around trying to reconcile these reported receipts to sales tax reporting. Tis was again based on a perception of a lack

14 CPAFOCUS May/June 2015

of reporting and compliance. Ten the focus drifted to restaurants and bars primarily in major metropolitan areas. Te emphasis there was on a perceived lack of compliance on certain beverage tax types in addition to sales and use. From there, the OTC focused on hospitals and their use tax compliance. Tis project lasted a number of years and many of the major health systems in the state were targeted. Tis program was given unction by a number of factors: a large number of refunds with questionable basis, incomplete reporting history for some direct pay permit holders and audit leads from a variety of sources. Many of the affected taxpayers in these audits found themselves unprepared for an examination. Te state made a lot of money and a lot of taxpayers had a nasty reality check on their sales and use tax compliance. In fairness to the OTC, it recognized a deficiency and created a program to address it. Unfortunately, many taxpayers learned a lesson the hard way (with a large audit assessment). Additionally, some businesses not only didn’t expect an audit, but in many cases, this was their first audit. Obviously, dealing with a known risk is easier to contend with than an unknown risk, especially when forced to respond within a limited amount of time. So all of this begs the question, who is the

next group of taxpayers to be singled out for special treatment and how can tax professionals prepare themselves and help their clients to deal with these audits? Unfortunately, the OTC is pretty tight lipped when it comes to discussing its audit program, but some information is available. Currently, it seems the OTC is focusing on manufacturers that make a large number of non-taxable sales. Clearly that involves almost all manufacturers because they usually sell to distributors for resale. At additional audit risk are those manufacturers that also operate a