presents

Sales and Use Tax Audit Strategies Anticipating Auditor Requirements for Documentation

presents

Anticipating Auditor Requirements for Documentation, Samples, Nexus and More

A Live 110-Minute Teleconference/Webinar with Interactive Q&A

Today's panel features:James Tauber, Managing Director, WTAS LLC, Chicago

Steve Oldroyd, Tax Senior Director - Sales & Use Tax, Property Tax, BDO USA, San Jose, Calif.Dan Davis Principal Associated Sales Tax Consultants Sacramento Calif

Q&

Dan Davis, Principal, Associated Sales Tax Consultants, Sacramento, Calif.Jen Galbreath, Senior Manager of Indirect Taxes, Amazon.com Inc., Seattle

Thursday, September 23, 2010

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Sales And Use Tax AuditSales And Use Tax Audit Strategies Webinar

Sept. 23, 2010

James Tauber, WTAS LLCjames.j.tauber@wtas.com

Steve Oldroyd, BDO USA soldroyd@bdo.com

Dan Davis, Associated Sales Tax Consultants

Jen Galbreath, Amazon.com Inc. jgalbrea@amazon.com

ddavis@astc.com

Today’s ProgramToday s Program

Preparing For The Audit Slides 6-15 (James Tauber)

Midstream Management Of The Audit Slides 16-22

(Steve Oldroyd)

What Auditors Typically Look For Slides 23-28 (Dan Davis)( )

Post-Audit Procedures Slides 29-39 (Dan Davis)

A I E i Slid 40 50Amazon.com Inc. Experience Slides 40-50 (Jen Galbreath)

5

P i F Th A diPreparing For The Audit

James Tauber, WTAS LLC

6

Objectives For This Section

• Assignment of auditors

• Auditor’s pre-audit research

• Your pre-audit preparation/research

• Initial contact with auditor

• Preparation for the opening conference

7

State’s Procedures For Assigning Auditors

• Capacity• Capacity

• Geographic proximity to the taxpayer/records

• Industry experience

• Overall experience relative to the complexity/size of the company

8

Scope Of Auditor’s Pre-Audit Research

• General infoo Googleo Googleo Company Web siteo Public financialso Advertising (Yellow Pages, billboards, representatives,

etc.)o Press releases for recent activity (e.g., dispositions,

)acquisitions)o Visit retail locations Store

9

Retail Web site

Scope Of Auditor’s Pre-Audit Research (Cont.)

• Other tax filingso Tax returnso Tax returnso Noticeso Statement of accountso Nexus questionnaires

• Prior audit work papers

10

Your Pre-Audit Preparation/Research

• Audit starts before the auditor callso Know where the skeletons areo Know where the skeletons areo Credit/refund opportunitieso Consider what type of sampling/sample periodso Know what issues have occurred and could affect the audito In what condition is your exempt documentation?o How long it will take to get information?o Review recent changes in law for potential

exposures/opportunities (e.g., amnesty)

11

Your Pre-Audit Preparation/Research (Cont.)

• Develop a proposed audit plan/work program• Develop a proposed audit plan/work program

• Communication to the businesso Let information resources know that you will be contacting

themo Let the facility know there will be an auditor in the houseo Remind employees not to talk to auditors

12

Initial Contact With The Auditor• Confirmation of companies and periods

• Confirmation of information request/process

• Confirmation of timing of field audit and anticipated return visitsg p

• Inquire about their level of experience

• Discuss the auditor’s audit plan and address any gaps compared with your plan

13

• Set the tone

Preparation For Opening Conference

• Develop an outline of what to covero Timingo Recordso Rules of the roado Communication plano Communication plano Process for resolution of issues

• Availability of requested documentsB f ili ith t i t /• Be familiar with tax requirements/processes

• A few words about sampling agreement…• Determine your rapport with auditor

14

In Summary

• Be prepared …• Know your issues• Know your issues• Have your resources lined up• Review your documentation

• Develop an audit plan…

• The more your prepare in advance …• The smoother the audit will go • The more likely you will achieve good results

15

The more likely you will achieve good results

Midstream Management Of TheMidstream Management Of The Audit

St Old d BDO USASteve Oldroyd, BDO USA

16

Sales Tax ExaminationSales Tax Examination

Analysis of revenue streams

• Taxability of products and services• Destination-based sourcing• State and local tax rates (2.9% to 10%)• Statutory exemptions • Exemption certificates• Exemption organizations

17

Use Tax ExaminationUse Tax Examination• Fixed assets

• Accounts payable

• Inventory withdrawals

• Inter-company

• Mergers and acquisitions

18

Statistical SamplingStatistical Sampling

Sampling trends

• Electronic vs. manual

• Statistical vs non-statisticalStatistical vs. non statistical

19

Transaction Sampling Transaction Sampling

Bl k li• Block sampling

• Statistical sampling

20

Block Sample Block Sample

• Selecting a period of time Select g a pe od o t e

• Grouping

• Most recent transactions

21

Statistical Random Sample Statistical Random Sample

Advantages of a statistical random sample• Basic premise that every item in the population has an equal

chance of being selected

• The sample result is objective and defensible

• Results can be evaluated and supported mathematically. Results can be evaluated and supported mathematically.

• Standard deviations and confident levels of the results can be computed computed.

• Multiple samples or strata can be made and evaluated separately, or combined and evaluated together

22

or combined and evaluated together.

Wh t A dit T i ll L k FWhat Auditors Typically Look For

Dan Davis, Associated Sales Tax C lt tConsultants

23

Auditors’ Preliminary Objectives

• Review internal file; determine points of interest

• Review reporting history; compare with prior audit for significant differences

• Determine if fixed asset dispositions and/or changes in entity are indicated

24

Purchases Subject To Use Tax

• Overall, largest area of audit assessment

• Untaxed purchases of fixed assets, including computer hardware & software

• Untaxed purchases of supplies

• Inventory withdrawals

25

Questionable Exemptions And Credits

• Reviewed on sample basis• Reviewed on sample basis

• Based on sample, a percentage of disallowance is computed.

26

Additional Taxable Sales

• Total sales reconciled differences assessed• Total sales reconciled – differences assessed

• Indirect audit methods

27

Other Areas Of Auditor Interest

• Sales of fixed assets• Sales of fixed assets

• Changes in entity or sale of division

28

Post-Audit Procedures

Dan Davis, Associated Sales Tax Consultants

29

Post-Audit Procedures In General

• Post audit administrative protest processes vary widely from state to• Post-audit administrative protest processes vary widely from state to state. Some states allow only one level of administrative appeal before the case must proceed to court. Most provide two levels, and a few provide three. The details and procedures differ greatly among theprovide three. The details and procedures differ greatly among the states and should never be taken for granted.

30

Representation• Taxpayers generally may be represented by outside parties at the first• Taxpayers generally may be represented by outside parties at the first

level of appeal.– Qualifications for permitted representatives vary from state to

statestate.

• Requirements may be more restrictive at higher levels; where the di i j di i l ( h ld b f d i i t ti lproceedings are quasi-judicial (e.g., held before an administrative law

judge), an attorney and/or the taxpayer may be the only representatives permitted.

• However, a non-attorney may be allowed at any level as a general or expert witness.

31

Audit Exit Conference

• Held by auditor or immediate supervisor at completion of audit field workwork

• The auditor should provide complete copies of the audit work papers.

• If a conference is held solely by auditor, taxpayer can request an additional meeting with supervisor.

32

Informal District Conference

• May be held with highest ranking supervisor in the audit district• May be held with highest ranking supervisor in the audit district

• Provided for in many, but not all, states

33

Official Billing (Notice OfOfficial Billing (Notice Of Determination, Of Assessment, Etc.)

• Generally issued after audit exit conference and/or district conference• Generally issued after audit exit conference and/or district conference

• Must be protested in writing within statutory time limit or the billing ill b fi l if billi b fi l th l ti ll i twill become final; if billing becomes final, the only option usually is to

pay the assessment and sue for refund in court.

34

Second Level Of Hearing

• Generally held before the tax department

• May be formal or informal, depending on the state

• May be quasi-judicial

• Generally should submit written arguments, with citations and exhibits where applicable

35

Third Level Of Hearing (If Any)

• Often quasi-judicial

• Usually at an executive level (director of revenue, or elected or i t d t b d)appointed tax board)

36

Alternative Administrative ResolutionAlternative Administrative Resolution (Not Available In All States)

• Mediation

• Settlement (may be based on ability to pay strength of state’s case or• Settlement (may be based on ability to pay, strength of state s case, or a combination, depending on the state)

I t th lt ti b i k d hil l• In most cases, these alternatives may be invoked while a normal protest is in process.

• If alternatives are agreed to, they’re usually final.

37

Proceeding To Court

• In most states, assessment must be paid in full, although a few allow bonds to be posted.

• Some states require exhaustion of all administrative remedies prior to proceeding to court; others allow some steps to be bypassed.

• Depending on the state and the procedural method chosen, the case may be heard solely on issues previously raised or treated as a trial de novo The court may limit its rulings to legal issues or may alsonovo. The court may limit its rulings to legal issues or may also entertain factual arguments.

38

In Conclusion

• At all stages of protest: Take nothing for granted learn the• At all stages of protest: Take nothing for granted, learn the requirements and complete all required steps in a timely manner. o not assume the state will notify you of the next required step, even where it’s required by law to do so.it s required by law to do so.

39

Amazon.com Inc. Experience

Jen Galbreath, Amazon.com Inc.Jen Galbreath, Amazon.com Inc.

40

Audit Best Practices And Experiencesp41

Develop tax audit best practices Engage other tax functions: Income, international, payroll,

planningplanning

IDR’s increasingly cross-tax types D t i f d t ti i / i ff Determine process for documentation review/sign-off

Protocol for auditor interactions Leverage data and research happening in other areas Reconcile tax returns

Example: Corporate vs. license gross receipts

Audit Best Practices And Experiences (Cont.)42

Develop tax audit best practicesp p Engage other departments: Finance and business groups

Contracts and agreements (Legal) Contracts and agreements (Legal) Detailed journal entries (Accounting) Inter-company agreements and entries (Inter-Company

Accounting) Business groups

Schedule auditor visits during times when key groups have availability to answer questions that come up while the auditor is on site

Audit Best Practices And Experiences (Cont.)43

Preparing for the audit Develop (and maintain) a grid for “key events and happenings” Develop (and maintain) a grid for key events and happenings

Whiteboard/bulletin board/Wiki/spreadsheet New business initiatives/system changes/organizational

updates Attend business update meetings/read press releases/review

Web sites and FAQs/customer service responses

Audit Best Practices And Experiences (Cont.)44

Preparing for the audit (Cont.) Be a customer (the auditor might be) Be a customer (the auditor might be)

Store/online experience: Signage, receipts, packaging Reward programs, e-mail lists, advertising Tax holidays, rate and taxability changes

Helpful for selecting sample periods, stratification of results

Audit Best Practices And Experiences (Cont.)45

Preparing for the audit (Cont.) Amazon 101 Amazon 101

Provide background on business operations Utilizes screen shots and other publicly available data FAQs

Other business process documentation

Audit Best Practices And Experiences (Cont.)Audit Best Practices And Experiences (Cont.)46

Once the audit notification arrives Pre-audit conference (auditor/supervisor)

Clarify IDR other auditor requests Clarify IDR, other auditor requests Provide report examples Sticking points: Any data you can’t (or won’t) provide Discuss timeline & critical dates Document and circulate (DOR/Tax Department)

Audit Best Practices And Experiences (Cont.)Audit Best Practices And Experiences (Cont.)47

Once the audit notification arrives (Cont.) Pre-audit conference (auditor/supervisor)

Routine audit or “special” selection Auditor experience

Auditor information sheet

Travel information: Hotels, restaurants, etc. Guidelines for visiting your office

Security parking Security, parking

Audit Best Practices And Experiences (Cont.)Audit Best Practices And Experiences (Cont.)48

Field work Field work Facilitating an effective visit

O i dit ti G d l d il ffi lif Opening audit meeting: Ground rules, daily office life Walk through documentation being provided Explain processes, show examples Check in, answer questions

Answer questions during field work

Audit Best Practices And Experiences (Cont.)49

Post-field work Keeping the momentum Keeping the momentum

Schedule check-in calls/meetings (weekly/monthly) Set expectations and deliver as promised

Closing things out: Subsequent field work trip or travel to the Closing things out: Subsequent field work trip or travel to the DOR to close out final items

Audit Best Practices And Experiences (Cont.)50

Taking it full circle Successes and “Opportunities”

Let managements know results Let managements know results Communicate throughout audit cycle Leverage exposures into processes improvements