Article Submitted to NTBA by Favad Bajaria

Passed during the 80th Texas Legislative Session in 2007, House Bill 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. Since fiscal year 2009, the Comptroller’s office has identified more than $523 million due to the state.

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.

A second HB 11, passed by the 2011 Legislature and effective as of Sept. 1, 2011, amended Chapter 151 of the Tax Code by requiring electronic reporting for all wholesale sales of alcoholic beverages. Holders of brewer’s permits, manufacturer’s licenses and package stores that hold a local distributor’s permit all must now file monthly reports.

Small convenience store and gas station retailers of alcohol and tobacco products have been severely affected by the collection of HB 11 data   The Comptroller has been consistent in proposing a 50% penalty in addition to the 10% penalty permitted by law.  In some cases, the Comptroller may agree to drop some penalties in exchange for a quick settlement, but only if the taxpayer has timely and properly petitioned for an audit redetermination and complied with the requirements of the audit.  This is why it is important to consult with a professional who can help guide taxpayer’s through the tricky process related to sales tax audits.

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 the vast majority of sales tax audits presented to us by 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 our office before the audit begins, or as soon as you receive the audit questionnaire and information request letter.  Do not make any admissions to the auditor or agree to anything until you speak to us.  We have represented clients in hundreds of tax audits over the past 30 years and look forward to assisting you.