Tax Type
Retail Sales and Use Tax
Description
Calculation of gross sales
Topic
Accounting Periods and Methods
Allocation and Apportionment
Date Issued
05-10-1982
May 10, 1982
Re: §58-1118 Application/Sales and Use Tax
Dear *****************
This letter is in response to your correspondence of July 31, 1981, an application for correction of your client's sales and use tax assessment dated May 27, 1981, which covers the audit period November, 1977 through October, 1980.
FACTS
The Department has held *********** liable for use tax on certain purchases and for sales tax on certain additional taxable sales.
This dealer is contesting the audit on the basis (1) that the removal of crushed car sales, an exempt transaction, from the sample period, used to determine the percentage of exempt sales, destroys the representativeness of the sample, and (2) that the Department's determination of gross sales is unfairly overstated since accounts receivables appear in the audit computation twice (once as a charge and then again on payment as a cash sale).
In reference to the crushed cars, the taxpayer maintains that once the sample period has been selected, it must be accepted as valid. He states that to adjust for a known variance destroys the validity. It is noted, however, that there were no crushed car sales in 1977 or 1978. Rather, these sales were isolated incidents first initiated in 1979 and occurring only in two months of the audit period, July of 1979 and September of 1980.
As to the amount of gross sales, the auditor reconstructed these sales from records that were incomplete and inadequate. The gross sales were reconstructed using the taxpayer's cash receipts journal and the accounts receivable ledger. The taxpayer was keeping his records on a cash basis accounting system; thus, charge sales were not reported when charged.
The taxpayer as an alternative method has calculated gross sales by a reconciliation of cash receipts, which ties to bank statements as well as federal tax returns. Once cash basis sales were established, the taxpayer converted this figure to an accepted accrual method by adjusting for the difference between beginning and ending accounts receivable.
DETERMINATION
As agreed to in your phone conversation with my staff member, on May 4, 1982, no hearing will be held in this instance. This letter will serve as a complete and final determination of your § 58-1118 application for correction submitted on behalf of your client,
After review of the calculation of gross sales, the Department has decided to accept your alternative method of figuring these sales via reconciliation of cash receipts to bank statements.
However, since crushed car sales were not first initiated until 1979 and occurred during only two months of the thirty-six month audit period, we believe the sample would be distorted if these items were spread over the entire audit. Accordingly, it is our determination that these items be removed from the sample period and be audited on a detailed basis as was done in the original audit.
The audit of your client's business has been adjusted to reflect this determination (See attached copy). In accordance with this audit, the assessment for sales and use tax and interest against your client will be revised.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner