contracting or service business in a major metropolitan area.

What can targeted taxpayers expect from

an OTC sales and use tax audit? Te OTC recently hired numerous CPAs and former auditors from other states, including former IRS agents. Obviously IRS audit methods and the sales and use tax laws of other states do not translate well into an Oklahoma sales tax audit. Depending on who is assigned, a taxpayer can expect one or more auditors to arrive at his or her location with field work that could last a few hours to a few weeks. Te examinations themselves can go a year or longer. Te audit methods vary greatly between

different field auditors and supervisors. Some taxpayers are pressed to try and reconcile not only income tax to sales and use tax returns, but also cash deposits to sales tax returns. Tis type of activity, even for a small, simple business can be onerous. In the absence of good records, the burden of proof is almost always on the taxpayer. Te state is putting a large emphasis on supporting non-taxed sales with documentation. For contractors operating as sub-contractors on exempt jobs, the OTC demands documentation that specifically ties the exempt entity’s contract with the prime to the actual sub- contractor. In other words, a sub-contractor or even a materials supplier needs to be

specifically mentioned in the contract to qualify for exemption even if other exemption documentation is available. Understandably, when these contracts are originally signed, the actual sub-contractors and suppliers are not known, a fact that the OTC probably does not fully appreciate. As a remedial measure, the OTC allows taxpayers in this situation to prove the exemption applies to them with an affidavit from the actual exempt entity, an onerous and not necessarily easy thing to obtain, especially as the project in question may be a couple of years old by the time the audit is initiated. Further, auditors are focusing on documentation to support non-taxed sales for manufacturers in general. Tis means just having an old certificate laying around may not be adequate. Field auditors want to see actual copies of Oklahoma sales tax permits with valid dates for non-taxed customers. Certificates that have the old six-digit OTC permit numbers, FEIN numbers or parenthetical statements are not going to be accepted. Of course, the older the sales transaction is, the more difficult it will be to get a copy of a sales tax permit. Customers’ names change, permits are closed and reopened under different numbers, customers go out of business… In other words, a lot of things can make getting old sales tax permit copies difficult

or even impossible. Finally, it is prudent for professionals in the targeted industry to document their compliance system and test whether non-taxed sales are adequately supported. Just getting copies of OTC letters and certificates may not work, especially for construction sales to exempt entities by sub- contractors and material suppliers. Prudence demands taxpayers prepare

themselves because the OTC really believes it has a potential cash cow and there is no clear end in sight. Most taxpayers have never been audited, so just because the OTC has not initiated contact in the past doesn’t mean taxpayers should be complacent. To mitigate risk and avoid liability, due diligence is necessary. Professionals should be willing to reach outside their organization when necessary, document their internal findings and prioritize dealing with deficiencies. Ignoring a compliance problem doesn’t make it go away. States are cash hungry and are increasingly looking to these types of audits to drive revenue, because it avoids the alternative of an unpopular tax increase. However, these issues are not insurmountable, and when taxpayers exercise due diligence and preparation, risks can be adequately managed.

May/June 2015

CPAFOCUS

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