Alabama business learns an expensive sales tax audit lesson

“If they don’t pay their taxes, we’ll come after them,” an Alabama city councilman said after a local restaurant lost an appeal against a sales tax audit.

 sales tax audit

Unrecorded cash transactions at an Alabama restaurant earned the owner a $100,000 tax bill.

The Hoover, Alabama city council agreed to a settlement for $100,000 after the Jefferson County Circuit Court ruled in the city’s favor finding that the Top China Buffet was not keeping adequate records.

The city originally won a judgment against the buffet which was ordered to pay nearly $124,000 in back taxes and penalties. The city agreed to the settlement amount to end the dispute and commended the revenue department for its diligence and persistence.

The city of Hoover conducted a tax audit of the restaurant for the period from July 2007 to August 2010 and the investigator allegedly observed cash being accepted without being recorded. The auditor used an estimate to determined the restaurant owed $91,940 in unpaid taxes plus $31,923 in interest and penalties.

The restaurant owner accused the state of using a faulty method for estimating tax due in cases where records were not available, but admitted to owing the state more than $41,000 in unpaid sales taxes.

If they don’t pay their taxes, we’ll come after them.

Jefferson County Presiding Circuit Judge Scott Vowell said, “Even if all sales were reported, it is undisputed that the taxpayer did not keep accurate records required by Alabama law.”

The ruling also found evidence that the Top China Buffet changed hands in an apparent attempt to avoid the tax bill. The judge disallowed the change in ownership as a tax-negating tactic finding that it was not an “arm’s length” transaction because the restaurant never closed and did not change names.

“It sort of sends a signal out to local merchants that we want them as good citizens as long as they pay their taxes,” said councilman Jack Natter.

Tangible or intangible? The tangled taxability of discounts and deals

complicate taxability

complicate taxability

Retail offers, manufacturer coupons, rebates and other savings enticements complicate the sales tax situation

daily deal discounts affect taxabilityJust when retailers thought they had the rules nailed down on the taxability of different kinds of discounts, daily deal companies like Groupon have enticed states to revisit the conventions.

With just a little variation in a few states, the amount discounted through coupons, trade ins and savings offers created by retailers are generally not subject to tax if the retailer does not recoup the discounted amount.

The amount discounted through coupons and rebates offered by manufacturers that repay or refund the retailer generally ARE subject to sales tax.

The sale of gift certificates are generally not taxed since the tax is applied when the consumer returns to the store and purchases a tangible item. This gets complicated however when online “daily deal” vouchers come into play.

Questions similar to those encountered by online discount travel companies come up, questions like who owes the tax – the vendor or the discount voucher seller, or both? Is the sales tax due on the full retail value or the discounted amount? Are these vouchers equivalent to gift cards or do they constitute sale of tangible items?

States are responding to this opportunity for increased revenue in different ways. In a recently published New York State guidance on the matter, the state choose to treat the daily deals differently depending on whether the advertised item was tangible or whether it was more of a gift card-type transaction. For instance, NY will charge sales tax on the discounted value paid by the consumer to the voucher company if the item or service has a specifically advertised face value, such as a $25 pedicure discounted to $10. In this case, NY would charge sales tax on the $10.

If the advertised deal is worded more like a gift card, say a $25 voucher good for $50 worth of any product, then NY would look to receive sales tax on the full retail value of the underlying taxable goods or services, in this case, the $50 amount.

Other states are varied in their findings. Kentucky and Iowa look solely at the published face value of the voucher while California turns out to be one of the more tax-friendly states in this case, ruling that the sales tax is to be applied to the amount paid by the consumer regardless of the type of voucher. Different proposals put forth by Tennessee and Nebraska are currently under consideration by the board of the Streamlined Sales and Use Tax Agreement.

Energy Star sales tax holiday in Georgia

sales tax holiday in Georgia

sales tax holiday in Georgia

There will be a sales tax holiday in Georgia Oct. 5 – 7 for energy and water efficient products with a sales price of $1,500 or less. “Energy efficient products” include products for noncommercial home or personal use and does not apply to purchases for trade, business, resale, or commercial use.

Qualifying items can include: dishwashers, clothes washers, air conditioners, ceiling fans, fluorescent light bulbs, dehumidifiers, programmable thermostats, refrigerators, doors, or window which has been designated by the United States Environmental Protection Agency and the United States Department of Energy as meeting or exceeding each agency’s energy saving efficiency requirements, or which have been designated as meeting or exceeding such requirements under each agency’s Energy Star program.

Water efficient products include any product used for the conservation or efficient use of water which has been designated by the EPA as meeting or exceeding specific water saving efficiency requirements or which has been designated as meeting or exceeding specific requirements under the agency’s Water Sense program.

Texas sales tax transparency

Texas sales tax

Texas sales tax

Texas sales tax transparency is more important than ever because Texas has one of the most difficult-to-understand sales tax structures in the modern United States.  Individual municipalities and various public agencies are encouraged to fund themselves by creating special-purpose tax districts  – virtually willy-nilly – sometimes resulting in dozens of overlapping jurisdictions with poorly defined boundaries.Texas sales tax jurisdictions

Take Harris County for example. This single county is home to Houston and hosts no less than 72 different sales tax entities. Aside from 34 city jurisdictions, Harris county has special tax districts for transit, airline improvement, crime control, emergency services, fire, general improvement, management, and municipal development.

Since sales taxes made up nearly a quarter of all state revenue in 2011, one would think there would be a vested interest in making it simple to collect and distribute. This doesn’t seem to be the case, however, since both state and city governments have been unable to comply with repeated requests to define the tax jurisdictions. A Texas comptroller web page states, “With so many entities layered upon each other, usually with overlapping boundaries, it can be difficult to identify all of the entities collecting local taxes in any given location.”

When Zip2Tax asked for jurisdictional boundary maps, we were instructed to contact individual districts for information. As a result, our staff spent months attempting to get answers from the individuals listed as district contacts. Generally, our repeated e-mails and phone messages were ignored, while the representatives who did respond said something to the effect of “no such map exists” or “go to the state’s web site and type in the address you want to know about.”

I’ve heard that when you find yourself in a hole, the first thing to do is to stop digging.

We quickly decided not to attempt to manually type in every address in the longhorn state with a population of more than 26 million. Since there was no simple answer to the question “which span of addresses fall inside your district,” the task was declared virtually impossible and mothballed.

Some may think the Texas “total tax cap” a good compromise which eliminates any real need to define the exact districts involved. The tax cap consists of a 6.25% state tax with a total combined district tax that maxes out at 2% (for a total which cannot exceed 8.25% in any location). But this is an unsatisfactory answer for any individual who wants to know how their tax dollars are being spent, not to mention these public agencies that want to be assured that the state is remitting to them the proper amount of taxes collected.

Texas seems to be aware that a problem exists and recently expanded a web site called TexasTransparency.com. While not providing any greater insight into jurisdictional boundaries, the site does go to some pains to make revenue structures more clear, at least on a macro scale.

The site is geared at educating the Texas taxpayer as well as encouraging local governments to open the books. Subsections include “Texas, It’s Your Money: Find out who is taxing you and for what purpose,” “Where the Money Comes From,” and Local Government Transparency.”

So it’s possible the knee-jerk reaction of the state saying  to “Go ask the district,” and the district’s reply of “I don’t know. Go ask the state” might eventually become a thing of the past.

Find out more about sales and use taxes in Texas or visit TexasTransparency.org .

Rhode Island offers tax amnesty program

tax amnesty program

tax amnesty program

tax amnesty programThe Rhode Island Division of Taxation is offering a limited tax amnesty program starting Sept. 2 and running through Nov. 15, 2012. The amnesty will allow certain taxpayers to pay the full amount of the overdue taxes plus 75% of interest due without having to pay the remaining 25% of interest and any penalties. It also exempts the taxpayer from additional civil or criminal penalties.

The amnesty is extended to corporate income tax, estate tax, fiduciary and personal income, sales and use tax, tobacco taxes, and unemployment and temporary disability insurance.

The amnesty program covers tax that were due before Dec. 21, 2011 and personal income tax returns that were due in April 2012. Taxes and interest must be paid in full by Dec. 14, 2012, but payment plans are available. Certain taxpayers facing criminal investigation or with cases currently in court are not eligible.

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