The place to find business sales tax information

— as well as solutions, services and jobs!

It's on the Sales Tax Assessment, so it MUST be Taxable!

author photo of Alison Manning

This particular sales tax "fiction" brings to mind a certain auditor’s “high”, his self-satisfied pleasure mixed with a hint of superiority and how quickly it changed to sober discouragement. About 15 minutes earlier, he had quite confidently informed me that my company was facing a substantial use tax assessment on the cost of product withdrawn from inventory and donated to various charitable organizations. He was oblivious to the law his state had enacted, providing a use tax exemption for product donated to certain charitable entities. He remained smugly disbelieving until I presented him a copy of his law, at which time he shook his head and muttered, “Humph, with all the budget shortfalls, auditors were not provided with recent law changes.”

How about the time when a single auditor was sent to conduct a field audit for 17 states for an MTC Sales Tax Joint Audit? Let that sink in. Then, imagine the look on my face when the auditor listed all sales of “baseball caps” on her audit schedule for a state that exempts clothing from sales tax. She adamantly argued that the state’s exempt list of clothing said “hats” and not “caps”. Therefore, caps were taxable. The argument seems silly but the number of hours I spent getting it removed from the assessment was not trivial.

Then, there is the more common situation when an auditor reviews a purchase invoice and doesn’t understand exactly what the purchase is. Rather than ask for clarification or additional information, many auditors just include the invoice in taxable purchases and lay the burden of proof on the taxpayer to support the position that the purchase was not subject to tax. If an invoice is erroneously left in a sample, it could have a significant impact on the final assessment.

Conversely, I have had the pleasure of working with many fair, intelligent and professional state auditors. Regardless of the auditor’s competence, though, always be wary, as incorrect application of state-specific laws can happen in any audit when the auditor may not understand your facts as well as you do.

Summary

Fiction: Just because the auditor included it on the assessment does not mean it is necessarily taxable.

Fact: You must question every audit adjustment to ensure that each truly represents sales or use tax your company owes.

  1. Know the sales and use tax laws affecting your business and industry.
  2. Always err on the side of caution and thoroughly review items on an audit assessment for accuracy, including taxability of purchase invoices assessed. Small invoices can add up to large assessments when part of a sample.
  3. Use the opening conference to provide the auditor with facts about the company operations that they will need to conduct a fair and accurate audit.
  4. Communicate with the auditor throughout their review to avoid potential confusion.

What stories do you have? Let’s hear them!

About the Author: Alison Manning, CMI, managed sales and use taxation for Nike, Microsoft, and International Game Technology (IGT) for over 15 years, developing industry experience in manufacturing, gaming, high technology, wholesaling, and retailing operations. Her colleagues, competitors, and customers often sought her advice and perspective, developed by managing hundreds of sales tax audits, implementing automated solutions, leading cross-functional solution teams and solving customer concerns.

Note: Alison is no longer accepting new comments or questions. Use the Site's SEARCH bar to locate other helpful information.

Other recent “Fiction and Fact” posts by Alison Manning, CMI:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

4 Responses to It's on the Sales Tax Assessment, so it MUST be Taxable!

  • Posted by Kenneth on May 10, 2014 2:40am:

    I had an interesting experience with a NY state auditor, in that he saw on the invoice a "sat phone" that went with the helicopter that was operating in NY. I had to explain, and went out to the hanger and photographed the installed "sat phone". The "sat phone" was a black box attached to the helicopter frame along with its respective antenna, and wired so the pilot or medics could use it with a flip of a switch on their respective control pannels. Since the "sat phone" was an aircraft electronics part and attached to the aircraft, it was exempt. This item, and many others that were on the initial assessment were removed after a few months of back and forth, with the reduction of $60,000 to the tax assessment.

    • Posted by Author photo of Alison ManningAlison Manning Flanner on May 11, 2014 2:07am:

      That's a great example! I might be cynical, but I wonder how many times the "questionable" item is just put on the assessment and the taxpayer may not have the experience to question or dispute it, and it is actually exempt. I shudder! Thanks for sharing, Kenneth!!!

  • Posted by Ronal on May 8, 2014 5:45am:

    I appreciate this story as an auditor and wonder at the numerous times I have tried to explain that, "I give exemptions for concrete reasons and, no, I'm not going to tax you on that." I love refunds, the blank expressions are priceless.

    • Posted by Author photo of Alison ManningAlison Manning Flanner on May 8, 2014 9:13am:

      Thanks, Ronal! I bet you could write a book on the scenarios you have come across! I think many think the auditor is going to be a big hairy monster and getting a refund is probably a complete shock! Should make them look at their processes too! Thanks for sharing!!

Disclaimer:

Access to any portion of SalesTaxSupport.com is contingent upon your acceptance of our Terms of Use. This Web Site and content provided by STS Publishing, LLC and its third party content providers, including, but not limited to information, documents, forms, comments, advice and opinions, is for informational purposes only, and is not a substitute for professional advice, nor does the use of this Web Site constitute a professional-client relationship. The Web-Site also includes advertisements, directory listings, job postings and links to third party web sites, all of which are provided for your convenience only and in no way constitute a referral, endorsement, or warranty by SalesTaxSupport.com of any product or service provided by such third parties. All content is provided “as is” with no guarantee regarding accuracy, suitability, or timeliness. Your reliance on any content accessed on or through the Web Site, or on any product or service provider is strictly at your own risk.