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FOCUS on self-study CPE


8 common areas where avoidable errors are found in sales tax audits


By Deanne Nunn, CPA


Deanne Nunn, CPA, is a sales tax auditor with the Oklahoma Tax Commission in Oklahoma City. A  Nunn has served on the Financial Literacy, Public       is currently a director at large for the Oklahoma City Chapter.


Self-Study


CPE Details Taxes


CPAs who assist businesses with sales tax 


Learn the most common issues that trigger a sales tax audit and how to be 


Basic None


  1 hour


CPE credit is available to OSCPA 


MUST BE COMPLETED AND SUBMITTED BY OCTOBER 31, 2018 TO QUALIFY.


10 CPAFOCUS


who are purposely trying to evade paying sales tax. Generally, it is quite the opposite. Te majority of the time, audits are of ethical taxpayers who genuinely think they are following tax laws. Tese taxpayers often use CPAs to handle their income taxes and can be quite surprised later when deficiencies in sales and use tax compliance are found. Many taxpayers believe their CPAs are aware of how their sales tax is being handled. Yet there are common reasons taxpayers find themselves with large audit assessments despite thinking that they are following sales tax rules. Tese issues are avoidable with proper focus and review of common problem areas of sales tax compliance.





1. Exemption management: Exemption management is the most common area where the OTC finds deficiencies in an audit. All sales are subject to sales tax until they are shown to be tax exempt. Te burden of proving that a sale of tangible personal property is an exempt sale is upon the vendor (Okla. Admin. Code Sec. 710:65-1-4). Terefore, it is imperative that proper exemption documentation be maintained for all exempt sales. An audit is not the time to find out a taxpayer does not have adequate exemptions. Annually updating exemptions will help flag those that need to be reviewed. Te customer may no longer be in business, making it impossible to track down documentation. Also, if the taxpayer is no longer selling to a particular customer, it is difficult to incentivize them to cooperate regarding exemption documentation. It’s not only lack of exemptions that causes audit deficiencies; sometimes the exemptions themselves are the issue. For example, if an agricultural exemption is accepted for a sale to a business that is not involved in farming, but owned by the farmer, the exemption will not be accepted. Te invoice “bill to customer” name should match the name of the exemption on file. If a company has been purchased and renamed


September/October 2018


ost people think because I am a sales tax auditor for the Oklahoma Tax Commission (OTC), I audit taxpayers


and the taxpayer is still billing to the old company with an expired permit, the exemption may not be accepted. Accepting resale certificates for purchases that will be consumed and not resold is an example of a situation where the exemption would be questioned.


2. Sale of business assets: Federal Income Tax Form 4797 transactions are often missed for sales tax considerations. Tese sales include equipment and other tangible personal property sold outside the normal course of business operations. A company may have excellent systems for capturing sales tax for regular sales but may not consider these occasional sales. Business closures are another transaction


reported on Form 4797 where sales tax considerations are often neglected. Sales agreements may be written stating the buyer is responsible for sales tax. In Oklahoma, vendors are liable for the sales tax collected as well as for tax that should have been collected (Okla. Admin. Code Sec. 710:65-7-6(a)). Detailed allocations of tangible personal property, real property and intangibles are necessary to properly account for these bulk sales. If the purchasing business plans to have an Oklahoma resale permit or manufacturer’s exemption permit, these permits need to be obtained prior to the sales date. Otherwise, the transaction is taxable for sales tax.


3. Use tax on out-of-state purchases: Out-of-state purchases of tangible personal property brought into Oklahoma for consumption, storage or use are subject to Oklahoma use tax (Okla. Admin. Code Sec. 710:65-21-3). Tis is an area where there have been large audit assessments. Most annual tax questionnaires ask merely if there are any out- of-state purchases, instead of “Did you purchase anything online?” or “Are any of your vendors out-of-state?” OTC auditors review three years of books and records, bank statements and credit card statements for out-of-state purchases. Many companies have never reported Oklahoma use tax. Companies that have not reported Oklahoma use tax are not subject to the usual three-year statute


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