Everything to Know about Texas Sales and Use Tax Audits
Facing a Texas sales and use tax audit can be daunting, but understanding the process can help your business prepare and navigate it with confidence. At The Wilson Firm, we specialize in guiding businesses through tax audits to ensure compliance and minimize risks. The Texas Comptroller of Public Accounts conducts over 10,000 audits annually, targeting businesses of all sizes to verify compliance with sales and use tax regulations. Triggers for audits include the rapid growth of e-commerce, spurred by the 2018 South Dakota v. Wayfair ruling, which expanded state authority to tax remote sellers, as well as discrepancies in tax filings or industry-specific risks.
Who Gets Audited?
Certain businesses are more likely to face a Texas sales and use tax audit due to specific risk factors and red flags. Understanding these can help you assess your vulnerability:
High-Risk Industries: Retail, manufacturing, construction, and hospitality sectors are frequently targeted due to high transaction volumes and complex tax scenarios.
Inconsistent Filings: Significant discrepancies between reported sales and industry benchmarks or irregular filing patterns can trigger audits.
Out-of-State Sales: Businesses with nexus in Texas due to the Wayfair ruling, such as e-commerce sellers, face increased scrutiny.
Large Refund Claims: Claiming substantial tax refunds or exemptions without proper documentation raises red flags.
Random Selection: Some audits are randomly selected to ensure broad compliance across industries.
Proactively addressing these risk factors, such as maintaining consistent filings and robust documentation, can reduce your audit likelihood.
Steps of a Texas Sales/Use Tax Audit
The Texas sales and use tax audit process follows a structured timeline. Understanding each step helps you prepare effectively and respond promptly. Here’s how it works:
1. Audit Notification
The Comptroller sends a letter outlining the audit period and taxes under review. It requests initial records and provides auditor contact info. You have 30 days to respond.
a. Example: A retailer receives a letter stating an audit for 2021–2024, requesting sales journals and exemption certificates.
b. Consequences: Ignoring the letter or delaying response can lead to penalties or an unfavorable audit scope.
c. Tips: Review the letter immediately, note deadlines, and contact a tax professional to assess initial risks. Schedule a call with the auditor to clarify expectations.
2. Pre-Audit Preparation
Collect records like sales invoices, purchase records, exemption certificates, and tax returns, and organize them by year. The Wilson Firm can help spot errors early.
a. Example: A client saved $50,000 in penalties by identifying a misclassified exemption during pre-audit review with The Wilson Firm.
b. Consequences: Incomplete or disorganized records can prolong the audit or lead to unfavorable assumptions by the auditor.
c. Tips: Prepare documents like Sales and purchase invoices and exemption certificates (e.g., for non-taxable sales), and engage a tax attorney early to spot errors, such as misapplied tax rates.
3. Entrance Conference
The auditor holds a meeting (in-person or virtual) to discuss scope, timeline, and records needed. Use this to clarify questions and explain your operations.
a. Example: A manufacturer presents a business overview document highlighting their exempt sales process, reducing auditor scrutiny.
b. Consequences: Failing to explain complex transactions (e.g., drop shipments) can lead to misunderstandings. c. Tips: Prepare a concise business overview document detailing your sales process, exemptions, and industry nuances. Ask about the auditor’s sampling methods and timeline expectations.
4. Records Review and Testing
The auditor checks records using sampling methods to verify tax collection, use tax, and exemptions. This may involve on-site or remote reviews
a. Example: An auditor flags unreported use tax on out-of-state equipment purchases during a stratified sample.
b. Consequences: Accepting default sampling methods without review can amplify errors across the audit period.
c. Tips: If the auditor's approach seems unfair, request alternative sampling methods (e.g., block sampling). Ensure digital records are backed up and accessible.
5. Audit Findings and Exit Conference
The auditor shares preliminary findings, noting discrepancies or taxes owed. You can dispute errors during the exit conference. A preliminary report follows
a. Example: A retailer disputes a $20,000 assessment by providing overlooked exemption certificates, reducing liability.
b. Consequences: Failing to challenge errors during the exit conference can lock in unfavorable findings. [The exit conference is not the last opportunity to challenge errors. Taxpayers can also challenge errors during the Redetermination phase and SOAH.]
c. Tips: Review findings with a tax attorney before the conference. Prepare evidence to counter discrepancies and note appeal deadlines (typically 30 days for informal appeals).
6. Final Report and Payment
The Comptroller issues a final report with tax assessments, penalties, and interest. Pay within 30 days or request a hearing.
a. Example: A business negotiates a penalty waiver through an informal appeal, saving $10,000.
b. Consequences: Missing payment or appeal deadlines can accrue additional interest.
c. Tips: Evaluate informal vs. formal appeals. Informal appeals are faster but less structured, while formal appeals involve a hearing with an administrative law judge. Engage legal counsel for complex disputes.
Timeline and Duration
A Texas sales and use tax audit typically spans 3–12 months, depending on complexity, business size, and record accessibility. Small businesses with straightforward records may complete audits in 3–6 months, while larger firms or those with discrepancies may face 9–12 months.
Delay Factors: Incomplete records, auditor scheduling, or disputes during the exit conference can extend timelines.
Tips: Maintain proactive communication with the auditor and provide records promptly to avoid delays. Use digital audit tools to streamline document submission.
Key Considerations During an Audit
To navigate the audit successfully, keep these factors in mind:
Record Retention: Retain detailed records for at least four years, including sales invoices, purchase records for out-of-state transactions, and exemption certificates. For example, document use tax paid on out-of-state equipment purchases to avoid assessments (Texas Comptroller, 2024).
Timely Responses: Meet auditor deadlines to avoid penalties or assumptions of non-compliance. Use secure file-sharing tools for remote audits.
Technology Tools: Leverage audit software (e.g., Avalara, TaxJar) to organize records and track tax compliance in real time (Avalara, 2025).
Post-Audit Actions: Conduct an internal review after the audit to identify process improvements, such as automating tax calculations or training staff on exemptions.
Professional Support: Engaging a tax attorney like those at The Wilson Firm can streamline communication, reduce errors, and improve outcomes.
The Do’s and Don’ts for Audits
| Do's | Dont's |
|---|---|
| Provide complete, organized records promptly | Ignore auditor requests or miss deadlines |
| Review findings with a tax professional | Accept preliminary findings without scrutiny |
| Use digital tools to streamline record access | Rely solely on paper records |
| Prepare a business overview for the entrance conference | Overwhelm auditors with irrelevant documents |
| Dispute errors with evidence during the exit conference | Delay appeals or payment beyond 30 days |
Why Choose The Wilson Firm
Navigating a Texas sales and use tax audit can be complex, but The Wilson Firm offers expert guidance to ensure a smooth process and favorable outcomes. Our experienced tax attorneys provide personalized support to protect your business, with a track record of reducing liabilities by up to 40% for clients through strategic preparation and negotiation.
Key Reasons to Choose The Wilson Firm:
Specialized Tax Expertise: Our team is well-versed in Texas sales and use tax laws, helping you address complexities like nexus post-Wayfair with confidence.
Proactive Audit Defense: We review records pre-audit to correct issues, such as a client who avoided $75,000 in penalties by fixing exemption errors early.
Effective Representation: From entrance conferences to appeals, we negotiate with auditors, helping our clients reduce tax obligations and penalties.
Tailored Solutions: Whether you’re a small retailer or a multi-state manufacturer, we customize strategies to fit your needs.
Local Knowledge: As a Texas-based firm, we understand the Comptroller’s processes and the state’s business landscape, ensuring responsive service.
Frequently Asked Questions
High-risk industries (e.g., retail, manufacturing), inconsistent filings, large refund claims, out-of-state sales with nexus, or random selection can prompt a Texas sales and use tax audit.
A Texas sales and use tax audit typically lasts 3–12 months, depending on business size, record complexity, and response timeliness. Small businesses may finish in 3–6 months.
You’ll need sales invoices, purchase records, exemption certificates, and tax returns for at least four years. Organized records help avoid penalties during the audit.
Avoid incomplete records, missing deadlines, accepting findings without review, or ignoring nexus rules. Work with a tax attorney to ensure accuracy and compliance.
The Wilson Firm provides expert guidance, reduces liabilities (up to 40% in cases), and offers tailored defense strategies, from record review to appeals, ensuring compliance.
Take the Next Steps with The Wilson Firm
Understanding the Texas sales and use tax audit process empowers your business to prepare effectively and minimize risks. With the rise of digital audits and increased scrutiny on e-commerce, proactive preparation is more critical than ever. Each audit stage, from notification to resolution, requires meticulous record-keeping and timely responses. The Wilson Firm is here to guide you, ensuring compliance and protecting your interests.
To get started, download our free Texas Sales and Use Tax Audit Checklist to streamline your preparation. Contact us at The Wilson Firm to schedule a consultation and learn how we can support your business during an audit and beyond.
Disclaimer: The Wilson Firm PLLC provides this information as a public service for general information only. The materials contained herein may not reflect the most current legal developments. Such material is not intended as legal advice or as a substitute for the particularized advice of your own counsel, and no person should act or refrain from acting based on any information contained in this website without seeking appropriate legal or other professional advice on that person’s particular circumstances. The Wilson Firm PLLC and all contributing authors expressly disclaim all liability to any person with respect to the contents of this website, and with respect to any act or failure to act made in reliance on any material contained herein. The articles, blogs, and other information on this website are provided as is without warranty of any kind, either express or implied, including but not limited to the implied warranties of merchantability, fitness for a particular purpose, or non‐infringement.
Why Choose The Wilson Firm?
At The Wilson Firm, we provide personalized, strategic representation tailored to each client's situation. Whether you're facing a government investigation, a tax dispute, or enforcement action, our attorneys work closely with you to understand the facts, assess the risks, and pursue the most favorable resolution possible.
We manage the legal complexities so you can focus on moving forward. From handling communications with tax authorities to developing a strong legal strategy, we are committed to protecting your rights, your interests, and your peace of mind at every stage.
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