What Triggers A Sales Tax Audit In The US? 13 Red Flags to Watch For

Think you’re flying under the radar? Not so fast. Sales tax audits can strike when you least expect them, and the warning signs are often hiding in plain sight.

This guide breaks down 13 red flags that can put your business on a state’s audit radar. Fix them before they turn into costly problems.

1. Filing Inconsistencies

Late, missing, or error-filled returns signal disorganization or neglect. States expect on-time, accurate filings every period. Frequent mistakes push your account into the audit queue.

When sales reported on your return don’t match marketplace reports or state income data, auditors see a gap. The mismatch hints at under-reporting or misapplied exemptions. Inconsistencies become a clear audit flag.

Correct totals and reconcile data before filing. Accurate, timely returns keep you off a state’s exception report. Consistency is your first defense.

2. Rapid or Unexpected Nexus Expansion

Exceeding a state’s economic nexus threshold without registering is instant non-compliance. Most states set a sales-only threshold, often $100, 000 though some are higher (e.g., CA $500,000; TX $500,000 [sales only]; NY $500,000 + 100 transactions) Very few states still apply the 200-transaction threshold, including Ohio, Hawaii, and Rhode Island. States monitor remote-seller volume and spot new entrants fast.

A sudden sales surge into multiple states without permits raises alarms. Data-sharing between payment processors, marketplaces, and tax agencies makes hidden growth hard to miss. Missing permits equal missed tax.

Track monthly sales by state and register as soon as you cross a line. Quick, proactive registration prevents audits and back-tax bills.

3. Missing or Invalid Resale/Exemption Certificates

Exempt sales need valid paperwork. One missing or expired certificate can shift the tax liability for that sale back to you. Auditors check certificates first.

Failing to collect proper documentation from exempt buyers is a key trigger. If your customer claims exemption, but you fail to obtain a signed and dated certificate with all required fields filled out, you’re legally on the hook for the tax.

States require sellers to maintain proof of exemption for each transaction. A single missing form can result in liability for the full tax amount during an audit.

Incomplete forms—wrong IDs, missing signatures, or outdated dates—are deemed invalid. States treat them the same as if no certificate exists. Penalties follow quickly.

Collect, verify, and store certificates digitally. Monitor renewal dates and keep them ready for instant retrieval during an audit.

4. Unusual Deductions or Exemptions Claimed

Reporting an exemption rate far above industry averages looks suspicious. For example, your business regularly reports that 80–90% of sales were exempt, but you’re in a sector where most transactions are taxable. Auditors may suspect either missing exemption certificates or misclassified sales.

Auditors compare your ratios to peer data and outliers invite scrutiny.

Claiming items that aren’t exempt in that jurisdiction is a common error. Examples include apparel in states where clothing is taxable or cloud software mislabeled as non-taxable. Misclassification leads to assessments.

Document every exemption with clear support. Match product codes to each state’s matrix and keep proof handy.

5. Large Volume of Remote Sales Without Collection

Post-Wayfair, selling past $100,000 into a state without charging tax equals unpaid liability. The economic nexus thresholds vary by state often $100,000 but as high as $500,000 in California, New York, and Texas. Many states now receive detailed marketplace data and may obtain 1099-K totals via information-sharing agreements with the IRS.

For example, you ship thousands of orders to California via Shopify yet report zero tax. States cross-check marketplace and payment-processor data, spot the gap, and flag you for audit.

Track thresholds monthly and collect tax once crossed. Registration timing prevents audits and back-tax demands.

6. Industry-Specific Targeting

Certain sectors, like restaurants, contractors, and breweries, have chronic compliance issues. States build “hit lists” from past error rates and being on that list raises audit probability.

Industry-specific errors include misrating mixed food and alcohol or labor vs. material splits. Auditors know precisely where to look.

Automate rate rules and product mapping for your industry. Fix known weak points before regulators do.

7. Discrepancies Between Marketplace Reports and Tax Returns

In the majority of marketplace facilitator states, platforms transmit detailed sales totals to the tax department. However, a few states still rely on seller‐level reporting or partial data. Your returns must reconcile to those numbers because differences stand out instantly.

Double-reporting facilitator-collected tax inflates totals while forgetting direct sales under-reports. Either mismatch can trigger an audit inquiry.

Download marketplace summaries for each period. Reconcile and adjust before submitting returns. Alignment keeps you safe.

8. Prior Audit History

If past audits found errors, states schedule follow-ups. They expect proof of corrective action. Repeat issues draw harsher penalties.

Even a clean audit keeps you on the radar. Agencies often revisit high-revenue accounts on a cycle. Staying perfect matters.

Fix root causes immediately and document process changes. Maintain spotless records to pass the following review.

9. Customer or Competitor Complaints

States act on credible tips. A rival claiming you advertise “no sales tax” or a customer disputing a taxed exempt item can start an inquiry.

Complaints lead to spot checks of your filings and nexus status. If auditors find gaps, a full audit follows.

Train staff to apply tax correctly and keep transaction records. Transparent practices defuse complaints quickly.

10. Failure to Report Use Tax

Purchasing out-of-state goods without sales tax still creates liability. Nearly all states require a use-tax self-assessment form for businesses. However, a few, including Florida, handle it through alternative returns. Ignoring it leaves a compliance gap.

SaaS subscriptions or equipment bought online often slip through. Expense-report audits reveal the omission.

Maintain a use-tax log and review accounts payable monthly. Remitting the use tax closes the loophole and prevents penalties.

11. Inaccurate Product Taxability Classification

Each state taxes items differently. Misclassifying a taxable SKU as exempt under-collects tax. Accumulated errors flag you for audit.

Example: SPF moisturizer treated as non-taxable cosmetics when many states tax sunscreen as OTC medicine. Sales data exposes the shortfall.

Use a taxability matrix and automation to map SKUs correctly. Update product classifications as states change rules.

12. Frequent Business-Structure Changes

Entity changes, like LLC to C-corp, mergers, and spin-offs, confuse registration records. States may think the new entity lacks permits.

If old liabilities transfer poorly, auditors dig in. Missing filings during the switch amplify risk.

Notify states of every restructure and secure new permits promptly. Keep a clean audit trail through transitions.

13. Non-Compliance with Marketplace Facilitator Rules

Marketplace facilitators collect tax in many states, but not on every sale. Sellers must know what’s covered and what isn’t.

Over-reporting facilitator tax inflates liabilities; under-reporting direct sales hides them. States cross-match both data sets.

For example, Amazon collects and remits sales tax for your orders in California, but you also report and pay that tax on your return. That double-reporting causes a mismatch.

Conversely, if you sell on Shopify and assume they handle tax the same way, you may forget to collect and remit it yourself, creating a liability gap.

Separate marketplace and direct channels in your system. Reconcile reports each filing cycle to avoid mismatches and audits.

Automating sales-tax calculation, filing, and certificate management eliminates manual errors, late returns, rate mistakes, and missed nexus triggers that put businesses on an auditor’s radar. Real-time rate engines, automatic threshold alerts, and digital exemption certificate storage keep every transaction compliant and fully documented, so you’re always audit-ready.

Ready to take the risk off your plate? Book a quick demo with Kintsugi and see how effortless sales tax compliance can be.