MD Tax Assessment Amount – $254,494.80
Reduction Amount $150,789.63 – 59%
Refund from Reverse Audit – $12,850.09
Interest & Penalty Savings – $140,604.75

Maryland Taxpayer manufactured and installed canvas and fabric awnings and installed aluminum awnings.  This was a first-time audit of the Taxpayer for sales and use taxes.  Marsu was contacted by the Taxpayer’s lawyer to assist in the review of the workpapers right after receiving the initial workpapers that stated that the Taxpayer owed $254,494.80 for failure to collect sales tax on the sale of tangible personal property and to pay use tax on expenses.  Marsu contacted the auditor to setup an appointment to review the workpapers.  Marsu assisted the Taxpayer in reviewing the sales and expense schedules:

1. For sales, the auditor reviewed just a one-month sample period and listed 40 invoices as taxable. Marsu pulled the contracts and job estimation sheets for each job and documented that 4 invoices were not taxable.  Marsu also reviewed the projection methodology and presented an alternative methodology that significantly reduced the sales tax projected assessment.  Part of the new methodology was assessing a certain type of awning installation and assessing it on an actual basis instead of projecting.  10 invoices on the sales schedule was moved from the projection schedule to sales that were assessed on an actual basis.  This methodology was accepted by the Comptroller’s Office.  The tax assessed was reduced from $199,547.67 to $130,107.79, a savings of $69,439.88.
2. For expenses, the auditor reviewed just a one-month sample period and listed 14 invoices as taxable. Marsu reviewed the 14 invoices and documented that 8 invoices were not taxable.  The tax assessed was reduced from $53,900.49 to $445.68, a savings of $53,454.81.
3. For sales and expenses, Marsu was also finally able to get the Comptroller’s Office to agree that a certain type of awning installation was not a sale of tangible personal property but was deemed real property after installation for residential, not commercial sales. This transaction was taken out of the original assessment with the auditor as a sale that was included in the projected sales assessment to being assessed on an actual basis and now is having all residential sales taken out.  The tax assessed for Actual Sales being taxed was reduced from $57,354.78, to $2,700.36, a savings of $54,654.42.  Since this item was deemed to be real property after installation, the Comptroller’s Office had Marsu perform an audit on the purchases of the real property installation item and the Taxpayer was assessed an additional $26,759.43 in tax.  These taxes were assessed as Expenses – Actual in the audit workpapers.

After Marsu’s review of the workpapers with the auditor in the field, the auditor was not able to make the adjustment outlined in #3 above and some other adjustment requests, so the lawyer filed for an informal hearing.  Prior to the informal hearing, Marsu has been able to get the tax assessed reduced from $254,494.80 to $131,600.11, a savings of $123,894.69.

At the informal hearing, the lawyer presented our case to the hearing officer that the Taxpayer was a real property contractor and did not sell tangible personal property.  The lawyer presented two (2) miniature types of awnings that the Taxpayer manufactured and installed to provide the Comptroller’s Office a better idea of what the awning looked like and how they are manufactured and installed.  The lawyer also presented literature on a third type that the Taxpayer installed.  Because of the complexities of this case, our case was handed to a higher official within the Comptroller’s Office for review.

Marsu presented the case again to this third person.  Marsu was able to get the Comptroller to remove the third type of awning that was presented at the hearing out of the audit for residential customers only.  The Comptroller agreed that these sales to residential customers were deemed to be real property and not taxable, but sales to commercial customers were still deemed to be tangible personal property and taxable. These sales had previous been taken out of the sales projection and assessed on an actual basis.  The Sales – Actual that were added to the workpapers were reduced from $57,354.78 to $2,700.36, a savings of $54,654.42.  Also at this review, the Comptroller’s Office approved a refund documented by Marsu in the amount of $12,850.09.  This refund was incorporated into the workpapers as required by law.

Since these sales were taken out of the audit, the Comptroller’s Office had the Taxpayer perform an audit of the materials incorporated and installed for this third type of awning to determine if sales or use tax had been paid.  The Taxpayer had not paid sales tax on these materials, but occasionally had paid use tax.  The self-audit determined that the Taxpayer owed $26,759.43 in use tax on these materials.  Even though the Taxpayer owed this tax, the taxpayer still saved $27,894.99 in taxes on these transactions from the audit because they were moved from the sales schedule to the expense schedule.

The last item that Marsu was able to do for the Taxpayer was to have them sign up for the 2015 Tax Amnesty Program.  Taxpayer was approved to the program and upon full payment of the liabilities, the program abated 50% of the interest due and the 10% penalty was abated in full.  See Comptroller’s Letter of December 16, 2015.  By signing up for the Amnesty Program, the Taxpayer saved $25,021.48 in interest and $9,085.50 in penalty from the final assessment amount of $90,855.03.

Collection of Tax by Awning Installers

The problem in this industry is that their product, an awning, seems to be installed to improve real property because if its’ attachment to buildings or homes and for real property tax purposes is included in the real property assessment for all building or home owners.  In a lot of states, awnings are deemed to be real property in their laws or regulations.  But the Maryland Comptroller’s Office for sales and use taxes deem an awning as a sale of tangible personal property even though there is no public written information to that fact.  The Comptroller’s Office audit department cling to some internal memo that was written in 2002 to a Taxpayer that had requested a response.  Keynote … private letter.  There is nothing in Maryland laws or regulations that say that awnings are tangible personal property, so the Taxpayers have no clue.

So when an awning installer gets audited, the audit department will conduct the audit and will use the 2002 letter as their documentation that awnings are tangible personal property and assess all new canvas and fabric awning installations as tangible personal property.  Because of the letter, the audit department cannot audit otherwise.  A Taxpayer must go further in the appeal process to possibly get tax relief.

Main Audit Issues

This is the classic case where the Taxpayer believes they are a real property contractor and has no knowledge otherwise, but when audited by the Comptroller’s Office they are deemed that some portion of their business is for the sale of tangible personal property and assessed 6% tax on those sales.

Another problem here was that the Taxpayer did not properly pay use tax on materials that were installed into real property.  When being audited by the Comptroller’s Office for sales and use tax, the auditor will be auditing on two main issues.  First if the Taxpayer is supposed to collect tax, then the auditor will review all sales invoices in a sample period to determine if sales tax was properly collected. And second, if the taxpayer is a real property contractor, then the auditor will be reviewing construction materials in a sample period to determine if sales tax was paid to the suppliers or use tax was self-assessed.

Call Marsu

If you are a Taxpayer who manufactures and installs awnings or just installs awnings 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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