FL Sales & Use Tax Audits – Is the FL DOR using the best available information?
If you or your client has gone through an audit, then you have received the Notice of Intent to Make Audit Changes (DR-1215/1216) which should have included audit workpapers with an Explanation of Items to explain each exhibit alleging tax due. At the bottom of these exhibits are cites to the supporting legal authority for the assessment. In many audits, especially those involving car dealers or convenience stores, the auditor (or desk auditor) will cite to sections 212.12(5)(b) or 212.12(6)(b), Florida Statutes. If you are unfamiliar with them, they are very powerful statutory provisions. But, they are often misapplied by the DOR.
Section 212,12(5)(b), F.S., authorizes the Department to make an assessment based upon the best information available in provided situations. But, section 212.12(6)(b), F.S., provides a different process if the taxpayer does not have adequate records. Naturally, the DOR chooses to cite to the former statute (rightly or wrongly) to use the best available information. But, my dealings with the DOR cause me to question their ability to do that and to seek for available protections from abuses that occur under the guise of 212.12(5)(b), F. S. In looking for the "best available information" as the DOR will say, it looks to third party data for guidance.
With car dealers, it goes to DMV reports. Though generally good, there are still problems with this source of information that create significant problems for taxpayers. As with other third party information, the DOR treats this information as gospel so that it takes significant proof to overcome errors in the report. The best way to avoid these errors are to make sure that you or your client properly register the vehicle with the sales price and tax paid. A number of problems occur with vehicle purchasers who register their own vehicle as they can "innocently" cause the error (or try to save a few bucks by lessening the sale tax).
The problems are magnified if you are a dealer who has a large volume of vehicles sold. I won't go into the repossession issue since that is its own article, but I will mention it because sales tax is shown for the sale even if you repossess the car shortly after the sale (which may even be before the first payment is made). If you are audited, the auditor is likely to simply take the DMV report and put that into an exhibit. As auditors are evaluated at least in part by how quickly they do an audit, there is a likelihood that the DMV information is not thoroughly reviewed by the auditor (again, more likely as the dealer's volume of cars increases).
This means you or your client is likely to receive a large proposed assessment because the auditor failed to remove the errors and simply assessed tax from the report and (hopefully) reduced that amount by the tax remitted. Ignoring the fact that the auditor likely disallowed most (or all) or your line 6 credits (repos), this DMV report is going to list vehicles registered with the state. The difficulty here is that you will not identify the errors until the protest process because you are not likely to receive the DMV report until you receive the workpapers. As we have seen, those reports are not necessarily provided in a user friendly way. I will give some auditors credit as they provide Excel information as opposed to PDF files which are in small print or are broken into multiple pages which make it very inefficient to identify the vehicles in the exhibit. But, despite the errors that are included in this "best available information", car dealers should consider themselves lucky because they don't have to deal with ABT reports.
ABT reports are the bane of existence for convenience store owners. You need to tell your client to keep meticulous purchase records if they aren't doing that now. This means keep invoices (preferably scanned and ideally totaled) in an organized fashion. Reports can be requested from vendors, but we have seen that a number of vendors are going out of existence which means your client's purchase information is no longer available or the vendor was bought by another company who shows little consideration for accessibility to those prior owner's records.
By way of a short history, a few years back Florida vendors were required to start providing purchase information to the state. These are the ABT reports which are now used in essentially every convenience store audit. From the inception of this process, the DOR has viewed these ABT reports as infallible. Initial amounts reported included a number of inaccuracies and errors. In all honesty, I think vendors have generally gotten better in their reporting. My problem is that, in the vast number of audits we have dealt with, we have provided numerous reports that show vendor reporting errors. In some cases, it is as simple as including delivery charges in with the ABT amounts. In other cases, there are non-ABT items or non-taxable items included in the reports to a small degree (such as a beverage vendor who sells water along with ABT items). But, in too many other cases, the vendors might sell significant non-ABT or non-taxable items. In these cases, the errors are greatly magnified.
In a number of cases, we have shown that vendors are consistently providing total purchases to the DOR instead of ABT only information. Yet, the DOR consistently says the information it receives is accurate. I believe this statement is incorrect. With the number of cases we have dealt with, we have naturally dealt with DOR conferees repeatedly over the variously assigned protests and reconsiderations. So, I know that we have provided them with the inaccuracies so they know the errors exist. What creates the true question, is that the conferees follow the party line and say the information is accurate when the same vendors have repeatedly provided incorrect information. Despite this, the DOR stays the course and says the current information is correct.
But, this subtle change in position belies the position is arguably takes. The DOR does admit that some vendors provided incorrect information though they disclaim it by saying it was in early periods. I have a problem with this because they say this now when it is outside some audit periods but they used it when it was inside the audit period in previous audits. What causes the most concern about the DOR's "best information available" position is how they have handled some vendors' information within an individual audit period.
In a very recent matter, the conferee indicated that the information did not look reasonable so they created an adjustment to the purchase data. This simply fact calls into question all of the purchase data at this point. If part of something is in question, then that naturally calls into question the other parts. When I address this situation, conferees simply indicate the other information is right or that the taxpayer should prove them wrong. Both statements are problematic.
The first statement is incorrect on its face. The DOR claims the ABT data is accurate to use it in its estimation model. So, a part of it being wrong eliminates the ability to blindly take the stance that it is correct. This leads into the incorrectness of the other statement. In requiring the taxpayer to prove it wrong, the DOR is violating the statutory provision. The DOR is entitled to use the best information available. I do not believe this allows the DOR to use information that it knows to be wrong. In a large number of convenience store audits, the DOR has been adjusting purchase totals (sometimes explained). By making an adjustment, this is an admission that the information is wrong. When I asked about the adjustment, I was not provided with a calculation methodology or consistent explanation. The same conferee told me it was for different vendors and different periods. The conferee also told me that the system generated the calculation but could not provide me with the calculation other than the adjustment number itself. I hate to inform the DOR that saying a number is accurate because it is the number is not the best available information. Just because the DOR tells me an apple is an orange doesn't mean it's true. That circular logic is unsupportable.
In a large number of other audits (or even in the same audits with ABT purchase adjustments), the DOR has tried an end around and has tried to disguise questioning its own beloved ABT data by adjusting ABT sales percentages. This action essentially is an admission that the DOR believe the ABT data is incorrect and it is unilaterally trying to correct the mistake. Again, that is inconsistent with the authorization to use the best available information.
In all of these cases, there are errors in the third party data being utilized. Motor vehicle dealers may have to invest time in finding the errors but they generally have the benefit of dealing with identifiable transactions. Convenience store owners are not afforded that luxury. In addition to facing the DOR prejudice that all of its industry apparently are liars, the DOR has chosen to use all kinds of assumptions to estimate audit findings and the associated tax due. The primary starting point involves ABT data which numerous previous audits have shown (and are showing) include erroneous purchase data. Yet, the DOR sticks its head in the sand and says that the information is right when my experience has shown the contrary. As such, you need to be prepared that when the DOR says it is using the best information available that truly means it is using the best information available for maximizing the audit assessment.
About the author: Mr. Parker is a sales and use tax attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A., based in the firm's Tampa office. Mr. Parker's practice includes state tax audits and controversies involving sales and use tax and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Parker received his law degree and L.L.M. in Taxation from the University of Florida. To learn more about Mr. Parker, please visit his firm bio.
ADDITIONAL RESOURCES
WHEN A CLOSED BUSINESS ISN'T CLOSED TO FL DOR, published September 26, 2014, by Matthew Parker, Esq.
FL DOR SALES TAX AUDITS - BEWARE OF ELECTRONIC RECORDS REQUESTS, published December 12, 2014, by Matthew Parker, Esq.
FL SALES TAX AUDITS ON USED CAR DEALERS - WHAT IS TAXABLE?, published July 22, 2014, by Matthew Parker, Esq.
TAMPA'S HYDE PARK CAFE - SALES TAX REVOCATION, published June 18, 2015, by James Sutton, CPA, Esq.