Summary: Sales tax assessments often result from overlooked compliance fundamentals rather than major legislative changes. This article outlines four key sales tax health checks businesses should perform regularly, including reviewing nexus, verifying product taxability, evaluating compliance processes, and assessing audit readiness. Taking a proactive approach can help identify issues early, strengthen internal controls, and reduce the risk of unexpected sales tax assessments.

Sales tax risk doesn’t usually start with a major legislative change. It starts with the basics.

When companies receive large sales tax assessments, the root cause is often surprisingly simple: a nexus review that hasn’t been updated in years, a new product coded incorrectly, an expired exemption certificate, or a compliance process that never evolved as the business grew.

As businesses grow, yesterday’s sales tax conclusions may no longer be accurate. Expanding into new markets, adding new revenue streams, implementing new technology, or acquiring other companies can all change a company’s sales tax profile. Periodically evaluating the foundation of your sales tax function can uncover issues long before an auditor does.

Here are four sales tax health checks every business should consider.

Has Your Sales Tax Nexus Changed?

Your sales tax footprint is rarely static. Opening a new location is no longer the only event that creates nexus. Today, businesses frequently establish filing obligations through:

• Remote employees
• Economic nexus thresholds
• Third-party inventory or fulfillment centers
• Marketplace sales
• Trade shows or temporary projects
• Mergers and acquisitions

As business operations evolve, registrations that were appropriate five years ago may no longer be sufficient or even necessary.

Questions to ask:

• Are we monitoring economic nexus thresholds annually?
• Have new employees or inventory created physical presence?
• Are we registered everywhere we should be?
• Are we filing returns in states where nexus no longer exists?

A regular nexus review helps ensure compliance while eliminating unnecessary filing obligations.

Is Your Product Taxability Correct?

One of the most common misconceptions is that product taxability is a “one-and-done” exercise.

In reality, products evolve, and so do state tax laws.

Software, SaaS, digital goods, data and information services, marketing and advertising services, maintenance agreements, bundled offerings, AI-enabled products, installation services, and subscription models continue to receive increased scrutiny from state taxing authorities.

Even seemingly minor changes such as adding consulting services, changing pricing models, or bundling products together can alter the tax treatment in multiple states.

Businesses should regularly verify:

• Their legal taxability determinations on a state-by-state basis
• That those determinations are correctly configured within their ERP, billing platform, tax engine, or point-of-sale system

A technically correct taxability decision provides little protection if it isn’t implemented correctly in the systems calculating or reporting the tax.

Is Your Sales Tax Compliance Process Working?

Even when nexus and taxability are correct, poor processes can create significant audit exposure. Effective sales tax compliance requires more than simply filing returns.

Key areas to evaluate include:

• Exemption certificate collection, validation, and renewal
• Product tax code mapping
• ERP and tax engine integrations
• Manual tax overrides
• Sales tax reconciliations
• Exception reporting
• Return review and approval procedures

As organizations grow, manual workarounds often become permanent processes. Over time, these small inefficiencies can create substantial compliance gaps that remain hidden until an audit uncovers them.

A routine process review helps identify breakdowns before they become expensive.

Could You Survive a Sales Tax Audit Tomorrow?

The best time to prepare for an audit is before the audit notice arrives.

Ask yourself:

• Can we quickly produce exemption certificates?
• Are invoices and contracts easy to retrieve?
• Can we reconcile filed returns back to our financial records?
• Do we know who owns the audit response process?
• Are records retained through the applicable statute of limitations?
• If we have acquired a business, do we still have access to its historical records and systems?

Many audits become costly not because the tax was wrong but because supporting documentation cannot be located.

Conducting a periodic mock audit or audit readiness assessment often reveals documentation gaps, inconsistent procedures, and record retention issues that can be corrected before they become audit findings.

Reduce Sales Tax Risk Through Regular Reviews

Sales tax laws will continue to change, but the biggest audit exposures often come from fundamentals that have been overlooked.

Regularly reviewing your nexus footprint, product taxability, compliance processes, and audit readiness helps businesses identify issues early, strengthen internal controls, and reduce the likelihood of unexpected assessments.

Regular sales tax reviews can help businesses identify issues before they become costly audit findings.

Sales tax issues are often easier and less expensive to address before an audit begins. KSM’s State and Local Tax professionals can help evaluate your sales tax footprint, identify hidden compliance risks, assess your current processes, and recommend practical strategies to strengthen your sales tax function. To learn more, contact your KSM advisor or fill out the form below.

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