Sales Tax Presentation


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Sales Tax Presentation

  1. 1. Grocery and Convenience Stores: Why Sales Tax Audit? How to Prepare for it?<br />Arif D. MaknojiaCertified Public Accountant<br />Telephone (713) 337-3100<br /> Cell (832) 419-7502<br />
  2. 2. Overview of Sales & Use Tax Audits<br />In today’s economy, states are increasing their audit efforts, particularly in the area of sales and use taxes. Audits are becoming increasingly more frequent and auditors are becoming more aggressive.<br />Understanding how to manage the audit process can save the company both time and money, and can assist in developing policies and procedures to address items before they become an issue. <br />
  3. 3. Comptroller Criminal Investigation Division(CID)<br />Rogelio Ramirez of South Texas arrested for Sales Tax Fraud.<br />He is charged with collecting but failing to remit $100,000 or more in sales tax for calendar year 2008.<br />HB11 requires distributors of alcohol and tobacco products to report sales to retail outlets monthly, giving the auditors ability to compare distributors reports against reported taxable sales.<br />
  4. 4. SALES TAX AUDIT ALERT<br />Putting some of the cash receipts in your pocket is a temptation many convenience store owners can&apos;t resist<br />The Texas Comptroller and IRS knows small business owners pocket cash and its computers check the reasonableness of Sales versus the Cost of Goods Sold<br />Too much cash is getting pocketed, the ratio of COGS/Sales will get high and the IRS computer will give the return a high “maybe we should audit this taxpayer” score.<br />
  5. 5. WHY IS AN AUDIT ESTIMATED(AP92) <br />Lack of Below Records<br />Cash Register Tapes (Z-Tapes) do not match reported sales<br />Daily Sales Reports Not Complete<br />Monthly P & L’S Do Not Match Sales Reports<br />Missing Purchase Invoices<br />
  6. 6. RECORDS AVAILABLE TO AUDITORS<br />Beer & Tobacco Purchases From Distributors<br />Lottery Ticket Sales<br />Food Stamp Sales<br />Inquiry Letter To Supplier<br />National Percentages For P-Mixes And Markups<br />
  7. 7. AVGPRODUCT MIX(AP 92)<br />BEER 27%<br />CIGARETTE 27%<br />SODA 16%<br />CANDY 9%<br />OTHER TAX 6% <br />TOTAL TAX 85% <br />NON TAXABLE 15%<br />TOTAL SALES 100%<br />
  8. 8. AVERAGE CONVENIENCE STORE MARKUP % (AP 92) <br />Beer/Wine 127.67% <br />Candy 184.09%<br />Cigarettes 118.44%<br />Chips/Snacks 150.17%<br />Other Food Drinks 197.16%<br />General Merch156.57%<br />Soft Drinks 159.21%<br />
  9. 9. How to Calculate Markup & Gross Profit<br />State Uses Markup % to Determine An Audit<br />Sales Price = $100<br />Purchase Price = $75<br />Markup %= $100/$75 = 1.3333%<br />Gross Profit % = ($100-$75)/$100= .25%<br />
  10. 10. COST-MARKUP AUDIT<br />A markup method is the preferred method of auditing grocery/convenience stores when the records are unavailable, inadequate, or unreliable.<br />
  11. 11. AUDIT ESTIMATION METHOD<br />BEER, CIGARETTE AND SODA70 % OF TOTAL SALES. <br />1/70% = 1.42 = Total Sales<br />Beer Sales 30,000 Cig Sales 22,000 Soda Sales 8,000<br /> Total Beer, Cig & Soda Sales 60,000<br /> Total Estimated Sales 86,000 (60,000 * 1.425)<br /> Taxable Sales 73,000 (86,000 * 85%)<br /> Reported 35,000<br /> Under Reported 38,000 (73,000-35,000)<br /> Tax 3,135 (38,000 * 8.25%)<br /> Tax 48 mths 150,500 plus penalty & interest<br />
  12. 12. AUDIT ESTIMATION METHOD<br />BEER AND CIGARETTE 54% OF TOTAL SALES<br />1/54% = 1.85 = Total Sales<br />Beer Sales 20,000 Cig Sales 15,000 Beer/Cig Sales 35,000<br />Total Beer/Cig Sales 35,000<br /> Total Estimated Sales 65,000 (35,000 * 1.85)<br />Taxable Sale 55,000 (65,000 * 85%)<br />Reported 35,000 <br />Under-Reported 20,000 (55,000-20,000)<br /> Tax 1,650 (20,000 * 8.25%)<br />Tax 48 mths 79,000 plus penalty & interest<br />
  13. 13. Audit Estimation Method For Periods Prior To HB11(JAN 2008)<br />Average Taxable Sales Method(no records available)<br />Total Audited Taxable Sales Using 12 Months Of HB11 data: $600,000<br />Reported Taxable Sales 12 Months = $420,000<br />Sales Under Reported for 12 Months = $180,000<br />Sales Under Reported for 48 Months = $720,000<br />Total Sales Tax Under Reported (8.25%) = $59,400<br />Tax Assessment with Penalty/Interest = $72,000<br />
  14. 14. BEST CASE SCENARIO<br />Taxpayer Has All Purchases<br />Taxpayer Has All Cash Register Tapes<br />Register Tapes List Each Product Type<br />Expected Sales Can Be Calculated By Using Actual Costs and Markup From Taxpayer Records<br />
  15. 15. NO RECORDS<br />No Z-Tapes<br />No Purchase Invoices From Taxpayer<br />Little or No Bank or Income Tax Information<br />No Way To Determine Product Markup<br />IF NO RECORDS ARE AVAILABLE DO A COST MARKUP AUDIT <br />USING THE NATIONAL CONVENIENCE STORE MARKUPS AND <br />PRODUCT MIXES <br />
  16. 16. What after Sales Tax Audit?<br />Once you are found deficient you have a right to appeal<br />Request for Redetermination Hearing<br />60 Day Conference with Auditor/Supervisor<br />File Sent to Legal Department<br />Attorney Review with Taxpayer Conference<br /> AT ANY POINT IN TIME DURING REDETERMINATION PERIOD A SETTLEMENT CAN BE REQUESTED.<br />
  17. 17. What after Sales Tax Audit?<br />Question Often Asked Will IRS Audit Follow Sales Tax Audit? <br />
  18. 18. WHAT IF IRS AUDIT?<br /> Once You Have Accepted The Liability Of Sales Tax by settling with Texas Comptroller, you could be liable for Corporate Income Tax On Under Reported Sales.<br /><ul><li>For 4 year audit under reported sales = $800,000
  19. 19. Corporate Tax Rate = 15%
  20. 20. Estimated Income Tax = $120,000 w/o Interest & Penalty</li></li></ul><li>THINK OUTSIDE THE BOX WHEN DEALING WITH A CASH BUSINESS<br />ASK YOURSELF – CAN YOU DEFEND THIS IN A COURT OF LAW<br />
  21. 21. Record Keeping<br />
  22. 22. Thank you <br />