[IMGCAP(1)]State tax exam information requests are increasingly becoming more comprehensive and demanding. We’ve noticed a disturbing trend with our clients who maintain their records electronically. States, in their information document requests, are requesting that those businesses supply all transaction data for the entire period covered by the exam; i.e., data regarding every transaction, every check paid and complete general ledger detail.
During a recent sales tax exam, one of our clients received an information document request that contained a written notification that the state’s tax provision governing what constitutes adequate books and records required that a taxpayer under exam provide “complete electronic sale and purchases data in a standard record format for all transactions nationwide.” This notification indicated that such information included, but was not limited to, “accounts payable, accounts receivable and journal entries” for the entire three year period covered by the exam.
After we reviewed the statute the state cited in its request, we found that it did not, in any specific way, require nationwide data to be provided to the state. In addition, the state’s external publication and Taxpayer’s Bill of Rights did not require the taxpayer to provide the state with nationwide data. Nevertheless, at the start of the exam, the state was emphatic that since the taxpayer’s records were stored electronically, they wanted all of the information.
The state’s insistence on gathering all nationwide transactional information for the entire period under exam was unexpected and disconcerting. To provide nationwide data is not only time-consuming and burdensome upon a taxpayer’s tax and IT departments (not to mention unnecessarily invasive), but in many instances a state may not have adequate statutory support for its demand for such information. Equally troubling is an increasing predisposition by states to attempt to require that taxpayers agree to statistically determined samples based on all of the data, in lieu of the much smaller block samples that have been the standard for many years.
Appreciating how aggressive state exam information document requests are becoming, it is more important than ever that your clients plan now for pending or potential exams. Extensive preparation is critical to any state tax exam. Becoming aware of what is required to be provided to the state prior to the initial meeting with the state tax examiner should be an essential part of the preparation process. Businesses need to review the state statutes, state examination guidelines and taxpayer bill of rights early in the exam process, ideally before the initial meeting with the state.
New York State, for instance, has issued several publications that may provide excellent insights to how the state will approach a sales tax exam, including Publication 131 Your Rights and Obligations Under the State Tax Law and Publication 750 A Guide to Sales Tax in New York State.
Armed with the knowledge of what information the state is entitled to and more importantly, what it may not be entitled to -- businesses should be able to successfully challenge some of these requests, and potentially avoid spending unnecessary time and effort complying with arbitrary information requests.
Joseph Pizzimenti, Esq., is a tax director specializing in state and local tax services at Top 100 Firm Margolin Winer & Evens, and the author of the SALT Strategies blog, where this article originally appeared.
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