In February, it was estimated that Oklahoma was facing a state budget deficit of $1.3 billion. To help overcome the deficit, Oklahoma state agencies were ordered to reduce budgets by an average of 7 percent. However, while other agencies saw budget reductions, the Oklahoma Tax Commission actually saw a budget increase of more than $1 million. This increase has enabled the Oklahoma Tax Commission to hire new sales tax auditors, and these new hires, along with new technology, have led to what appears to be a more efficient method of sales tax audits by putting more document substantiation burden on the taxpayer.
Taxpayers Asked for Proof
Recently, the Oklahoma Tax Commission has been sending out audit notices seeking very specific information from taxpayers, and has developed a cost-effective audit methodology that is likely to return significant rewards.
In the audit notices sent out, the Oklahoma Tax Commission is asking taxpayers to provide proof of all exempt sales for a one month period. For a manufacturer, this might include documentation showing exemption certificates, or sales that shipped outside of Oklahoma. This information is routinely asked during a regular sales tax audit, but by asking for the taxpayer to dig through their own records and identify exempt sales, even if for only a single month, the Oklahoma Tax Commission is saving money and increasing anxiety for those taxpayers with “loose” paperwork or documentation policies.
If the taxpayer fails to correlate the exempt sales documentation to prior sales tax reporting, the Oklahoma Tax Commission may issue a tax assessment or expand the audit beyond one month to the full three years allowed under the law. Like most states, Oklahoma puts the burden on the taxpayer to prove a sale is exempt from tax. So it is easy to see how this simple letter might be very expensive for a taxpayer.
Other States Taking Notice
This quick and cost efficient audit technique is being watched closely by other states, so taxpayers outside of Oklahoma should also take notice and be proactive in maintaining exemption certificates, nexus rules, and taxability decisions. It is better to be prepared ahead of time—before a letter arrives from the Oklahoma Tax Commission.
Please contact your Eide Bailly professional or a member of our state and local tax team to learn more. The best insurance against a costly sales tax audit is having a strong sales and use tax system in place, so when an audit letter arrives, the necessary documentation is easily found and can be sent to the state quickly and with confidence.