Begin­ning on Jan­u­ary 1, 2008, the Texas Comp­trol­ler of Pub­lic Accounts was given a very pow­er­ful and effec­tive sales tax audit­ing tool by the Texas Leg­is­la­ture.  The Crim­i­nal Inves­ti­ga­tion Divi­sion of the Comptroller’s Office recently pub­lished the fol­low­ing post on its website.

“Passed dur­ing the 80th Leg­isla­tive Ses­sion in 2007, HB 11 dra­mat­i­cally increased the Comptroller’s abil­ity to iden­tify, audit and, when appro­pri­ate, pros­e­cute retail­ers who are col­lect­ing sales tax but not remit­ting the proper amount to the state.

HB 11 amended the Alco­holic Bev­er­age Code and the Tax Code to require dis­trib­u­tors and whole­salers who make sales of ale, beer, wine, cig­a­rettes, cig­ars and tobacco prod­ucts to Texas retail­ers to report those sales monthly to the Comptroller’s office. Those dis­trib­u­tors and whole­salers are also required now to report that data elec­tron­i­cally, unless inabil­ity to do so is shown.

HB 11 data, which has now been col­lected since Jan­u­ary 2008, allows the Comp­trol­ler to com­pare the pur­chases that retail­ers have made of these prod­ucts with the sales that retail­ers are required to report. Because both sets of data are largely received elec­tron­i­cally, dis­crep­an­cies can be more eas­ily and rapidly iden­ti­fied. Rapid iden­ti­fi­ca­tion is essen­tial so that the Comp­trol­ler audi­tors can begin their work to mit­i­gate and recoup the rev­enue loss to the state. The Comptroller’s office iden­ti­fied almost $90 mil­lion due to the state in fis­cal year 2009 and more than $102 mil­lion due to the state in fis­cal year 2010. To date in fis­cal year 2011, more than $59 mil­lion has been identified.

In some cases, audit doc­u­men­ta­tion may sug­gest that the tax­payer had crim­i­nal intent to evade taxes. If so, the case will be reviewed and eval­u­ated by the Crim­i­nal Inves­ti­ga­tions Divi­sion for the pos­si­ble fil­ing of crim­i­nal charges.”

Small con­ve­nience store retail­ers of alco­hol and tobacco prod­ucts have been flood­ing my office in recent months with sales tax audit deter­mi­na­tions which clearly show the effec­tive­ness of an audit based upon HB 11 report­ing.   The Comp­trol­ler has been con­sis­tent in propos­ing a 50% penalty in addi­tion to the 10% penalty per­mit­ted by law.  In some cases, the Comp­trol­ler will agree to drop the 50% penalty in exchange for a set­tle­ment, but only if the tax­payer has timely peti­tioned for an audit redetermination.

If a store has closed and the audi­tor can­not con­duct an in-store “shelf test” or if the tax­payer can­not or will not pro­duce actual daily sales doc­u­men­ta­tion suf­fi­cient for the audi­tor to deter­mine a markup on alco­hol or tobacco prod­ucts, the audi­tor is instructed to use cer­tain per­cent­ages for alco­hol and tobacco markups.  In addi­tion, the audi­tor is instructed to use a cer­tain per­cent­age to obtain a “prod­uct mix” of alco­hol and tobacco prod­ucts as com­pared to tax­able non-alcohol and tobacco prod­ucts.  A very small per­cent­age is allowed for spoilage and theft.  Once these fac­tors are applied, a sales tax esti­mate is cal­cu­lated and com­pared against the sales tax reported by the taxpayer.

In the case of all audits pre­sented by poten­tial clients, the tax­able sales esti­mate, which has been derived by for­mula and  upon which the sales tax defi­ciency is cal­cu­lated, is sig­nif­i­cantly higher than the tax­able sales amounts reported by the taxpayer.

The best way to defeat an sales tax audit based upon Texas  HB 11 data is to keep good records and accu­rately report tax­able sales.  How­ever, if record keep­ing or report­ing proves to be a prob­lem, the audit may be attacked admin­is­tra­tively or at hear­ing in sev­eral dif­fer­ent ways.

If you are a retailer fac­ing a sig­nif­i­cant sales tax increase as pro­posed by a sales tax audit, call my office before the audit begins, or as soon as you receive the audit deter­mi­na­tion let­ter.  Do not make any admis­sions to the audi­tor  or agree to any­thing after the audit deter­mi­na­tion let­ter has been issued.  If a request for an admin­is­tra­tive rede­ter­mi­na­tion or a hear­ing is not timely made, the results to the tax­payer are usu­ally disastrous!

One needs an attor­ney expe­ri­enced in sales tax audits and hear­ings to level the play­ing field.  Call for a con­sul­ta­tion now!