MD Case Study – Sales and Use Taxes – Manufacturer and Government Contractor

MD Tax Assessment Amount – $182,874.59
Reduction Amount $114,768.59 – 63%
Refund from Reverse Audit – $907,177.37
Refund from Taxpayer – $237,198.19
Interest & Penalty Savings – $73,149.84

Exceptionally large Maryland manufacturer and government contractor who manufacturers products and provides services to the federal government and has locations throughout the United States was selected for another sales and use tax audit.  This Taxpayer was last audited in 2001 and Marsu assisted in that audit and had filed and gotten refunds approved by the Comptroller.  Taxpayer had received their audit workpapers and was working on filing their own refunds but wanted assistance with reviewing the audit and in filing any additional refunds.  Marsu assisted the Taxpayer as follows with the asset and expense schedules:

  1. For capital assets, the auditor reviewed all Maryland assets and listed 107 invoices as taxable. Marsu reviewed each invoice to determine where and how each asset was used to establish if an exemption was available or if sales or use tax was paid.  Marsu was able to document 48 invoices were non-taxable.  The tax assessed was reduced from $83,751.76 to $51,996.24, a savings of $31,755.52.
  2. For expenses, the auditor reviewed a one-month sample period and listed 38 invoices as taxable. Marsu reviewed each invoice and was able to get only 11 invoices deleted, but these 11 invoices represented 84% of the sample dollars.  The tax assessed was reduced from $99,122.83 to $16,109.73, a savings of $83,012.60.

With Marsu’s assistance, this Taxapayer was able to significantly reduce their tax assessment and to recover all sales and use taxes paid in error.  The original workpapers had the Taxpayer owing $182,874.59 in taxes and the final workpapers had the Taxpayer receiving refund checks in the total amount of $1,076,284.68, a savings of $1,259,159.27.  Since the Taxpayer had filed their own refunds that exceeded the tax assessment amount, there was no interest and penalty assessed.  This saved the Taxpayer approximately $73,149.84 in interest and penalty because the refunds were filed.

Main Audit Issues

The only minor audit issue here is that the Taxpayer sometimes misses paying use tax on some of its assets and expense items.  Their percentage of error is exceedingly small.  For assets, there were 6,041 assets and tax was not properly paid on 59 of them for an error rate of less than 1% – .0097665.  I think that is a pretty great job.  For expenses, the assessment ended up to total $16,109.76 which is a monthly average of $335.62 which is not terrible for the size of the company.  A review of the final 27 invoices on the expense schedule shows that the assessment came from mainly office supplies and online purchases.  One area that the States love to audit, and Taxpayers have difficulty with is credit card transactions.  Usually the monthly credit card transactions are not reviewed by the Taxpayer to pay use tax and a lot of times these transactions come from out of state transactions where MD sales tax is not collected.

Audits of Exceptionally Large Businesses

Auditing exceptionally large businesses for sales and use taxes is very time-consuming job not only because of the sheer volume of records, but also because of the different exemptions or exclusions available for businesses that operate in and have contracts in multiple states.  Just for the asset portion of this audit alone, this Taxpayer had to at least provide invoice copies of over 6,000 assets for the auditor to review to establish minimally that sales or use tax was paid so the asset would not be assessed.   This does not even count the expense audit and heaven forbid if the Taxpayer had taxable sales and the auditor would have to review at least a one-month sample.

Time is one of the things that the States have as an advantage over the Taxpayer.  The State’s auditor does not have a time limit or a job profit and loss statement to answer to.  When the auditor does their audit, they will list everything possible on the workpapers and hope it sticks.  If the Taxpayer does not invest the time by providing the requested information and then thoroughly reviewing the workpapers to provide additional information, then the Taxpayer will be over assessed.  That is why is it is beneficial to bring in experts who for 40 years have been reviewing workpapers and dealing with auditors, supervisors, and hearing officers.  Plus any refund that Marsu gets approved will offset any taxes due and decrease the interest and penalty due.  After the audit is finalized, Marsu will review with the Taxapayer the refund that was approved so the Taxpayer can implement changes to their accounting system to take advantage of the annual tax savings.

Call Marsu

If you are a Government Contractor or a multi-state contractor and have been audited in the past, then please call Marsu now to determine if your case can be reopened pursuant to Section 13-509 of the Annotated Code of Maryland to get any taxes improperly assessed back as a refund or if you are just due a refund of sales and use taxes paid in error.  Marsu’s review is performed on a contingent basis and no fee is due if no refund is approved by the Comptroller’s Office.

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MD Case Study – 60 Day Letter Issued – Manufacturer/Wholesaler/Retailer

MD Tax Assessment Amount – $85,660.97
Reduction Amount – $62,718.99 – 73%
Offset Credit/Refund Approved – $20,570.04
Interest Saved – $22,053.89
Penalty – Waived at Settlement

Maryland manufacturer who sold products on a wholesale and retail basis was selected for a Maryland sales and use tax audit.  Marsu was contacted by the company’s lawyer to assist in the review of the workpapers.  The Taxpayer was assessed $85,660.97 for failure to collect sales tax on their sales and a small assessment for failure to accrue use tax on assets purchased when tax was not billed.  Taxpayer was also issued a 60 day letter for their resale certificates which means that the Comptroller gave them 60 days from the date on the letter to obtain all properly documented Maryland resale certificates from their customers or the sales would be deemed to be taxable regardless if they were for resale or not.  Marsu did the following for the capital and sales schedules in the audit:

  1. For the capital assets, the auditor reviewed every asset purchase in the audit period and listed every invoice that did not have sales tax billed and collected. The auditor listed 6 invoices on this schedule and Marsu was able to get three of those invoices deleted from the schedule for the manufacturer’s exemption.  The tax assessed was reduced from $2,618.37 to $252.67, a savings of $2,365.70.
  2. For sales, the auditor reviewed a six-month sample period and listed just 19 lines, but the projection totaled $83,042.60 in tax liability. The majority of the assessment came from just two customers.  One who did not have a resale certificate until after the 60-day grace period and the other went bankrupt and we could not get a resale certificate even if they had one.  The Comptroller’s Office would not negotiate on the resale certificate customer because of the 60-day letter, but Marsu was able to get the bankrupt customer out of the projection and assess that customer on an actual basis over the audit period.  Of the remaining lines listed, Marsu was able to get five (5) more lines out.  The tax assessed was reduced from $83,042.60 to $22,689.31, a savings of $60,353.29.

Marsu also performed a reverse audit and documented sales taxes paid in error and the Comptroller’s Office approved and included the refund in the amount of $20,570.04 in the audit workpapers as required by law.  The original workpapers had the Taxpayer owing $85,660.97 in taxes and the final workpapers had the Taxpayer owing $22,941.98 in taxes, a saving of $62,718.99.

Main Audit Issues

The Comptroller’s Office has the legal right to issue a taxpayer a sixty (60) day letter to have the Taxpayer obtain properly documented Maryland resale certificates for all customers that they do not collect tax from or The Comptroller will deem those sales as taxable and 6% tax will be due.  See Title 11, Section 408 which allows the Comptroller to issue a Taxpayer a 60-day letter.  The Taxpayer had a lot of customers that were for resale and the Taxpayer had actually done a great job in getting the majority of properly documented Maryland resale certificates for the auditor.  The one thing the Taxpayer could have done a little different was to prioritize the resale certificates by dollar value in the audit so they would get the resale certificates for the customers that made up the largest portion of the $83,042.60 tax assessment.  The one customer that they did not get a resale certificate in time for was worth $11,802.00 in tax.

The importance of getting properly documented resale certificates when the customer’s credit is approved or at the time of the first sale is also shown here by the fact that the Taxpayer got assessed for tax for a customer that went bankrupt.  For whatever reason, the auditor had selected a sample sales period that was over two years old and that made it more difficult for the Taxpayer and Marsu in securing valid Maryland resale certificates and made it impossible for the customer that went bankrupt.  Luckily Marsu was able to have the Comptroller assess the tax on the actual sales for the audit period instead of the projected tax assessment for this customer.  The projected tax assessment was $34,397.00 and the actual amount due was only $3,790.49, a saving of $30,606.51.

The last important issue with the sales audit was that several of the lines included in the audit were sales where the customer picked up the product at the Taxpayer’s manufacturing plant in Maryland.  Even though each customer could have had a resale certificate from their home state, DC, OH, PA, VA or WVA, pick-up sales are taxable unless the customer has a valid Maryland resale certificate.

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