South Dakota Sales Tax Audit Readiness Checklist
Introduction
South Dakota requires most businesses and specific individuals to register for sales tax and file returns on a regular schedule. Sales tax audits occur when the South Dakota Department of
Revenue examines your records to verify that the taxes you reported and paid are accurate and complete.
An audit can be triggered by a state notice, or a business may need to prepare for one as part of regular compliance planning. Failing to respond to an audit notice or to state requests can result in additional penalties, collection actions, and increased scrutiny of your account.
What This Issue Means
A sales tax audit is a formal review of your sales tax returns, records, and transactions for one or more specific time periods. The state examines documentation to confirm that you correctly identified taxable sales, applied proper tax rates, claimed valid exemptions, and remitted the correct amount of tax.
Why the State Issues Audits or Requires Audit Readiness
South Dakota conducts audits to ensure all businesses comply with sales tax laws and remit the correct amount of tax owed. Common triggers include unusual filing patterns, significant changes in reported sales, missing returns, or random selection as part of the state’s compliance program.
What Happens If You Ignore an Audit Notice
If the state sends an audit notice and you do not respond, the Department of Revenue will typically issue follow-up communications. It may proceed with the audit using only the information available to them. This can result in assessments based on incomplete data, estimated tax calculations, and the addition of penalties and interest.
What This Does NOT Mean
Receiving an audit notice does not mean you have committed fraud or that the state has already determined you owe additional taxes. Cooperation and clear documentation often result in audits being completed with no changes or minimal adjustments.
Checklist: South Dakota Sales Tax Audit Readiness
Step 1: Organize Your Sales Records
Gather all sales records for the audit period specified in the notice or the period you anticipate may be reviewed. Compile sales invoices, point-of-sale reports, cash register tapes, or electronic transaction records.
Organize records chronologically by month or quarter, depending on your filing frequency.
Ensure documents are legible and clearly show the date, amount, and nature of each transaction.
Step 2: Compile Your Sales Tax Returns
Gather copies of all sales tax returns filed for the audit period. Include worksheets, schedules, or supporting documentation you used to prepare each return. Verify that the returns match.
If
you receive a formal audit notice, carefully review the response deadline.
The sales
records you gathered in Step 1. Create a simple list showing the filing date and amount reported for each return.
Step 3: Document Taxable and Nontaxable Sales
Identify which sales were subject to South Dakota sales tax and which sales were nontaxable, such as sales for resale with valid resale certificates. Gather any documentation that supports nontaxable sales classifications, such as resale certificates or proof of delivery outside South
Dakota.
Step 4: Gather Exemption Certificates and Documentation
Locate all resale certificates, tax-exempt customer certificates, or other exemption documentation on file. Under South Dakota law, all documents evidencing reduction, exemption,
or deduction of tax must be presented to the auditor within 60 days of the audit commencement date.
You may apply for an extension before the 60-day limit expires, and upon showing good cause, an additional 30 days may be granted. Create a file or spreadsheet listing each exemption certificate, the customer name, the date received, and the sales covered.
Step 5: Organize Your General Business Records
Gather bank statements, deposit records, and accounting ledgers for the audit period. Compile purchase orders, vendor invoices, and expense records.
Organize business licenses, permits, registration documents, and correspondence with the state. Create a central file or binder containing these materials in chronological order.
Step 6: Identify Out-of-State and Remote Sales
Document any sales made to customers located outside South Dakota. Gather shipping records, delivery confirmations, or customer documentation showing out-of-state delivery.
Explain how you determined whether these sales were subject to South Dakota tax. Create a summary of out-of-state sales volume and how this was reported on your returns.
Step 7: Document Any Audit or Compliance History
Gather copies of any prior audit reports, assessment notices, or correspondence from the South
Dakota Department of Revenue. Create a timeline showing your compliance history with the state.
Step 8: Prepare a Narrative Summary
Write a brief description of your business operations, products or services sold, and customer base. Explain your record-keeping system, accounting software used, and how sales data flows into your tax returns.
Step 9: Create an Index or Table of Contents
Organize all compiled materials into a logical structure by time period, document type, or issue.
Label folders, binders, or digital directories clearly.
Step 10: Respond to Any Audit Notice Within the Timeframe Given
If you receive a formal audit notice, carefully review the response deadline. Gather the requested items promptly and deliver or submit materials by the deadline stated in the notice.
Step 11: Designate a Contact Person
Identify who will communicate with the auditor: yourself, a bookkeeper, an accountant, or a tax professional. Provide the auditor with clear contact information for this person.
- State enforcement notices and responses
- Sales tax audits, assessments, and collections
- Payroll & trust fund tax enforcement issues
- Penalty and interest reduction options
- Payment plans and state tax relief eligibility
- Representation before state tax agencies
Step 12: Request Clarification if Needed
If the audit notice is unclear or requests records you do not understand, contact the Department of Revenue. Ask for a clear explanation of what materials are needed and why.
What Happens After You Complete These Steps
Once you have compiled and submitted your audit materials, the Department of Revenue auditor will review your records, sales tax returns, and supporting documentation. The length of an audit varies considerably depending on the complexity of the business and problems encountered.
After preliminary examination, the auditor decides whether to conduct a detailed audit, examining all business records for the entire audit period, or a sample audit, examining a representative sample and applying an error factor to the audit period. After the review is complete, the state typically issues a final audit report that either confirms that your returns were accurate or identifies adjustments and any tax, penalties, or interest assessed.
Understanding Audit Statute of Limitations
The department is precluded from collecting taxes owed more than three years before the audit.
This limitation period does not apply in the following instances: any period during which the taxpayer was unlicensed, any period during which the taxpayer filed a fraudulent return or failed to file a return, and the three years preceding the date of mailing of a notice of intent to audit.
Common Mistakes to Avoid
Missing the audit response deadline can result in automatic assessments and penalties. Always mark the deadline clearly and respond well before it expires. Submitting incomplete records or
providing only partial information can cause the auditor to question the completeness of your submission.
Disorganized materials submitted in random order, without dates, or in illegible condition waste the auditor’s time and may result in additional requests. Always retain a copy of everything you send to the state, along with proof of delivery or submission.
Frequently Asked Questions
How long does a sales tax audit typically take?
The timeframe varies depending on the complexity of your business and the scope of the audit.
Your auditor can provide an estimate based on the materials requested.
Can I have a tax professional represent me during an audit?
Yes. You may work with an accountant, bookkeeper, or tax attorney to help gather records and communicate with the auditor.
What if I cannot find all the records the auditor requested?
Contact the auditor and explain what records are missing and why. Provide the best documentation you have available.
Does an audit automatically mean I owe additional tax?
No, many audits result in no changes.
What if I disagree with the audit findings?
If you believe the assessment is based on a mistake of fact or an error of law, you may request an administrative hearing before the Secretary of Revenue. The written request for a hearing must be received by the Department no later than 60 days after the date on the Certificate of
Assessment.
Is the information I provide during an audit confidential?
Yes, South Dakota law protects the confidentiality of tax information provided to the state.
What if the auditor finds that I owe additional tax plus penalties?
The audit report will itemize any tax owed, penalties assessed, and interest calculated. A penalty of 10 percent of the tax liability, or a minimum of $10, is evaluated if a return is not received within 30 days after the month the return is due.
Closing Summary
A sales tax audit is a standard administrative review, not a sign of wrongdoing. Taking time now to compile your materials, understand your filing history, and document your business practices reduces stress and demonstrates your commitment to compliance.
Facing State Tax Enforcement Action?
If you’ve received a notice related to sales tax or payroll tax enforcement, and aren’t sure how to respond, our team can help you understand your options and next steps.
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