THE STATE OF MINNESOTA is auditing more small businesses as it tightens its enforcement of sales and use tax laws, say local certified public accountants. Companies that haven’t yet been audited may be — soon.
Though the state recently targeted specific industries, now it seems “everybody is getting audited,” says Derek Bertolas, CPA and owner of Bertolas and Pekula, a Ramsey-based firm that works primarily with small businesses. Of his 250 personal clients, about 50 have been audited so far. All but two ended up owing.
“Sales and use tax laws are complex and therefore often misunderstood by companies,” says Teri Grahn, sales and use tax specialist with HLB Tautges Redpath, in White Bear Lake.
The Minnesota department of revenue, which collects more than $12 billion a year in all sorts of taxes, has recently hired more staff in an effort to handle a larger volume of sales and use tax audits, she says.
The current level of enforcement, which has been ramping up over the last four to five years, hasn’t been seen by CPAs in at least 20 years, says Bertolas.
Among those companies eligible for filing these taxes, small businesses especially are easy game. They tend to have limited resources for sales and use tax compliance.
Larger companies, on the other hand, can afford to put internal controls — even whole departments — in place for navigating the state’s labyrinthine tax code.
With all the hats small businesses wear, “there is very little education going on” says Bertolas.
‘Use tax’ can sting
Most companies are getting stung in matters relating to use tax, say CPAs.
When a company buys goods from an out-of-state vendor, it isn’t charged sales tax if the vendor is based in a state that doesn’t impose sales tax. If those goods are used within the company, it has to pay a charge, otherwise known as a use tax, to the state of Minnesota.
The increase in online purchases has spiked the number of businesses that are subject to use tax, says Grahn.
Other companies got nailed on sales tax, especially when they didn’t charge any on shipping fees. Though they could attempt to go back and collect from their customers, many small businesses are reluctant to upset them and endanger any future business opportunities.
Missed — or misapplied — sales and use taxes are common, honest mistakes, CPAs say. But government makes a lot more money from companies that are merely confused versus those that wantonly avoid taxes.
While many companies do in fact owe the state government some money, that’s just the tip of the iceberg. Penalties and interest payments tacked on to the tab can make the final bill excruciating for some companies.
The amount varies widely, with some owing a few hundred dollars, to a handful owing tens of thousands — enough to have put a few small businesses into bankruptcy court or out of business, Bertolas says.
The state government has stepped up its efforts to net outstanding tax revenue because of a few years’ worth of budget deficits, he says. “They’re saying, ‘We know we’re probably leaving money on the table somewhere. We need to go collect it.’ ”
Agents can be flexible
The auditing process is pretty straightforward. The department of revenue has to send a letter informing a company of its intent to audit, but often one of its agents will call first. Catching companies off guard is a common tactic, and is a handy way to sniff out those that are less organized, CPAs says.
Once they’ve been alerted to an upcoming audit, a company may give its CPA the power of attorney, thereby conferring the authority to handle arrangements directly with the revenue agent.
By doing so, companies may find out the government is often a lot more flexible than it originally lets on.
For example, the government gives a company two weeks notice before it arrives for its preliminary audit. But that time frame isn’t set in stone. Bertolas says one of his clients received an audit letter in January, but the ensuing busy tax season prompted him to ask for an extension until May. The agent agreed to the schedule change.
And while the initial letter may insist on conducting the audit at the company’s headquarters, CPAs usually can get that switched to their own offices.
Kevin Willette, co-owner of Verus Corp., a Fridley-based computer-networking company, says some companies, such as his, don’t have the space to accommodate an agent. Also, an audit is a distraction; a change of locale can save a company a lot of questions from employees and a possible loss of productivity and morale.
“You really don’t want the rest of your staff that’s not involved with it to know that you’re going through an audit. It can be perceived in many different ways.” Willette ended up owing less than $500 once his two-week audit was concluded. He has seven employees and posts revenue between $1 million and $2 million.
Agents are typically assigned a specific geographic area, so they may run into the same CPAs for audits. Such a pre-existing acquaintance can make matters go a bit more smoothly — not because it’ll persuade an agent to back off, but because the CPA will be able to give a clear picture of what to expect from that individual.
During an audit, the company is expected to pull together records from the previous three years for purchase and sales transactions, including tax returns, receipts, check registers and invoices.
Unless a company leaves a bad first impression with auditors, in most cases, they won’t need all that information, Bertolas says. A data sample pulled from a company’s accounting software, such as QuickBooks, is probably sufficient. The government will extrapolate how much a company owes for the full three years from that small sliver.
Companies can challenge the results from a preliminary audit or even a final audit. Payment plans can be set up, but it’s best to pay the whole amount right away, say CPAs, to avoid additional fees and fines.
Once an audit passes through the appeals process and into the collections phase, companies can’t haggle to get out of any penalties or interest.
Technology firms targeted
Law firms, medical offices, accounting firms and other service-sector companies don’t sell a product, so they typically don’t charge or pay sales and use taxes.
Other industries aren’t laid out in such black and white terms. The relationship between a product and a service in technology companies, for example, can be a bit murky, which may explain why they have been hit hardest recently. Before that, restaurants and commercial and residential cleaners were targeted.
What is clear is that each year a fresh crop of new small businesses sets up shop in Minnesota, says Bertolas, thus replenishing one of the state’s quick and easy resources for sales and use tax revenue.
[contact] Derek Bertolas, Bertolas and Pekula: 763.421.1819; www.bertolasandpekula.com. Teri Grahn, HLB Tautges Redpath: 651.426.7000; tgrahn@hlbtr.com; www.hlbtr.com. Kevin Willette, Verus Corp.: 763.571.5546; info@veruscorp.com; www.veruscorp.com.
