No business owner wants to hear that the Pennsylvania Department of Revenue believes you owe it taxes, interest and/or penalties. And while a tax assessment notice is certainly unpleasant, it may help ease your concern to learn about some of the issues around such assessments.
One such area is industry standards, which is when the state Department of Revenue assesses your sales tax on the average sales of other taxpayers in the same business or industry. For example, the department might decide to evaluate a number of convenience stores in a certain area of the state and determine the average sales and related sales tax paid by those businesses. Based on that data, the state will issue an assessment notice if it believes a taxpayer has under-reported its sales and sales tax and use tax (SUT) liability, according to experts. This often occurs when a taxpayer ignores a request for documentation or fails to provide enough or appropriate documentation to the Department of Revenue.
Using an “industry standard,” is problematic, financial authorities suggest, because determining an average, means some will, by definition, fall above and below the so-called standard. Another pitfall with the industry standard approach is that it makes several assumptions, including that the businesses used for the sample represent the overall industry and that the targeted taxpayer fits within a “standard mold,” explain experts.
A good example for comparison would be a large chain grocery store versus a small mom-and-pop specialty grocery store. The two stores will likely sell different products and will also differ in the number of products they sell that are taxable versus nontaxable. One would expect a small grocery store to specialize more in fresh foods and produce and therefore have lower taxable sales. A general grocery store that sells a higher volume of products of varying types including prepared foods and household items, would be expected to have higher taxable sales.
If a business owner or owners receive an assessment citing the industry standard, it is recommended he or she ask for as much detail as possible about the information surrounding the finding.
A second issue to be aware of is that being issued an assessment for SUT is often accompanied by an assessment of personal income tax or PIT. The rationale is such that if sales and sales tax were under-reported, then the owner or owners must have also under-reported their income.
Since these are two separate assessments and two completely different liabilities they must be appealed individually.
Previously, invoices showing that sales tax was charged would have been sufficient to prove that taxes were paid. However, currently, the Department of Revenue is more frequently issuing assessments for lack of documentation of payment—meaning, in the absence of a check or other proof of total payment of the bill, the claim that tax was correctly paid is not accepted by the taxing authority.
This is problematic for companies of all sizes, financial services professionals agree. While smaller businesses may not even think to maintain these kinds of records, larger enterprises retain too much information. The burden of producing such documentation, even if possible, would be extremely time-consuming. This puts business owners in a very difficult position.
Business owners should also be aware of concerns regarding proper withholding of taxes. An employer who fails to withhold the proper amount of taxes for an employee can be vulnerable to an assessment.
All business owners should be as well-informed as possible about these and other tax assessments. Please contact one of our tax experts at Diamond & Associates, PC, if you receive an assessment or have concerns about your tax reporting.