PENNSYLVANIA SALES TAX AUDIT DEFENSE 

Pennsylvania regularly audits businesses that are required to charge, collect and remit various taxes in the state. Unless you have experience as to how to handle a state tax audit, how can you trust the state? How can you tell when to provide documents or when to push back? In our view, controlling the audit is paramount to the limiting exposure and shaping the results. If your business collects or should collect sales and use tax, hotel occupancy tax, public transportation assistance tax, vehicle rental tax, or employer withheld personal income tax, you are on the Pennsylvania Department of Revenue’s audit radar.  Therefore, you should likely hire or at least consult a state and local tax professional to assist your business along the audit journey.

IS MY BUSINESS SUBJECT TO PA TAXES?

As a starting point, in order to be subject to the tax collection requirements imposed by Pennsylvania, your company must have nexus, or a connection, with the state. Pennsylvania takes the position that having a physical location in the state creates nexus, as does having an employee resident or present in the state, tangible personal property (owned or leased), or delivery of goods using property owned by the company.

Effective July 1, 2019, Pennsylvania adopted an economic nexus standard, similar to many states. Under the new law, if a business sells over $100,000 into PA over the last 12 months, then it is treated as having nexus and it must register, collect tax on its sales.

If a company has nexus and sells a product or service subject to Pennsylvania tax, it can be audited. In general, Pennsylvania taxes sales of tangible personal property, digital products, and certain services.

Receive an Audit Engagement Letter

Many audits begin by a call out of the blue from an auditor from the Pennsylvania Department of Revenue. Shortly after the call, your business will receive an audit engagement letter, which indicated you were lucky enough to be chosen for a state tax audit. To being preparing for the impending audit, it is likely a good time to get a state and local tax professional involved.

The engagement letter has a few other key features that are worth pointing out. The engagement letter will indicate the name of the entity being audited, the audit period, and provide the statutory 60-day period in which DOR cannot start the audit unless waived by the taxpayer. Absent fraud, Pennsylvania can only audit the previous three years, which is known as the statute of limitations.

From there, the auditor has 12 months to complete the audit. If the audit appears that it will take longer, the audit period may be extended by the auditor or the taxpayer. There may be reasons to extend or argue not to extend the statute of limitations, which should be consulted with an experienced sales tax lawyer.

During a sales tax audit, the auditor will request a wide range of documents.  For example, on a Pennsylvania sales tax audit, the auditor will first determine whether all sales, or gross sales, were reported on your sales tax return. Often times the auditor will compare your sales tax return to a control document like bank statements or your federal tax return. This will allow them to make sure all sales were reported. The PA tax auditor will also make sure you can provide proof on your exempt sales. The slightest error on a type of transaction, when multiplied over three years, can add up to a considerable amount of sales tax liabilities. Often times a sales tax audit can be driven purely by simply not having the correct paperwork can result in a huge assessment.

On the use tax side, the auditor generally checks to make sure you properly paid tax on items used by the business. Despite publications to the contrary, if a business buys an item online without paying tax, the business has an obligation to remit use tax to Pennsylvania. Along with untaxed purchases of equipment, this can result in shocking results for the unsuspecting taxpayer.

Upon completion of the audit, there will usually be an exit conference with the auditor. The purpose of the exit conference is to review the workpapers. It is advisable to have a Pennsylvania tax attorney present during this meeting.  Eventually the audit will culminate in an audit report. The purpose of the audit report is to provide a clear basis of the assessment. While it may be cause for panic or concern, the receipt of the audit report can actually help the taxpayer by illuminating the road map to resolve the case.

Disagree with the Audit?

Following the audit, if you disagree with the adjustments cannot be resolved with the auditor, the assessment is filed. The business or its state and local tax lawyer can file an appeal with the Department of Revenue’s Board of Appeals.  The Board can receive evidence and conduct hearings with respect to the assessment. When the appeal is over, the Board will issue a written disposition of the case. For more details please view our appeal process page for PA.