Cannabis businesses operating in the retail space, including CBD businesses, are no strangers to the responsibilities and challenges of collecting sales tax from customers and remitting it to local tax authorities. However, the fear of facing an auditor due to miscalculated sales tax can be a significant stressor. In this guide, we’ll provide practical advice on how to handle a cannabis business sales tax audit, what to expect during the process, and how to equip your business to withstand future audits.
The cannabis industry is subject to stringent regulatory checks and balances, including sales tax audits. These audits are conducted to ensure that businesses are accurately calculating and remitting their sales tax to the relevant authorities. For cannabis businesses, understanding how to navigate these audits can be the difference between business growth and closure.
Understanding cannabis business Sales Tax Audits
Sales tax audits are typically initiated when local tax authorities suspect that a business may have miscalculated sales tax. In the context of cannabis businesses, these audits can be triggered by various factors, including changes in tax laws, the business’s sales volume, or the intricacies of origin versus destination-based states.
These audits can be daunting, particularly for businesses that are not well-versed in tax matters. However, understanding the audit process and knowing what to expect can help alleviate some of the stress associated with these audits.
Handling the Dreaded Audit Notification
Receiving an audit notification can be an unnerving experience for any business owner. However, the key to successfully navigating the process is not to panic. Remember, the audit notification is not a verdict but rather an invitation for dialogue.
When you receive a notification, resist the urge to respond immediately. Instead, gather your thoughts and prepare to engage an expert who specializes in sales tax audits — preferably someone with experience in the cannabis industry.
Engaging an Expert
Engaging a skilled accountant, Certified Public Accountant (CPA), or State and Local Tax (SALT) expert is crucial when facing a sales tax audit. These professionals have the knowledge and experience to navigate the complexities of sales tax audits and can serve as a buffer between your business and the tax authorities.
When choosing an expert, pick someone with prior audit defense experience. This is not the time to take chances with someone who is just “okay” or has only handled an audit once a long time ago. Remember, your business and livelihood are at stake.
What To Do After Engaging an Expert
Once you have engaged an expert, your next step should be to provide them with all the necessary transactional data required for the audit. This includes sales data, cost of goods sold, and any other relevant financial information. The more comprehensive your data, the better equipped your expert will be to defend your case.
During this time, it’s also crucial to maintain open lines of communication with your expert. They will need to understand the intricacies of your business and its financial operations to effectively defend your case.
The Audit Process
The audit process can be lengthy, often taking up to a year or more, depending on the state and its resources. During this time, your expert will communicate with the tax authorities on your behalf, providing them with the necessary data and negotiating potential penalties and interest charges.
Note that the state might continue to accrue interest and penalties during the audit process. Therefore, it’s crucial to cooperate fully with your expert and the tax authorities to expedite the process.
The Power of Attorney
One crucial step in the audit process is obtaining a Power of Attorney (POA) for your chosen expert. This legal document allows your expert to act on your behalf and interact directly with the tax authorities, providing you with a layer of protection.
Once a POA is in place, tax authorities are legally required to communicate directly with your representative, effectively shielding you from potential stress and pressure.
The State’s Findings
At the end of the audit process, the state will present its findings and an assessment of any additional taxes, penalties, and interest due. At this point, your expert can negotiate with the tax authorities to reduce penalties and interest based on your cooperation during the audit process.
However, it’s essential to understand that any taxes due from the audit are tax-deductible. However, penalties and interest are not.
If the assessment presents a significant financial burden, your expert can help negotiate a payment plan with the tax authorities. These plans typically allow businesses to pay off their tax liability over several months, helping to maintain liquidity and operational continuity.
Note that while a payment plan can provide financial relief, interest may continue to accrue during the repayment period, potentially increasing the overall cost.
Facing a cannabis business sales tax audit can be a daunting experience for any cannabis business. However, with the right expert on your side and a thorough understanding of the audit process, you can navigate the ordeal with confidence.
Remember, the key to surviving a sales tax audit is preparation, cooperation, and expert representation. By following this guide, you can ensure your business is well-equipped to handle any audit that comes your way.