What to do when you Receive a Sales Tax Notice from the State

May 22, 2024 | Compliance, Sales Tax

Once you register for a permit, you may notice that your mailbox is suddenly stuffed full of sales tax notices from your state’s taxing authority. Usually called the “Department of Revenue,” but also going by other names, your state’s tax department will send you letters in the mail when you need to know something important.

The trouble is, they also send you letters that you can safely ignore. The trick is understanding which is which. 

This article will break down what to do when you open the mailbox and find a communication from your state’s taxing authority.

Sales Tax Notices & How to Handle Them

It would be easy to say “ignore and file these,” and “immediately take action on these,” but sales tax doesn’t work that way. 

What you do with sales tax notices depends on your business: your nexus states, how you make sales, and who handles your sales tax admin.

Notices from the state can be divided into four main buckets:

Informational Notices

You’ll generally receive this type of notice the most often. They can include:

  • Sales tax rate changes
  • New sales tax forms or form changes
  • New sales tax rules or laws

Depending on your business, you can often file these notices under “good to know.” However, sometimes, such as with a law change or the switch to a new sales tax form, action is required. 

These days, most e-commerce channels handle sales tax, but if your business uses a custom solution for sales tax rate then it might be up to you to make sales tax rate changes automatically. 

Instructions for your Business

Some notices are generally always “action required.” These include:

  • Changes to filing frequency – If your sales volume has increased or fallen, the state may assign you a new filing frequency
  • Changes to filing procedure – States may change their filing procedures, such as no longer requiring rounding to whole dollars or adding additional reporting fields
  • Changes to filing and/or payment method – The state may ask that you change to electronic filing and/or payment, or even to prepay your tax. These notices generally also arrive after the state flags that your sales volume has changed

These notices are generally informational, but do require that you make changes to your sales tax administration. 

One of the most painful notices to ignore is a filing frequency change. In most cases, these mean the state wants your business to file and pay sales tax more often. If you ignore a frequency change and you were supposed to change from filing and paying quarterly to filing and paying monthly, you can find yourself building up two month’s worth of penalties and interest before realizing that you should have changed how often you file.

Ignoring new procedures or payment methods can also result in fines and penalties. For example, many states now require businesses to file electronically and will penalize anyone turning in paper forms. 

Filing and Payment Issues

Sales tax is complex, especially since every state has their own rules and laws. It’s very easy to make a mistake, and in most cases the state is understanding. (As long as you pay attention to their notices!)

These types of notices include:

  • Late, incorrect, or missing sales tax filings
  • Late, incorrect or missing sales tax payments

Every once in a while, these notices even include good news, such as that you accidentally overpaid and will receive a credit on your next filing. (Don’t count on too many of those, though.) 

Pay attention to these notices, because failing to quickly correct the problem could turn a minor inconvenience into a major problem, and by that we mean penalties and interest on any outstanding sales tax due. 

Too many administrative mistakes can lead to flags on your sales tax account and also push your business into audit territory. 

Notices of Review or Audit

These are the major, red flag “action required” notices. Don’t ignore these!

Sometimes the state will send you a letter requesting further information. Other times, the letter will include a notice for a formal audit with any preamble. 

Either way, step one when you receive this type of sales tax notice is to contact a state and local tax professional like the experts at HOST. Even an innocuous looking request for information can be the first step to the state placing your business under audit. (Are you here because you received an audit notice? Our Complete Guide to Sales Tax Audits should be your next read.)

Too many sales tax notices to handle? 

When a business has nexus in more than one state, the notices can start to snowball into an overwhelming pile. 

That’s why sales tax notice management is one of the services HOST offers to our clients. Because we are familiar with your business, from which e-commerce platforms you use to your filing frequencies, we’re able to quickly evaluate notices and determine next steps. This saves your own team valuable time trying to decide if a notice requires action. (Or worse, putting off a confusing notice that does require action and ending up paying the penalties.)

Learn more about HOST’s Notice Management service here. 

Need help handling sales tax? Contact HOST today!