Sales Tax Audit Triggers in Texas

What Are Sales Tax Audit Triggers in Texas?

A sales tax audit trigger is any factor or discrepancy that increases the likelihood of a business being audited by the Texas Comptroller’s office. Some common audit triggers in Texas include:

• 1099-K Mismatches: If your reported sales on your tax return do not match the amount reported on the 1099-K form from your payment processors (like Stripe, PayPal, etc.), the Comptroller’s office may initiate an audit.
• Misreported Sales: If your sales figures do not match your bank deposits or financial statements, the Texas Comptroller may flag the discrepancy for further investigation.
• Overlooking Exemptions: If you fail to properly claim sales tax exemptions for purchases made for resale or qualified services, this can trigger an audit.

Common Audit Triggers in Texas

Here are the most common sales tax audit triggers in Texas that businesses should watch out for:

1. 1099-K Mismatches: A 1099-K form reports gross sales processed through third-party payment platforms. If there’s a mismatch between what you report and what the payment processors report, it may signal a potential issue with your tax filings.
• Tip: Always reconcile your sales figures with the amounts reported on 1099-K forms to avoid discrepancies.
2. Misreported Sales: If your sales are underreported or if the sales amounts reported on your returns do not match your bank deposits or financial statements, you might be flagged for a sales tax audit.
• Tip: Cross-check your sales figures and bank deposits regularly to ensure consistency.
3. Failing to Claim Exemptions Correctly: Texas offers sales tax exemptions for items purchased for resale or certain services. If you fail to correctly apply these exemptions, you may face an audit.
• Tip: Always maintain resale certificates for items purchased for resale and ensure that your exempt purchases are documented.
4. Nexus Issues: Nexus refers to your business's connection to the state. If you have physical nexus or economic nexus in Texas and fail to collect sales tax, the Comptroller’s office may audit you.
• Tip: Regularly review your nexus status to ensure compliance, especially if you have remote sales or out-of-state transactions.

For more details, visit our Sales Tax Nexus.

How to Avoid Sales Tax Audits in Texas

To minimize the risk of being audited in Texas, businesses should take the following steps:

1. Keep Accurate Records: Always maintain detailed records of all sales and purchases, including exemption certificates and proof of transactions.
2. Regularly Reconcile Sales: Ensure that your reported sales match your payment processor reports (e.g., 1099-K) and your financial statements.
3. Apply Exemptions Correctly: Properly apply sales tax exemptions for items purchased for resale and services that qualify for exemption.
4. Review Nexus Regularly: If you have remote sales or engage in cross-border transactions, regularly review your nexus status to ensure you’re correctly complying with Texas tax laws.
5. Seek Professional Advice: If you’re unsure about sales tax rules, nexus, or exemption applications, consider consulting with a tax professional to avoid costly mistakes.

For more tips on avoiding audits, visit our penalties and interest begin accumulating.