MD Tax Assessment Amount – $138,629.42
Reduction Amount – $84,911.83 – 61%
Approved Credit/Refund – $73,202.29
Interest and Penalty Savings – $55,451.77
Refund Check Received – $19,484.70

Maryland woodworking and cabinet making shop was selected by the Comptroller’s Office for a Maryland sales and use tax audit.  This taxpayer had been audited before and Marsu was contacted by the Taxpayer’s lawyer to assist in the audit process.  Like any other audit, the auditor reviewed a sample period of sales and expenses and projected the assessment over the audit period and reviewed all asset purchases.  Marsu assisted the Taxpayer in reviewing each schedule as follows:

1. For sales, the auditor reviewed three months of sales invoices and listed 77 out of 223 invoices as taxable. Marsu had Taxpayer pull invoices, contracts, and job estimation sheets to prove to the auditor that an invoice was not taxable.  Sales schedule ended up with just 8 taxable invoices where tax was not properly collected.  The tax assessed was reduced from $54,939.82 to $24,488.35, a savings of $30,451.47.
2. For sales tax projection methodology, the Comptroller’s methodology did not fairly represent the Taxpayer’s business over the audit period so Marsu had the Taxpayer document an alternative methodology that was accepted by the Comptroller’s Office. Alternative methodology saved the Taxpayer approximately $10,000 in tax on the sales schedule.
3. For expenses, the auditor reviewed three months of expense invoices and listed 188 invoices as taxable. Marsu reviewed each line item and provided documentation to the auditor that the line was not taxable or that use tax was paid.  The expense schedule was reduced by 67% of the dollar value of the invoices listed.  The Taxpayer had a complicated system of paying use tax and showing that the purchase was for resale.  The Comptroller made the Taxpayer prove each line item that was for resale by matching the purchase to its’ corresponding sales invoice.  This was a very time-consuming process.  The tax assessed was reduced from $78,406.27 to 23,945.91, a savings of $54,460.36.
4. For assets, the auditor reviewed every asset purchased during the audit period and only found issue with one invoice. Marsu agree that the one invoice was taxable.

Marsu also performed a reverse audit and documented sales and use taxes paid in error and the Comptroller’s Office approved and included the refund in the amount of $73,202.29 in the audit workpapers as required by law.  The original workpapers had the Taxpayer owing $138,629.42 in taxes and the final workpapers had the Taxpayer receiving a refund check in the amount of $19,484.70, a savings of $158,114.12.  Since the Taxpayer received a refund, there was no interest and penalty assessed.

Main Audit Issues

Cabinet and countertop manufacturers have been a favorite audit target of the Comptroller’s Office for years.  If a Taxpayer is not collecting tax properly, then the assessment will be in the tens of thousands of dollars or even hundreds of thousands of dollars depending on the size of the company and type of work performed.

Twenty years or so ago, the Comptroller’s Office added the infamous two sentences to Maryland Tax Regulation .19C(5) – Real Property Construction, Improvement, Alteration and Repair that sums up the Comptroller’s position of taxability when auditing a cabinet and countertop 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 or commercial spaces will be treated as realty”.  So if a Taxpayer does commercial work and it is not in a kitchen or bathroom, then the Comptroller’s Office is going to assess the Taxpayer regardless of how the cabinetry or countertop is installed.  Even commercial built-in cabinetry work that is installed directly against wall studs or recessed into the wall is considered tangible by the Comptroller’s Office.  For the Comptroller’s Office the word built-ins are defined as like garbage disposals not built-ins as understood by the cabinetry manufacturers and installers.

So if you furnish and install any of the following, then tax should be collected from the customer – any cabinetry and countertop installed in a non-kitchen or bathroom area, like in a doctor’s office or a work area room (paper copy station), bank teller stations, bars and food stations in restaurants, benches, cashier counters, concession stands, credenzas, lockers, reception desks, and service desks and counters.  The Comptroller has even assessed window ledge under windows in conference rooms, recess cabinetry in walls, and sinks in common areas of doctor’s office or exam rooms.

One minor issue in the sales tax collection area was fabrication labor.  If the Taxpayer takes the customer’s material and manufacturers an item or just performs a simple task as cutting or drilling holes in the material, then the Taxpayer’s labor charge is taxable.  The Comptroller’s Office considers the labor as part of taxable price of the finished product.  Just because the labor to manufacture a product is performed by two or more businesses, it is still taxable.  If one Taxpayer had performed all the labor to manufacture a product, then the total price is taxable.  See MD Tax Regulation 30 – Fabrication or Production for the Comptroller’s description of what fabrication labor is.

 The last major issue in this audit was inventory items used in jobs for resale and also in jobs where the Taxpayer is installing the material into real property.  If the material is used in a job for resale, then no tax is due on the material when purchased and tax is collected from the customer on that material.  If the material is used by the Taxpayer on a real property job that is installed by the Taxpayer, then tax is due on the cost of the material incorporated into the job.  Taxpayer was buying all the inventory items for resale and paying no use tax when used on realty jobs.  Inventory items were items like bolts, caulk, glue, hardwoods, melamine, molding, nails, paint, plywood, screws, shims, stain, thinner and washers.  Problem was that items purchased in bulk were not allocated to realty or resale jobs, so the Taxpayer had no methodology to self-assess use tax on the material cost of inventory items being used in realty jobs.  The Comptroller’s Office took the position that 100% of the inventory items were taxable.  For the hardwoods purchased by the Taxpayer, Marsu matched the purchase to sale invoices to get the purchase removed or reduced on the expense schedule.  For all the other items, Marsu calculated a percentage of sales dollars of non-taxable jobs to total jobs for the sales sample period and used that percentage to reduce the inventory items on the expense schedule.  The Comptroller’s Office accepted this analysis.

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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 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 Tax Assessment Amount – $43,982.98
Reduction Amount – $16,891.50 – 38%
Approved Offset Credit/ Refund – $42,945.17
Interest and Penalty Savings – $17,593.19
Refund Check Received – $15,853.69

Maryland countertop manufacturer and installer was selected by the Comptroller’s Office for a Maryland sales and use tax audit.  This taxpayer had never been audited before and Marsu was recommended by the Taxpayer’s accountant to assist in the audit process.  Luckily, we were contacted as the initial workpapers were issued and Marsu was able to review the workpapers with the field auditor and supervisor.  No informal hearing was needed.  Like any other audit, the auditor reviewed a sample period of sales and expenses and projected the assessment over the audit period and reviewed all asset purchases.  Marsu assisted the Taxpayer in reviewing each schedule as follows:

1. The auditor reviewed six months of sales invoices and listed only 7 invoices as taxable. Marsu pulled the job folders to prove to the auditor how the three invoices were not taxable.  The jobs that were removed were either a residential install or for resale.  The sales schedule ended up with just 4 taxable invoices where tax was not properly collected.  The tax assessed was reduced from $37,202.14 to $23,466.10, a savings of $13,736.04.
2. The auditor reviewed three months of material (COGS) expense invoices and listed only 9 invoices as taxable. Marsu reviewed each line item and provided documentation to the auditor to have one line deleted and one line reduced.  Even though Marsu only change two lines, the changes reduced the dollar value of the invoices listed by 32% and the tax due was reduced from $2,390.78 to $1,022.89, a tax savings of $1,367.89.
3. The auditor created a second expense schedule for administrative expenses and again reviewed six months of invoices. There were 22 lines listed.  Marsu reviewed each line and was able to prove to the auditor that either tax was paid or the invoice was a non-taxable transaction for nine lines.  The tax due for this schedule was reduced from $$4,390.06 to $2,602.49, a savings of $1,787.57.
4. The auditor reviewed every asset purchased during the audit period and the Taxpayer had properly paid sales tax to the vendor.

Marsu also performed a reverse audit and documented sales taxes paid in error and the Comptroller’s Office approved and included the refunds in the amount of $42,945.17 in the audit workpapers as required by law.  The original workpapers had the Taxpayer owing $43,982.98 in taxes and the final workpapers had the Taxpayer receiving a refund check in the amount of $15,853.69, a savings of $59,836.67.  Since the Taxpayer received a refund, there was no interest and penalty assessed.  Without the refund, interest would have been assessed at approximately 30% and penalty at 10% to the total tax due of $27,091.48.

Main Tax Issue in Audit

Countertop manufacturers have been a favorite audit target of the Comptroller’s Office for years.  If the Taxpayer is not collecting tax properly, then the assessment will be in the tens of thousands of dollars or even in hundreds of thousands of dollars depending on the size of the company and type of work performed.

Fifteen 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 the Comptroller’s position of taxability when auditing a countertop 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 or commercial spaces will be treated as realty”.  So if a Taxpayer does commercial work and it is not in a kitchen or bathroom, then the Comptroller’s Office is going to assess the Taxpayer regardless of how the countertop is installed.

So if you furnish and install any of the following, then tax should be collected from the customer – any cabinetry and countertop installed in a non-kitchen or bathroom area, like in a doctor’s office or a work area room (paper copy station), bank teller stations, bars and food stations in restaurants, cashier counters, reception desks, and service desks and counters.

Call Marsu

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 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 Tax Assessment Amount – $598,110.61
Reduction Amount $531,320.75 – 89%
Refund from Reverse Audit – $17,085.98
Interest Savings – $189,486.77

Large commercial and federal government contractor provides general contracting services in Maryland and Washington DC.  This Taxpayer was selected by the Comptroller’s Office for a first-time MD sales and use tax audit.  The Taxpayer undoubtedly got sticker shock when the auditor provided them the initial workpapers where they owed $598,110.61.  Marsu was contacted by the Taxpayer’s lawyer and accountant to assist in the review of the workpapers.  This Taxpayer was deemed a consuming contractor and the assessment was for the failure to pay use tax on their expenses and assets.  Marsu assisted the accountant with the two schedules as follows:

1. For capital assets, the auditor reviewed all Maryland assets and listed just 2 invoices as taxable. Marsu found no errors with this schedule.
2. For expenses – Job Cost Materials, the auditor reviewed a three-month sample period and listed 45 invoices as taxable. Marsu pulled each job folder and reviewed each invoice and was able to get 26 invoices deleted from the schedule and had 2 invoices removed and put on a separate schedule and taxed individually.  The tax assessed was reduced from $590,987.93 to $61,753.77, a savings of $529,234.16.  Five of the remaining 19 invoices were credit card transactions and were not reviewed by this Taxpayer for use tax payments.
3. For expenses – G & A Expenses, the auditor reviewed the same three-month sample and listed 9 invoices as taxable. Marsu reviewed each line and provided documentation to get 1 line deleted from the workpapers.  The tax was reduced from $6,247.28 to $4,161.89, a savings of $2,085.29.  Eight of the 9 invoices listed were credit card transactions which were not reviewed by this Taxpayer for use tax payments.
4. For expense projection methodology – Job Cost Materials, Marsu documented and presented an alternative projection methodology that was approved by the Comptroller’s Office. This new methodology saved the Taxpayer $23,564.77 in taxes in the final workpapers.

With Marsu’s assistance, this Taxapayer was able to significantly reduce their tax assessment.  The original workpapers had the Taxpayer owing $598,110.61 in taxes and the final workpapers had the Taxpayer owing just $66,789.86.  Marsu performed a reverse audit and documented sales and use taxes paid in error and the Comptroller’s Office approved and included the refund in the amount of $17,085.98 in the audit workpapers as required by law.

Main Audit Issues

The Comptroller’s Office properly deemed this Taxpayer as a consuming contractor; therefore this Taxpayer is liable for sales and use taxes on all materials purchased directly by them and tangible personal property deemed tangible personal property after installation by a subcontractor into a job.

Unfortunately, this Taxpayer dealt with a lot of these gray area tax issues where there is not a lot of written information on, but the Comptroller’s Office loves to audit for and assesses many a business.  This gray area deals with Regulation 19 and the State’s definition of tangible personal property.  Pursuant to Regulation 19C, the Comptroller’s Office has written the following:

Reg. 19C(3) – “If the intention of the annexation is for a temporary purpose, that is, for the enjoyment or use of the material as a chattel or personalty, the material will be considered to retain its character a tangible personal property.  Machinery used in a production activity retains its character as tangible personal property without regard to the method or permanency of its annexation to real property.  Farm equipment, a foundation in support of machinery and equipment used in a production activity and any machinery, device, or equipment which is required for conformance with air or water pollution laws or regulations retain their character as tangible personal property”.

Reg. 19C(4) – “Factors to be considered in determining the intention of the party making the annexation are the:

• Nature of the article annexed;
• Mode of annexation;
• Purpose of which it was annexed; and
• Practicality and feasibility of removal of the annexed article”.

Reg 19C(5) – “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 or commercial spaces will be treated as realty”.

As you can see there is a lot of grey here and the only issue the Comptroller gives a little information about is on the furnishing and installation of countertops and cabinetry in commercial spaces which is automatically deemed tangible personal property with the exception of kitchen and bathroom areas.

I like to talk about this issue in another way to give a different perspective of what the Comptroller’s Office deems as tangible personal property and why.  The question you must ask yourself is “whose purpose does the item or article serve, the tenant or the building?”  If the item or article after installation was installed to serve some purpose for the tenant, then the Comptroller is going to say that it is tangible personal property and if the item or article serves the building, then the item or article is deemed realty.  So if the item or article deals with the doors, windows, except blinds and drapes, walls, ceiling, floors, except carpet, roof, plumbing, heating, central air conditioning or domestic water systems of the building, then the item or article will most likely be deemed realty because they serve the building and not the tenant.  In this case, the Comptroller even deemed that a sink that was installed in a work area of a doctor’s office was tangible personal property.  The Comptroller deemed that it served the doctor’s office and not the building and entire amount of the contract to install was deemed taxable.

Below are some other examples of items that after installation, the Comptroller’s Office deems as tangible personal property and have taxed in audits that I have been involved in.

1. Countertops and cabinetry installed in commercial spaces, regardless of how installed and not installed in kitchen or bathroom areas.
2. Bars and food stations in bars and restaurants.
3. Reception desks and bank teller stations.
4. Lockers
5. Blinds or drapes installed. Even motorized units that may hide in the ceiling.
6. TV installation (fabrication labor), programming and cabling.
7. Projection screens in conference rooms. Unit may hide in the ceiling.
8. Specialized water systems that are outside the domestic water system that supplies water to the kitchen and bathroom areas.
9. Backup generator systems for commercial customers.
10. Canvas or vinyl awnings for commercial customers. Most residential awnings are considered tangible personal property.
11. All types of signage. See Regulation 36.
12. Fuel tanks, even those in the ground.

Another issue with this audit was credit card transactions.  Even though this Taxpayer filed monthly use tax returns, the credit card bills were not reviewed for use tax due on purchases from out of state suppliers who did not collect MD sales tax.  This is a favorite area for the MD auditor’s to review that usually leads to a lot of issues because more and more is being purchased via credit cards these days, there are missing invoices, and there is usually a fair amount of out of state purchases because a direct account is not setup with these suppliers to pay by the normal AP system.

Call Marsu

If you are a General or Subcontractor 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 Tax Assessment Amount – $113,011.03
Reduction Amount – $69,836.18 – 62%
Approved Credit/Refund – $17,335.29
Interest and Penalty Savings – $42,698.94

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:

1. 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.
2. 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.
3. 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.

Call Marsu

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 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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