State & Local Tax Blog

How Far Back Can a State Go On Audit and How Long Should You Retain Your Records?

We subscribe to some of the best resources available today when it comes to state and local tax research. Chances are, whatever question you could possibly have, we can find the answer. Today, we thought it would be interesting to highlight the statute of limitations for various states and a corollary issue of just how long you should retain your sales tax records.

Statute of Limitations
A statute of limitations is a law that sets forth the maximum time after an event that legal proceedings based on that event may be initiated. When applied in a sales and use tax context, there are time limits established by state laws that govern how long a taxpayer has to file a refund claim after paying tax erroneously and how long taxing jurisdictions have to assess you tax. Most states have just adopted the federal statute of limitations meaning that they have a 3 year limitation, except in the case where the tax liability is understated by 25% or more which gives the state 6 years to go back. Other states use something different than 3 years. The most common other time limit is 4 years but some states use a 5 or 6 year statute of limitations. One interesting state is Louisiana. In Louisiana the statute of limitations is 3 years, but 3 years after December 31st. So, get in your refund claim just before December 31st to preserve a whole additional year of time.
Tolling — here is a concept that I frequently hear being used incorrectly. Tolling is a legal doctrine that means “paused” or “stopped” while a certain condition exists. For example, if a company does not file sales tax returns when required to do so, the statute of limitations is tolled or paused and does not run out. Frequently, people will say that the statute of limitations is NOT tolled in this scenario but that is incorrect usage that leads to confusion. Suffice it to say that however you use the tolling word, the sobering fact is, under certain conditions, a state can go back much further than the statute of limitations would seem to indicate.
If you would like a chart for your own use of which states use the 3, 4, 5 or 6 year statute of limitations, see the end of this article for how you can get your very own at no charge.
Record Retention
So if a state can go back as much as 6 years the next natural question you probably have is what would be a good record retention policy? The answer to this question is: “It varies all over the board”. In general, if you retain records for 6 years, you’ll be in compliance with just about every state. You may not want to keep records for that long though, so if you’re primarily in a state that just requires 3 years, you can get away with destroying records sooner.
We Have a Chart for That You might call it a Taxability Matrix or a Taxability Chart, the name is not important. We have various tax matrices already put together based on survey questions made to the states each year. This particular matrix addresses this question of what are the various states’ statutes of limitations and what are their record retention requirements. We offer this basic research to you at no charge for up to 10 states. If you like to receive one of these charts, just request it. But remember, this chart is the result of a survey performed by the states and is research provided to us by CCH. The charts are fantastic resources, but cannot substitute for professional advice based on your specific facts and circumstances. By all means, have a look at the charts we can provide but then do your own research and consult an expert.What’s the Best Way to Get Answers to Your State Tax Questions?

CALL THE STATE? — This may not be the best thing to do. Clients frequently remark that when the call the state for guidance, they often get hazy and even conflicting answers. We usually say that it’s not that people at the state don’t know what they’re talking about. In fact, if you get a hold of the right people with expertise in your industry, and they understand your question correctly, then you can almost always trust the answer you get from them. Just try to get the answer in writing, so you’re protected in the event of a future audit.

But you have to get the right people and you have to phrase the question appropriately using correct terminology so that misunderstandings are avoided. Certain words carry meaning in the sales tax world that might not be immediately apparent to a non sales tax person. Sales tax is much more a “form over substance” type of tax than income tax and how things are worded in a contract or invoice can be crucial to the taxability. How a question is worded can also make a big difference. Don’t get me wrong, I’m not saying there’s some sort of trick or code language that you must conform to or else, I’m just saying that you want to understand all the implications of the words you choose in asking for guidance so that you get the most accurate answer.

Plus, how do you know if you got the whole answer on your situation? You may have described your facts and circumstances accurately but left out something that you did not think was important. The answer you get would be dependent on the facts you presented. But in reality, the answer you get may not be appropriate when you consider all the relevant facts.

GOOGLE IT? — With so much information available on the Internet these days, you can Google your question and chances are, you’ll find something that seems to match your situation. The problem here, of course, is, does this answer really apply to your situation? Is there another contradicting ruling or law on this matter? Has this item you found been superseded?

GET A RULING? — What if there is no law, regulation, court case or state ruling that addresses your exact situation? Yes, this does happen and quite frequently. State revenue departments have not produced answers to every possible question. This is in stark contrast to the IRS, where it seems that no matter what situation you face, there is a regulation or revenue ruling or court case that addresses it on point — it’s just a matter of finding it. At the state level, we frequently run into situations where there is simply no documented answer to your question. In this case, we usually recommend obtaining private letter rulings from the revenue departments. Each state has their own procedure. We usually recommend only seeking a letter ruling where you have already discussed the question with a subject matter expert at the state, and gotten a pretty good idea of what you’re going to get in the ruling. It’s not always possible to do, but you don’t want bad precedent, if you can help it.

ASK THE EXPERTS? — Have you tried calling the state or just searching the Internet and came away wondering if you got the right answer? Have you considered asking an expert? You probably have, but hesitated, considering the cost. Well, this is what we do — We Solve State Tax Problems.

And, we don’t always charge for this service. How can that be, you ask? We subscribe to just about every service available and can find just about any law, regulation or court case that would bear on your facts and circumstances. And more than that, we use our many years of experience to evaluate your facts to form the correct questions. With that experience we can draw conclusions you can rely on. And we maintain contacts with key state personnel that we can confirm how the state will treat certain transactions that fall in gray areas.

Sometimes we just flat know the answer to a question you have. We always tell our clients: “If you have a question, just call us or email us. If we can answer you off the top of our heads, we’re not going to charge you. If we need to do some research, we’ll tell you before we do the work and seek your approval before we do it.” You can expect no surprise invoices from us.

So What Questions Do You Have?

Like we said earlier, we can deal with any state tax question you can think of. Of course, the answer to many questions we get is, “it depends!” And that may sound like a cop out, but it really does depend. The answer depends on which state we’re talking about number one and then on other possible variances in the facts. One of the helpful resources we subscribe to is provided by CCH. And one of the resources they give us access to are certain charts or tax matrices.

CAUTION ON CHARTS –A big word of caution is in order when it comes to charts. A chart is just a starting place when you want to do some research, and not the final answer by any means, but it’s still interesting and insightful. One particular chart they provide is unique in that it is based entirely on surveys of actual state tax departments and as such it is a good representation of state tax policy. But it is just state policy and this survey is not binding on them. Sometimes, a state’s own policy is at variance with the law, so take this with a grain of salt. But, it still makes for good state tax conversation. We’re here to help, give us a call.

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