A sales tax notice arrived from the state

State revenue departments are not the IRS. They move faster, the deadlines are shorter, and the collection powers can be more immediate. A sales tax notice is worth opening the day it arrives.

The upside is that contractor sales tax notices are usually about a small number of very specific things.

Work out which kind you have

A missing return. The state believes you were registered and did not file for a period. Often the easiest to resolve, and sometimes the state is simply wrong because a registration should have been closed.

A math or matching notice. What you filed does not agree with something else they hold — a marketplace report, a prior return, or gross receipts from your income tax filing.

A billing notice. They have assessed an amount. Read whether it is an assessment or an estimate; estimated assessments issued because you did not file are usually much larger than the real liability, and they become final if you do not respond in time.

An audit notice. A defined period, a request for records, and a named auditor. Different from all of the above and worth professional help from the start.

A nexus or registration letter. They believe you have an obligation in a state you have not registered in. Common for contractors who took work across a state line.

The deadline is the first thing you write down

Whatever it is, find the response date and put it in your calendar with a reminder well before. State response windows are frequently shorter than federal ones, and in many states an assessment that goes unanswered becomes final and much harder to challenge — the argument shifts from whether you owe it to why you should be allowed to argue about it at all.

If you need more time, ask before the deadline rather than after. Extensions are often available and almost never granted retroactively.

Why contractors get these more than most

Contractor sales tax is genuinely one of the hardest areas in state tax, and not because contractors are careless. The rules are unusual:

Whether you are the retailer or the consumer changes everything. In many states, a contractor performing real property improvement is treated as the consumer of materials — you pay the tax when you buy them, and you do not charge the customer sales tax on the job. In others, or for other kinds of work, you are a retailer and you do. Get the classification backwards and you are wrong in one direction or the other for every job.

Repair, maintenance and installation are often treated differently from new construction, and the line between them is not always where a tradesperson would draw it.

Labour is taxable in some states and not others, and sometimes only when attached to certain kinds of work.

Exemption certificates have to be collected and kept. A tax-exempt customer does not make a sale exempt; a valid certificate on file does. Auditors ask for them, and "they told me they were exempt" is not a defence.

Rates are local, not just state. Many states layer county and municipal rates, and the correct rate can depend on where the work was performed rather than where your office is. Crossing a county line can change it.

Use tax. If you bought materials without paying sales tax and consumed them on a job, use tax may be owed. This is a very common audit finding and it surprises people, because nothing about it feels like a sale.

What to gather

• The returns for the periods in question, as filed
• Proof of remittance — the actual payment confirmations, not just the returns
• Sales by period, split between taxable and non-taxable
• Exemption certificates for every exempt sale
• Purchase invoices showing tax paid on materials
• Job records showing what the work actually was, since classification depends on it

The pattern in all of that: you have to be able to tie what you charged, what you collected and what you remitted together, period by period. If sales tax collected has never been tracked in its own liability account, that is the hard part, and it is the reason many of these notices take weeks instead of an afternoon.

Get help earlier than you would for a federal notice

For a straightforward missing return you filed and can prove, handle it yourself.

Get a state and local tax professional involved for anything involving classification, nexus, an audit, multiple periods, or an estimated assessment. State sales tax is specialised, the rules differ meaningfully across state lines, and a general practitioner CPA may not be the right person. Ask directly whether they handle state sales tax for contractors.

One more thing worth knowing: in many states, unremitted sales tax you collected from customers is treated as trust money, and responsible individuals can be held personally liable for it — the same principle as unpaid payroll trust fund taxes. Money you collected on the state's behalf and did not pass on is the most dangerous version of this problem.

Related

• Sales tax for contractors: what is taxable and what is not
• You missed a payroll tax deposit
• You got a letter from the IRS. What to do first

This is general information about how state sales tax notices work. Sales tax rules for contractors vary substantially by state and by the type of work, and they change. Confirm the position for your state and take advice from a state and local tax professional.