Don’t Be Afraid to Challenge an Audit
- Nov 1, 2013 | Gail Cole
When an auditor knocks on a business’ door, cooperation is the appropriate response. When documentation is requested, provide it. When questions are asked, answer them honestly. It’s always best to comply with audit requirements as quickly and fully as possible.
That said, if you feel that an audit determination is wrong, challenge it. Auditors are human, after all, and humans sometimes err.
Baked goods, utensils, and sales tax
Recently, the owner of a café in Washington State did just that. The Taxpayer challenged the findings of an audit and won.
The café serves an assortment of “Baked Goods” as well as salads, soups, sandwiches and beverages. There is a dining area in the café but no table service: customers order at the counter and may carry their purchased food to a table if they wish. All Baked Goods are placed in white bags or boxes rather than on a plate. Napkins and eating utensils are available at a self-service station.
The cash register included in the sale when the Taxpayer purchased the café in 2006 “was not able to distinguish between taxable and non-taxable sales.” A new cash register capable of making that distinction replaced the old one in March 2009.
Prior to the installation of the new cash register, the Taxpayer charged and collected sales tax on all sales. After installing the new system, “Taxpayer stopped charging sales tax on Baked Goods” because it believed those sales exempt. RCW 82.08.0293 exempts “bakery items” when they are “sold without eating utensils provided by the seller.” Eating utensils were not provided.
The magic number
Utensils aside, retailers must collect sales tax on all sales of food when sales of prepared foods amount to more than 75% of total food sales. When exact information is unavailable, sellers are allowed to “make a good faith estimate.”
The Taxpayer in question did just that. Once the new cash register was installed, it became possible to determine the exact percentage of sales of prepared foods. In 2009 and 2010, taxable sales were just under the 75% threshold, and the Taxpayer did not collect sales tax on sales of bakery items. In 2011, taxable sales were just above the threshold. Although no sales tax was collected on bakery items in 2011 (based on a good faith estimate from the prior year’s sales), the Taxpayer began collecting sales tax on all sales on January 1, 2012.
The auditor noticed while in the café that customers sometimes used the saucer served under their coffee or tea cups as a plate for their purchased bakery items (given to them in a small sack or box). “On this basis, the auditor concluded that all Baked Goods were sold with eating utensils provided by the seller and thus were not exempt from retail sales tax….”
The Taxpayer contested the audit findings. In its ruling, the Washington State Department of Revenue determined the following:
“Because Taxpayer does not physically deliver or hand a utensil to the customer as part of the transaction, the Baked Goods are not ‘sold with utensils provided by the seller.’ The fact that some customers may independently choose to use a saucer, which was originally intended to catch spills from a coffee cup, into a plate by placing a Baked Good onto the saucer does not alter the result.”
And so the Taxpayer’s petition was granted. Read the ruling.
Challenging an audit can be scary, but it is sometimes the right thing to do. An automated sales tax system allows businesses to feel more confident during audits.
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