In most states beer and cigarette distributors are required to report their sales to the state’s alcohol and tobacco division. There are numerous tax and licensing implications that demand these figures be reported to a state’s ABT agency. However, in most states, ABT does not share those invaluable sales reports with the state’s revenue agency. Over the last few years some states’ revenue agencies have found the value in these reports and pushed for changes in the law in order to require information sharing between the agencies.
For example, in 2011, Florida’s Department of Revenue got its law changed, which required the beer and cigarette wholesalers to report their sales to the Department of Revenue. While the change in the law affected few and interested even less taxpayers, the implications were substantial. The law requires the wholesalers and manufacturers to disclose their product sales by month to the Department of Revenue. For the first time in Florida history, the Department of Revenue had third party information that told them the quantity of beer and cigarettes being purchased by the retailers, namely the convenience store. Additionally, the Department of Revenue already has the amount of reported sales by month for each beer and cigarette retailer. The days of avoiding large audit assessments by dealing in cash and not depositing all sales into the bank were over.
In order to show the effect of this new law, consider a typical c-store in Florida. A typical c-store with easy numbers purchases about $30,000 a month in beer and cigarette items. Assuming that ABT items had an average mark-up of about 25%, c-stores sell about 49% ABT items, and that 85% of a c-store’s sales are taxable, the Department estimated that the same store had about $65,000/month in taxable sales. Assuming a 6% tax rate, that store should have been reporting about $4,000 per month in sales tax, or about $142,000 in tax during a three-year audit period. Assuming the same store actually reported $1,000 per month in tax, then it would owe over $100,000 in tax plus penalties on interest.
Putting the numbers aside, one can only imagine the look on a small convenience store owner’s face when they receive a bill for well over $100,000 without ever showing the Revenue agency a single record. For the larger stores and many of the liquor stores in Florida, the numbers were multiples of that $100,000 figure. It would also shock you to learn that several owners were reporting far less in total sales than even their beer and cigarette purchases.
Armed with this information, the Department sent out audit notices in force. It was reported that the Department was issuing in the neighborhood of about 200 new audits per quarter and assigning each of the state’s auditors at least one ABT case. Just by issuing audit notices, the Department reported that sales tax reporting from a company that received a notice magically increased by 67% in the following month. In the truly abusive cases, the Department pursued the cases from a criminal perspective.
Over the past two years, our firm has defended hundreds of these types of audits. With the success of revenue generation by Florida, many other states have followed suits and have come up with creative ways to get third party reporting to catch those who are trying to cheat the system.
It is important to keep your ear to the ground as your state could be next. It is equally important to know that, when a revenue agency sends a bill, there are people out there to help. It is a mistake to take on a state agency without a tax professional at your side. If you or a client of yours has been contacted by a state revenue agency please do not hesitate to call or email our offices today for a free consultation.
About the Author
Gerald Donnini is a Florida licensed attorney with the Law Firm of Moffa, Gainor, & Sutton, P.A. Donnini’s primary practice is Florida and multi-state tax controversy with a heavy emphasis on the petroleum and convenience store industry. Donnini also focuses on other state taxes, such as beverage and tobacco tax, reemployment tax, corporate income tax, property tax and motor fuel tax. Donnini can be reached at firstname.lastname@example.org or at 954–642-9390.