Ohio Sales and Use Tax Audits – What to Expect!

With the addition of 85 agents to the Ohio Department of Taxation’s (the “Department”) Audit Division (representing a 32% increase), half of which are assigned to sales and use tax, audits in this area are certain to substantially increase in the coming years. As Ohio attempts to capture revenue, you should understand the process and expectations of a sales and use tax auditor.

The first contact by the Department informing of an audit is generally an Audit Commencement Letter (ACL) requesting numerous documents from the taxpayer. Oftentimes, taxpayers respond to the ACL themselves hoping they can quickly resolve the matter. This is not likely. Prior to even sending the ACL, the auditor has compiled substantial information about the taxpayer by reviewing prior Ohio tax history and returns, federal tax returns, Security and Exchange Commission filings, and information available through Harris InfoSource and other databases, as well as the taxpayer’s website and searching Google, Yahoo and other search engines. Moreover, the taxpayer’s response to the ACL, and any information or documentation provided therewith, will be used by the auditor during the audit. Thus, it is imperative to respond to the ACL in a manner that preserves the taxpayer’s rights and presents the information/documentation in a light most favorable to the taxpayer.

After the initial contact is made, the auditor will likely attempt to schedule a meeting at the taxpayer’s facility to discuss the method and timeline for conducting the audit, and perhaps request a plant tour. The timeline is helpful in that it gives the taxpayer an expectation as to the depth and procedure of a sales and use tax audit. Furthermore, if a test check will be conducted, where only a representative portion of the taxpayer’s purchases or sales will be examined, the auditor will attempt to enter into a sample agreement with the taxpayer setting forth the method for conducting the test check. Beware this sample agreement is binding and will foreclose any challenge on appeal to the methodology of the test check, except to the extent the agreement itself is unreasonable or unreliable.

Many taxpayers dig themselves into a hole by attempting to head off an audit at the initial stages by responding to the Department’s inquiries themselves. Unfortunately, if one waits too long to retain a professional to assist with the audit, after crucial information has been disclosed, the taxpayer may unnecessarily waive some of its rights. By contacting a sales and use tax attorney immediately upon receipt of the ACL, you enhance the ability to present the required information and documentation in a favorable light, while preserving all of your rights as a taxpayer.