Does Sampling Make Any Sense?
Sampling? Does it make any sense at all that the Auditor would audit your sales, then, when it came time to look through all of your books and records, they would only pick 1–3 months out of a given year and then estimate the sales and profits for the entire year?
If you think this is an entirely unfair and incompetent method, you are right. If you think this is fair, then, you are probably an auditor for the State and enjoy getting paid for doing at best half your job.
Examples of How Sampling Determines Your Sales Tax Liability
Sampling for Gross Revenue
Sampling to determine gross revenue works like this:
- The auditor takes your gross sales for January, June, and September for a given year.
- They will add up the three months and then take an average sale.
For example:
- January: $20,000.00
- June: $2,000.00
- September: $2,000.00
Average Sale: $8,000.00
Problem:
Our client in the example above is poised to make gross revenues of $96,000.00 in sales. Assuming the sales tax rate is 10.25%, their sales tax collection will be determined to be $9,840.00.
When the auditor takes the average sales figure, then applies the sales tax rate for your county, you are left with the balance owed per the Auditor.
Penalties and interest will apply to the difference in what you collected versus the Auditor’s findings.
Estimating Prices
Estimating your prices is even more ridiculous.
- The auditor will look to similar stores just like yours in your area.
- There is no clear indication of what the “area” encompasses.
- They compare prices at other businesses and suggest that you should be selling the items at the same price.
This ignores:
- Your clientele
- Sales
- Specials
- Giveaways
The auditor will use these prices and profit margins of other businesses and compare them to yours.
If you sell for less, then the difference in estimated profits will be used to determine the difference in sales tax.
Estimating Cash Sales
This is the most egregious part of the audit process.
If all of your sales are on debit or credit card, then you are out of luck.
- The Auditor will compare the amount of cash sales of similarly situated businesses to your cash sales.
- If they determine that the number of cash sales in the area is 5%, then you are now accused of hiding 5% of your gross sales.
Result:
Tack on 5% worth of gross sales to your liability and add penalties and interest.
Conclusion
As you can see, a sales tax audit can almost never go well without at least an appeal, if not a managed audit by a sales tax attorney.
You are guilty until proven innocent.
Frequently Asked Questions
Why do auditors use sampling in sales tax audits?
Sampling allows auditors to estimate a business’s annual tax liability by examining a small portion of records—typically 1 to 3 months—rather than conducting a full audit. While it saves time, this method often produces inaccurate results that may not reflect the business’s actual operations.
Can I challenge the results of a sampling audit?
Yes, you can and should challenge audit results based on sampling, especially if the sample does not accurately reflect your business’s financial activity. A sales tax attorney can help appeal these findings and reduce liability.
How does price estimation impact my audit results?
Auditors may estimate your prices by comparing them with similar businesses in your area. This overlooks unique factors like discounts, promotions, and your specific clientele, often resulting in inflated tax assessments.
What is the issue with estimating cash sales?
Estimating cash sales based on similar businesses can unfairly inflate your reported revenue. If the auditor assumes a certain percentage of your sales should be in cash, they may accuse you of underreporting income—even if you primarily accept card payments.
What should I do if I’m being audited using sampling methods?
If you’re audited using sampling, consult a sales tax attorney immediately. They can request a managed audit, appeal unfair findings, and ensure your financial records are represented accurately.