Maryland Taxpayer designs workplace environments, provides and installs office furniture, including workstations, in the Mid-Atlantic region. Taxpayer was selected for a first-time MD sales and use tax audit. Taxpayer contacted Marsu to assist in the review of the workpapers. The Taxpayer was assessed $43,790.62, $35,768.75 for failure to properly to collect sales tax and $8,021.87 for failure to pay use tax on assets and expenses where sales tax was not paid to the supplier. Marsu did the following for each schedule included in the audit:
For sales, the auditor reviewed a block sample of two months and listed just 4 invoices as taxable to get the $35,768.75 tax assessment amount. Marsu convinced the hearing officer that the two month sample did not fairly represent the Taxpayer’s business and that the sample period should be expanded and a five month block sample was agreed upon. This five month sample included the original two months selected by the Comptroller’s Office. The auditor came back out to the Taxpayer’s office to review the additional three months and listed an additional 21 lines to the sales schedule as taxable sales. Marsu reviewed the job folder for each sales invoice and was able to document that 13 lines should be deleted from the schedule. The tax assessed was reduced from $35,768.75 to $6,957.40, a savings of $28,811.35.
For sales projection methodology, the projection methodology did not fairly represent the Taxpayer’s business over the audit period and Marsu convinced the Controller’s Office to enlarge the sample period and to accept a different projection methodology that greatly reduced the sales tax collection liability.
For expenses, the auditor reviewed the same two month block sample and listed 6 invoices as taxable. Marsu reviewed these 6 invoices and found no errors.
For assets, the auditor reviewed all assets in the audit period and listed 31 invoices as taxable. Marsu reviewed these invoices and was able to document that 2 invoices were non-taxable. The tax assessed was reduced from $7,051.09 to $5,971.09, a savings of $1,080.00.
With Marsu’s assistance, this Taxpayer was able to significantly reduce their tax assessment by 63% and save $13,000.82 interest and to have the penalty abated at settlement. Marsu did perform a reverse audit, but this Taxpayer did not overpay on any sales or use taxes on their business purchases.
Main Audit Issues
When the Comptroller’s Office performs a sales and use tax audit, the procedure in how the sales and expense projections are calculated is always the same. The Comptroller takes certain information off the federal income tax returns and assesses the Taxpayer by multiplying the total expenses or sales for the audit period by the error factor calculated in the sample used and then multiplying the resulting taxable base by the 6% tax rate to finally calculate the amount of tax due. The problem with this methodology is that the sample does not always fairly represent the Taxpayer and his business over the four year audit period. Sometimes the sample is heavy in some type of taxable transaction or transactions that exaggerates the projection or sometimes the sample is light in non-taxable transactions that would also exaggerate the projection because they are not fairly represented.
This Taxpayer had a little bit of both problems in their sales projection. The sales sample selected by the state only had 4 sales invoices that were deemed taxable, but they were 4 large invoices which projected to a large assessment and the percentage of non-taxable transactions were not fairly represented in the original two-month sample. By expanding the sample size from two to five months, the average liability per month decreased so the total tax liability decreased and Marsu presented another projection methodology that pulled the non-taxable transactions out of the projection entirely.
A second issue that this Taxpayer had was that the Taxpayer was not collecting tax on all taxable separately stated lines items on their invoices. The Taxpayer was collecting tax on the furniture that was being sold but did not collect tax on the “fabrication labor” used at the jobsite to fully assemble the furniture or workstations. The Comptroller’s Office position is that all costs used to assemble a piece of property for the first time, on the jobsite or elsewhere, is taxable.
If you are a retailer who collects tax and is not being audited, then please call Marsu to do a mock sales tax audit to determine if the company is properly collecting sales tax. See our Mock Audit Services tab on the website. State sales tax collection assessments does not only deal with getting proper resale certificates, but with collecting tax on all appropriate line items on your invoices. General rule is that all lines are taxable unless there is a specific exemption in the law. Of course, the main exemption in Maryland is on freight, shipping or delivery that is separately stated on the invoice. If the invoice says shipping and handling, then that item is taxable because you are bundling a taxable and a non-taxable item together and that makes the entire charge taxable.
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:
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.
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.
Maryland countertop manufacturer and installer was selected by the Comptroller’s Office for a Maryland sales and use tax audit. Taxpayer manufactured and installed countertops for residential and commercial customers in DC, MD, and VA. This Taxpayer had never been audited before and Marsu was recommended by the Taxpayer’s lawyer to assist in the audit process. Unfortunately, Marsu was not contacted in time to review the workpapers in the field with the auditor so the lawyer had to request an informal hearing and Marsu had to present the documentation to a hearing officer. The Taxpayer had been assessed tax on sales for failure to collect sales tax on commercial jobs and for failure to remit use tax on expenses and capital assets. Marsu assisted the Taxpayer in reviewing each schedule as follows:
For sales, the auditor reviewed nine months of sales invoices and listed only 14 invoices as taxable, but the projected liability was $77,663.09. Marsu pulled the job folders to review each job and was able to document that 1 job was non-taxable, reduce the liability for 3 jobs and got the Comptroller’s Office to tax 2 jobs on an actual basis. These adjustments reduced the tax assessed from $77,633.09 to $25,496.05, a savings of $52,137.04.
For COGS expenses, the auditor reviewed twelve months of invoices and listed 301 invoices as taxable. Marsu reviewed each line item and provided documentation to have 142 lines deleted and 2 lines reduced. These adjustments reduced the tax assessed from $24,908.39 to $14,924.70, a savings of $9,983.69.
For assets, the auditor reviewed every asset purchased during the assessment period and listed 14 invoices. Marsu reviewed each of the assets and was able to provide documentation to get 3 of the lines deleted. The tax due was reduced from $10,469.55 to $2,754.10, a savings of $7,715.45.
Marsu also performed a reverse audit and documented sales taxes paid in error and the Comptroller’s Office approved and included refunds in the amount of $17,335.29 in the audit workpapers as required by law. At the time of the audit, the Comptroller’s Office was offering an Amnesty Program and the Taxpayer enrolled and was able to pay only half the interest due and have the penalty abated.
Main Audit Issues
Countertop manufacturers and installers have been a favorite audit target of the Comptroller’s Office for many years. If the Taxpayer is not properly collecting tax, then the tax assessment will be in the tens of thousands or even in the hundreds of thousands of dollars depending on the size of the company and type of work performed. As you can see from this case, this Taxpayer is a testimonial to that fact. This Taxpayer did a fair amount of commercial work and was not collecting sales tax.
Twenty years or so ago, the Comptroller’s Office added the infamous two sentences to Maryland Tax Regulation .19 – Real Property Construction, Improvement, Alteration and Repair that sums up their position on taxability when auditing a countertop manufacturer and installer.“As a general rule, counters, countertops, and cabinetry installed in commercial spaces will be treated as tangible personal property. Doors, windows, molding, built-ins, and kitchen cabinetry installed in residential and commercial spaces will be treaty as realty”. So if a Taxpayer does commercial work and it is not in a kitchen or bathroom, then the Comptroller’s position is that the job is taxable and will assess the Taxpayer for failure to collect tax unless tax was collected by the Taxpayer.
So if you the Taxpayer furnish and install any of the following for a commercial business, then tax should be collected from the customer – any countertop and cabinetry installed in a non-kitchen or non-bathroom area. Examples are bank teller stations, bars, beverage counters, food stations and wine racks in restaurants, built-in shoe racks, cashier counters, lockers, reception desks, and service desk and counters. Other examples include countertops and cabinetry in all non-kitchen and non-bathroom areas in office buildings, like in copy or conference rooms. The Comptroller’s Office in this case even assessed a stone countertop ledge and cabinetry that was installed in the conference room underneath the windows even though the ledge and cabinetry was installed to bare stud walls and an operating table in a veterinarian’s office.
How Audits Happen
This audit represents a typical way that a Taxpayer gets selected for a sales tax audit. The Taxpayer’s customer gets audited first and the auditor sees that the countertop manufacturer is not collecting sales tax, so the auditor turns in the Taxpayer for an audit.
Countertop manufacturers and installers are one of the most often audited types of businesses. That is because the MD sales tax law is so confusing and there are so little guidelines available. If you are a countertop manufacturer and installer and have been audited in the past, then please callMarsu 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.
A small Maryland Taxpayer that provides printing and mailing services was being audited by the Comptroller’s Office. The accounting firm and Taxpayer had reviewed the original workpapers and provided the field auditor with some documentation to get the tax assessment down to $25,145.41. Marsu was contacted by the Taxpayer’s accounting firm to assist in continuing the review of the workpapers. Since the accounting firm and Taxpayer had completed the review of the workpapers with the auditor in the field, Marsu had to request an informal hearing to get any other adjustments out of the audit and to submit the refund request to the Comptroller’s Office. Like most Maryland sales and use tax audits, the workpapers had liabilities for assets, sales, and expenses. Marsu assisted the Taxpayer in reviewing each schedule as follows:
For sales, the auditor reviewed a two-month sample and had originally listed 195 invoices as taxable and now 57 invoices remained. Marsu reviewed each remaining sales invoice and provided documentation to get 26 more sales invoices deleted from the schedule and 7 invoices reduced. The tax assessed was reduced from $22,739.41 to $10,049.15, a savings of $12,690.26.
For expenses, the auditor reviewed a one-month sample and listed 21 invoices as taxable and now 5 invoices remained. Marsu reviewed each expense invoice and provided documentation to get 1 invoice reduced in the schedule. At the time of the audit, the most current year tax return was not filed, and the expenses were estimated based on the previous years’ tax return. With the new tax return information, the tax assessed was actually increased from $1,254.50 to $1,285.77, an increase of $31.27.
For assets, the auditor reviewed every asset in the audit period and listed 4 invoices as taxable. Marsu reviewed each invoice and provided documentation to get 2 invoices deleted from the schedule. The tax assessed was reduced from $1,151.50 to $654.47, a savings of $497.03.
After reviewing the audit workpapers, Marsu performed a reverse audit and documented sales and use tax paid in error and the Comptroller’s Office approved and included the refund in the amount of $45,248.22 in the workpapers as required by law. The hearing officer applied $11,989.39 of the refund to the outstanding tax assessment from the audit and instructed the Refund Desk to issue the Taxpayer a refund of $33,258.83.
Main Audit Issues
Another typical case where a small growing business did not have the manpower and knowledge to request and obtain proper executed MD resale certificates and to properly collect sales tax on sales of printed materials delivered in MD. This Taxpayer had evolved into a fulltime printer who not only provided mailing services, but sometimes printed the customer’s materials and shipped the final product all over the United States. One thing they forgot to consider was that any printed materials delivered to a MD location was taxable unless a properly executed MD resale certificate was obtained. Marsu assisted the Taxpayer in getting the properly executed MD resale certificates and to limit the liability on each sales invoice in the audit workpapers to those materials delivered to MD, if any, for the remaining sales invoices in the audit. Luckily the Taxpayer had customer files of the delivery locations for all the recipients for each job, so Marsu could easily document the adjustment requested and these adjustments were approved by the Comptroller’s Office for out of state sales which are not taxable for MD sales tax purposes.
If you are a printer who collects tax and is not being audited, then please call Marsu to do a mock sales tax audit to determine if the company is properly collecting sales tax. See our Mock Audit Services tab on the website. State sales tax collection assessments does not only deal with getting proper resale certificates, but with collecting tax on all appropriate line items on your invoices. General rule is that all lines are taxable unless there is a specific exemption in the law. Of course, the main exemption in Maryland is on freight, shipping or delivery that is separately stated on the invoice. If the invoice says shipping and handling, then that item is taxable because you are bundling a taxable and a non-taxable item together and that makes the entire charge taxable.
Total Original Assessment Amount – $11,835.94
Refund from Original Assessment $5,152.14 – 43%
Refund from Reverse Audit – $49,501.47
Unfortunately, I hate to admit it but, this is the only closed case that Marsu has ever been given the opportunity to appeal. This Taxpayer had been previously audited in 2004 and assessed and paid $11,835.94 for failure to pay use tax. The Comptroller classified the Taxpayer as a consuming contractor who performs real property work and was audited as such. In 2006, Marsu appealed the assessment under Section 13-509 of the Annotated Code of Maryland and was able to reduce the original assessment and get the Taxpayer a $5,152.14 refund check. This was a 43% reduction from the original assessment which includes penalty and interest.
After reviewing the old assessment, Marsu performed a reverse audit and was able to secure the Taxpayer a sales tax refund for $49,501.47.
Main Audit Issues
I understand that Taxpayer’s feel like they go from fire to fire in their business and when the fire is put out, they do not want to revisit the issue again. In this case, not only did the Taxpayer get almost half his money back that he paid for the audit, but he received an additional refund that averaged $12,375 a year. So for over the past 14 years, this Taxpayer has saved $173,250 in taxes that he would have paid if he had not allowed Marsu to do their free review.
One important point here is that I understand that Taxpayers believe that tax auditors are all experts in their field. The truth is that they are not always an expert and they definitely are not an expert in what your business does. The auditor comes into the audit with preconceived ideas of how sales and use taxes apply to your business. When you should be collecting tax and when you should be paying taxes to your suppliers. This is especially true for real property contractors like my electrical contractor friend here. If there is a small part of your business that is different than the auditor’s preconceived ideas, the business could be inadvertently overpaying their sales and use taxes. Even if the auditor sees that the Taxpayer is due a refund, the auditor will most likely not inform the Taxpayer of the overpayment. Another important point is the Taxpayer needs a representative that will look out for the Taxpayer and that is what Marsu does. The reverse audit is performed on a contingent basis. If no refund is found, then no fee is due. Marsu only gets paid after the refund is approved and credited against the current tax assessment amount or paid to the Taxpayer. Even if no refund is found, the Taxpayer at least gets the assurance that their sales and use taxes are not being overpaid and it cost the Taxpayer nothing to get that assurance.