Top Reasons Small Businesses Get Flagged for Sales Tax Reviews

Sales tax compliance is a complex, ever-evolving responsibility that often overwhelms small business owners. As states continue to tighten enforcement and broaden nexus rules, many small businesses unknowingly place themselves in the crosshairs of tax authorities. One of the most common—and costly—outcomes is being flagged for a sales tax review.

Understanding what triggers these reviews can help you stay one step ahead. In this article, we explore the key red flags that lead to reviews, the potential consequences, and how your business can proactively avoid them.

What Is a Sales Tax Review?

A sales tax review is a formal or informal examination by a state’s Department of Revenue to verify the accuracy of your sales tax collection, filing, and remittance. Unlike a full audit, which is typically more in-depth and may span several years, a review is often a preliminary step to assess risk. But make no mistake—if discrepancies are found, a review can quickly escalate into a full-scale audit.

Sales tax reviews can be initiated by:

• Filing inconsistencies

• Transaction anomalies

• Complaints

• Data mismatches from third-party sources (like 1099-K forms or federal returns)

For small businesses without in-house tax teams, navigating these reviews can be daunting.

8 Major Red Flags That Trigger Sales Tax Reviews

1. Late or Missed Sales Tax Filings

Timely filing is critical. Even if you made no taxable sales, many states require a "zero return" if you're registered. Consistently filing late—or worse, failing to file at all—is one of the most common triggers for a review. Repeated issues may lead authorities to assume you're struggling with compliance or hiding liabilities.

Risk factor: High

Example: Missing multiple monthly filings in California or New York can trigger immediate penalty notices or system-initiated reviews.

2. High Volume of Exempt Sales Without Documentation

Exempt sales are perfectly legal—if supported by valid exemption or resale certificates. However, claiming large volumes of exempt sales without documentation (or with incomplete, expired, or out-of-state certificates) raises red flags.

Risk factor: Very high

What they check: Certificate validity, accuracy of buyer info, exemption reason

States like Texas and Florida actively audit for certificate compliance and may deny undocumented exemptions entirely.

3. Inconsistent or Amended Returns

Frequent corrections, overpayments, or underpayments create doubt around the reliability of your filings. While amending a return isn’t inherently suspicious, doing so repeatedly—especially across different states—can signal a pattern of inaccuracy or mismanagement.

Risk factor: Medium

Solution: Use automated tax software or a managed service to reduce manual errors.

4. Unregistered Nexus Activities

With economic nexus laws in effect in nearly every state, businesses may trigger a sales tax obligation without realizing it. If you’re making sales in a state but not collecting tax—and your volume exceeds the threshold—you’re likely out of compliance.

Triggers include:

• $100,000+ in sales or 200+ transactions annually

• Remote employees or contractors

• Warehousing inventory in Amazon FBA or 3PL locations

Not registering where you have nexus is a major red flag that often leads to audits and back tax assessments.

5. Sales Tax Collected but Not Remitted

Collecting tax from customers and failing to remit it is considered tax fraud. Even unintentional delays in remitting collected funds can result in significant penalties, interest, and criminal implications.

Risk factor: Severe

States affected: All—this is universally enforced

6. Discrepancies Between Reports

Tax agencies now cross-check:

• Sales tax returns

• 1099-K reports from payment processors

• Federal income tax filings

• Franchise tax returns

If your sales reported to the IRS or third parties don’t match your sales tax returns, the state may assume you’re underreporting taxable income.

Risk factor: High

Example: Reporting $750K in gross receipts on your IRS return but only $250K in taxable sales in sales tax filings.

7. Complaints or Whistleblower Reports

States encourage consumers and competitors to report suspected sales tax fraud or noncompliance. An anonymous tip—valid or not—can lead to a review that uncovers broader issues.

Sources of complaints:

• Former employees

• Disgruntled customers

• Competing businesses

8. Industry-Wide Sweeps and Targeted Campaigns

Certain industries are consistently under scrutiny due to high rates of sales tax evasion or complexity in taxability. These include:

• Restaurants and food service

• Home improvement and construction

• eCommerce retailers

• Subscription services

• Healthcare providers

If your business falls into one of these sectors, you may be part of an industry-wide enforcement sweep, regardless of whether you’ve done anything wrong.

What Happens If You’re Flagged?

Being flagged for a review doesn't always result in an audit—but it can.

If authorities find:

• Underreported tax

• Incomplete certificates

• Unregistered nexus

…you may face:

• Penalties (often 10%–25%)

• Interest on unpaid tax

• Filing backdated returns (for years)

• Legal action, license revocation, or reputational harm

  
  

How to Avoid Getting Flagged

Prevention is always better than damage control. Here's how small businesses can stay off the radar:

1. Register in Every State Where You Have Nexus

Use a nexus analysis to determine where you're obligated to collect tax. This includes physical and economic nexus.

2. Stay Current on Filing Requirements

File on time, every time. Set reminders, automate the process, or outsource your compliance.

3. Maintain Valid Exemption Certificates

Keep your certificates organized, up to date, and compliant with state-specific rules.

4. Use Reliable Sales Tax Software

Manual filings are error-prone. Automate rate calculations, collection, and filings using reputable tools—or hire a sales tax specialist.

5. Conduct Internal Reviews Annually

Even if you're not flagged, do your own mini-audit to catch issues early.

Top Reasons Small Businesses Get Flagged for Sales Tax Reviews

Understanding the top reasons small businesses get flagged for sales tax reviews can help you avoid unnecessary scrutiny and penalties. Common triggers include inconsistent filings, missing exemption documentation, incorrect tax rates, or failure to register in nexus states. By proactively addressing these issues, you can lower your risk of audit and stay ahead of compliance challenges.

How Manage My Sales Tax Protects Your Business

At Manage My Sales Tax, we specialize in helping small businesses avoid costly sales tax reviews and audits. With over 20 years of experience, we handle your compliance from start to finish—so you don’t have to stress.

Our services include:

• Nexus Risk Analysis: Identify where you must register

• Sales Tax Registration: We handle multi-state filings and renewals

• Filing & Remittance: Timely, accurate, and worry-free

• Exemption Certificate Management: Secure storage, validation, and audit support

• Audit & Review Defense: We help you prepare, respond, and reduce liability

  
  

Don’t wait for an audit notice to take control of your compliance.

Our team helps you spot and resolve potential red flags before they become costly problems. Whether you're unsure about filing accuracy or need help organizing your records, we’re here to guide you every step of the way.

👉 Visit our website to learn more and schedule your FREE consultation with a sales tax expert today. Get ahead of issues—before they start.

👉 Book your FREE consultation with our sales tax experts today! https://lisajonescpa.youcanbook.me/