Announcement

Collapse
No announcement yet.

Classic State Audit

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

    Classic State Audit

    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.

    #2
    Guilty until proven innocnet

    You may wish to consider writing your elected representative to alert him or her of the situation. In my state, I've had a few situations where the department was "not reasonable" and if it came from the top down {State Senator} rather than a computer letter the situation got a second and fair look. I'd do this only if your client back back up his or her numbers. Too many governments think the profit just comes and they ignore competitive market forces often drive prices and margins south. These types of notices seem like a witch hunt.

    Mahalo,
    Bjorn

    Comment


      #3
      Yes, all states use the same approach to grossing up purchases for imputed sales.
      The only way to fight it is to follow rules on the letter regarding appeal procedures. Then
      schedule a conference and present your case.

      Contacting local legislators just might make the Tennessee revenoors mad as heck.
      ChEAr$,
      Harlan Lunsford, EA n LA

      Comment


        #4
        Tennessee Revenooers

        Most Tennessee Legislators would tell my client "Yessir, if the state is not doing you right, I'll see what I can do to fix the problem."
        But fact of the matter is they are twisting arms at the Dept of Revenue telling them to squeeze out every dollar they can so the
        politicians can spend it.

        ChEAr$, I'm so happy to hear this kind of double-talk doesn't happen with Alabama officials....

        Comment


          #5
          Most politicians would be checking their donor list before trying to formulate a response as to whether or not they can try to help you.
          "The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith

          Comment


            #6
            If you have documented their markup and the beer distributors have provided the sales numbers it seem like an Excel spreadsheet would solve the problem. Don't forget to factor in .5% or so for shrinkage. We will be seeing more of this heavy handed bullying as the states get desperate for money. I'm waiting for states to reverse compile the 1099-K info and send out bills based on individual purchases from Amazon. I remember when they did that for mail order tobacco sales after the big tobacco settlements of the late 90's.
            In other words, a democratic government is the only one in which those who vote for a tax can escape the obligation to pay it.
            Alexis de Tocqueville

            Comment


              #7
              Moving Ahead

              Thanks for the input and suggestions. I am going to have to somewhat determine to the best of my ability
              whether the state is on a capricious and unsupportable mission, or face up to the possibility of my client
              not reporting all his sales.

              If anything notable develops I'll keep the forum informed.

              Comment


                #8
                While I'm thinking about it, not only for sales tax purposes do state revenoors gross up purchases, but here in Alabama, also for income tax gross profit recalculations. Had a client first name of Buster once, who really got "busted" by the auditor.
                ChEAr$,
                Harlan Lunsford, EA n LA

                Comment

                Working...
                X