Sales Tax Audits in 2026: What Businesses Should Expect and How to Prepare

State revenue departments are stepping up sales tax enforcement, and businesses across the country are receiving audit notices at increasing rates. Whether you operate in one state or fifty, understanding what triggers an audit and how to prepare can make the difference between a routine review and a costly compliance nightmare.

The landscape of sales tax audits has evolved significantly. States are using sophisticated data analytics, automated systems, and information sharing to identify non-compliant businesses with unprecedented accuracy.

What’s Driving the Increase in Sales Tax Audits?

Several factors are contributing to more aggressive audit activity:

• State budget pressures following economic uncertainty
• Enhanced data matching capabilities
• Marketplace facilitator reporting requirements
• Wayfair implementation and economic nexus tracking
• Cross-state information sharing agreements

States are no longer waiting for businesses to come to them. They’re actively mining data to find potential audit targets.

Common Audit Triggers to Avoid:

1. Inconsistent Reporting Patterns

Red flags that attract auditor attention:

• Significant fluctuations in reported sales
• Declining tax collections while revenue increases
• Consistently reporting zero tax due
• Late or missing returns
• Amended returns without clear explanations

Consistency and accuracy in your reporting demonstrate compliance and reduce your audit risk profile.

2. Exemption Certificate Issues

This is the number one problem auditors find:

• Missing certificates for tax-exempt sales
• Expired certificates still being honored
• Incomplete documentation
• Accepting certificates from out-of-state customers improperly
• Blanket certificates used incorrectly

If you can’t substantiate your exempt sales during an audit, you’ll owe the tax plus penalties and interest—even if the sale was legitimately exempt.

3. Nexus Without Registration

States are identifying businesses with nexus that haven’t registered:

• Economic nexus threshold monitoring
• Marketplace facilitator data sharing
• Third-party fulfillment tracking
• Trade show and event attendance records

Once a state identifies unreported nexus, they’ll look back as far as their statute of limitations allows—often three to four years.

4. Industry-Specific Scrutiny

Certain industries face heightened audit risk:

• E-commerce and online retailers
• Manufacturing and wholesale distribution
• Construction contractors
• Software and SaaS providers
• Healthcare suppliers

If you’re in one of these sectors, proactive compliance is especially critical.

How to Prepare for a Sales Tax Audit:

Organize Your Records Now

Don’t wait until you receive an audit notice. Maintain:

• Complete sales records by jurisdiction
• All exemption certificates in an accessible system
• Documentation for tax-free sales
• Shipping and delivery records
• Product taxability research and decisions

The better organized your records, the smoother and shorter your audit will be.

Conduct Internal Audits

Regular self-audits help you:

• Identify problems before auditors do
• Correct errors while they’re manageable
• Develop better processes going forward
• Build institutional knowledge

Many businesses discover significant refund opportunities during internal reviews, turning compliance into a revenue recovery opportunity.

Understand Your Rights

During an audit, you have rights:

• You can request reasonable timeframes for document production
• You can ask for clarification on auditor requests
• You can contest findings through administrative appeals
• You can negotiate payment plans for audit assessments

Knowing your rights helps you manage the process effectively and avoid unnecessary concessions.

Consider Professional Representation

Sales tax audits are technical, time-consuming, and stressful. Professional representation provides:

• Experience with audit procedures and auditor tactics
• Technical knowledge of tax law and regulations
• Negotiation skills for dispute resolution
• Time savings for your internal team
• Better outcomes and reduced assessments

Former state auditors and Big 4 consultants understand both sides of the audit process and can level the playing field.

The Best Defense is Proactive Compliance

Businesses that maintain strong sales tax compliance practices rarely face significant audit adjustments. The key is treating sales tax as an ongoing priority rather than an annual afterthought.

If you’re concerned about your sales tax compliance or want to prepare for potential audit exposure, DDH’s team of former state auditors and Big 4 consultants can conduct a comprehensive review and help you implement sustainable compliance processes.

About Davis Davis & Harmon LLC – Sales Tax Experts: Headquartered in Dallas, Texas, Davis Davis & Harmon LLC – Sales Tax Experts specializes in sales/use tax refund recovery and audit defense. Our team of consultants is comprised of former Big 4 sales tax consultants and state sales tax auditors. Each of our consultants has 15 to 20 years of experience, providing our clients with access to a highly specialized team of sales/use tax professionals. At Davis Davis & Harmon, LLC, we are committed to maintaining the highest standards in our talent pool. We work hard to meet our clients’ needs by ensuring that you view our firm as an extension of your company and a member of your team.