Small Business Journal: Sales tax compliance follies

(’76 Contributor) The burden of sales and use tax compliance, reporting and audits for small business is one of many reasons that a rational person should think twice, thrice and beyond before launching a new enterprise.

My 10–person technical service shop in metro Denver recently received a long–awaited sales and use tax audit report. Tax due was less than a hundred dollars. No business can run completely error free. Confirmation that we were 99.999875% compliant over the five–year period was cause of celebration. My controller received praise and a raise.

Taxpayers beware of the real cost of a sales tax audit. Here is the estimated tab from ours:

  • State auditor on site 8 business days ($3,500 borne by the state)
  • Estimated report compilation time ($2,500 borne by the state)
  • Accounting hours preparation ($2,250 cost to the company)
  • Answering questions, research during audit ($1,600 cost to the company)
  • Owner time to clean rest room after every “visit” by the auditor ($150 cost to company)

(The hygiene habits of our government guest will not be disclosed in this family friendly forum.)

Ten thousand dollars—when you add it all up, that was the estimated total cost to our Colorado economy! It’s true that not all companies comply with sales/use tax complexities as well as we have. The threat of an audit encourages businesses to follow the rules.

But only a state would deem it cost–effective to fully prosecute an eight–day audit of a company that on the first day could be identified as highly compliant. The return on investment of this audit was a minus 98% from the perspective of the state.

Is it any wonder why employment growth is anemic and the state budgets are in the red?

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