Why Sales and Use Tax Audits Are Getting Harder In 2026
Audit risk is no longer limited to a few high volume states or obvious problem areas. States are:
- Using data analytics and cross-matching to identify gaps between registrations, returns, and third party data
- Relying on notice automation that flags late or inconsistent filings almost instantly
- Expanding focus to digital goods, services, and complex exemption usage
If your sales and use tax workflow depends on tribal knowledge, ad hoc spreadsheets, or manual overrides, the weakness will show up during an audit.
In 2026, the core question is changing from “Did you get this rate right?” to “Can your tax operating model consistently produce accurate, supportable results over time?”
This guide outlines how to build that model.
Pillar 1: Define Your Audit Operating Model, Not Just a Checklist
Most companies treat audit readiness as a year-end activity: pull reports, clean up a few issues, hope nothing big shows up.
Auditors do not think in those terms. They look at:
- How your policies and controls are defined
- How consistently those controls are applied in systems
- How quickly you can reproduce and prove your decisions
That is an operating model, not a checklist.
A modern sales and use tax audit operating model rests on four components:
- Scope clarity
- Where you are registered
- Where you should be registered
- What tax types and fees you are responsible for
- Codified rules
- Nexus rules
- Taxability logic by state and product
- Exemption and use tax rules
- Systematized execution
- How rules are implemented in your ERP, billing, and tax automation
- How transactions flow from source systems to returns
- Continuous monitoring and KPIs
- What you track monthly or quarterly
- How you detect drift before an auditor does
Action point: Write down, in one page, how your sales and use tax process works from transaction to return. If you cannot, your team is running a process that is too complex to control.
Pillar 2: Get Your Nexus and Footprint Intelligence in One Place
Economic nexus and remote work have expanded exposure far beyond traditional physical presence. For an auditor, the first question is simple: “Where should you have been registered, and when?”
Your operating model should maintain a live nexus picture that includes:
- Revenue by state and tax type
- Transaction counts where still relevant
- Physical footprint including offices, warehouses, and remote employees
- Marketplace, drop shipment, or third party logistics activity
This data should feed forward looking decisions: when to register, which period to disclose, and how to support those choices.
KPIs to monitor:
- Number of states where economic nexus thresholds are at or above 80 percent
- Time from threshold crossing to registration
- Percentage of revenue in “monitored but not registered” states
Action point: Build a quarterly “nexus heat map” that flags states nearing thresholds, not just those already over them.
Pillar 3: Treat Taxability Rules as Governed Assets
Most audit adjustments come from taxability, not rates. Misclassified products and services create years of compounding error.
Your taxability model should be:
- State specific, especially for SaaS, digital goods, professional services, and bundled offerings
- Documented, with clear rationale for how you treat key products
- Centralized, so changes are made once and flow across systems
Key questions to answer before an audit:
- Where is your master list of taxability decisions by state and product?
- Who can change those rules, and how is that change approved?
- How are changes communicated to billing and sales teams?
KPIs to monitor:
- Number of product codes with explicit taxability decisions by state
- Frequency of rule changes and approvals per quarter
- Percentage of transactions using default or catch-all taxability categories
Action point: Start with your top 20 revenue-driving products or services and validate taxability treatment in your top 10 states by revenue.
Pillar 4: Build Industrial Strength Exemption and Use Tax Governance
Exemptions and use tax are two of the most scrutinized areas in sales and use tax audits.
Exemptions
You should be able to answer, with documentation:
- Which customers are exempt, where, and for what reasons
- Which certificate supports each exemption
- Whether certificates are valid, complete, and current
That requires:
- Centralized exemption certificate management
- Rules based exemption logic instead of free form customer flags
- Clearly defined responsibilities between tax, sales, and customer operations
Use tax
On the purchasing side, states expect to see a coherent process for:
- Identifying non-taxed or under-taxed purchases
- Applying use tax based on correct jurisdiction and tax base
- Reconciling use tax accruals with general ledger and returns
KPIs to monitor:
- Percentage of exempt sales with a valid, current certificate on file
- Number of certificates expiring in the next 90 days
- Ratio of vendor-charged tax to internally accrued use tax for key categories
Action point: Pick one high volume exempt customer and one high spend purchasing category. Try to assemble all supporting documentation for the last 12 months. Time how long it takes and note every manual step.
Pillar 5: Engineer Your Data and Systems for Audit Readiness
Audit success depends on data pipelines as much as tax rules. Auditors increasingly ask for data extracts rather than paper reports.
Your systems should be able to answer:
- How does a transaction move from source system to tax engine to return?
- Can you reproduce the tax decision for a single invoice line, including rate, taxability, and exemption logic?
- Do all systems use the same customer, product, and jurisdiction keys?
A sound data architecture for sales and use tax typically includes:
- A single tax engine or authoritative logic layer
- Standardized mappings for products, customers, and locations
- Automated feeds from ERP, billing, ecommerce, and P2P systems
- Reconciliation reports that tie transaction level data to return level summaries
KPIs to monitor:
- Percentage of transactions where calculated tax differs from expected tax by more than a defined threshold
- Number of manual tax overrides per month
- Time required to produce a transaction level data extract for a requested period
Action point: Document where tax is calculated, stored, and reported in each major system. Any manual handoff is a control gap to address.
Pillar 6: Make Filing and Notice Management a Controlled Process
Filing is where many otherwise solid processes fail. Common issues include:
- Wrong filing frequency after a state reassigns you
- Missing or late returns for low volume states
- Misapplied payments that do not match reported liability
An audit operating model should treat filing as a repeatable, monitored process, not a calendar reminder.
Core elements:
- A centralized filing calendar across all entities and states
- Clear ownership for each return and backup coverage for vacations and turnover
- Automated preparation where possible, with defined review and approval steps
- Standard workflows for notices, amended returns, and voluntary disclosures
KPIs to monitor:
- On time filing rate across all jurisdictions
- Number of notices received per quarter, by type
- Time to resolution for notices
Action point: Review the last 12 months of notices. Categorize them by root cause: late filing, missing return, registration mismatch, payment error, or taxability dispute. That becomes your filing control improvement roadmap.
Pillar 7: Move From Annual Cleanup to Continuous Monitoring
Audits are retrospective. Your controls should not be.
An always on audit ready posture means you are:
- Running periodic self reviews on high risk areas like exemptions, use tax, and nexus
- Reviewing exception reports monthly instead of waiting for a year end close
- Treating KPIs as triggers for investigation, not vanity metrics
Examples of continuous monitoring activities:
- Quarterly nexus review for expanding revenue and new locations
- Monthly review of high value manual overrides and credit memos
- Semiannual exemption certificate quality checks for top accounts
- Ongoing comparison of vendor tax versus internal determinations
Action point: Choose three audit relevant KPIs you can track reliably with existing data. Put them on a simple dashboard and review them every month with tax and finance leadership.
Pillar 8: Use Automation as the Backbone, Not a Bandage
Sales tax automation is no longer a nice to have. It is the infrastructure layer that makes this operating model possible.
Effective sales and use tax automation should support:
- Sales tax by state with local rate detail and rooftop accuracy
- Real time calculation for invoices, ecommerce, and P2P
- Integrated exemption certificate management and use tax accruals
- Filing and remittance automation, including multi state schedules
- Robust reporting for audits and internal governance
When evaluating or re-evaluating automation, focus less on feature checklists and more on whether the platform can:
- Act as a single source of truth for tax logic
- Integrate cleanly with your ERP, billing, and P2P tools
- Produce audit ready data without manual stitching
Action point: Ask your current or prospective provider to walk you through how their system would support a real audit request for a specific period, product, and state. The mechanics of that demo will tell you more than a generic product tour.
Bringing It Together: Building a 2026 Audit Operating Model
In 2026, sales and use tax audits will continue to get more data driven, more frequent, and less forgiving of weak controls.What used to be a periodic clean up exercise now needs to operate as an ongoing risk discipline.
A resilient audit operating model for sales and use tax:
- Knows where your exposure is and how it changes
- Makes taxability and exemption rules explicit and governed
- Treats data quality and system design as audit controls
- Measures performance through a small set of meaningful KPIs
- Uses automation to execute and document decisions at scale
If your current process still feels like a scramble whenever a notice arrives, that is your signal that the operating model needs to evolve.
Ready to turn sales and use tax audits from a recurring fire drill into a controlled process?Talk to a CereTax specialist about how our automation, exemption intelligence, and reporting can support an always on, audit ready sales and use tax environment for 2026 and beyond.
