What’s your audit risk?

In today’s economy, many states face severe budget deficits. But no politician wants to make the unpopular decision to raise taxes unless they know for certain that all the taxes that are already in place are being paid.

Many states have found a solution to this problem by hiring additional auditors and getting more aggressive with interpretation and enforcement of existing sales tax laws. For example, Idaho hired 48 temporary auditors and collectors in 2011. They brought in such a windfall of additional tax receipts that all the positions were made permanent this year. Other states are following suit.

What does this mean to the grower community? It means that you are more likely than ever to be audited.

Here are three key areas of audit risk faced by many greenhouse growers:

Exemption Certificates – Growers who sell to retailers may be required to maintain proof of exemption for each state or locality in which their retailers receives the product, pending nexus rules. This is usually in the form of an exemption certificate.

Many growers have time-consuming, error-prone, manual processes for tracking certificates. Not only does poor certificate tracking slow down sales (“I’m sorry, we can’t process that order because we don’t have a current certificate on file”), but it can put you at risk for severe fines and penalties.

In an audit, it isn’t enough just to show that you have current proof of exemption on file for all of your existing customers. You can be required to produce proof for historical transactions, as well. Suppose you did business with a company two years ago and didn’t collect – or collected but then misplaced – proof of their exempt status at the time. If they subsequently went out of business, you’d have a hard time proving there was no sales tax liability incurred. And you’d find yourself on the hook for that liability, plus penalties and interest.

If an auditor were to arrive at your door tomorrow, how confident are you in your ability to show proof of exemption on transactions where you have not charged sales tax?

Nexus – A common expansion strategy among growers is adding additional strategic locations to be able to serve a larger geography. This type of expansion typically creates what’s known as “nexus.” Nexus refers to a substantial physical presence in a state which creates an obligation to collect sales tax (or proof of exemption) in that state. Nexus can be created by a number of scenarios such as holding a business license, owning tangible properties or hiring an agent or sales representative in a new state. And anyone who’s been keeping up with Amazon.com in the news lately can tell you that nexus rules vary from state to state and can change regularly.

If an auditor from another state you have a presence in called on you tomorrow, would you be confident that they’ll find you to be in complete compliance with their state’s tax laws?

Use Tax – Use tax is a variation on sales tax where tax is not collected with the initial purchase, but is self-assessed and remitted after the purchase.

Most states offer tax exemptions that allow growers and others in the agricultural industry to purchase equipment, machinery and production inputs tax-free. But laws vary from state to state on what is considered exempt. For example, one state rules that if a piece of equipment is used temporarily for non-farming purposes, as long as it is used for agricultural use 50 percent of the time or more, it will still be considered tax-exempt. Another state offers only partial tax exemption on such equipment purchases in the form of a discounted tax rate.

A forklift that is used to move plants within the greenhouse may not be taxable, but one that’s used in a parking lot to transport finished goods is considered taxable in some states. In this situation, if the grower were to purchase the forklift using their tax exempt status and then used the forklift in the parking lot, the forklift would be subject to use tax.

If you were audited tomorrow, are you confident that you could prove that all the equipment you’ve purchased using tax exempt status is being used in accordance with the laws?

Most likely if you haven’t done so already, you’ve considered outsourcing your payroll taxes so you can focus on your business of growing. Sales tax is another area where you can save time and minimize risk by leaving it to the experts.

Darcy Boerio works for Avalara. Avalara is North America’s leading provider of automated, up-to-date sales and use tax compliance solutions. For more information, view the five-minute video, Sales Tax Automation: The Time Is Now, or contact Greg Lafferty at Practical Software Solutions, (704) 721-6800.