The Secret to Winning a New Jersey Sales Tax Audit
- Thomas F. DiLullo, Esq., CPA
- 5 hours ago
- 2 min read
New Jersey sales tax auditors are given a clear mandate: reconstruct a business’s taxable
sales when the State believes reported sales are understated.
Their preferred method is straightforward—and aggressive.
The State’s Reconstruction Method
Auditors begin by analyzing all purchases over a given audit period.
The underlying presumption is simple: if you bought it, you sold it.
Raw materials are converted into units of sale using assumed yields.
Selling prices are taken from menus or price lists.
Sales are then calculated by simple multiplication.
This approach almost always overstates sales.
The Business Owner’s Logical Objection
Waste and spoilage
Shrinkage
Complimentary items
Discounts and promotions
Deep employee discounts
Non-sales uses of inventory
Unfortunately, logic alone does not win audits.
The Auditor’s Response
“Show me documentation.”
“Show me invoices.”
“Show me records proving exact quantities.”
Small businesses almost never maintain detailed records tracking these items.
As a result:
The auditor refuses meaningful adjustments.
A token percentage reduction may be allowed.
The core reconstruction remains intact.
The Red Herring
At this point, most owners and CPAs stay focused on arguing waste percentages, shrinkage assumptions, discounts, and industry realities.
This argument is a nonstarter.
How Sales Are Inflated:
A Simple Example
100 pounds of ground beef are purchased.
Auditor assumes 8 ounces of raw meat equals one hamburger.
Auditor concludes 200 hamburgers sold.
Menu price is $10 per burger.
Auditor computes $2,000 in sales.
Reality:
The business sells 16-ounce burgers.
Only 100 hamburgers were sold.
Actual sales are $1,000, not $2,000.
The State’s calculation is $1,000 too high.
Why Owners and CPAs Lose This Argument
They argue the effects (waste, discounts, shrinkage).
The auditor demands documentation that does not exist.
The auditor’s core assumption goes unchallenged.
As long as the State’s assumed yield stands, the audit stands.
The Real Key to Winning
You do not attack the adjustments. You attack the assumptions.
Turning the State’s Statistics Against the State
Identify the statistical model the auditor is using.
Demonstrate why the assumed yield is incorrect.
Establish that cooked product weighs less than raw input.
Use state-recognized statistics and industry data.
Replace assumptions with conclusive evidence.
The Bottom Line
Sales tax audits are not won by arguing fairness or logic.
They are won by disproving the State’s assumptions.
Knowing what to focus on is the difference between losing
