7 Important Insights for Businesses Facing Texas Sales Tax Audits

Texas sales tax audits pose substantial risks for businesses targeted by the Texas Comptroller’s Office. As a result, targeted businesses need a clear understanding of whether they are in compliance with Texas law—and, if they are not, they must work with an experienced Texas tax defense lawyer to seek a resolution that avoids unnecessary liability for back taxes, interest, and penalties.

Both in-state and out-of-state businesses can face Texas sales tax audits. Since Texas does not have an individual or corporate income tax (though it does have a corporate franchise tax), it relies heavily on sales tax revenue—and the Texas Comptroller’s Office aggressively pursues sales tax enforcement when warranted. Texas sales tax audits can present substantial liability exposure and can involve a wide range of issues. As a result, when facing an audit, it is important to engage an experienced tax counsel promptly.

What Business Owners and Executives Need to Know About Texas Sales Tax Audits

In all cases, business owners and executives need to have a clear and comprehensive understanding of the legal issues—and legal risks—involved in their Texas sales tax audits. With this in mind, here are some key insights from Texas tax defense lawyer Lawrence Brown:

1. Nexus is the Threshold Issue for Texas Sales Tax Liability

Businesses that have nexus with the State of Texas are required to collect and remit Texas sales tax, while those that do not have nexus do not. As a result, making an uninformed nexus determination can have serious financial and legal ramifications. In-state businesses have nexus by default, while out-of-state businesses can either have economic nexus based on their “total Texas revenue” or physical nexus based on their contacts with the state.

2. It Is Important to Engage Experienced Tax Counsel Promptly

Due to the substantial risks involved in facing a Texas sales tax audit (more on this below), it is important to engage experienced tax counsel promptly. Waiting to engage counsel can lead to mistakes that increase both the risks involved and the costs of mounting an effective defense.

In this scenario, it is important to engage tax counsel who has specific experience handling Texas sales tax audits. These are high-stakes inquiries that present a variety of unique challenges, risks, and opportunities—and relevant experience can make all the difference in pursuing a favorable resolution.

3. Businesses May Have Multiple Sales Tax-Related Obligations

Along with state and local sales tax, businesses may also have a variety of other sales tax-related obligations under Texas law. For example, the Texas Tax Code contains provisions that apply specifically to:

Noncompliance with any of a business’s state tax obligations can lead to invasive and high-risk scrutiny. When facing an audit, it is imperative to have a clear and comprehensive understanding of the business’s risk exposure, and this starts with gaining a clear and comprehensive understanding of the business’s tax compliance record.

4. Defending Against a Texas Sales Tax Audit Requires Thorough Preparation and In-Depth Knowledge of the Law

This brings us to our next point: Defending against a Texas sales tax audit requires thorough preparation and in-depth knowledge of the law. State-level tax audits in Texas are no less serious than federal tax audits involving the Internal Revenue Service (IRS). When facing scrutiny from the Texas Comptroller’s Office, targeted businesses need to be prepared to defend themselves by all means available.

5. Negotiating a Tax Settlement Might (But Might Not) Be the Best Approach

In some cases, targeting a settlement with the Texas Comptroller’s Office will be the best approach. But, in other cases, businesses will have complete defenses to liability. As with all legal matters, determining whether it makes sense to target a settlement when facing a Texas sales tax audit requires a comprehensive assessment of all relevant facts and circumstances.

6. Texas Sales Tax Audits Pose Substantial Risks

In all cases, Texas sales tax audits pose substantial risks. While the specific risks involved depend on whether and to what extent targeted businesses are prepared to affirmatively demonstrate compliance, potential risks include:

Liability for unpaid sales tax (regardless of whether the business collected tax)
Interest and penalties
Sales tax license revocation
Bank levies and asset seizures
Personal liability for business owners (in some cases)

Texas sales tax audits can also lead to criminal prosecution in some cases. In criminal cases, business owners, executives, and other individuals can face both fines and prison time.

7. When Facing an Audit, Businesses Should Be Preparing to File a Protest if Necessary

Even with a sound defense, Texas sales tax audits can (and do) lead to unwarranted determinations of liability. With this in mind, businesses should prepare to file a protest if necessary. Several forms of evidence can support protests, and businesses can pursue multiple levels of administrative and judicial appeals if necessary.

FAQs: Defending Against a Texas Sales Tax Audit

Why is the Texas Comptroller’s Office auditing my business?

The Texas Comptroller’s Office conducts audits at random and targets individual businesses due to suspicions of noncompliance. In both scenarios, building and executing an informed defense strategy is critical for avoiding unnecessary liability.

Do out-of-state businesses have to collect Texas sales tax?

Out-of-state businesses must collect Texas sales tax if they have either economic or physical nexus with the state. If you are unsure whether your business is required to collect Texas sales tax, you will need to consult with an experienced tax lawyer who can assess your business’s obligations.

How can businesses avoid additional liability during Texas sales tax audits?

Avoiding additional liability during a Texas sales tax audit requires an informed, strategic and proactive defense. This starts with engaging experienced tax counsel, and owners and executives of targeted businesses should be prepared to work closely with their business’s counsel throughout the process.

Request an Appointment with Texas Tax Defense Lawyer Lawrence Brown

If you need to know more about defending against a Texas sales tax audit, we invite you to get in touch. To request an appointment with Texas tax defense lawyer Lawrence Brown, please call 888-870-0025 or contact us confidentially online today.

Categories