Texas HB 11 Sales Tax Audits Successful for Auditor, Disaster for Retailer

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!

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2 Comments

  1. Stmrtax
    Posted August 2, 2011 at 12:56 AM | Permalink

    Inside the Comptroller, it is well known that Tax Auditors have lied in order to utilize the HB 11 Data.  Complete record in the hands of the Taxpayer preclude the use of thrid party records.  The first mistake is to allow the Comptroller’s Tax Auditor or Contract Auditor to remove Taxpayer Record from the business location.  The second scandal is that the Comptroller’s audit division incubates tax liabilities;  discrepancies noted after the first  year of a taxpayer is now examined until after 3 or more year; assuring a larger liability
    Tommy Morgan 214-507-6999  stmrtax@aol.com

  2. Posted December 22, 2011 at 9:26 AM | Permalink

    Such a very informative post! Thanks for sharing such valuable suggestions regarding sales tax audit. 

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