Audit Selection and Firm Compliance with a Broad–based Sales Tax

Michael McKee Department of Economics, College of Business Administration, University of Tennessee at Knoxville, Knoxville, TN 37996 Abstract This paper examines the process by which firms are selected for a sales tax audit and the determinants of subsequent firm compliance behavior, focusing upon the Gross Receipts Tax in New Mexico. A two–stage selection model is used to estimate the State’s audit selection rule and, conditional upon audit selection, the firm’s compliance choice. The first–stage estimation results indicate that auditors select returns based upon a systematic, even if informal, audit rule. The second–stage results show that firms that exhibit greater variation in deductions, provide services, miss filing deadlines, and have an out–of–state mailing address have a lower compliance rate.