By Gary Smith

Sales tax revenue is critical to every state’s budget, which means state departments of revenue are always looking for businesses that may not be collecting or remitting enough. Since landmark cases like Wayfair v. South Dakota, states have stepped up enforcement—especially for businesses selling across state lines or through online platforms like Amazon and Shopify.

With increased electronic reporting and multi-state transactions, businesses that provide products or services outside their home state are prime targets for sales tax audits.

Here are the top 10 reasons your business could be audited—and how to stay prepared.

1. Reporting inconsistencies

If your reported sales or payments don’t match your returns, or your numbers seem unusually low compared with similar businesses, the state will want to know why.

2. Weak internal controls

Poor recordkeeping or outdated accounting systems can cause underreported sales and raise red flags for auditors.

3. Crossing state lines

You may not have needed to register for sales tax in another state before, but once you exceed that state’s minimum dollar amount or number of transactions, registration becomes mandatory. States often get this information from your marketplace partner or payment processor (e.g., Amazon or PayPal) and check it against their taxpayer databases.

4. Invalid exemption certificates

If a resale or exemption certificate from a customer is missing, incomplete, or expired, the tax liability falls back on you.

5. Industry-specific risks

Some industries are audited more frequently due to common reporting errors, particularly when distinguishing between taxable goods and non-taxable services.

6. Data mismatches from partners

States receive detailed information about your sales from marketplace facilitators, vendors, and payment processors. If your returns don’t align with their reports, expect a closer look.

7. Audit history

Businesses often repeat past mistakes. If you’ve been audited once, don’t be surprised if the state checks again in a few years.

8. Customer or competitor complaints

States take tips and complaints seriously. Even informal reports can trigger an audit review.

9. Taxability errors

Each state treats goods and services differently in terms of taxation. Misclassifying what’s taxable versus exempt can lead to back taxes and penalties.

10. Major business changes

Mergers, acquisitions, or reorganizations often lead to gaps or mistakes in tax reporting. States frequently audit during or after these transitions.

Top 5 Things You’ll Need During a Sales Tax Audit

If you receive an audit letter from a state department of revenue, preparation makes all the difference. Here are the five most important items to have ready before the auditor arrives.

1. Filed sales tax returns and payment confirmations

Be able to show what you filed, where, and when. Departments of revenue may not always locate your filings or payments in their system.

2. Valid exemption certificates

Keep a current, signed certificate for every customer from whom you don’t collect sales tax. If one is missing, you’ll owe the tax.

3. Detailed records of sales and sales tax by state

Maintain accurate records that show how sales and taxes were calculated by jurisdiction, including cash transactions.

4. Marketplace facilitator and payment processor reports

Download and retain reports from platforms like Amazon, Shopify, or PayPal. They document when tax was collected or remitted on your behalf.

5. General ledger and accounting records

Your financial statements must reconcile with your tax filings and payments. Inconsistent numbers are an immediate audit concern.

Final Thoughts

Sales tax compliance is increasingly complex in a multi-state, digital economy. Regularly reviewing your internal processes—and consulting with an experienced tax or business attorney—can help you identify issues before an auditor does.

For more information about Venn Law Group’s Corporate and Tax Planning legal services, visit www.vennlawgroup.com/practice-areas/corporate.

Gary W. Smith is an attorney at Venn Law Group with more than 20 years’ experience providing legal counsel and innovative solutions to business owners and management teams. His areas of focus include mergers and acquisitions, succession and exit planning, securities and capital structures, business structures, and tax. He excels at navigating the legal complexities of diverse industries ranging from professional services and IT infrastructure to manufacturing and real estate.