How to Handle a Sales Tax Audit

Few envelopes cause more instant anxiety than a letter from a state tax department announcing a sales tax audit. Even if you have tried to do everything right, the word "audit" triggers questions. What did we miss? How far back will they look? How much time will this take?

The reality is that many audits are routine. States use them to check compliance, not only to punish. You cannot control whether you get selected, but you can control how prepared you are once that notice arrives.

Read the Notice Carefully

Start by reading the audit letter slowly. Note which periods are under review, which tax types are involved, and what the state is asking you to do next. Some notices request that you call to schedule a meeting. Others include an initial list of records to provide.

Sharing the notice with your CPA or sales tax advisor early is helpful. They can highlight anything unusual and help you map out a response plan.

Gather Core Records Before the First Meeting

Most sales tax audits focus on a few key categories of documentation:

Pulling these records before the auditor arrives saves time and signals that you take the process seriously. Organize them by period and by type so you can find items quickly when questions come up.

Understand the Scope and Sampling Approach

Early in the process, ask the auditor to explain their planned approach. Will they review all transactions for a short period, or sample transactions across a longer span of time? How will they extrapolate any findings to the full audit period?

Knowing the methodology matters. If an error shows up in a small sample, you want to understand how the state plans to apply that error rate. In some cases, you may be able to suggest a different sampling period that better reflects typical activity.

Be Honest About Weak Areas

If you already know there were rough patches, such as a year when staff turnover left records disorganized, do not try to hide that. Instead, explain what happened and what you have changed since then. Auditors are more likely to work constructively with businesses that acknowledge reality and show improvement.

That does not mean volunteering every tiny irregularity on day one. It does mean answering questions truthfully and providing context when gaps appear.

Review Proposed Assessments Carefully

At the end of the audit, the state will present proposed adjustments if they believe additional tax is due. Take the time to review their calculations. Check whether they treated exempt sales correctly, used the right tax rates, and applied sampling results accurately.

If something does not make sense, ask polite, specific questions. In some cases, providing missing certificates or clarifying documentation can reduce assessments. If you still disagree after discussion, talk with your advisor about formal appeal options and deadlines.

Use the Experience to Strengthen Your Processes

Regardless of the outcome, a sales tax audit is a clear signal about where your systems can improve. Maybe your exemption certificate process needs tightening. Maybe your item taxability settings are inconsistent. Maybe use tax on purchases has been an afterthought.

Make a short list of changes to implement after the audit closes. That way, the next audit letter, whenever it comes, will be less daunting because you will already have plugged the biggest holes.