What should an online seller do when a state sends a sales tax audit notice?

The first week: read, calendar, and contain

Start by reading the notice carefully for three things: the audit period, the response deadline, and the list of records requested. The audit period is usually the open statute of limitations, typically three to four years, and can extend further if the state believes you never filed. The deadline is often short, and missing it forfeits leverage; if you need more time to assemble records, ask for an extension in writing before the date passes rather than after. The records list tells you what the auditor plans to test, which tells you where your exposure is.

Then decide who will run the response. For anything beyond a very small assessment, an accountant or sales tax specialist who has handled audits in that state is worth the fee, because they know the auditor's procedures and what documentation is accepted. Designate one point of contact so the auditor is not getting different answers from different people. Do not volunteer records or explanations outside what was requested; answer the questions asked, completely and accurately, and nothing more.

Keep reading: US Sales Tax Basics for Online Sellers, What Economic Nexus Means and Why It Matters, Origin vs Destination Based Sales Tax, Explained. See how SalesTaxly helps you us sales tax rates and lookup for online stores.

What the auditor will actually test

An ecommerce audit typically reconciles three numbers: gross sales from your accounting records or bank deposits, sales reported on your returns, and tax collected according to your order system. Gaps between them are the first finding. The second area is exempt sales: every untaxed sale in the period needs a valid exemption certificate or a documented reason such as a marketplace collecting on your behalf, and missing certificates are among the largest sources of assessments for online sellers. The third area is rate accuracy, where the auditor samples orders and recalculates tax at the delivery address. Related: US Sales Tax Basics for Online Sellers

Auditors also look at use tax on your own purchases, such as equipment, software, and supplies bought without tax from out-of-state vendors, and at whether shipping charges and product categories were treated correctly. For a business with high order volume, the auditor will usually propose a sampling method rather than review every order; understand the method before agreeing, because a small sample projected across years can produce a large assessment from a few mistakes. You can and should negotiate the sample period and size. Related: Common Sales Tax Mistakes Small Sellers Make

Assembling records that support your position

Pull together filed returns, order exports with tax and jurisdiction detail, exemption certificates linked to the sales they support, marketplace reports showing tax collected by the marketplace, and bank statements. If you have monthly sales-by-state reports and documentation of when you crossed nexus thresholds, include those, since they establish when you were and were not required to collect. Organize everything by period and by the auditor's request numbers so each item can be located quickly. Related: What Economic Nexus Means and Why It Matters

Where records are missing, do not fabricate or estimate silently. Explain what is missing and why, and offer the best available substitute, such as a customer's exemption certificate obtained now with a declaration that the exemption applied at the time of sale, which some states accept in an audit. For rate errors, showing that you used a reputable address-based rate lookup with logged results often reduces or eliminates penalties even where tax is still owed, because it demonstrates reasonable effort. Related: Why Sales Tax Rates Change So Often

Assessment, appeal, and prevention

At the end of the fieldwork the auditor issues proposed findings. Review every line: check the math, challenge projections that rest on unrepresentative samples, and provide any documentation that was still outstanding. Penalties are often negotiable when the underlying errors were not willful, so ask for penalty relief in writing and give the reasons. If you disagree with the final assessment, every state has an appeal process with its own deadline, and that deadline is as unforgiving as the first one.

Use the audit as a map of what to fix. The findings will show whether your weak point was exemption documentation, rate lookup, nexus timing, or return reconciliation, and each of those has a specific remedy. Sellers who go through one audit and fix the root causes usually find the next one short and uneventful. Sellers who pay the assessment and change nothing tend to hear from the state again in a few years, with a larger period under review.