MD Assessment Amount – $58,209.92
Reduction Amount – $36,250.95 – 62%
Interest Savings – $21,054.55
Penalty Savings – $5,820.99

Maryland Taxpayer provides security guard and private investigative services to private, government and other clientele.  Taxpayer was selected by the Comptroller’s Office for a Maryland sales and use tax audit.  Taxpayer went through the audit process himself and went to an informal hearing without getting any relief from the $36,291.73 tax liability.  Marsu was contacted by the Taxpayer’s lawyer to review the workpapers to determine if any adjustments could be requested.  Taxpayer was being assessed for failure to collect sales tax on all line items on their invoices for security and private investigative services, failure to pay use tax and failure to remit all sales taxes collected.  Since the Taxpayer had already had an informal hearing, the lawyer had to file an appeal to the Maryland Tax Court and then present our finding to the Maryland Attorney General’s Office for any reductions.  Marsu did the following for each of the schedules:

1. For taxes collected but not remitted, the auditor did an analysis comparing the MD sales tax collected, monthly sales tax liability report and the tax remitted to come up with the liability which was almost half the assessed tax amount for the whole audit. Marsu reviewed this schedule and found that the auditor had incorrectly recorded the tax collected amount for four of the months and tax liability became zero.  The tax assessed was reduced from $15,915.00 to $0, a savings of $15,915.00.
2. For sales, the auditor reviewed six months of invoices and listed 87 lines on the workpapers. Marsu reviewed the 87 lines and only found two adjustments.  Marsu also reviewed the projection methodology and found that the total sales for the oldest year should have been for only 8 months and not for the entire year as the Comptroller had recorded.  Marsu also found that the total sales for the sample period was higher than recorded.  With these four minor adjustments, the liability for failure to collect sales tax was reduced from $17,378.10 to $13,492.88, a savings of $3,885.22.  These four minor adjustments alone paid the bill for the lawyer and Marsu to do their review and present the case to the AG’s Office.
3. For expenses, the auditor again reviewed six months of invoices and listed 38 lines on the workpapers. Marsu reviewed the 38 lines and found that all lines were correct. Marsu also reviewed the expenses projection methodology and again found that the expenses for the oldest year should have been for only 8 months and not for the entire year as the Comptroller had recorded.  This minor adjustment reduced the expense tax assessment by $340.48.

In the Settlement Agreement with the Attorney General’s office, the lawyer was also able to get the 10% penalty abated.

The total assessment due, including penalty and interest, in the Notice of Final Determination was $58,209.91.  After our review, the Taxpayer paid, per the Attorney General’s Settlement Letter, $21,958.97, a savings of $36,259.04.

Main Audit Issue

Effective July 1, 1992, security and private investigative services in Maryland became a taxable service.  Over the years, Marsu has represented several security firms and has seen plenty of firms listed in the Maryland Business Journal for liens being attached against the business for a sales tax audit.  Usually these cases have assessments in the hundreds of thousands of dollars in just tax amount due.  And the reason for all these tax assessments is the failure to properly collect tax on all items listed on an invoice for services provided.  The Comptroller’s position is that all charges are part of the price of the services provided and taxable.  So security firms should be collecting tax on all lines listed on their invoice.

Call Marsu

If you provide taxable services and want to confirm that sales tax is being properly collected, then please call Marsu to do a mock sales tax audit.  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.

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MD Tax Assessment Amount – $15,638.16
Total Reduction Amount – $5,897.87 – 38%
Interest Reduction – $4,717.61
Penalty Waived – $1,563.82
Total Savings – $12,179.40 – 55%

A three-year-old Company gets audited by the Comptroller’s Office for failure to collect sales tax on a taxable service – commercial window cleaning.  Marsu was contacted by their accountant to assist their new client with the audit.  The workpapers were just received by the Taxpayer so Marsu was able to perform the review of the workpapers in the field with the auditor.  Like any other audit, the auditor reviewed a sample period of sales and expenses and projected the assessment over the 3 plus year audit period and reviewed all asset purchases.  Marsu did the following for the three schedules:

1. For sales, the auditor reviewed six months of sales and listed the total commercial sales for each month as a separate line item on the schedule.  The auditor also did list three exceptions as non-taxable sales on this schedule to calculate the taxable sales amount for the sample period.  Marsu reviewed these sales and found 17 more exceptions that were approved.  The tax assessed was reduced from $12,432.74 to $9,122.49, a savings of $3,310.25.
2. For expenses, the auditor reviewed six months of purchases and listed 12 line items as taxable. Marsu found no errors with the 12 lines listed but found that the projection schedule was incorrect in the fact the auditor did not use the total purchase amount for the accounts being audited for the sample period.  Once corrected, the tax assessed was reduced from $2,698.91 to $397.05, a savings of $2,301.86.
3. For assets, the auditor listed 7 line items where use tax was not properly paid on out of state purchases. Marsu found no errors with this schedule.

Marsu was able to make one more adjustment to the assessment.  Marsu discovered in the sales tax returns folder that the Taxpayer had filed a Combined Registration Application to collect sales tax but was denied by the Comptroller’s Office.  The Comptroller’s Office had stated in their reply that commercial window cleaning was a service and tax did not need to be collected.  I brought this to the attention of the Director of Compliance and the hearing officer abated the interest on the sales portion of the audit and all penalties.

Main Tax Issue

For fifty years, Maryland was a tangible state meaning that sales tax was only collected on the sale of tangible personal property.  Effective July 1, 1992, that all changed when the Comptroller’s Office amended the law to include certain services as taxable services.  Seems like whoever was processing the Combined Registration Applications missed that change and this Taxpayer paid the price.  It cost him $10,008.55 and a lot of aggravation.

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