What's Wrong with a $0.00 Balance due Sales Tax Audit?

Over the years, I've met with tax folks at companies who's personal goal is to have a $0.00 tax assessment.  Anything short of this goal was viewed as a shortcoming of his staff.  I've also met with tax directors who say if they are not getting assessed at least $100,000 they are not being aggressive enough.
The true position is somewhere in between.

Back to my question, "what's wrong with at $0.00 sales tax assessment?" In short, nothing.  However, sometimes that level of perfection comes with a hefty and hidden price tag.  Here are a few reasons why the auditor may come up with a $0.00 assessment.

1. Auditor incompetence: You may have met this type.  Very nice, hard working, very thorough, but just not the sharpest knife in the drawer.  Before they arrived, you knew where the bodies were buried and were prepared for the worst.  At the end of the day, he/she walks out and proclaims there is no assessment worth pursuing. 

In many cases, companies view this type of report as a blessing or endorsement of their current sales tax procedure.  However, when a new and more experienced auditor takes over, these companies are usually surprised when there is a large assessment the next time around.   Unfortunately, many companies set their tax policies based on their audit experience rather than treating these as independent issues.  Be very careful if an auditor finds nothing or finds very little when you may suspect there are serious issues with your system.

2. Over payments exceed underpayments: I've heard it many times over the years.  "we have never been audited and have been here for 20 years".  Depending on the industry, this statement may be totally acceptable.  In other industries, such as manufacturing, this statement screams "OVERPAYMENT".  At the end of the day, the job of an auditor is to raise revenue by identifying non-compliant taxpayers.  What is the incentive to audit a company if it will yield a "zero assessment" or even a refund?  Sure, the states will tell you that everyone has an equal change of being audited, but in reality, the state is looking for companies who will write them a check. 

If you have never been audited and you are remitting large amounts of sales tax or use tax, you may be overpaying.  In this case, the price you are paying for a $0.00 audit is the money you are overpaying to the state.  This could be significant.

3.  Too much time spent on processing: As I've mentioned before, sales tax is as much an art as it is a science.  Over the years, I have known companies who build so much process into their sales and use tax function, that they never have an assessment or, at worst, a very small assessment.  So what's wrong with this scenario?  Nothing, perhaps, but if you continue to spend large amounts of staff time trying to manage your sales tax risk down to $0.00 you are probably wasting valuable staff time that could be used in better places.  As a company, you must be willing to assume some level of tax risk.  There are some transactions and some events, that the cost to perfect the process far exceeds the tax savings.  I've seen companies who re-computed the tax charged by their vendors and accrued the difference.  In most cases, this was just a few cents on any given invoice.  Yes, this is technically accurate, but what a waste of time and effort.  The same company was also over paying other vendors by over $50,000 in tax and should have focused on that issue.

If your goal is a "zero" assessment of sales tax, be sure you have quantified the price you are paying for this level of perfection.  If the price is not too high, then leave the process in place.  If the price is too high, consider the best way to change the process so that you are better managing your staff's time.

New York Starts Cola War with Tax

You may or may not remember the so called "Cola War" back in the 70s between Coke and Pepsi.  They were battling for market share in head to head battles.  Well now there may be a new type of cola war in New York but this one is based on sugar content.

To bridge the revenue gap in New York, the governor is expanding the based of products subject to sales tax and also is proposing a new, and much  higher tax, on soda that contains sugar.  The tax would be as high as 18% and would apply to soda and other drinks that contain less than 70% of fruit juice.

The proposal also includes a tax on digital downloads of information.  This would include music and books that are downloaded onto i-pods and other devices.  This tax may be difficult to collect given that most of the sellers of this service may not have nexus in New York and most consumers won't be accruing use tax on their purchase.

The tax proposal would also expand the sales tax to cable services, taxi rides, beer, and movie tickets.  My guess is that the list will expand greatly once the full extent of the revenue problem is revealed in New York. 

The interesting issue is that many states follow New York in terms of tax policy.  Many states already tax soda and beverages that are not 100% fruit juice.  But taxing of digital download could have some very interesting issues depending on how the define these terms.

Be prepared for lots of sales tax changes in the coming months as legislatures re-convene and start to explore options for increasing revenue by expanding the sales tax base.

Also be on the look out for more tax audits and more aggressive enforcement of the existing sales tax rules.

Response question:

What do you think about New York's proposal for increasing revenue?

Give Yourself an Economic Stimulus in 2009

The latest idea going around to stimulate the economy is to have your employer temporarily stop withholding federal income tax on your paycheck and to stop withholding the social security and medicare payments on your paycheck.  This sounds like such an easy idea.  According to the statistics, there is about $101 billion of taxes paid each month on individual income tax.  I doubt that is an accurate number given the drop in employment, but we can play with this.  Doing this would drive your employer nuts and create a huge issue with the HR and Payroll departments. 

What troubles me the most about this plan, is that there is no corresponding change in tax law or tax rates.  Therefore, when you go to file your 2009 income tax return in 2010, you will be under withheld.  This may not bother you very much or it could be a real hardship for some.

On the other hand, i do like a spin on this plan that is very doable and may not impact you negatively at all.  The first thing to remember is that the income you earn is yours, not the governments.  Many Democrats are under the belief that everything you earn is the governments and they let you keep some.  This is where the notion of "tax expenditures" came from.  That is, the governments counts as an expenditure certain tax breaks that allow you to keep your money.  That is the topic of another Blog.

Here is the plan: The vast majority of middle class and middle income folks get a refund every year on their tax returns.  This is an interest free loan to the federal government that shows up a year or 18 months after you earned the money.   Why wait for your refund?  Give yourself an economic stimulus by adjusting your federal and state withholding now.  Don't overpay the government just to get a refund later.  Keep more of your income by adjusting your withholding with your employer. This will reduce your refund but it will also reduce the interest free loan you are giving to the federal and state governments. 

You could free up $100 or $200 a month now so why wait.  It's your money and you deserve to keep it as long as you can and use it for any reason you want.