Sales Tax Audits
Sales tax compliance is a critical aspect of business operations in Maryland. The Comptroller of Maryland conducts regular audits to ensure businesses collect and remit sales tax correctly, maintaining fairness and accuracy in the state’s tax system. These audits, while necessary, can be complex and potentially stressful for business owners. However, understanding the process, preparing adequately, and knowing your rights can empower you to successfully navigate a Maryland sales tax audit.
Understanding Sales Tax Audits in Maryland
The Comptroller initiates audits based on various factors, including discrepancies in reported sales, industry comparisons, or random selection. These audits aim to verify compliance and identify any underpayment of taxes.
Preparing for a Maryland Sales Tax Audit
Preparation is critical to a successful audit outcome. Start by organizing all relevant documents for the audit period. Review your sales tax returns and ensure you can substantiate all figures reported. If you notice any errors, consider voluntarily disclosing and correcting them before the audit begins.
Create a system to track all correspondence with the Comptroller’s office. If you still need documents, try to obtain copies or recreate the information from other sources.
Audit by Comparison Method
It’s important to note that if you fail to respond to an audit request or provide inadequate records, the Comptroller can assess sales tax based on comparisons with similar businesses. This method, often called the ‘like-kind business’ comparison, allows the Comptroller to estimate your sales and corresponding tax liability based on data from businesses of similar size and type in your industry. This means that if your records are not sufficient, the Comptroller may use data from other businesses to estimate your tax liability, which could result in higher assessments than what might be determined from your actual records.
This estimation method often results in higher assessments than what might be determined from your actual records. Therefore, it is crucial to respond promptly to audit notices and maintain accurate, detailed records of your sales and tax collections.
Consequences of Audit Assessments
Unfavorable audit results can lead to additional tax due, interest charges of approximately 10% per year, and penalties. In severe non-compliance cases, criminal charges may be pursued.
Responding to Audit Findings
If you disagree with the audit findings, options include:
Requesting a conference with the auditor or supervisor
Filing an appeal with the Comptroller’s Office
Appealing to the Maryland Tax Court
Paying the assessment and filing a claim for refund
Use Tax Issues in Maryland Audits
Use tax is often a focus in Maryland sales tax audits, particularly when businesses have purchased goods or services without paying sales tax. Use tax is complementary to sales tax and is imposed on the use, storage, or consumption of tangible personal property or taxable services in Maryland when sales tax was not paid at the time of purchase.
A common pitfall seen in Maryland involves businesses purchasing goods in Delaware, which doesn’t have a sales tax, thinking they’re saving money. However, these purchases are often subject to Maryland use tax. During an audit, the Comptroller will typically review purchase records and may assess use tax on items bought out-of-state without paying sales tax. This scenario is particularly relevant for businesses near the Delaware border or those that regularly purchase from out-of-state vendors.
To avoid use tax issues, businesses should keep thorough records of all purchases, including those made out-of-state or online. If sales tax wasn’t paid at the time of purchase, use tax should be self-reported and paid to Maryland. During an audit, be prepared to show either that sales tax was paid on purchases or that use tax was properly remitted. Remember, ignorance of the law is not considered a valid defense in tax audits, so it’s crucial to understand and comply with Maryland’s use tax requirements.
Nexus Issues in Maryland Sales Tax Audits
Nexus refers to the level of connection between a business and Maryland that requires the business to register and collect sales tax. Traditionally, a physical presence in Maryland established nexus. However, following the 2018 South Dakota v. Wayfair decision, Maryland adopted economic nexus standards. Out-of-state sellers must now register and collect Maryland sales tax if their gross revenue from Maryland sales exceeds $100,000 or if they have 200 or more separate transactions in Maryland during the current or previous calendar year.
During a sales tax audit, the Comptroller may closely examine a business’s activities to determine if a nexus exists. This could include reviewing sales records, marketing materials targeting Maryland customers, contracts with Maryland-based affiliates, evidence of physical presence, and use of marketplace facilitators. Businesses should be prepared to defend their nexus position and maintain clear records of all Maryland-related activities and transactions.
The Role of Tax Attorneys in Maryland Sales Tax Audits
Tax attorneys can provide invaluable assistance during a sales tax audit. They can:
Help you understand the audit process and your rights
Assist in organizing and presenting your records effectively
Communicate with the Comptroller’s office on your behalf
Identify and address potential issues proactively
Negotiate with auditors to resolve disagreements
Represent you in appeals if necessary
Their understanding of Maryland tax law and audit procedures can often lead to more favorable outcomes, potentially reducing or eliminating proposed assessments.
Partnering with Azarvand Tax Law
Navigating a Maryland sales tax audit requires attention to detail, thorough record-keeping, and a deep understanding of state tax laws and audit processes. Our attorneys at Azarvand Tax Law are dedicated to protecting your rights and ensuring a fair audit process. We provide personalized assistance to guide you through every step of your Maryland sales tax audit, giving you the reassurance and confidence you need during this challenging process.
Visit us online to schedule a free 30-minute consultation and take the first step toward resolving your Maryland sales tax audit concerns. Don’t let the complexities of a sales tax audit overwhelm you – let our experienced team help you achieve the best possible outcome.