New Audit Procedures For Convenience Stores And Related Issues

1. New Audit Procedures For Convenience StoresAndRelated Issues

2. Sohail Ali Director, Sales Tax Group H R Shaikh, Seyar, LLP Tel: (713) 328-4041

3. WHY IS AN AUDIT ESTIMATED • ABSENCE OR UNRELIABLE SALES RECORDS i.e. Z-TAPES DO NOT MATCH REPORTED SALES. • INCOMPLETE / MISSING PURCHASE INVOICES • OR PURCHASE RECORDS NOT VERIFIABLE. • LACK OF INTERNAL CONTROLS

4. AUDIT ESTIMATION METHODS • BASED ON COMPLETE PURCHASE RECORDS PROVIDED MARKED UP = TOTAL SALES * 85% =TAXABLE SALES MINUS TAXABLE SALES REPORTED = ADDITIONAL TAXABLE SALES • Actual Sales 60,000 Taxable Sales 48,000 Reported 25,000 Under Reported 23,000 Tax 1,900 Tax For Audit Period - 48 mths 91,000 Tax Assessment with Penalty / Interest 162,000

5. AUDIT ESTIMATION METHODS • BASED ON BEER, CIGARETTE AND SODA TAKEN AT 70 % OF TOTAL SALES. BEER AND CIG SALES TIMES 1.42 = TOTAL SALES * 85% = TAXABLE SALES MINUS TAXABLE SALES REPORTED = ADDITIONAL TAXABLE SALES • Beer Sales 24,000 Cig Sales 18,000 Soda Sales 6,000 Total Beer, Cig & Soda Sales 48,000 Total Estimated Sales 69,000 Taxable Sales 56,000 Reported 25,000 Under Reported 31,000 Tax 2,500 Tax For Audit Period - 48 mths 120,000 Tax Assessment with Penalty / Interest 212,000

6. AUDIT ESTIMATION METHODS • BASED ON BEER AND CIGARETTE TAKEN AT 54% OF TOTAL SALES. BEER AND CIG SALES TIMES 1.85 = TOTAL SALES * 85% = TAXABLE SALES MINUS TAXABLE SALES REPORTED = ADDITIONAL TAXABLE SALES • Beer Sales 24,000 Cig Sales 18,000 Beer/Cig Sales 42,000 Total Estimated Sale 78,000 Taxable Sale 63,000 Reported 25,000 Under-Reported 38,000 Tax 3,000 Tax for Audit Period - 48 mths 144,000 Tax Assessment with Penalty/Interest 264,000

7. AUDIT ESTIMATION METHODS • BASED ON BEER TAKEN AT 27% OF TOTAL SALES– BEER SALES TIMES 3.7 = TOTAL SALES * 85 % = TAXABLE SALES MINUS TAXABLE SALES REPORTED = ADDITIONAL TAXABLE SALES. • Beer Sales 20,000 therefore Total Estimated Sales 89,000 Taxable Sales 72,000 Reported 25,000 Under-Reported 47,000 Tax 3,900 Tax For Audit Period - 48 mths 187,000 Tax Assessment with Penalty /Interest 328,000

9. PRODUCT MIX AS PER STATE ( AP 92 ) BEER 27% (100 / 27 = 3.70 ) CIGARETTE 27% (100 / 54 = 1.85 ) SODA 16% (100 / 70 = 1.42 ) CANDY 09% OTHER TAXABLE 06% TOTAL TAXABLE 85% NON TAXABLE 15% TOTAL SALES 100%

10. ACTUAL ESTIMATED AUDIT RESULTS AND SUBSEQUENT ADJUSTMENTS Example 1 Original Revised Beer Sales 26,000 22,000 Cig Sales 26,000 10,000 Soda Sales 16,000 5,400 Other Taxable 15,000 8,000 Non Tax 15,000 8,000 Total Sale 98,000 53,400 Tax Assessed 6,150 2,780 Audit period –months 47 47 Tax assessed – total 298,000 131,000 Penalty 174,000 79,000 Interest 39,000 17,000 Total 502,000 227,000 Settled For 150,000 Total reduction in audit 352,000

11. ACTUAL ESTIMATED AUDIT RESULTS AND SUBSEQUENT ADJUSTMENTS Example 2 Original Revised Beer Sales 34,000 27,000 Cig Sales 31,000 14,000 Soda Sales 19,000 5,500 Other Taxable 18,000 12,500 Non Tax 18,000 10,000 Total Sale 120,000 69,000 Tax Assessed 4,125 1,145 Audit period –months 48 48 Tax assessed – total 198,000 55,000 Penalty 119,000 5,500 Interest 37,000 11,500 Total 354,000 72,000 Settled For 72,000 Total reduction in audit 282,000

12. HB 11 BASED ASSESSMENTS • As a result of House Bill 11 Comptroller receives sales information from wholesalers and distributors of alcohol and tobacco products. Based on the information received it appears that taxable sales for this entity were under reported. Therefore we have estimated additional sales tax due……. • This assessment is not an audit. All exam periods are open to future audits….. • We encourage you to disclose all under reported taxes, otherwise ,you may be subject to an audit….

13. HOUSE BILL 11 ESTIMATES ASSESSMENT PERIOD - JANUARY 2008 THRU SEPTEMEBR 2008 BEER PURCHASE DATA FROM VENDOR 160,000 MARK UP AS PER AP 92 25% BEER SALES 200,000 CIGARETTE PURCHASE PER DATA FROM VENDOR 85,000 MARK UP AS PER AP92 17.65% CIGARETTE SALES 100,000 BEER AND CIGARETTE SALES 300,000 SALES TAX @ 8.25% 24,750 SALES TAX REPORTED 15,000 ADDITIONAL TAX DUE9,475

14. EXTRACT FROM SALES TAX POLICY/PROCEDURES MANUAL II.  FRAUD Definition The federal definition of fraud: "...implies bad faith, intentional wrong doing and a sinister motive. It is never imputed or presumed and the court should not sustain findings of fraud upon circumstances which at most create only suspicion." To successfully sustain the additional penalty due to fraud, it is necessary to establish, in detail, that the deficiency is due to a deliberate misrepresentation of facts by the taxpayer. There must be knowledge of the falsity or deception that reduces the tax liability. It must be the taxpayer's intention that the falsity or deception be acted upon as truth.

15. EXTRACT FROM SALES TAX POLICY/PROCEDURES MANUAL Civil Fraud versus Criminal Fraud “Under civil fraud, the penalty is limited to assessment of the additional 50% penalty. In criminal fraud cases fine and/or imprisonment may be imposed. The evidence requirements and referral procedures previously stated must be followed. The evidence to show fraud must meet the federal standard cited above..”