A Texas based liquor, beer and wine distributor discovered that samples are not only important in gaining new customers but in reducing costs as well. Let me explain. Well, I guess I don’t have to explain wine samples—everyone knows and likes those. It is the other samples I want to talk about—samples from a tax audit perspective. They are representative samplings of sales invoices and purchase invoices. The auditor, during a sales and use tax audit goes through the sample invoices and determines an average error rate and then applies it to the whole population.
Texas sales and use tax auditors are trained to do samples several different ways. Most auditors however take the easy way out. They do sample sales and purchases separately but in each case, they do sometimes lump everything together for their population—every sale in one population / sample pairing and every purchase in one population / sample pairing. There may be ways that the data should be segregated that would result in a fairer sampling for the taxpayer but in most cases, the auditor doesn’t take the time to determine what that more fair way is.
Take for example one of our clients—the Texas-based liquor, beer and wine distributor who engaged our firm after their audit was over and they had been assessed $250,000 in additional tax due. After a review of the audit, their records and the auditor’s notes, we determined that additional segregation over and above the normal “dollar stratification” that auditors are required to employ in a transaction sample would have been a more correct representation of our client’s business. The State was forced to comply because we used the State methodology for sampling and did it correctly this time and to our client’s advantage.
The new sample strategy resulted in a $225,000 reduction in the tax assessed. The original sample methodology inflated the tax due by almost ten times! We see it every day in our practice. Auditors taking the easy way out like this situation or just making simple mathematical errors. Everything needs to be checked and rechecked to make sure that the State gets only what they are owed and not a penny more.