Throughout my time both with the Florida Department of Revenue and after, I have seen that gas stations and convenience stores are a common target of Florida sales tax audits. As we are rapidly approaching almost ten years of this focus on this industry by the Department, I think it would be good to address the trend that I have seen with these convenience store and gas station sales tax audits.
As has been noted in many of our prior articles, the Department started getting wholesale information for gas stations and convenience stores’ alcohol and tobacco purchases from the Division of Business and Professional Regulation (DBPR). This gave Department auditors at least some information to use to “test” against the Florida sales and use tax returns filed for those businesses. And, like a sixteen year old with a new car, the Department took off full speed to see what it could do.
The Department considered the information as “gospel” and simply estimated taxable sales based on the wholesaler purchase totals and other statistics from an industry report. The Department rushed into the estimations with its new found power and simply put the burden on taxpayers to show how the estimation was wrong. Unfortunately, many taxpayers were unfamiliar with exactly what the Department was doing and the specific process for contesting the Department’s audit findings and were saddled with grossly overstated tax obligations.
For those that understood the process or engaged representation, the vast majority of the Department’s estimates were shown to include incorrect purchase information. Additionally, the Department’s “national averages” routinely were shown to simply inflate audit findings by using inapplicable sales ratios and mark-up percentages. The Department generally did not seem to be very familiar with the actual operations of the industry it was targeting for a significant number of audits (and ultimately re-audits).
After years of protested audits showing the Department’s estimation model was significantly over stating sales tax liabilities, the Department attempted to “correct” the situation by modifying its percentages. The initial changes were nominal and did not approach realistic numbers found in the operations of most gas station and convenience stores. The Department continued to resist understanding the actual operations of this industry and the factors it faced in pricing structures and through competition. The biggest disregarded fact was the emergence of WaWa into Florida. WaWa’s arrival in Florida generally coincided with Wal-Mart expanding their number of Super Centers. Both these chains have huge store numbers and operate on a level that affords them huge price discounts that did not result in an even playing field with individually owned gas stations and convenience stores.
Individual owned gas stations and convenience stores routinely were family run and had to rely on low margins – most prevalent through cigarette sales with prices dictated by the manufacturer. The Department did not realize that these locations regularly “survived” through the tobacco rebates along with commissions from lottery sales. These factors generally resulted in Department of Revenue sales tax auditors disbelieving reported exempt sales amounts. The sales tax audit adjustments for lottery and/or gas sales resulted in the Department commonly using a low sales percentage that multiplied estimated sales based on purchases. The audit findings, if not successfully corrected on protest, put many stations out of business and lowered business values for the individually owed gas stations and convenience stores.
Fast forward to today and the Department has again modified its estimation model. The Department has increased the sales percentage of ABT products (alcohol and tobacco) but did so at the expense of nontaxable sales percentage. The Department has also shifted the number of audits to “desk” auditors in Tallahassee instead of field auditors that visit the store. This procedure generally promotes estimates. “Desk” auditors mail out notices and information requests with limited phone calls and follow up to confirm receipt and understanding of requested information. If business owners don’t respond quick enough – or at all – the “desk” auditors commonly issue initial workpapers within 120 days of the audit notice. I have seen a number of workpapers issued to businesses around the sixty day mark. By statute, a business is afforded sixty days to prepare for the audit. Somehow, these audits were completed during the preparation period.
The danger I am now seeing with these audits is that auditors ask for records for a month or a couple months. In the spirit of cooperation, or simply trying to get an accurate audit, businesses are providing records to the Department as requested. However, the auditors are not fully understanding the information they receive from the audited businesses. The auditors seem to look at the information in the light most favorable to the Department. This typically results in overestimation yet again. Auditors don’t understand purchase discounts or sales by wholesalers resulting in large one time purchases that result in inventory that will last for weeks or months. The Department auditor then tries to reconcile actual records to ABT monthly totals and frequently “find” missing invoices when they think they have identified a purchasing pattern – again, based on limited records. All of this sets up for exaggerated additional tax due calculations (estimates) that go into an informal protest process where the business is guilty until it proves itself innocent.
What this history of Florida sales and use tax audits of gas stations and convenience stores has illustrated is the importance of having accurate information and knowing how to properly provide and note that information. Even correct information can be manipulated and misinterpreted by the Department to result in overstated tax liabilities. Adding penalty and interest to that can kill a business. As a result, it is imperative that you or your client knows about the audit process and provides the most relevant and least damaging information to result in accurate audit findings.
However, one also must consider that if the “accurate information” given to the sales tax auditor shows a deliberate and consistent under reporting of sales tax, then there is a substantial risk that the sales tax audit could turn into a criminal investigation. Considering that $20,000 of sales tax fraud has penalties of up to 15 years in jail, that leaves many business owners with a serious problem. How to you prove that the sales tax assessment should only be $20,000 instead of $150,000, without giving the Department of Revenue evidence that the business stole $20,000? Our firm handles the criminal side of sales tax and it is probably the most common reason so many accounts and CPAs trust our law firm to assist their convenience store and gas station clients with Florida sales tax audits. Our firm has handled hundreds gas station and convenience store Florida sales tax audits and protests as well as many that proceed to litigation for a proper resolution. We provide a free initial consultation that can help gas station and convenience store owners better understand what to expect from the audit process and how to start preparing for the audit or the protest process if the audit findings identify an overstated amount of additional tax due at an early point following the audit notice.
About the author: Mr. Parker is a Florida 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 accounting degree, law degree, and L.L.M. in Taxation from the University of Florida. You can read more about Mr. Parker on his firm bio.
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. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
If you want to learn more about Florida sales & use tax, then come to one of our dozens of seminars around the state. Click the following link to SEE OUR LIST OF FUTURE SPEAKING EVENTS!
Additional Articles
FL DOR Abuses Convenience Store Industry, published October 4, 2015, by James Sutton, CPA, Esq.
FL Tax Alert - ALCOHOL & TOBACCO RETAILERS BEWARE!, published February 10, 2012, by James Sutton, CPA, Esq.
Jacksonville Convenience Stores Get Sales Tax Audits, published August 6, 2018, by Matthew Parker, Esq.
FL TAX ALERT - CONVENIENCE STORE OWNERS TARGETED!!!!, published August 16, 2012, by James Sutton, CPA, Esq and Jerry Donnini, Esq.
Florida Sales Tax Audits - Common Industries Targeted, published November 9, 2018, by Steve Middle
FL Sales Tax - Like Texas, FL's DOAH Getting Flooded, published July 27, 2015, by Matthew Parker, Esq.
FL Tax – Voluntary Disclosure Can Be The Perfect Solution, published October 5, 2012, by Jerry Donnini, Esq.