Understanding Sales Tax Audits in Joliet

When you are undergoing a sales tax audit, you may regret selling tangible items along with your service. If you have not taxed the entire sale, then, the auditor will look at the true object of the sale.

Determining the True Object of the Sale

When you provide a physical good along with a service (e.g., heart treatment along with a heart monitor), but the good is secondary to the service, taxability is based on the real object of the transaction: the service provided.

To comply with the sales tax laws of your state, determine the intended use of the good or service. Is the service you’re providing secondary in importance (“incidental”) to the installation of the equipment?

Applying the True Object Test

To help make the determination, a number of state taxing authorities developed an analysis called the “true object test” which they apply to the total transaction.

Using the true object test, you can get a better idea of whether a transaction will be taxable by determining whether the service provided or the property acquired is the main purpose—or the true object—of the transaction.

To apply the true object test, look up the rules of the state in which you’re conducting business.

Common Triggers for Audits and Penalties

Audit Flags for Service-Based Businesses

What’s responsible for audit flags and potential penalties?
Tax obligations service-based businesses don’t think they have.

For companies servicing:

  • Installation contracts
  • Technical support
  • Other business services

Sales tax can become a problem if not addressed promptly.

Industries at Risk

Similar at-risk businesses include:

  • Construction services
  • Manufacturers that provide services along with products
  • Many other service-based businesses along the supply chain

As ecommerce shrinks the time between order and delivery, the sales tax risk for supply chain providers grows.