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STATE & LOCAL TAXES
Proven digital strategies for
sales and use tax audits
Editor: If you have never had the privilege of e-commerce sales to new heights, adding
Moshe Bell-Jacobs, J.D. working through a sales and use tax over $219 billion to e-commerce’s bot-
audit, particularly local audits, now is tom line over the past two years. While
Authors: your chance to stop reading. However, the taxability of these transactions de-
Lindsay Galvin, J.D. for those who have experienced a re- pends on several factors, the data is still
Elizabeth Schraeder, CPA volving door of state and local auditors recorded, mostly in real time, and ana-
Daniel Gwin, CPA examining whether your company col- lyzed for sales and use tax applicability.
lected, accrued, and remitted the correct
amount of sales and use tax, you likely Key triggers of increased
have witnessed the evolution of the role audit pressure
of data in the audit process. By the end In addition to big data, recent key trig-
Businesses must of this column, you may want to trade gers have resulted in greater complexity
increasingly depend in the tried-and-true methods for the of tax administration and demands on
opportunity to manage big data when state auditors — and, therefore, increas-
on big data, sampling, it comes to audit defense with indi- ingly difficult audits.
and artificial rect taxes. Marketplace facilitator laws have
intelligence tools The evolving role of big data been evolving since 2017, with states
enacting these requirements in a rolling
to anticipate and The early 2000s saw enterprise resource fashion. Every state with a statewide
prepare for audits planning (ERP) solutions develop and sales tax has adopted marketplace fa-
cilitator laws, shifting the burden of re-
expand into a full back-office support
from cash-strapped function. Tax departments were able to porting and with it the need to manage
state and local download monthly transactional data data for sales tax compliance and audit
governments. fairly easily and leverage simple desktop defense. At the same time, these states
have adopted economic nexus thresholds
tools to pivot and manually analyze
the data. for sellers, which can result in disputes
Fast-forward to 2023: ERP options between purchasers and these newly tax-
are moving into cloud solutions to han- collecting sellers.
dle big data. “Big data” is not just a fun Another key factor increasing audit
term — it is an industry-acknowledged pressure is state and local revenue needs.
way to describe data that has greater Tax collection accounts for more than
volume, variety, and velocity. 50% of revenue in several states, with
The transactional nature of sales income tax revenue making up the ma-
and purchases directly results in a tre- jority in only a handful of states. Most PHOTO BY NIROSHAN86/ISTOCK
mendous amount of data each month. local jurisdictions rely on indirect taxes,
Digital Commerce 360 estimates that primarily sales tax and property tax, for
the COVID-19 pandemic pushed their tax revenue streams. Further, some
54 March 2023 The Tax Adviser
