Every day we talk to taxpayers who have received their audit bill from the Texas Comptroller who tell us that their bill is correct, that they worked very hard on it and there’s nothing else that can be done, or that the auditor explained why they (the taxpayer) were wrong in how they applied the tax rules. In my experience, of all the sales tax audits conducted by the Texas Comptroller contain tax assessments that are incorrect. To these taxpayers who think their audit is right, I would like to tell them that you just don’t know what you don’t know.
Consider our client, a semi-conductor manufacturer with a home office in California and a manufacturing plant in Texas who engaged our firm after they received their $350,000 audit bill. The auditor assigned to the audit was based out of the Los Angeles audit office of the Texas Comptroller and did not conduct a plant tour. One very important facet of auditing a manufacturer is the plant tour. The auditor needs to see the equipment and understand the process in order to appropriately audit the taxpayer.
During the initial conversation with the Controller of the semi-conductor, he stated that “We’ve done everything we can, there’s nothing left to do on this audit”. After review of their audit and documentation along with a plant tour for the auditor, not only did this taxpayer not owe $350,000 to the State of Texas, the State of Texas owed them $280,000! Effectively, a $630,000 swing in the audit assessment.
Another client, a Texas-based restaurant franchise with twenty-three locations engaged our firm to assist him with reducing his sales tax audit. The original bill from the Comptroller was $80,000 and was primarily tax assessed on construction projects on which he had not paid tax. The auditor explained to him that the construction jobs were remodel and therefore taxable (labor and materials). After reviewing the audit and the construction project contracts and invoices, we determined that the jobs were actually new construction. What the auditor failed to see was that the taxpayer had added square footage to his restaurants in almost every instance which qualifies as new construction, not remodel. The removal of the assessment for these jobs reduced his liability to the Comptroller by over $50,000!
Even if you think that your audit is right, there may be things that you are unaware of that can reduce it. Remember, it’s been our experience that of all audits contain errors, through erroneous calculations by the auditor, incorrect application of the law, and misunderstanding the essence of a transaction.