LIQUOR STORE OWNERS ARE BEING AUDITED BY THE FLORIDA DEPARTMENT OF REVENUE AT UNPRECIDENTED LEVELS. HERE IS THE REASON WHY…
If you own a liquor store (or convenience store) in Florida, then you have likely heard that an extremely high number of liquor store owners have been receiving disturbing notices from the Florida Department of Revenue ("FL DOR") starting around February of 2012. If you have heard this, then we can confirm that it is likely much broader of a concern than you realize. It is not uncommon for a small convenience store or liquor store to be facing $100,000 assessments - at least based on the FL DOR's estimates. And the scariest part is that it only takes a very small amount of collected but unremitted sales tax to become a felony in Florida, which includes jail time. [See link at bottom of this article about civil and criminal penalties in Florida sales and use tax law]. Effectively, the entire liquor store industry in Florida has a target on their back right now. Here is the reason why…
In 2011, without much fanfare, a new law went into effect in Florida requiring all wholesalers, manufacturers, and distributors of alcohol and tobacco to provide annual sales information to the FL DOR for sales to retailers of alcohol or tobacco in the state of Florida. What was not generally reported to the public was the level of detail the wholesalers and distributors were required to disclose. Effectively, these wholesalers were required to disclose their sales by type of product, by month, by retailer. If you are a retailer of alcohol or tobacco, then this should start to set off an alarm in the back of your mind. Now, the FL DOR knows exactly how much and what type of alcohol and tobacco each retail location is buying in the state of Florida. The next alarm that should be going off is just how easy it is for the Department of Revenue to compare what a retailer reports in monthly alcohol or tobacco sales on their sales tax returns to the reports coming from the wholesalers. [See the link to an article on the new wholesaler's law at the bottom of this article.] As of August 1, 2012, the FL DOR now has alcohol and tobacco wholesale information for both 2010 and 2011.
Since the start of July, our firm started seeing the aftermath of this new wholesale reporting law. We received several calls a week from companies that sell alcohol and tobacco products, particularly liquor stores and convenience store, that are literally being assaulted by the FL DOR. We have received reliable information that each of Florida's over 500 auditors has been assigned at least 1 alcohol and tobacco sales related case and some have several audits assigned to them. Additionally, there are a high number of desk audits being issued from the Tallahassee Service Center. The majority of the taxpayers have been convenience and liquor stores. As of December 2012, the FL DOR has reported to us that there are over 400 ongoing audits around the state and more than 200 more are going out each calendar quarter. So underreporting convenience store and liquor stores owners can no longer play the lottery simply hoping the audit notice will not come. The notice is coming. It may not happen in the next month, but it is coming. This article is meant to educate the liquor store owner (and their professional advisors) about the perils they face, how the FL DOR is comes up with their sales estimates, and how to handle the matter.
If a notice of audit has not been received and you have underreporting, then we strongly suggest going through a voluntary disclosure to come clean now with a friendly division of the FL DOR and have all penalties waived and greatly ensure that the situation does not turn criminal.
Various businesses are being contacted by different methods, each with their own unique perils. Some people are receiving a Form DR-840 Notice to Audit Books and Records, effectively a notice that they are about to be audited for Florida sales and use tax. Others are receiving a Form DR-846, Notice of Intent to Conduct a Limited Scope Audit or Self-Audit. Finally, and most disturbing of them all, a high number of liquor store owners are receiving a Form DR-1216 – Notice of Intent to Make Audit Changes, without ever having been audited. No business owner is happy when they are contacted by a state tax agency, but this last type of notice, the DR-1216, feels like an outright accusation of wrong doing with a demand for more money that most small business owners could not possibly afford to pay. Imagine opening your mail to find that the Florida Department of Revenue, without ever looking at your records, is going to assess in excess of $100,000 plus penalties and interest. I have yet to see a DR-1216 for less than $100,000 of assessed tax, and I've seen several claiming more than $300,000 due. Let's start with a discussion of each of these FL DOR Notices.
FORM DR-840 – NOTICE OF INTENT TO AUDIT BOOKS AND RECORDS
The Form DR-840 - Notice of Intent to Audit Books and Records is the standard method of auditing a business. The auditor will examine all areas of potentially taxable purchases and sales to determine whether addition tax is due. While this is the most typical type of audit performed by the state of Florida, the majority of the liquor store audits are not being handled this way. So we will not go into much detail herein. However, please feel free to contact our offices to discuss this type of audit if you have more questions.
FORM DR-846 – NOTICE OF INTENT TO CONDUCT A LIMITED SCOPE AUDIT OR SELF-AUDIT
The Form DR-846, Notice of Intent to Conduct a Limited Scope Audit or Self-Audit, is considered by the FL DOR a minor audit with a very limited focus of one type of transaction or one particular transaction. However, to a liquor store owner with almost 100% alcohol and tobacco sales, this is anything but a minor issue. The notice itself proclaims to be an effort "to ensure compliance with the tax law of Florida and to educate taxpayers about the tax law," while asking the taxpayer to admit very specific facts about purchases and sales of alcohol. In reality, the FL DOR is attempting to get you to admit your taxable sales are higher that what you reported. Most taxpayers are unaware that the FL DOR already has purchase information from the company's alcohol and tobacco vendors, so providing false information on this form is not only futile, but is very likely evidence of fraud. So liquor store owners could unwittingly be lining themselves up for criminal charges, if they have not already done so. Ideally, it is in the taxpayer's best interest to get a Florida Tax Attorney experienced in Florida sales and use tax or other professional involved at this stage. If done correctly, the Taxpayer may be able to avoid the next stage of the process and get the issue resolved accurately and much more cheaply if done at this stage.
FORM DR-1216 – NOTICE OF INTENT TO MAKE AUDIT CHANGES
The Form DR-1216, a Notice of Intent to Make Audit Changes that can be found here. The FL DOR is simply taking the alcohol and tobacco purchases for the company during the prior year and multiplying them by an estimated "mark-up." The so-called "mark-up" is based on industry national averages, with a complete disregard for the local market practices. The FL DOR will then take the purchases data reported from the wholesalers and multiply it against the national average mark-up for that type of product (e.g. beer, wine, liquor), to come up with a complete guess of a taxpayer's alcohol and tobacco sales prices for each type of product. Next, the DOR, based on industry averages, calculates the amount of sales that each product represents compared to total sales for that industry. With this completely invented sales price and estimate of what percentage of total sales are each type of product in hand, the DOR assumes that it knows a taxpayer's alcohol and tobacco sales for the period. We have found that these estimates contain mark ups that are much, much higher than our Florida retailers can get from customers, which results in dramatically higher sales numbers than the actual sales. Because the FL DOR is estimating taxes due based on estimated sales, you can see how this can be a real problem.
HOW TO HANDLE THESE CASES
There are a lot of serious flaws in the Florida Department of Revenue's logic in these cases. Each and every liquor store has its own story, its own sales mix, and its own mark-up percentages. To simply accuse a store owner of underreporting based on national averages is crossing the line. We have even found instances where wholesalers have double reported sales figures to certain retailers, which leaves the retail business owner with an enormous assessment in complete error. These cases are challengeable to say the least. Another interesting tidbit of information is that most of the FL DOR's purchase information provided by the wholesalers only goes back one year (two years after Aug. 1, 2012). So, for each particular case, there are a lot of holes to punch in the both the FL DOR's logic and the estimated amounts.
Normally, our comrades at the FL DOR are more careful before making such accusations. However, the FL DOR has received too many reports of substantial underreporting of sales tax receipts in the non-corporate owned liquor stores. So, in their minds, the FL DOR feels justified in being this aggressive. It is the honest (and not so honest) liquor store owner that now has to deal with the consequences.
We started hearing rumors as early as Spring 2012 that the criminal division was being brought on board for more than 400 cases with over $1,000,000 of allegedly under reported sales tax. It only takes $301 of underreported sales tax to become a 3rd degree felony in Florida and $20,001 to become a 2nd degree felony with a maximum sentence of up to 15 years in prison. If one crossed the $100,000 line of collected but unremitted Florida sales tax, then the one is looking at a 1st degree felony and up to 30 years in prison if convicted. The FL DOR will quickly threaten a taxpayer with these statutory statistics if they really think a business owner has been skimming sales tax. The FL DOR also has other weapons up their sleeve to use against a business owner, such as a legal action to remove the business owners sales and use tax registration certificate. [See link at the end of this article to an article discussing this tactic].
It is a mistake to try and take on FL DOR in these cases without the help of a very experienced Florida sales tax attorney or other professional to guide your business through the process. The stakes are just too high. While there are some serious civil tax risks at stake, there is also the potential for criminal liability. Even if a taxpayer ends up owing some taxes at the end of the day, we can help you negotiate a payment plan or potentially compromise some of the taxes Our lawyers, who also all have strong accounting backgrounds, are experienced in not only defending audits but only handle criminal defense in Florida sales and use tax matters. If you or a client of yours is has been contacted (or you fear being contacted) by the Florida Department of Revenue, then please call or email our offices today for a free initial (and confidential) consultation about your matter.
If you have not been contacted by the Florida Department of Revenue but you are worried that the audit notice is coming, then please contact our office about going through the voluntary disclosure program to work with a more friendly division of the FL DOR, eliminate penalties, minimize the impact of the crazy mark up estimates, and greatly lessen the chance of going through a criminal investigation.
Please also take note, while your accountant is a trusted advisor, there is no protection of confidentiality in criminal proceedings between an accountant and client. Such confidentiality only occurs when speaking with a Florida licensed attorney or an accountant working under an attorney with a Kovell Letter. We work with accountants around the state to assist client in criminal matters.
ABOUT THE AUTHOR: MR. SUTTON IS A FLORIDA LICENSED CPA AND ATTORNEY AND
A SHAREHOLDER IN THE LAW FIRM the Law Offices of Moffa, Sutton, &
Donnini, P.A. MR. SUTTON IS IN CHARGE OF THE TAMPA OFFICE FOR THE FIRM
AND HIS PRIMARY PRACTICE IS FLORIDA TAX CONTROVERSY. MR. SUTTON WORKED
FOR THE STATE AND LOCAL TAX DEPARTMENT OF A BIG FIVE ACCOUNTING FIRM FOR
A NUMBER OF YEARS AND HAS BEEN AN ADJUNCT PROFESSOR OF LAW AT STETSON
UNIVERSITY COLLEGE OF LAW SINCE 2002 TEACHING STATE AND LOCAL TAX, ACCOUNTING
FOR LAWYERS, AND FEDERAL INCOME TAX I. YOU CAN READ MORE ABOUT MR. SUTTON
IN HIS FIRM BIO.
About the author: Mr. Donnini is a Florida Attorney and an associate in
the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A., in
Fort Lauderdale, Florida. Mr. Donnini's primary practice is Florida
tax controversy with a heavy emphasis on the petroleum industry. Mr. Donnini
worked as an accountant for a public REIT prior going to law school and
is currently pursuing his LL.M. in Taxation at NYU.
AUTHORITY
§ 212.133, Florida Statutes ("F.S.")
ADDITIONAL RESOURCES
FL Tax Alert - Alcohol & Tobacco Retailers Beware, February 10, 2012, by James Sutton, CPA, Esq.
CRIPPLING PENALTIES UNDER FLORIDA SALES AND USE TAX LAW, July 19, 2012, by James Sutton, CPA, Esq.
FL DOR'S GREATEST WEAPON - REVOCATION OF DEALER'S SALES TAX CERTIFICATE, August 6, 2012, by Jerry Donnini, Esq.
FT. MYERS BUSINESS OWNER ARRESTED FOR FAILING TO REMIT ONLY $8,000 IN SALES TAX COLLECTED, August 11, 2012, by James Sutton, CPA, Esq.
© 2012 All rights reserved - the Law Offices of Moffa, Sutton, & Donnini, P.A.