North Dakota Sales Tax Audit Readiness Checklist
Introduction
North Dakota requires businesses that collect sales and use tax to maintain accurate records and file returns on time. The North Dakota Office of State Tax Commissioner conducts audits to verify that sales tax has been reported correctly and paid in full. Understanding what an audit entails and how to prepare for it reduces stress and ensures the process moves forward smoothly.
What This Issue Means
A sales tax audit is a formal review by the North Dakota Office of State Tax Commissioner to examine whether your business collected, reported, and paid the correct amount of sales and use tax during a specific period. The state may contact you by mail with an audit notice that identifies the tax period under review and the records they need from you.
Why the State Requires This
The Office of the State Tax Commissioner conducts sales tax audits to ensure that all businesses comply with state tax laws and filing deadlines. Common reasons include unusual filing patterns, unusually low reported sales compared to similar companies, changes in business structure or ownership, or routine random selection. The statute of limitations allows the state to audit returns for 3 years, or 6 years if the tax was understated by 25% or more.
What Happens If This Is Ignored
If you do not respond to an audit notice within the deadline stated in the notice, the state may proceed without your cooperation. The state may estimate your sales tax liability based on available information, which can result in tax penalties and interest charges being added to any tax owed.
What This Does Not Mean
An audit notice does not mean you have committed a crime. It does not automatically mean you owe additional taxes. The state has not yet determined whether you owe money or face penalties. An audit is an information-gathering process, and the outcome depends on what records you provide.
Understanding Audit Risk Factors
Your business may be selected for an audit based on several audit risk factors. These include inconsistent sales and use tax returns, significant changes in reported revenue, gaps in filing frequency, or red flags in internal controls. Businesses with economic nexus or physical presence in North Dakota must maintain accurate sales invoices and purchase invoices to minimize audit risk.
Checklist: What to Do After Receiving an Audit Notice
Step 1: Read the Notice Carefully
Review the entire audit notice from the North Dakota Office of State Tax Commissioner. Note the tax period being reviewed and identify the deadline for responding to the state. Write down the name and phone number of the assigned auditor if provided.
Step 2: Locate Your Sales Tax Records
Find all sales and use tax returns filed during the period listed in the notice. Gather bank statements, bank reconciliations, and deposit records showing deposits from sales. Collect sales invoices, purchase invoices, receipts, and POS system records for the audit period.
Organize documents in chronological order.
Step 3: Gather Documentation of Sales and Exemptions
Compile a list of total sales by month for the period under audit. Locate any North Dakota sales tax exemption certificates for sales claimed as tax exempt, such as resale certificates or
Streamlined certificates. Find records showing sales to out-of-state customers, if applicable.
Organize receipts showing customer names and transaction details.
Step 4: Review Your Return Filings
Pull copies of all sales and use tax returns filed for the audit period through the Taxpayer
Access Point online portal. Check that the sales figures reported on the returns match your internal records and inventory management systems. Verify that the North Dakota sales tax rate calculations are mathematically correct on each return.
Step 5: Prepare a Written Response
Contact the auditor by the deadline specified in the notice using proper audit communication strategies. Let the auditor know whether you will provide the records in person, by mail, or by electronic funds transfer. Provide a summary of your business activities during the audit period.
Step 6: Organize Records for Submission
Create a clear folder structure or binder for all records being provided. Include documentation of taxable items sold, exemption certificates collected, and any sales of prescription medications, medical devices, or food for home consumption that may be exempt. Label each section with the document type and time period.
Step 7: Submit Records by the Deadline
Send records using the method specified by the auditor. Keep a copy of everything you send for your own records. Request written confirmation of receipt if submitting by mail or email. Do not miss the deadline stated in the audit notice.
Step 8: Document All Communication
Keep copies of all emails and letters exchanged with the state. Write notes on the date and content of any phone calls with the auditor. Save the auditor’s contact information for future reference. Record the title and date of any documents received.
Step 9: Keep Business Records Intact
Do not discard or alter any sales records, capital asset tracking documents, or inventory management files during the audit period. Do not remove documents from their original files or folders. Continue filing sales tax returns normally through the Taxpayer Access Point during the audit process.
- Missing the response deadline: Respond to the audit notice within the timeframe
- Providing incomplete records: Submit all requested documents, including sales
- Altering original records: Keep all documents, including POS system reports,
- Not keeping copies: Always maintain duplicate copies of everything you submit to the
- Filing amendments during audit: Do not file changes to prior sales and use tax returns
- Ignoring the protest deadline: You have 30 days from the Notice of Determination to
- Losing exemption certificates: Failure to maintain valid North Dakota sales tax
- State tax notice review and response
- Penalty and interest reduction options
- Payroll and trust fund tax assistance
- Payment plan and relief eligibility review
- Representation with state tax agencies
Step 10: Wait for the Audit Findings
The auditor will contact you when the review is complete. Be patient, as audits can take several weeks or longer depending on complexity. The auditor will explain the findings and next steps when the review concludes. You have 30 days from the Notice of Determination to file a written protest.
What Happens After This Is Completed
After you submit your records, the North Dakota Office of State Tax Commissioner will review them to verify your reported sales and use tax. The state will then issue a formal audit report explaining whether you owe additional tax and interest charges, are entitled to a refund through a reverse audit, or have no change owed.
Understanding Tax Registration Requirements
Businesses with economic nexus or physical presence in North Dakota must obtain a North
Dakota sales and use tax permit before collecting sales tax. The economic nexus threshold requires businesses with annual sales of over $100,000 to register for a North Dakota seller’s permit. Marketplace facilitators that sell on online marketplaces may have different registration requirements under the Streamlined Sales and Use Tax Agreement.
Common Mistakes to Avoid stated to avoid the state assessing tax without your input. Ignoring a notice typically results in higher tax penalties and interest charges being added to amounts owed. invoices, purchase invoices, exemption certificates, and bank reconciliations, in a clear, organized format. Partial records may require the state to estimate your liability using external indices. inventory management records, and capital asset tracking files, in their original form and condition. Modifying or destroying records can raise red flags for fraud prevention and may result in penalties. state. This protects you and ensures you can reference what was sent if questions arise later. without discussing them with the auditor first to avoid complicating the review.
Amendments during an active audit can create additional issues. file a written protest. Missing this deadline means the tax assessment becomes finally and irrevocably fixed under the statute of limitations. exemption certificates for exempt sales can result in you owing use tax on those transactions. Implement proper North Dakota sales tax exemption certificate management systems to track and renew certificates.
Frequently Asked Questions
How long does a sales tax audit typically take?
Audits can range from a few weeks to several months, depending on the complexity of your business, your internal controls, and the completeness of your records. Simple audits with well-organized documentation, including sales invoices, purchase invoices, and bank reconciliations, typically conclude faster.
Can I hire a tax professional to handle the audit?
You may designate a representative, such as a certified public accountant, tax attorney, or enrolled agent, to communicate with the auditor on your behalf. You will need to provide written
authorization to the North Dakota Office of the State Tax Commissioner using proper audit communication strategies.
What records should I keep going forward?
North Dakota law requires retailers to preserve sales and use tax returns, sales invoices, purchase invoices, exemption certificates, POS system records, and bank reconciliations for three years and three months. Maintain clear records of sales, collected use tax, claimed exemptions, and paid tax to make future audits easier.
Do marketplace facilitators have special requirements?
Marketplace facilitators that facilitate sales through online marketplaces must collect and remit sales and use tax on behalf of third-party sellers. Businesses selling through marketplace facilitators should verify whether the facilitator is handling sales tax registration and collection responsibilities under the Streamlined Sales and Use Tax Agreement.
What is the current North Dakota sales tax rate?
The North Dakota sales tax rate is 5 percent at the state level. Local government entities may impose additional local tax rates. Businesses must apply the correct combined tax rate based on the destination of taxable items sold within North Dakota.
Received a State Tax Notice?
If you’ve received a state tax notice and aren’t sure how to respond, we can help you review your options and next steps.
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