Understand and Minimize Risk of State Sales Tax Audit
Based on an anonymous tip and subsequent investigation, a central Florida businessman was arrested two years ago on Christmas Eve, handcuffed and taken to jail — not for murder or defrauding unsuspecting investors, but for state sales tax evasion. The man, state investigators alleged, had failed to pay sales tax on mobile homes he sold to dozens of buyers over a three-year period. By their calculations, he owed $250,000 in taxes and another $250,000 in penalties. For these transgressions, he was also looking at a maximum of 30 years in jail.
As it turned out, the man had actually paid a large amount of sales taxes on units he sold. His defense team, of which I was a part, determined that the state investigator had calculated the taxes without a clear understanding of the man’s industry and how units were sold. On closer examination, we found that the state lacked the evidence to support its claim. The matter was ultimately resolved in 2011 with the businessman paying $20,000 to the state in taxes and penalties, and receiving no jail time. However, without a diligent attorney and forensic examination, the case could have ended badly.
This matter illustrates two critical points for both taxpayers and the attorneys who represent them. States including Florida are aggressively enforcing tax compliance. Taxpayers must be vigilant in their efforts to comply with sales tax laws or they may be putting their businesses at risk. Nearly 22,000 Floridians were audited in fiscal year 2010/2011, and 4,500 of those were for state sales tax violations. This represented an increase over the previous fiscal year, when 19,961 Florida taxpayers were audited, 4,069 for sales tax violations. Each year about 1,000 people are arrested in Florida for tax violations, according to a spokesperson for the state’s Department of Revenue.
Secondly, sales tax calculations are often anything but straightforward. With a multitude of industries, products, services and calculations for determining the amount of sales tax owed, taxpayers, attorneys and even state investigators don’t always get it right.
While state tax audits may not receive as much attention in the media or even among professionals, in more than 30 years of practice, I have seen the number of state audits consistently outnumber Internal Revenue Service audits. As if the threat of an audit and potentially ruinous penalties were not enough, there is also risk of incarceration.
If your client owns a business, he or she may be at risk for a sales and use tax audit. Does the client purchase supplies for the business via the Internet or from out-of-state or international vendors?
Does the client manufacture a product? Because of the tax incentives offered to manufacturers, many believe they don’t have to be concerned about sales tax issues. However, manufacturers are subject to a long list of complex sales tax rules along with the tax incentives.
Does the client sell a service that is taxable under Florida law? Does the client sell items at retail or wholesale? The state also imposes sales taxes on purchases of certain services and tangible goods. Any retailer is subject to sales tax audit, particularly fast-growing ones.
The State of Florida imposes sales tax on most materials purchased for business, and in certain situations, levies sales tax on the cost of labor needed to make the product. If your client is audited, he could end up paying sales tax of up to 100 percent of its labor costs.
To protect your clients and your own business, immunize against the risk of an audit. As a first step, clients should be encouraged to educate themselves about Florida sales tax laws in order to converse effectively with you and their accounting professionals. However, even with basic knowledge, a client will likely not know whether his or her business is in compliance without a thorough review by a qualified accounting professional. Without it your client’s business and future may be at risk.
By STANLEY I. FOODMAN, CPA/CFE/CFF/CAMS
Foodman CPAs & Advisors
1201 Brickell Ave., Suite 610
Miami, FL 33131
South Florida Legal Guide 2012 Edition