Have a client who is being dinged by State of Tennessee on a substantiation audit. This is an old technique and quite effective.
Client owns convenience store catering to the party crowd near a recreation area. Calls himself a grocery, but very little of what is sold is grocery. Mostly gas, beer, cigarettes, snacks. Beer by the tons.
With this background, groceries are on a separate line item for sales tax reporting, leaving beer & cigarettes on a line together. State has now consolidated reporting from beer distributors and tobacco companies, who tell them to the penny how much my client buys. The state adds a profit margin of their own choosing and estimates what should be reported to them on the sales tax line. (Beer & cigarettes are on a line dedicated to nothing else, called "non-food")
After estimating what they think my client should report, they pull his sales tax return and are sending him a bill for the difference.
What the state believes, and what many of you might believe, is that my client is not ringing up all his sales. This is very common and I would never swear this is not happening. State has insulted my client to that effect.
The state has chosen 15% for their "reasonable" expected margin on beer. Earlier tonight I did some sampling. Case of Bud Lite sells for $21.99 versus cost of $20.36. Busch case is $19.95 versus cost of $17.86. All my sampling on cases and half-cases range between 8 and 13 per cent. Six packs and singles approach 15%. From what I've seen, 15% is too high.
Thank you for reading this far. My question is "How do we effectively defend against the state?" The state is not willing to pay an auditor to spend a week in his store and track every beer sale, nor can my client afford to pay for this, as this cost would exceed the cost of the assessment. This is Tennessee, but I imagine the same procedures are being used to detect underreporting in other states, so wherever you are, please chime in.
Client owns convenience store catering to the party crowd near a recreation area. Calls himself a grocery, but very little of what is sold is grocery. Mostly gas, beer, cigarettes, snacks. Beer by the tons.
With this background, groceries are on a separate line item for sales tax reporting, leaving beer & cigarettes on a line together. State has now consolidated reporting from beer distributors and tobacco companies, who tell them to the penny how much my client buys. The state adds a profit margin of their own choosing and estimates what should be reported to them on the sales tax line. (Beer & cigarettes are on a line dedicated to nothing else, called "non-food")
After estimating what they think my client should report, they pull his sales tax return and are sending him a bill for the difference.
What the state believes, and what many of you might believe, is that my client is not ringing up all his sales. This is very common and I would never swear this is not happening. State has insulted my client to that effect.
The state has chosen 15% for their "reasonable" expected margin on beer. Earlier tonight I did some sampling. Case of Bud Lite sells for $21.99 versus cost of $20.36. Busch case is $19.95 versus cost of $17.86. All my sampling on cases and half-cases range between 8 and 13 per cent. Six packs and singles approach 15%. From what I've seen, 15% is too high.
Thank you for reading this far. My question is "How do we effectively defend against the state?" The state is not willing to pay an auditor to spend a week in his store and track every beer sale, nor can my client afford to pay for this, as this cost would exceed the cost of the assessment. This is Tennessee, but I imagine the same procedures are being used to detect underreporting in other states, so wherever you are, please chime in.
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