For about a decade, the Florida Department of Revenue has targeted convenience store owners in a blatant attempt to get this industry to pay up or else. This article will discuss what tactics can be expected from a Florida sales and use tax audit by the Florida Department of Revenue. Moreover, some helpful hints will be provided for fighting back against this unlawful attempt by the state.
About ten years ago, the Florida Department of Revenue had the bright idea to begin auditing convenience stores. Afterall, it seemed like a great opportunity for the state to target an entire industry that would simply pay whatever audit assessment was made. Since the oppression began, our firm has consistently fought back more than ever to protect these business owners from clear government overreach.
The Florida Department of Revenue had the law changed to get information directly from distributors. Specifically, the Florida Department of Revenue had the requirement passed of forcing distributors of alcoholic beverages and tobacco products to provide reports of alleged purchases by convenience stores. The Florida Department of Revenue, when determining whether to audit a convenience store, will take the alleged purchases, as reported by the distributors, apply the purchases to their self-serving calculation model, and always come up with a significantly higher number of alleged sales made by the convenience store. But how does the model actually work?
The model starts with the purchases the distributor reports. The Florida Department of Revenue will then plug those numbers into a spreadsheet. Using markups from just a few other audits, the Florida Department of Revenue will then calculate what it believes to be the amount of sales of these various categories of tobacco and alcoholic beverages. From here, the Florida Department of Revenue then assumes the amount calculated is only about seventy-four percent (74%) of the total sales made by the convenience store. The Florida Department of Revenue divides this calculated amount by seventy-four percent (74%) to get to the total estimated taxable sales for the audit period. From there, the Florida Department of Revenue compares this amount to the sales filed on the sales tax returns for the same period. Of course, the Florida Department of Revenue’s calculated numbers are always higher. Thus, the Florida Department of Revenue takes a “ratio” of the higher number the Florida Department of Revenue calculated divided by the total taxable sales on the sales tax returns. This ratio is then applied to the taxable sales for each month for the audit period to estimate the amount of taxable sales the Florida Department of Revenue believes there should have been. Following this calculation, the Florida Department of Revenue then uses an effective tax rate of its choosing to get to the estimated amount of sales tax due. From these estimated amount of sales tax calculated, the Florida Department of Revenue subtracts the sales tax remitted on the sales tax return for each month of the audit period. Thus, the Florida Department of Revenue is almost always able to calculate an under-reported amount of sales tax owed based on this model that is exceptionally favorable to the government.
The initial flaw is with the reports provided by the distributors. These reports are usually error-laden. Oftentimes, distributors will include purchases from another purchaser in the report of the subject convenience store owner. In other instances, there are simply blatant errors in the reports for purchases never made but that show up in the report. It would not be surprising to learn the Florida Department of Revenue takes these reports as fact with the burden on the business owner to prove a negative. Yes, that is correct. Business owners are required to prove something did not happen. If unable to do so, then the Florida Department of Revenue will assume the reports are accurate.
The next obvious flaw is markup percentages. The markups used by the Florida Department of Revenue are in exceptionally profitable areas. However, the markups do not account for highly competitive or low-income areas. Thus, the profit on sales will always be too high based on this issue. Following this, the steady constant of convenience stores having their alcoholic beverage and tobacco sales account for seventy-four (74%) of total taxable sales is unrealistic. For a lot of convenience stores, the alcoholic beverages and tobacco sales account for a higher percentage of total taxable sales. People frequently stop by to pick up a beer after work or cigarettes during a break.
Another avenue the Florida Department of Revenue’s model does not consider is spoilage, breakage, and theft. Assuming for a moment the purchase reports from the distributors are accurate, not everything purchased by a convenience store is resold despite being held out for resale. A lot of times, products will expire. The convenience store cannot sell expired products. Moreover, products also get damaged in transit or by staff or customers. Damaged products are purchased but cannot be sold. Likewise, convenience store owners experience a high amount of stolen products. These products are purchased but are never sold. Nonetheless, the Florida Department of Revenue holds this against convenience store owners by saying sales tax should have been collected on these events. What a ridiculous conclusion by the Florida Department of Revenue!
Another common explanation relating to the purchases is for purchasing groups. Let me explain. There may be a group of purchasers coming together to buy in bulk from a vendor. By doing so, all of the purchasers are able to obtain a cheaper price. However, the entity purchasing in bulk will get assessed by the Florida Department of Revenue for allegedly engaging in taxable sales of all of the items. Again, this explanation nullifies the assessment, if the Florida Department of Revenue were to listen.
What can you do to fight back? One thing is to provide records. It is easy for the Florida Department of Revenue to justify an assessment when nothing is provided. However, if you provide records and the records are ignored to calculate an assessment based on the above model, then that is exceptionally more challenging for the Florida Department of Revenue to defend. For instance, if your sales reported on federal tax returns for the audit period match the sales on the sales tax returns, then it is arguably unlawful for the Florida Department of Revenue to ignore your records just to make an assessment. However, this is exactly what happens in some circumstances!
Do not be afraid to hire competent legal counsel. For our clients, we fight vigorously against the Florida Department of Revenue to protect our client’s rights. You need to have someone in your corner who not only understands the law but has a clear game plan (and proven track records) of getting cases resolved.
In conclusion, it is imperative for convenience store owners to know and understand it is a matter of when and not if that the Florida Department of Revenue will audit their business. Knowing this ahead of time could allow the business to take steps now to mitigate exposure. Even if in the middle of an audit, having the knowledge of what to expect and how the Florida Department of Revenue runs these audits is an invaluable tool to maximizing your odds for a favorable resolution.
About the author: David Brennan is partner with Moffa, Sutton, & Donnini, P.A. His primary practice area is multistate tax controversy. David received a B.S. in Accounting and Finance, with a minor in Computer Science, from Florida State University. He worked as an accountant for a CPA firm before attending law school at Regent University. He received his Juris Doctor in 2013 and was licensed to practice law in Florida in the same year. In 2015, David earned his Masters of Laws in Taxation from Boston University. While working for the Florida Department of Revenue as a Senior Attorney, David focused on various sales and use tax issues. You can read his BIO HERE.
At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended Florida businesses against the Florida Department of Revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We represent taxpayers and business owners from the entire state of Florida. Contact us for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
AUTHORITY
Section 212.02, Florida Statutes – Definitions.
Section 212.05, Florida Statutes – Sales, storage, use tax.
ADDITIONAL RESOURCES
FLORIDA SALES TAX AUDITS PROCESS AND TRAPS, published March 4, 2023, by David J. Brennan, Jr., Esq.
2023 FLORIDA SALES TAX RATE ON COMMERCIAL RENT, published January 23, 2023, by James Sutton, CPA, Esq.
PHONE CALL FROM FLORIDA DEPARTMENT OF REVENUE: SALES TAX, published October 15, 2022, by Jeanette Moffa, Esq.
FLORIDA SALES TAX INFORMAL WRITTEN PROTEST, published November 17, 2018, by James Sutton, C.P.A., Esq.
FLORIDA SALES TAX - VOLUNTARY DISCLOSURE PROGRAM, published April 9, 2018, by Jeanette Moffa, Esq.