Sampling in Sales and Use Tax and Gross Receipts Tax Audits

Dr. Yancey is the author of Statistical Sampling in Sales and Use Tax Audits, (CCH, 2002), http://onlinestore.cch.com/default.asp?ProductID=1898. Available in print and in the online CCH Tax Research Network.

Related Web pages:

• Data Mining
• Evidence and Expert Testimony
• Sales, Use, Excise and Transaction Taxes
• Sampling Design Issues in Sales and Use Tax Audits
• Sampling for Income Tax
• Sampling for Medicare and Other Claims
• Sampling for Sales and Use Tax Audits - Bibliography of Review Articles
• Sampling in Financial Audits and Internal Audits
• Sampling Theory
• Statistical Education and Software
• Statistical Evidence in Litigation
• Taxsites.com - State and Local Tax page
• Will Yancey's Home Page

This bibliography lists review articles, statutes, court decisions, and government agency documents on the application of sampling in sales and use tax audits. A few references are provided for applications other than sales and use tax.  Some of the references deal with the production of records needed to apply sampling.  This bibliography will be updated frequently.  Please e-mail your suggestions for additions and changes to will@willyancey.com

Disclaimer: Inclusion in this list does not imply the reference is or was a reliable authority or relevant to any particular set of facts.  Omission from this list does not imply the item was not reliable.

Acknowledgments:  Suggestions of numerous tax professionals are greatly appreciated.  Particularly appreciated are citations provided by Lee Zoeller, Mark Sommer, Neil Pomerantz, Ted Bernert, and Bill Backstrom.  All errors are my own responsibility.

Review Articles

• Review articles on sampling in sales and use tax audits, see www.willyancey.com/sampling-sut-review.html
• Sampling evidence in litigation, see www.willyancey.com/statistical_evidence.htm
• Sampling in financial audits and internal audits, see www.willyancey.com/sampling-financial.htm
• Sampling in income tax, see www.willyancey.com/sampling-income-tax.html
  
• Sampling in other types of audits, see www.willyancey.com/statistical_evidence.htm#audits
• Statistical sampling in general, see www.willyancey.com/statistics.htm

Alabama

Statutes

• Section 40-2A-7(a), www.ador.state.al.us/salestax/Lawbook/402a7.html, Maintenance of records, audit and subpoena authority, authority to issue regulations.

Rules

• Alabama Department of Revenue, Sales, Use & Business Tax Division, Rule 810-6-4-.10,  www.ador.state.al.us/salestax/Rules/6410.html.  Keeping Records of Sales for Resale, (Formerly Regulation L).
• Alabama Department of Revenue, Sales, Use & Business Tax Division, Rule 810-27-1-7-.01,  www.ador.state.al.us/salestax/Rules/2717_01.html.  Multistate Taxpayers: Recordkeeping a Sales, Use, or Rental Tax Transaction.

Administrative Law Judge Decisions

• Central Alabama Home Equipment Company, Inc., Department of Revenue, Administrative Law Division, Docket No. S. 93-367, CCH-STATE-CASE-TAX-CT, AL-TAXRPTR ¶200-392, (December 14, 1994).  The taxpayer failed to file sales or lease tax returns during the period in issue.  The parties agreed that because of the taxpayer's voluminous records, the Department could conduct the audit using a sample period from January through June 1991. The taxpayer did not dispute the Department's audit method.
• Escambia Glass Company, Inc., Department of Revenue, Administrative Law Division Dockets No. 84-110, 84-111, CCH-ADMN-RUL, AL-TAXRPTR, ¶19990715010,  www.ador.state.al.us/aljrules/84-110.pdf  (September 4, 1984).  The auditor obtained a sample of 25 sales and used a mark-up method to estimate a total for approximately 6,000 sales.  Taxpayer argued that the sample was too small, and the gross profit margin in the sample was not representative.  The administrative law judge held the taxpayer had not presented sufficient evidence to overturn the auditor's estimate of the gross profit margin.
• Pelican Pub and Raw Bar, Department of Revenue, Administrative Law Division Docket No. S-00-286 (December 15, 2000).  When taxpayer fails to keep adequate records, the auditor may use the purchase mark-up method to estimate the sales and use tax liability.
• Joey C. Moore, d/b/a The Frosty, Department of Revenue, Administrative Law Division Docket No. S-99-126,  www.ador.state.al.us/aljrules/99-126.pdf (August 19, 1999).  The auditor marked up the purchases of a restaurant to estimate its taxable sales.  The administrative law judge ruled the department is authorized to use the best available information when the taxpayer does not present adequate records.
• Susan's Restaurant,a partnership composed of Fred and Ethlene Marler v. State of Alabama Department of Revenue, Administrative Law Division, Docket No. S. 91-201, CCH-STATE-CASE-TAX-CT, AL-TAXRPTR, ¶ 19981028093, (July 1, 1992). The Department has not proved fraud in this case. The Taxpayers' failure to keep good records does not by itself prove fraud. Also, if the Taxpayers had intended to evade tax, they would not have turned over both daily tapes to their accountant where the fraud could be discovered in a routine audit. There is also no evidence that the accountant conspired with the Taxpayers to defraud the State or even that only one of the two daily tapes was reported on the monthly returns. While the audit was properly conducted, the Department has failed to prove fraud by clear and convincing evidence and therefore all tax prior to February 14, 1988 is barred by the three year statute of limitations. The assessment. should be reduced and made final to include only tax due for the period February 14, 1988 through June 30, 1988, plus applicable interest.

Court Cases

• State of Alabama v. Levey, 248 Ala. 656, 29 So.2d 129 (Alabama Supreme Court, 1946).  Court ruled in favor of taxpayer where records lacked some details.  The issue there was whether the taxpayer could support its claim that certain sales it had made were at wholesale as opposed to retail and therefore exempt from the sales tax. In those instances where the taxpayers' books were at least sufficient to constitute a "semblance of a record" of the exempt wholesale sales, the Supreme Court upheld the trial court's decree which struck the State's assessment.
• State of Alabama v. T. R. Miller Mill Co., 272 Ala. 135, 130 So.2d 185, (Alabama Supreme Court, 1961).  Court held the tax auditor is not required to accept verbal assertions of the taxpayer.  Where the taxpayer does not have accurate records, the auditor may estimate a deficiency and assess.
• State of Alabama v. Mims, 249 Ala. 217, 30 So.2d 673 (Alabama Supreme Court, 1947).  While acknowledging the exacting nature of the statutory provisions as to sales tax records, the court refused to reverse the trial court's decision in favor of the taxpayer.
• State of Alabama v. Wheeler Ludlam, d/b/a Wheeler's Nursery, 384 So.2d 1089, (Court of Civil Appeals of Alabama, February 13, 1980).  Two of three appellate court judges held the taxpayer's accountant had provided appropriate alternative estimates for periods where the taxpayer had no adequate records.  One judge dissented and held that the taxpayer had not presented sufficient evidence to overcome the prima facie correctness of the state's assessment.

Alaska

• Underwood v. Fairbanks North Star Borough, 174 P.2d 785 (Alaska, 1983).  Court allowed a sales tax audit assessment on the basis of a statistical sample.   The court decided that auditors would not be forced to bear the cost of examining every single record of the taxpayer instead of  auditing with a valid sampling method.

Arizona

Statutes

• Revised Statutes section 42-1105, Taxpayer identification, verification and records; retention, CCH-STATE-LAW, AZ-TAXRPTR ¶92-640, www.azleg.state.az.us/ars/42/01105.htm     Taxpayers shall keep and preserve suitable records and other books and accounts necessary to determine tax liability. The books, records and accounts shall be open for inspection at any reasonable time by the department or its authorized agent.
• Revised Statutes section 42-1108, Audit deficiency assessments, CCH-STATE-LAW, AZ-TAXRPTR ¶92-643, www.azleg.state.az.us/ars/42/01108.htm
• Section 42-1108 subsection A, If the department conducts an examination of the taxpayer's books and record, it may use a detailed review of transactions or records or a statistically valid sampling method.
• Although 42-1108 subsection C was amended, effective January 1, 2001, subsection A was not.
• Revised Statutes section 42-1118, Refunds, credits, offsets and abatements, CCH-STATE-LAW, AZ-TAXRPTR ¶92-653,  www.azleg.state.az.us/ars/42/01118.htm    Describes evidence required for credits and refunds.

City Tax Codes

• Arizona Revised Statutes, Title 42, Chapter 6, www.azleg.state.az.us/ars/42/title42.htm .
• Section 42-6002.  Procedures for collecting and enforcing local taxes shall be in the same manner as state transaction and excise taxes.
• Sections 42-6051 to 42-6055, Model City Tax Code.
• Model City Tax Code section 555 (d). The Tax Collector may use any generally accepted auditing procedures, including sampling techniques, to determine the correct tax liability of any taxpayer. The Tax Collector shall ensure that the procedures used are in accordance with generally accepted auditing standards.
• City of Phoenix Tax Code section 14-555, CCH-STATE-LAW, AZ-TAXRPTR ¶96-135, www.ci.phoenix.az.us/PLT/artv.html#bm14555.
• Section 14-555(d). The Tax Collector may use any generally accepted auditing procedures, including sampling techniques, to determine the correct tax liability of any taxpayer.  The Tax Collector shall ensure that the procedures used are in accordance with generally accepted auditing standards.
• Section 14-555(e). The fact that the taxpayer has not maintained or provided such books and records which the Tax Collector considers necessary to determine the tax liability of any person does not preclude the Tax Collector from making any assessment. In such cases, the Tax Collector is authorized to use estimates, projections, or samplings, to determine the correct tax.
• City of Tucson, Business License and Privilege Tax Code, Chapter 19, CCH-STATE-LAW, AZ-TAXRPTR ¶96-298,  www.ci.tucson.az.us/finance/ .
• Section 19-555(d).  The Tax Collector may use any generally accepted auditing standards or procedures.

Department of Revenue Publications

• Taxpayer Bill of Rights, http://www.revenue.state.az.us/brochure/001.pdf

Cases

• Arizona Public Service Company v. City of Phoenix, 716 P.2d 430, 149 Ariz. 61, 2 CA-CIV 5561, CCH-STATE-CASE-APP-CT, 56--89 AZ-TAXRPTR-TB ¶200-695, (Arizona Court of Appeals, January 29, 1986).  Appeals court declined to review the propriety of the City's audit sampling technique because the trial court did not base its decision on that evidence.
• Arizona Department of Revenue v. Canyoneers, Inc. et al, 23 P3d 684, 1 CA-TX 00-0016; 1 CA-TX 00-0017; 1 CA-TX 00-0018; 1 CA-TX 00-0019 (Consolidated), (Arizona Court of Appeals, Division 1, Department T, May 17, 2001).  Taxpayers that paid the the transaction privilege tax (essentially a sales tax) were not required to pass refunds on to their customers, because in Arizona the incidence of the tax is on the seller, not the buyer.
• City of Phoenix v. Paper Distributors of Arizona, Inc., 861 P2d 701, No. TX 93-00068, CCH-STATE-CASE-TAX-CT, AZ-TAXRPTR ¶400-060,  (Arizona Tax Court, October 20, 1993).  Because the Tax Court found for the taxpayer on the issue of the taxability of the paper product sales, it did not consider the second issue raised by taxpayer relating to the City's audit sampling methodology.
• Goldfields American/ARC Corp. v. Arizona Department of Revenue, BTA Division 2, Docket No. 724-90-S(2), CCH-STATE-CASE-TAX-CT, 89--92 AZ-TAXRPTR-TB ¶200-978, (Arizona Board of Tax Appeals, Division Two, Feb. 28, 1991).  The Department of Revenue correctly applied a block sample method in a sales tax audit of a taxpayer. The taxpayer had agreed to the Department's use of a randomly selected four month block sample. In applying the block sample method, the Department extrapolated two of the taxpayer's errors, involving the taxpayer's failure to pay tax on sales to a church and a county, over the entire 45 month audit period. Because the taxpayer had made similar errors 12 times during the audit period, the block sample was reasonably representative of the taxpayer's transactions over the course of that period. Also, the taxpayer had voluntarily agreed to the Department's use of the block sample method. Therefore, the block sample method was correctly applied.
• Prime Refrigeration, Inc. v. Arizona Department of Revenue, Arizona State Board of Tax Appeals, No. 1641-96-S, CCH-STATE-CASE-TAX-CT, AZ-TAXRPTR ¶400-581, (April 7, 1998).  Held that although statute A.R.S. §42-117(A) authorizes either detail examination of all records or a statistically valid method, the taxpayer and the Department may agree to use block sampling.  Held that taxpayer had agreed to a block sample, and taxpayer did not provide compelling evidence that assessment was not valid.

Arkansas

Statutes

• Code Section 26-18-305, CCH-STATE-LAW, AR-TAXRPTR ¶96-021. As amended by Acts 1999, No. 1277, section 1 (House Bill 1626), effective July 30, 1999. Examinations and investigations.
• Section 26-18-305(a)(2)(A). The director may employ proper and reasonable audit methods as he deems necessary, including the use of sampling.
• Section 26-18-305(a)(2)(B). If sampling is to be employed as an audit method, the taxpayer's consent to the sampling technique must be obtained at the commencement of the audit.
• Code Section 26-18-401. Authority to audit and assess taxes.

Regulations

• Arkansas Regulation GR-78, CCH-STATE-REG, AR-TAXRPTR ¶65-390.  Taxpayer must keep accurate and complete records which reflect the amount of cash sales and credit sales. These records must show collections on accounts and be open for inspection and audit by the Commissioner of Revenues or his agents.

Cases

• Theodore Jones v. Charles D. Ragland and the Arkansas Department of Finance and Administration, 293 Ark. 320, 737 S.W.2d 641, CCH-STATE-CASE-HIGH-CT, 87--97 AR-TAXRPTR-TB ¶400-010, (Arkansas Supreme Court, Oct. 19, 1987).  Court held taxpayer who failed to keep adequate business records was liable for tax on the basis of an estimate of his income and sales from his auto salvage business.  Taxpayer claimed the Department's methods for computing the estimated tax assessments were unreasonable. The Department based the sales tax assessment on the monthly gross sales figure of $2400. The Department reached this figure by determining the taxable sales shown in the ticket books which was $800. Another $800 was added for sales for resales which were wrongfully claimed as exempt. Since one half of the ticket book pages were missing, another $800 was added to cover any unreported sales.  The state's only explanation for the unreported sales was, "... we just sort of estimated and used the Eight Hundred Dollar figure, which made the total then Twenty Four Hundred Dollars per month." Since this assessment was clearly arbitrary, the Supreme Court reduced the basis for the assessment from $2400 to $1600 per month.

California

California Revenue and Taxation Code

• Sec. 6481, Authority to use any information in its possession.
  
• Sec. 7051, Authority of board to adopt rules and regulations.
• Sec. 7054, Authority of board to examine records.
• Sec. 7076.1 - 7076.7,  Managed Audit Program.  (extension enacted in July 2003)
  
• Sec. 7085.  BOE required to prepare an annual report on areas of recurring taxpayer noncompliance based on samples of examined taxpayers.
• Sec. 7086  Rights and obligations of board and taxpayers.

State Board of Equalization Regulations

• Reg. 1602.5. Reporting Methods for Grocers,  www.boe.ca.gov/pdf/reg1602-5.pdf .   Markup factor percentages applicable to taxable merchandise should be determined by a shelf test sample of representative purchases, covering a minimum purchasing cycle of one month within a three year period, segregated by commodity groupings, i.e., beer, wine, carbonated beverages, tobacco and related products, paper products, pet food, soap, detergents, etc. The markup factor percentages determined for commodity groupings should be applied to the cost of sales of the respective commodities for the reporting period to determine taxable sales.
• Reg. 1668, Resale Certificates,  www.boe.ca.gov/pdf/reg1668.pdf   Requirements for resale certificates.  Appendix A is a template for a California resale certificate.
  
• Reg. 1698, Records, www.boe.ca.gov/pdf/reg1698.pdf Definition of records required to be produced by taxpayer.
• Reg. 1698.5, Audit Procedures, revisions approved November 17, 2009. www.boe.ca.gov/sutax/staxregs.htm
• Reg. 1705, Use Tax Reporting Methodology, www.boe.ca.gov/pdf/reg1705.pdf Establishes procedures for managed compliance agreements for use tax.
• Reg. 1807, Process for Reviewing Local Tax Reallocation Inquiries, www.boe.ca.gov/pdf/reg1807.pdf
• Reg. 1828, Process for Reviewing Sales and Use Tax Distribution Inquiries, www.boe.ca.gov/pdf/reg1828.pdf
  
• Reg. 5080, Burden of Proof

State Board of Equalization Sales and Use Tax Audit Manual 

• Chapter 1, Introduction, (revised January 2000), www.boe.ca.gov/pdf/fam-01.pdf
• Chapter 2, Preparation of Field Audit Reports, (revised January 2000), www.boe.ca.gov/pdf/fam-02.pdf
• Section 0216.21, Sampling for Refund Claims. Allows taxpayers to submit refund claims using sampling procedures outlined in Audit Manual chapters 4 or 13.
• Chapter 3, Audit Working Papers, (revised January 2000), www.boe.ca.gov/pdf/fam-03.pdf
• Chapter 4, General Audit Procedure, (revised June 2000), www.boe.ca.gov/pdf/fam-04.pdf
• Section 0405.20, Use of Test Basis.  Describes nonstatistical sampling with a time period block sample.
• Chapter 13, Statistical Sampling, (revised January 2000), www.boe.ca.gov/pdf/fam-13.pdf     (Significant revisions to this chapter were approved by the Board's Business Taxes Committee on January 4, 2000, and November 28, 2001.  The minutes of the November 28 meeting are online at www.boe.ca.gov/meetings/pdf/112801.pdf .)
• Section 1302.25(f) (revised November 28, 2001).  Treatment of Credit Invoices, Credit Memos, Debit Memos, and Related Transactions.  Provides several alternatives methods for treating negative amounts in transaction data files.
• Section 1304.15 (revised November 28. 2001).  Evaluation of a Stratified Random Sample.  For a stratified random sample, the BOE's Computer Audit Specialists will compute the confidence interval by combining the results from all strata.
• Section 1308.05 (revised November 28, 2001).   Minimum Number of Errors.  At least three errors per stratum are required for a projection or estimate of the errors in the sample to the population.

State Board of Equalization publications

• Publication 17, Appeals Procedures Sales and Use Taxes and Special Audits, www.boe.ca.gov/pdf/pub17.pdf
• Publication 53, Guide to the Managed Audit Program, www.boe.ca.gov/pdf/pub53.pdf
  
• Publication 70, The California Taxpayers' Bill of Rights, www.boe.ca.gov/pdf/pub70.pdf
• Publication 76, Audits, www.boe.ca.gov/pdf/pub76.pdf
• Publication 110, California Use Tax Basics, www.boe.ca.gov/pdf/pub110.pdf
  
• Publication 116, Sales and Use Tax Records, www.boe.ca.gov/pdf/pub116.pdf
  
• Operations Memo 1067, Managed Audit Program, (November 19, 1998).
• Sales and Use Tax Advanced Auditing Instructor's Guide (revised draft September 1999).

Cases - Sales, Use, and Excise Tax

• AB Cellular-LA, LLC v. City of Los Angles, 2003 Cal. App. Unpub. LEXIS 5502, 2003 WL 21290906, (Cal. Appeals - 2nd District, unpublished, June 5, 2003).   AB Cellular, doing business as AT&T Wireless,  asserted it could not accurately collect a City tax on cellular telephone customers because the City did not provide an adequate address database of customers residing in the City.  Cellular provided specific evidence of how it repeatedly attempted to get an accurate database from the City.  City auditor determined assessment by sampling 6,500 bills from one billing cycle within one month of audit period.  Trial court ruled in favor of the city.  Appellate court overturned and ruled in favor of the taxpayer.
  
• Associated Beverage Company, Inc. v. Board of Equalization, 224 Cal. App.3d 192, 273 Cal. Rptr. 639, CCH-STATE-CASE-APP-CT, 91--92 CA-TAXRPTR-TB ¶401-854, (Cal. Appeals, September 28, 1990). Court denied refund claim when a sample of bottler's sales found customers had not provided resales certificates.
• Delta Air Lines, Inc. v. State Board of Equalization , 214 Cal. App.3d 518, 262 Cal.Rptr. 803, CCH-STATE-CASE-APP-CT, 86--90 CA-TAXRPTR-TB ¶401-776, (Cal. Appeals - 2nd District, modified October 27, 1989). Court affirmed State Board of Equalization's method of determining amount of airline fuel used in interstate commerce exempt from California tax.
• Giraux, Ltd. Case No. 16494, (Board of Equalization, September 8, 2004).  Giraux, Ltd is an old-line, respected jewelry store in San Francisco. At issue was whether the staff had expanded the sample audit correctly. Attorney Joe Vinatieri, representing the taxpayer, said the staff, contrary to the audit manual, projected the error on a $42,800 sale of an item into an error rate for all other sales which caused an error rate of 11 percent instead of 5 percent. He said the sale was not representative and its error percentage should not be applied to total gross receipts. He cited statistics that showed that the business had only 13 invoices out of 8,500 in 1997 where the price was in excess of $40,000. He said 93 percent of the invoices were for items selling for $5,000 for less. BOE attorney Sharon Jarvis argued the sale was representative and BOE attorney Kevin Hanks said the store had sold items more expensive than $42,000. The board on a 3-2 vote agreed with the taxpayer position that the item in question should not be used to factor up the error rate for all other items, but should be added as a single item when computing the additional tax due.
  
• Maganini v. Quinn, 99 Cal. App.2d 1, 221 P.2d 241, STATE-CASE-APP-CT, 48--54 CA-TAXRPTR-TB ¶200-100, (Cal. Appeals - 3rd District, 1950). Court held that State Board of Equalization's assessment based on estimation could only be overcome by a preponderance of evidence from the taxpayer.
• People v. Schwartz, 31 Cal.2d 59, 187 P.2d 12, CCH-STATE-CASE-HIGH-CT, PEOPLE v. SCHWARTZ, (California Supreme Court, December 5, 1947). Court held taxpayer had burden of proving State Board of Equalization's deficiency determination is incorrect, but also of producing evidence from which another and proper determination may be made.
• Renovizor's Inc. v. State Board of Equalization, No. 99-15827, (US 9th Circuit, March 14, 2002).   The US Circuit Court of Appeals heard an appeal in a bankruptcy case and held that clear and convincing evidence is required to establish civil tax fraud under California law.  The State Board of Equalization audited the taxpayer for sales and use tax and found inadequate records.  The dispute focused on the adequacy of the sales tax auditor's audit workpapers to meet the "clear and convincing evidence" or "preponderance of evidence" standard of proof for asserting the tax fraud penalty.
• Riley B's Inc. v. State Board of Equalization, 61 Cal. App.3d 610, 132 Cal. Rptr. 520, CCH-STATE-CASE-APP-CT, 71--78 CA-TAXRPTR-TB ¶205-524, CCH-STATE-CASE-APP-CT, 71--78 CA-TAXRPTR-TB ¶205-524, (Cal. Appeals - 2nd District, 1976). Court held that State Board of Equalization could examine taxpayer's original transaction records in addition to its summary books of account.
• Sears, Roebuck and Co. v. City of Inglewood, (Los Angeles Superior Court, 1955), case discussed in R. Clay Sprowls, "The Admissibility of Sample Data Into a Court of Law," 4 UCLA Law Review 222 (1957).

Cases - Property Tax

• American Airlines, Inc., et al. v. San Mateo County , (California Supreme Court, April 8, 1996), No. S044279, CCH CA-TAXRPTR ¶402-835.  Court ruled in a personal property tax valuation case that taxpayers had to prove their property assessment-to-value ratio was significantly higher than other taxpayers.
• Glidden Company v. County of Alameda, (Cal. Appeals - 1st District, 1970), 5 CA3d 371, 85 Cal. Rptr. 88, CCH 66--71 CA-TAXRPTR-TB ¶204-292.  Court held that the evidence presented by the company failed to establish that the assessment of its personal property was improper and not equitable.
• Schwarz, Milton F. et al. v. County of Marin et al., (Cal. Appeals - 1st District, 1969), 271 CA2d 120, 76 CRptr 207, CCH 66--71 CA-TAXRPTR-TB ¶204-048.  Court ruled in a real property tax valuation case that taxpayers had to prove their property assessment-to-value ratio was significantly higher than other taxpayers.
• Web Service Co., Inc. v. County of Los Angeles, (Cal. Appeals - 2nd District, 1966), 242 CA2d 1, 51 CRptr 753, CCH 62--66 CA-TAXRPTR-TB ¶203-339.   Court held that the evidence presented by the company failed to establish that the assessment of its personal property was improper and not equitable.

Cases - Income Tax

• Appeal of W. R. and Emma Farlow, (California State Board of Equalization, April 7, 1964), SBE-XII-221, 64-SBE-040, CCH 62--66 CA-TAXRPTR-TB ¶202-422.  Board of Equalization ruled that the Franchise Tax Board had reasonably used sampling to estimate the amount of unreported illegal gambling income.
• Appeals of Roberto and Maria Munoz, Chow Yeekung and Luke Ying Saechow, George I. and Jennie Papan, Wolfgang Grahl, and Charles Langeweg , (California State Board of Equalization, June 25, 1985), SBE-XXXV-191, 85-SBE-064, CCH 84--86 CA-TAXRPTR-TB ¶401-107.   Board of Equalization ruled that the Franchise Tax Board had reasonably used sampling to estimate the amount of unreported restaurant tip income.

Chicago

City Ordinances

Online at http://livepublish.municode.com/LivePublish/newonlinecodes.asp?infobase=13322

• Code of Ordinances 3-4-150  General powers of the Department of Revenue and Finance.  The department is authorized to examine the books and records of any taxpayer or tax collector during business hours of the day to verify the accuracy of any return made or, if no return was made, then to ascertain and assess the tax imposed by any tax ordinance.  Any tax determination and assessment by the Department shall be deemed prima facie correct and the burden shall be on the person assessed to prove the contrary.
• Code of Ordinances  3-4-180  Duty to produce documents.  If the taxpayer or tax collector fails to provide the documents requested by the Department within the time so provided, then (1) the director may issue a tax determination and assessment based on the best estimate of the person's tax liability, or (2) the director may issue a subpoena requiring the attendance of any person having personal knowledge of any relevant facts and may issue subpoenas duces tecumfor the production of books, records, papers or memoranda.

Department of Revenue publications

• Determining Sampling Methods, www.cityofchicago.org/Revenue/Tax/Audit/SamplingMethods.html
• Audit Method Election Form, www.cityofchicago.org/Revenue/Tax/Audit/AuditForm.html

Colorado

Statutes

• Colorado Taxpayer's Bill of Rights, www.revenue.state.co.us/TAC_dir/statement_of_rights.htm
• C.R.S. 39-21-103
• C.R.S. 39-21-112

Rulings

• Colorado Department of Revenue, Ruling # 62 Reference: DD-427, CCH-CO-ADMN-RUL, # 62 Reference: DD-427  (undated).  Held Department of Revenue was authorized to perform statistical audit of sales and regional transit district (RTD) tax.  The department used stratified random sampling, difference estimation, and a 95 percent confidence interval.

Publications and Releases

• The Department of Revenue responded to a question posed at an Annual Liaison Meeting on November 18, 1999 with the CPA Society and Colorado Bar Association that it did not plan at that time to make available information concerning audit procedures and requirements, including sampling methods, via the Department's Web site.

Connecticut

Review Articles

• Gavin, Gene, "Connecticut's Innovative Managed Compliance Program Benefits Taxpayers and the State," Journal of Multistate Taxation and Incentives 16 (August 2000).

Public Acts and Statutes

• 1999 Conn. Public Act No. 173, §§ 60-62, as amended by 1999 Conn. Pub. Acts 1, §42 (June Special Session), www.cga.state.ct.us/ps99/act/pa/p\a173.htm
• Sec. 60, Definitions for managed audit and managed compliance.
• Sec. 61, Authorizes managed compliance agreements.
• Sec. 62, Authorizes managed audit agreements.
• Statute 12-39m, Posting of bond by taxpayer objecting to an assessment, www.cga.state.ct.us/ps99/pubstat/12--00--0039--mk.doc
• Statute 12-415, Deficiency assessments, www.cga.state.ct.us/ps99/pubstat/12--00--0415---k.doc
• Statute 12-415(1) Commissioner may make deficiency assessments based on available information.
• Statute 12-415(3) Commissioner may offset overpayments against underpayments.
• Statute 12-416, Assessments if no return made, www.cga.state.ct.us/ps99/pubstat/12--00--0416---k.doc
• Statute 12-426, Administration of audit function, www.cga.state.ct.us/ps99/pubstat/12--00--0426---k.doc
• Statute 12-426(1) Authority to adopt and enforce regulations to enforce collection
• Statute 12-426(3) Taxpayers required to keep records in required form
• Statute 12-426(4) Authorized to examine records
• Statute 12-426(5) Reports required to determine use tax liability

Department of Revenue Publications and Statements

• Information Publication 2001(8), Connecticut Managed Compliance Program, (May 2001).   Describes procedures for managed audit agreements, managed compliance agreements, and direct payment permits.
• Policy Statement 93(4), New Audit Examination Policy for Retail Transactions, CCH-ADMN-RUL, CT-TAXRPTR ¶350-032, http://www.ct.gov/drs/cwp/view.asp?a=1511&q=267256   (December 8, 1993). When the Connecticut Department of Revenue is conducting concurrent examinations of both a retailer and the retailer's customer, any deficiency on sale between these parties will be assessed on the retail customer (purchaser) rather than the retail seller (retailer).  If the audit examination period of the retailer overlaps but is not the same as the audit examination period of the retail customer, the Department conducts the audit examination of the retailer by sampling, and the taxable period or periods that are chosen as the test period were taxable periods within the audit examination period of the customer, the Department will not make an audit assessment against the retailer in connection with such sales to such customer (and, for sampling purposes, will not consider such sales as errors in reporting taxable retail sales). However, if the audit examination period of the retailer overlaps but is not the same as the audit examination period of the retail customer, the Department conducts the audit examination of the retailer by sampling, and the taxable period or periods that are chosen as the test period were not taxable periods within the audit examination period of the customer, the Department will make an audit assessment against the retailer in connection with taxable retail sales made by the retailer to the retail customer during the audit examination period of the retailer (and, for sampling purposes, will consider such sales as errors in reporting taxable retail sales).
• Policy Statement 98(5), Sales and Use Tax Refund Policy, CCH-ADMN-RUL, CT-TAXRPTR ¶350-079, http://www.ct.gov/drs/cwp/view.asp?a=1511&q=267332 (October 21, 1998).  Sets forth procedures for refund claims for overpaid sales and use taxes.  The Department may allow sampling methods for claims of  overpaid use taxes, but not overpayments of sales tax to vendors.
• Policy Statement 2001(1), reissued February 22, 2002, Department's procedure for retailers to claim a credit for sales tax paid on worthless accounts receivable.
• Special Notice 99(7), June 28, 1999.   Announces enactment of managed audit and managed compliance programs.

Cases

• C. Lawrence Constantine and Larcon, Inc., dba Bach Dor Disco Cafe v. Commissioner, Department of Revenue Services, No. CV-91-0390484-S,  CCH-STATE-CASE-TRL-CT, CT-TAXRPTR, ¶400-086, (Connecticut Superior Court, Tax Session, May 23, 1994).   The court held that in the absence of a showing by the Commissioner that the taxpayer's records were incomplete or misleading, it was improper for the Department to conduct a test audit.
• Lloyd Mansfield Co., Inc., DTA No. 809798, CCH-STATE-CASE-TAX-CT, NY-TAXRPTR, ¶402-069, (Connecticut Division of Tax Appeals, Tax Appeals Tribunal, June 8, 1995).  Taxpayer presented evidence that several items assessed in the audit of its sales were included in the overlapping audit of its purchaser.  The Tax Appeals Tribunal ruled in favor of the taxpayer.  [Subsequently, the Department issued Policy Statement 93(4) to clairfy its policy on overlapping audits.]
  

District of Columbia

Office of Tax and Revenue publications

• Tax Appeal Process, http://cfo.dc.gov/services/tax/appeals/process.shtm
  

Florida

Statutes

• FS Section 17.03, Claims against the state.
• FS Section 202.22, Determination of local tax situs for Communications Services Tax, Added by Chapter Laws 2000-206 (Senate Bill 1338), effective October 1, 2001. Allows dealers of communications services to avoid local tax deficiencies if they use an acceptable method. One condition is using a database that assigns street addresses, address ranges, post office boxes, or post office box ranges to the proper jurisdiction with an overall accuracy rate of 95 percent at a 95 percent level of confidence, as determined through a statistically reliable sample. The accuracy must be measured based on the entire state or, if the service area of the dealer does not encompass the entire state, based on the dealer's entire service area.
• FS Section 206.12, Retention of records; all persons that purchase, import, export, use, sell, or store motor fuel, "If the records of a person are adequate but voluminous in nature and substance, the department may use a representative sample of such records and estimate the audit findings derived therefrom for the entire audit period. The department must first make a good faith effort to reach an agreement with the person which provides for the means and methods to be used in the examination process. In the event that no agreement is reached, the person is entitled to a review by the executive director or the appropriate designee."
• FS Section 212.12 - 6 (b) Authority to use sampling. If a dealer does not have adequate records of his or her retail sales or purchases, the department may, upon the basis of a test or sampling of the dealer's available records or other information relating to the sales or purchases made by such dealer for a representative period, determine the proportion that taxable retail sales bear to total retail sales or the proportion that taxable purchases bear to total purchases.
• FS Section 212.12 - 6 (c) subparagraph 1, Authority to use sampling. Added by Chapter Laws 2000-355 (House Bill 2433), effective June 23, 2000. Previously the statute required the department to "statistically sample". In practice the Florida Department of Revenue performed many nonstatistical samples. The amendment in 2000 removes the word "statistically".
• Amended by Chapter Laws 2007 - 106 (Senate Bill 2482), effective July 1, 2007. The amendment in 2007 allows sampling for fixed assets if agreed by the taxpayer and the department.
• Text after amendments:
• 1. If the records of a dealer are adequate but voluminous in nature and substance, the department may sample such records and project the audit findings derived therefrom over the entire audit period to determine the proportion that taxable retail sales bear to total retail sales or the proportion that taxable purchases bear to total purchases. In order to conduct such a sample, the department must first make a good faith effort to reach an agreement with the dealer, which agreement provides for the means and methods to be used in the sampling process. In the event that no agreement is reached, the dealer is entitled to a review by the executive director.
• In the case of fixed assets, a dealer may agree in writing with the department for adequate but voluminous records to be statistically sampled. Such an agreement shall provide for the methodology to be used in the statistical sampling process. The audit findings derived therefrom shall be projected over the period represented by the sample in to order to determine the proportion that taxable purchases bear to total purchases. Once an agreement has been signed, it is final and conclusive with respect to the method od sampling fixed assets, and the department may not conduct a detailed audit of fixed assets and the taxpayer may not request a detailed audit after the agreement is reached.
• FS Section 212.12 - 6 (c) subparagraph 2, Sample and project tax overpayments. Added by Chapter Laws 2000-355 (House Bill 2433), effective June 23, 2000. Under prior law, the department took the position it could only project overpayments to offset underpayments.  After this amendment, when the department conducts an audit, it is required to project overpayments for the entire audit period and to refund net overpayments.
• Text after amendment: "2. For the purposes of sampling pursuant to subparagraph 1., the department shall project any deficiencies and overpayments derived therefrom over the entire audit  period. In determining the dealer's compliance, the department shall reduce any tax deficiency as derived from the sample by the amount of any overpayment derived from the sample. In the event the department determines from the sample results that the dealer has a net tax overpayment, the department shall provide the findings of this overpayment to the Comptroller for repayment of funds paid into the State Treasury through error pursuant to s. 215.26.

(2)It is the intent of the Legislature that this section clarify rather than change existing law. Further, this section shall apply to all tax periods that are still open for assessment or refund when this section takes effect, including tax periods that are the subject of assessment or refund claims that are pending in administrative or judicial proceedings when this section takes effect.

• FS Section 212.12 - 6 (c) subparagraph 3, added by Chapter Laws 2002 - 218 (Senate Bill 426), effective January 1, 2003. Amended by Chapter Laws 2007 - 106 (Senate Bill 2482), effective July 1, 2007.
• a. A taxpayer is entitled, both in connection with an audit and in connection with an application for refund filed independently of any audit, to establish the amount of any refund or deficiency through statistical sampling when the taxpayer's records are adequate but voluminous.
• In the case of fixed assets, a dealer may agree in writing with the department for adequate but voluminous records to be statistically sampled. Such an agreement shall provide for the methodology to be used in the statistical sampling process. The audit findings derived therefrom shall be projected over the period represented by the sample in to order to determine the proportion that taxable purchases bear to total purchases. Once an agreement has been signed, it is final and conclusive with respect to the method of sampling fixed assets, and the department may not conduct a detailed audit of fixed assets and the taxpayer may not request a detailed audit after the agreement is reached.
• b. Alternatively, a taxpayer is entitled to establish any refund or deficiency through any other sampling method agreed upon by the taxpayer and the department when the taxpayer's records, other than those regarding fixed assets, are adequate but voluminous. Whether done through statistical sampling or any other sampling method agreed upon by the taxpayer and the department, the completed sample must reflect both overpayments and underpayments of taxes due. The sample shall be conducted through:
• (I) A taxpayer request to perform the sampling through the certified audit program pursuant to s. 213.285;
• (II) Attestation by a certified public accountant as to the adequacy of the sampling method utilized and the results reached using such sampling method; or
• (III) A sampling method that has been submitted by the taxpayer and approved by the department before a refund claim is submitted. This sub-sub-subparagraph does not prohibit a taxpayer from filing a refund claim prior to approval by the department of the sampling method; however, a refund claim submitted before the sampling method has been approved by the department cannot be a complete refund application pursuant to s. 213.255 until the sampling method has been approved by the department.
• c. The department shall prescribe by rule the procedures to be followed under each method of sampling. Such procedures shall follow generally accepted auditing procedures for sampling. The rule shall also set forth other criteria regarding the use of sampling, including, but not limited to, training requirements that must be met before a sampling method may be utilized and the steps necessary for the department and the taxpayer to reach agreement on a sampling method submitted by the taxpayer for approval by the department.
  
• FS Section 213.34, Authority to audit, CCH-, taxlaw.state.fl.us/all_out_statutes.asp?r=213.34&file=all_s99.ask
• FS Section 213.35, Books and records, taxlaw.state.fl.us/all_out_statutes.asp?r=213.35&file=all_s99.ask

Administrative Code

Online in the Florida Tax Law Library at taxlaw.state.fl.us/all_search_fc.asp

• FAC 12-3.0017. Adoption of Materials That Contain Departmental Procedures. Formal adoption of audit sampling guides as rules, specifically including:
• GT-400514, Basic Electronic Auditing Manual (e-Auditing) (r. 9/02), which instructs the Department's auditors on electronic audit techniques.
• GT-400116, Stratified Statistical Sampling Manual (r.5/02), which instructs the Department's auditors on how to perform a stratified statistical sample of a taxpayer's books and records.
• GT-300034, Auditing in an Electronic Environment (e-Auditing) and Stratified Statistical Sampling (r. 5/02), which explains to audit candidates (taxpayers) the benefits of electronic auditing and what techniques the Department can use.
• FAC 12-24.023. Recordkeeping Requirements - General.  (1) A taxpayer shall maintain all records that are necessary to a determination of the correct tax liability. All required records must be made available on  request by the Department.  Such records shall include, but not be necessarily limited to:  books of account, invoices, bills of lading, gross receipts from sales, resale certificates, consumer exemption certificates, and other pertinent records as may be otherwise required by statute or by rule of the Department. If a taxpayer retains records in both machine-sensible and hardcopy formats, the taxpayer shall make the records available to the Department in machine-sensible format upon request of the Department.
• FAC 12-24.024. Recordkeeping Requirements - Machine Sensible Records.  Machine-sensible records used to establish tax compliance shall contain sufficient transaction-level detail information so that the details underlying the machine-sensible records can be identified and made available to the Department  upon request. A taxpayer has discretion to discard duplicated records and redundant information provided its responsibilities under this rule are met.  Taxpayers are not required to construct machine-sensible records other than those created in the ordinary course of business. A taxpayer who does not create the electronic equivalent of a traditional paper document in the ordinary course of business is not required to construct such a record for tax purposes.
• FAC 12-24.025 Records Maintenance Requirements. The Department recommends, but does not require, that taxpayers refer to the National Archives and Records Administration's (NARA) standards for guidance on the maintenance and storage of electronic records.
• FAC 12-24.025 12-25.0058 Dispute Resolution. Procedures for ranking and selecting applicants for contract auditors.
• FAC 12-25.0058(1)(b). Disagreements with professional judgments exercised by the Committee in evaluating any subjective criteria are not grounds for re-evaluation. Also, the Department reserves the sole right to determine what statistical sampling techniques, if any, will be used, and how the selected techniques will be applied. These determinations will not constitute acceptable grounds for initiating the dispute resolution process provided in this rule.

Department of Revenue - Guides

Guides formally adopted by Rule FAC 12-3.0017. Adoption of Materials That Contain Departmental Procedures.

• Auditing in an Electronic Environment (eAuditing) and Stratified Statistical Sampling,, Publication GT-300034 (Revised May 2002), http://www.myflorida.com/dor/taxes/eaudit_handbook.pdf
• Basic Electronic Auditing,, Publication GT-400514 (Revised September 2002), http://dor.myflorida.com/dor/taxes/eauditmaual.pdf
• Stratified Statistical Sampling Training Manual, Publication GT-400116, (Revised May 2002). http://dor.myflorida.com/dor/taxes/statsmanual.pdf

Other Guides

• Florida's Computer Assisted Audit System (FCAAS) - Procedures Manual, 1998.
• Non-Statistical Sampling, Publication GT-340001, (Revised April 2004), http://www.myflorida.com/dor/taxes/nonstat_handbook.pdf
• Sampling and Your Audit, Publication GT-800059, http://dor.myflorida.com/dor/taxes/sampling_audit.html
• Taxpayer Information Publication (TIP) No. 03A01-01, (January 22, 2003), http://dor.myflorida.com/dor/tips/tip03a01-01.html New Law Allows Taxpayers to Use Sampling Methods To Determine the Amount of a Sales and Use Tax Refund or Deficiency.
• Taxpayer Information Publication (TIP) No. 07ADM-02, (June 29, 2007), http://dor.myflorida.com/dor/tips/tip07adm-02.html New Law Allows Statistical Sampling of Fixed Assets.
• Technical Assistance Advisement (TAA) No. 92A-068R, CCH-ADMN-RUL, 88--93 FL-TAXRPTR-TB ¶202-488, (issued September 24, 1992; revised December 15, 1992).  Department denied a taxpayer's request to use sampling to determine an effective sales tax rate for a fast food chain.
• Technical Assistance Advisement (TAA) No. 98A-072, CCH-ADMN-RUL, FL-TAXRPTR ¶203-703, (September 23, 1998).  Department held storage of exemption certificates on computer, viewable via optical scanning, was an acceptable form of recordkeeping for Florida sales and use tax purposes, provided that the records were legible and available to Department of Revenue (DOR) auditors. However, DOR sampling to determine taxable sales and purchases would occur if the taxpayer failed to provide the equipment necessary to read, locate, and reproduce records maintained in the taxpayer's computer, or if electronic recordkeeping unduly disrupted an audit.

Department of Revenue - Forms and Instructions

• Form DR-26S and Instructions, Application for Refund of Sales and Use Tax, http://dor.myflorida.com/dor/forms/download/!refunds.html
• Form DR-370060 and Instructions, Refund Sampling Methodology Application for Sales and Use Tax, http://dor.myflorida.com/dor/forms/download/!refunds.html
• Form DR-370061, Refund Sampling Results, http://dor.myflorida.com/dor/forms/download/!refunds.html
• WinSample, random selection software, download from near the bottom of the page at http://dor.myflorida.com/dor/forms/download/!refunds.html

Administrative Hearings

• Allor, Inc. v. Department of Revenue, Case No. DOR 95-15-FOF, CCH-ADMN-RUL, 94--96 FL-TAXRPTR-TB ¶202-988, (Florida Division of Administrative Hearings, November 16, 1995).  Hearing officer sustained Department's assessment, because the taxpayer failed to provide sufficient documentation to contradict its presumed validity. An accounting firm was properly assessed sales and use tax based on sales revenue reported on the taxpayer's federal income tax return for a sample year. Because the taxpayer provided no purchase journals and few invoices, the tax assessed was estimated based on the only information available to the auditor, the taxpayer's federal tax returns. Adjustments were made to reflect invoices presented by the taxpayer.
• Benson v. Department of Revenue, Case No. 89-2437, CCH-ANNO, FL-TAXRPTR ¶61-410.50, (Florida Division of Administrative Hearings, October 2, 1989).  Hearing officer held it was reasonable to use the deposits noted on a small business owner's bank statements and a sample of the invoices of his vendor sales in estimating the sales and use taxes that he owed. The owner's own business records did not meet acceptable business standards.
• Bidders, Inc. v. Department of Revenue, Case No. 94-1131, CCH-ADMN-RUL, 94--96 FL-TAXRPTR-TB ¶202-824, (Florida Division of Administrative Hearings, January 30, 1995).  Hearing officer held the department properly conducted the audit by sampling the taxpayer's available books and records, as the sampling method was an appropriate method for conducting an audit when the taxpayer failed to maintain adequate records of its sales and purchases.
• DelVecchio d/b/a Monterey Glass and Mirror Distributors, v. Department of Revenue,  Docket 95-1450, (Florida Division of Administrative Hearings, April 2, 1997). Hearing officer ruled in favor of Department's block sampling method when taxpayer lacked adequate records.
• Florida Truck Dock Company v. Department of Revenue , Docket DOR 99-2-FOF, CCH-ADMN-RUL, FL-TAXRPTR ¶203-683, (Florida Division of Administrative Hearings, February 11,1999). Hearing officer ruled in favor of Department's block sampling method when taxpayer lacked adequate records.
• Christopher McQuade d/b/a Stage One Computer Systems v. Department of Revenue, DOR 01-9-FOF, (Florida Division of Administrative Hearings, October 25, 2001).  The administrative law judge held that when the taxpayer did not have adequate books and records, the auditor was justified in making an assessment based on the available information.
• Purple Neon, Inc. v. Department of Revenue, DOR 02-3-FOF, (Florida Division of Administrative Hearings, April 3, 2002).  Hearing officer upheld auditor's sample and projection method when a restaurant business was unable to produce adequate books and records.  It is the Department's duty to make an estimated tax assessment on the best information available.
  
• Tan, Inc. and Linda A. W. Mesa v. Department of Revenue, (Florida Division of Administrative Hearings, October 6, 1995), Case No. 94-2791, CCH-ADMN-RUL, 94--96 FL-TAXRPTR-TB ¶202-973.  Hearing officer held that Florida Statute Section 212.12(5), (6) [as it was in effect prior to amendment in 2000]  provides for the use of estimates, but only where the taxpayer "fails or refuses" to make records available; further, the auditor is required to "statistically sample" such records, and may not make unsubstantiated, unsound estimates that are not statistically reliable. Taxpayer has adequate and not voluminous records available. Furthermore, the samples used by the auditor that affect the period 12/03/92--05/31/93 are not statistically sound, and are not reliable for that period.
• Jay P. Weiss, Inc. v. Department of Revenue, DOR 00-5-FOF, (Florida Division of Administrative Hearings, September 19, 2000).  Hearing officer ruled in favor of Department's block sampling method when a motor vehicle dealer lacked adequate records.
  

Court Cases

• American Telephone and Telegraph Company v. Department of Revenue, Second Circuit Court Case No. 93-2731, CCH-STATE-CASE-TRL-CT, 96--98 FL-TAXRPTR-TB ¶203-647, (Florida Circuit Court, Second Circuit, December 15, 1998).  Trial court held department's sampling methodology  in a sales and use tax audit of a provider of specialized telecommunications equipment, installation and systems engineering work for central switching offices under packaged contracts, was appropriate because (1) the sales orders under the contracts were voluminous and (2) the provider did not assemble the requisite documents and details of its sales transactions. In addition, since the provider stipulated with the auditor the test months to use to calculate an error ratio, it could not later challenge that sampling methodology.
• American Telephone and Telegraph Company v. Department of Revenue, 764 S. 2d 665, CCH-STATE-CASE-APP-CT, FL-TAXRPTR ¶203-858, (Florida District Court of Appeal, May 17, 2000).  Appeal on the issue of taxability of engineering services sold as part of a bundle with telecommunications equipment.  The appellate court did not rule on the sampling issue.
• Department of Revenue v. Daystar Farms, Inc., 803 So2d 892, (District Court of Appeal of Florida, Fifth District, January 4, 2002).  Court held that statutes allowed only the party that directly paid sales and use tax could apply for a refund.  The plain language of the refund statute requires that the refund be paid to the person or entity bearing the tax burden.
• Gulf Power Company v. William H. Bevis, Commissioner of Florida Public Service Commission, 289 So.2d 401, CCH-STATE-CASE-HIGH-CT, (Florida Supreme Court, January 30, 1974).  The Supreme Court considered sampling for corporate income taxes in connection with a utility rate setting case.  The Court held, "The Commission thereby correctly recognized and considered initially the corporate income tax since it became effective before the hearings were even completed and before its order was entered. It could not be ignored. The test year data were accordingly adjusted to recognize and to take into account a known change in order properly to reflect typical conditions in the future period for which the rates were being fixed. That is what the 'test period' is - a sample or typical example, to determine a future course.  The law is a tool of justice, not a goddess to be worshiped. When the Commission later took the position that test period adjustments must recognize only those changes which take place precisely within ninety days after the end of the test year, it lost sight of this basic objective of the 'tool' it was using as a 'test period' to arrive at a fair, 'typical' result. For it is a correct result which is the goal of the determination and not merely the means or formula used in arriving at the answer. The blind application of such a time limitation is grossly arbitrary and completely ignores the purpose of the rule and the basic reason for tester adjustments. These are used simply because it is unwieldy and cumbersome to try to apply a total and unending time."
• Maas Brothers, Inc. v. Fred O. Dickinson, Comptroller, 195 So. 2d 193, CCH-STATE-CASE-HIGH-CT, 55--88 FL-TAXRPTR-TB ¶200-781,  (Florida Supreme Court, February 8, 1967).  It is a fundamental rule of construction that tax laws are to be construed strongly in favor of the taxpayer and against the government, and that all ambiguities or doubts are to be resolved in favor of the taxpayer.
• Stork et al v. BellSouth and Palm Beach County, 847 So. 2d 1098, (District Court of Appeal of Florida, Fourth District, June 18, 2003).  Plaintiffs brought a class action lawsuit against telecommunications provider and county alleging excessive collection of local public service taxes.  Court held that the same administrative remedies apply to county as provided for municipalities.  Court dismissed plaintiff's complaint for failure to follow administrative remedies.
  

Georgia

Statute

• Code of Georgia, section 48-8-51.  Authorizes commissioner of revenue to estimate sales and use tax liability and penalty when taxpayer fails to file a return or files a grossly false return.
• Code of Georgia, section 48-8-52.  Requires taxpayers to keep suitable records of sales and purchases.

Administrative

Georgia Department of Revenue, Compliance Division, Georgia's Computer Assisted Audit System.

Case

• Anderson v. Blackmon, 123 Ga. App. 128, 179 S.E. 2d 657, CCH-STATE-CASE-APP-CT, (Court of Appeals of Georgia, Division No. 3., Dec. 3, 1970).  Authorized commissioner to estimate sales tax liability when taxpayers records were insufficient.
• Blackmon v. Dilworth, 189 S.E.2d 106, CCH-STATE-CASE-APP-CT, (Court of Appeals of Georgia, Division No. 2, March 17, 1972).  Court denied Revenue Commissioner's motion for summary judgment and ruled if favor of taxpayer's motion where the sales and use tax audit sample appeared to be too small.
• Hawes v. Phillips, 178 S.E.2d 759, CCH-STATE-CASE-APP-CT, (Court of Appeals of Georgia, Division No. 2, Oct. 30, 1970).  Court ruled in favor of the Revenue Commissioner's sales tax bracket system.  The Commissioner's assessment in case number 45328 was established by a sampling method and the assessment was made based thereon by application of the bracket system.

Hawaii

Statutes

• Revised Statutes section 231-23. Adjustments and refunds.

Department of Taxation Administrative Rules

• Administration of Taxes, Section 18-231-3-14.22, www.state.hi.us/tax/har/chap231.pdf . General recordkeeping requirements for all taxpayers.
• Administration of Taxes, Section 18-237-13-03, www.state.hi.us/tax/har/chap237.pdf .  Tax upon contractors.  The department may audit the prime contractor and assess for unpaid taxes of a subcontractor.

Department of Taxation publications

• Taxpayer Information Release No. 94-3 (May 24, 1994), www.state.hi.us/tax/tir/tir94-03.htm , Audit of Net Income, General Excise, and Use Tax Returns; Appeal Rights; Claims for Refund; and Payment to State Under Protest.

Idaho

Statute

• Idaho Code 63-3624(b), www3.state.id.us/cgi-bin/newidst?sctid=630360024.K.  State tax commission shall employ qualified auditors for examination of taxpayers' records and books.
• Idaho Code 63-3624(c), www3.state.id.us/cgi-bin/newidst?sctid=630360024.K.  Every seller, every retailer, and every person storing, using, or otherwise consuming in this state tangible personal property purchased from a retailer shall keep such records, receipts, invoices and other pertinent papers as the state tax commission may require. Every such seller, retailer or person who files the returns required under this act shall keep such records for not less than four (4) years from the making of such records unless the state tax commission in writing sooner authorizes their destruction.
• Idaho Code 63-3629, www3.state.id.us/cgi-bin/newidst?sctid=630360029.K.  State tax commission is authorized to use any information in its possession to estimate sales tax deficiencies.  The state tax commission may offset overpayments against amounts due.

Illinois

Statute

• Illinois Compiled Statutes Annotated, Chapter 35 Revenue, Act 120 Retailers' Occupation Tax Act, 35 ILCS 120/4.

Regulations

• 86 Illinois Administrative Code 500.360. Audits, CCH-STATE-REG, IL-TAXRPTR ¶44-094.  Describes audit procedures for motor fuels tax.  At the beginning of the audit, the auditor will determine background information, reporting methods and records that will be reviewed. As the audit progresses, the auditor and licensee will discuss the sample periods, sampling techniques, and any problem areas. A final conference will be held with the licensee to explain audit adjustments and future reporting practices.

Department of Revenue Publications

• Electronic Records and Computer Assisted Auditing , Revenue Pub. 107 (N-12/98), www.revenue.state.il.us/publications/pubs/pub-107.pdf

Department Letters

• General Information Letter, ST 94-0380-GIL, CCH-IL-ADMN-RUL, (September 2, 1994).  In response to a long questionnaire about the state's tax policy, the Department's Office of General Counsel responded Illinois does use statistical sampling in auditing for Illinois sales tax liability. There is no explicit statutory authority for statistical sampling. Statistical sampling can be used even where records exist which are adequate to do a detail audit. Statistical samples can be used without taxpayer consent.
• General Information Letter, ST 95-0377-GIL, CCH-ADMN-RUL, IL-TAXRPTR, ¶19981019374, (September 12, 1995).  In response to a tax practice survey, the Department responded, "Illinois does use statistical sampling in auditing for Illinois sales tax liability. ... There is no explicit statutory authority for statistical sampling. Statistical sampling can be used even where records exist which are adequate to do a detail audit and statistical samples can be used without taxpayer consent."
• General Information Letter, ST 00-0073-GIL, CCH-IL-ADMN-RUL, (March 20, 2000). Department does not allow refund claims on the basis of a statistical sample.
• General Information Letter, ST 00-0153-GIL, (July 24, 2000).  Department may use statistical sampling in arriving at an audit assessment even where records exist that are adequate to perform a detailed audit.
• Private Letter Ruling, ST 88-0675-PLR, CCH-ADMN-RUL, (September 19, 1988). Regarding Department audit procedures, the specific details are confidential and are not released to the public as a matter of policy. However, as a general proposition, Illinois Revenue Auditors conduct both detail and sample audits. Traditionally, the sample audits have entailed testing sample months within the audit period. The current trend employs the ***** use of statistical sampling methods.
• Private Letter Ruling, ST 92-0021-PLR, CCH-ADMN-RUL, ADMN-RUL, IL-TAXRPTR, ¶19981113236, (January 10, 1992).  Taxpayer alleged the same transactions appeared in overlapping audits of the seller and purchaser.  Department denied taxpayer's request to exclude invoices of the particular vendor from the statistical sampling plan.

Hearings

Illinois Department of Revenue Administrative Hearing, ST 96-31, CCH-IL-ADMIN-RUL, (1996).  The administrative law judge held for the Department on a case of incomplete records.  The taxpayer executed an audit test check/statistical sampling agreement in which he agreed to abide by the projection of a sample review of his purchases, said sample being a "5% random selection of checks in the period 7/92 through 11/93, projected over total material purchases in audit period".

Illinois Department of Revenue Administrative Hearing, TC 97-1, CCH-IL-ADMIN-RUL, (1997).  At issue is the amount telecommunications excise tax liability for All Call Travel Card Service that the taxpayer owes to the state. After the hearing held in this matter, the parties stipulated to certain facts. Included in the stipulations is the fact that a large credit was improperly included in the dollar sample used to create the 2.29% error rate established in the sample used by the auditor. The sample was then projected to form the basis of the non-All Call portion of two of the assessments. If the credit is properly accounted for, the error rate is decreased to 1.91%. The taxpayer agrees to the test sample if the error rate is decreased to 1.91%.

Illinois Department of Revenue Administrative Hearing, ST 97-5 (1997). Whether the taxpayer met its burden of proving that the Department of Revenue's calculation of the tax liability based on unreported and underreported gross receipts was incorrect depends, initially, on whether the Department met a minimum standard of reasonableness in making its determination of additional tax due for the period.  When a taxpayer fails to supply the Department with records to substantiate its gross receipts, the Department is justified in using the markup method to estimate gross receipts.  The Department is required only to meet a minimum standard of reasonableness in conducting the markup.

Illinois Department of Revenue Administrative Hearing, ST 97-25, CCH-ADMN-RUL, (1997).  The taxpayer’s mere assertion that sampling techniques are not representative of the population is insufficient to rebut the prima facie correctness of the Department of Revenue's proposed adjustments.  Questioning the Department's determination or denying its accuracy does not shift the burden back to the Department.  The Department's determinations are rebutted only after a taxpayer introduces evidence which is consistent, probable and identified with the taxpayer’s books and records, showing that the Department's determination is incorrect.

Illinois Department of Revenue Administrative Hearing, ST 02-14, (April 5, 2002).  Taxpayers questioned the reasonableness and fairness of the sampling techniques used by auditor. They claim that projections based on the group of items randomly selected for investigation distorted the taxpayers' mark up. However, the courts have held that the type of discretion exercised by the auditor in arriving at a method to assess tax in this case is authorized under the broad powers granted the Department to administer the state's tax laws. Moreover, the taxpayers failed to present any evidence other than oral testimony showing that the auditor's sampling techniques produced an incorrect result and therefore have not shown that the auditor's methods were unreasonable. 

Cases

• A. R. Barnes & Co., 173 Ill. App. 3d 286 (1st District, 1988).
• Clark Oil & Refining Corp. v. Johnson, 154 Ill.App.3d 773, 506 N.E.2d 1362, 107 Ill.Dec. 307, Docket No. 84-0279, (Illinois Appellate -1st District, March 31, 1987).
• Copilevitz v. Department of Revenue, 41 Ill. 2d 154 (1968).
• Du Page Liquor Store Inc. v. McKibbin, 383 Ill. 276, 48 N.E.2d 926, (1943).
• Goldfarb v. Department of Revenue, 411 Ill. 573, 104 N.E.2d 606, (Illinois Supreme Court, March 20, 1952).
  
• Grand Liquor Co. Inc. v. Department of Revenue , 67 Ill. 2d 195, 367 N.E.2d 1238, (1977); 36 Ill.App.3d 277, 343 N.E.2d 555, Docket No. 61060, (Illinois Appellate -1st District, Feb. 17, 1976).
• Masini v. Department of Revenue, 376 N.E.2d 324, (Ill. App. 1978).
• Mel Park Drugs, Inc. v. Dept. of Revenue, 218 Ill. App. 3d 203 (1 st Dist. 1991). The auditor attempted to reconstruct the correct gross sales receipt figure by using check registers and matching purchase invoices for the three test months.  Taxpayer objected that the markup percentages used by the auditor were unreasonable.  The court held the Department is required only to meet a minimum standard of reasonableness when correcting taxpayer's returns. While the Department may not ignore the taxpayer's records when they are complete and accurate, and substitute its judgment based upon general estimates, the records submitted to the auditor in the case at bar were not sufficiently specific to permit the auditor to use a markup method.
  
• Novicki v. Department of Finance, 373 Ill. 342, 26 N.E.2d 130 (1940).
• PPG Industries, Inc. and PPG Biomedical Systems, Inc., v. Kenneth Zehnder, Director of Revenue of the State of Illinois, Docket No. 1-99-2487 unpublished (Illinois Appellate, June 12, 2001), reversing Docket No. 95-L-50872 (Illinois Circuit Court, Cook County, April 22, 1999).  Appellate court upheld auditors' method of estimating taxpayer's throwback sales when taxpayer did not provide records requested by auditor.  Department of Revenue auditors sought to verify sales factor used in determining Illinois corporate income tax by estimating the sales throwback to Illinois.  PPG did not provide the sales and origination data requested by the auditors, but instead said those records were maintained on microfiche at the corporate office in Pittsburgh.  The auditors estimated throwback sales with a formula based on the reports provided by PPG.  The circuit court ruled against the Department by reasoning that ignoring records a taxpayer has in its posession does not constitute a proper audit or investigation.  The appellate court reversed the circuit court and ruled in favor of the Department, holding that PPG failed to introduce competent documentary evidence that would overcome the Department's assessment.
• Filippo Puleo et al. d/b/a La Roma Pizza v. Department of Revenue, 117 Ill.App.3d 260, 453 N.E.2d 48, 72 Ill.Dec. 743, Docket No. 4-83-0051 (Illinois Appellate - 4th District, August 16, 1983).  Appellate court affiirmed auditor's method of estimating sales tax of a restaurant when taxpayer's records were not adequate.  Auditor obtained information on taxpayer's purchases and marked-up those purchases using industry average cost of sales ratios.
• Six Brothers King Drive Supermarket, Inc. v. Department of Revenue, 549 N.E.2d 586, (Illinois Appellate, 1989).  Taxpayer was granted a continuance to produce books and records reasoning that delay would promote "justice, not speed."
  
• Soho Club, Inc. v. Department of Revenue , 269 Ill. App. 3d 220 (1st District, 1995).
• Sprague v. Johnson, 195 Ill. App. 3d 798 (4th District 1990).

Indiana

Review Articles

• Heintz, James A., and John M. Wendt, "Improved Use Tax Auditing Through Sampling", 25 Government Accountants Journal 62 (Summer 1976).  Discusses a project to apply variables estimation statistical sampling in use tax audits by Indiana Department of Revenue.

Statutes

• Indiana Code 6-8.1-4-2, www.state.in.us/legislative/ic/code/title6/ar8.1/ch4.html .    Division of audit may inspect any books, records, or property of any taxpayer which is relevant to the determination of the taxpayer's tax liabilities; and employ the use of such devices and techniques as may be necessary to improve audit practices.

Administrative Rulings

• Indiana Letter of Finding 97-0497 ST, 9/1/98.  Taxpayer’s claim that a one year sample was not representative of the three year audit population (1993-95) was rejected.  The taxpayer’s previous agreement to use 1995 as the sample year because records were more easily accessed was held to be binding on the taxpayer.
• Indiana Letter of Finding 98-0272 ST. Taxpayer objected to the auditor's sample projection method. The taxpayer's protest was sustained pending review by the Department.
• Indiana Letter of Finding 98-0536 ST, 8/1/99.  A taxpayer’s claim for a credit in the projection amount for sales and use tax overpayments was sustained, subject to verification as to the overpayments.  The auditor had utilized a projection method for estimating the tax due for the audit period.

Court Decisions

• Great American Lines, Inc. v. Indiana Department of State Revenue, Docket No. 49t10-9512-ta-136, CCH-STATE-CASE-TAX-CT, STATE-ARD ¶400-471, (Indiana Tax Court, December 28, 2000).  Tax court sustained the Department's denial of a motor fuels tax refund claim.   The issue was whether the Department applied an invalid auditing methodology by using a miles per gallon (mpg) ratio "ceiling" and thereby excluding some sample vehicles in determining the average mpg ratio for the leased vehicles in Great American's fleet of trucks.  The taxpayer presented expert testimony on the treatment of outliers in the sample, but the court held the taxpayer's presentation was insufficient to overturn the Department's method.
• Monarch Steel Co. v. State Board of Tax Commissioners, No. 45T10-9610-TA-00134 and 45T10-9506-TA-00055, CCH-STATE-CASE-TAX-CT, IN-TAXRPTR, ¶400-338, (Indiana Tax Court, September 24, 1998).  A steel service center's claimed an interstate commerce exemption from Indiana personal property tax for its inventory of steel plates that were in the state for packaging rather than processing.  The taxpayer provided the State Board of Tax Commissioners with only a box of invoices of allegedly exempt steel. It did not review the invoices with the hearing officer, aid the officer in understanding the terminology used on the invoices, or explain why the inventory satisfied any of the exemption provisions. Merely giving a hearing officer a box of invoices to sift through to determine what was exempt was not sufficient evidentiary support for the exemption. Further, the taxpayer did not respond to an opportunity to provide the Tax Court with the invoices that allegedly supported the taxpayer's position.  Tax court denied the taxpayer's request for exemption.
  

Iowa

Statute

• Iowa Code section 422.50. Records required.  Retailers are required to keep records for a period of five years and make them available for inspection.
• Iowa Code section 422.54. Authorizes tax department to use external factors and indices to estimate sales tax liability if a sales tax return is not filed or is filed incorrectly.
• Iowa Code section 423.21. Books--Examination.  Authorizes audit of books and records.

Regulations

• Rule 701--11.4(422, 423).  Retailers required to keep records.
• Rule 701--11.5(422, 423).  Audit of records.  The department shall have the right and duty to examine or cause to be examined the books, papers, records, memoranda or documents of a taxpayer for the purpose of verifying the correctness of a return filed or estimating the tax liability of any taxpayer.

Cases

• The Dial Corporation v. Iowa Department of Revenue and Finance, 634 N.W.2d 643, 2001 Iowa Sup. LEXIS 183, CCH-STATE-CASE-HIGH-CT, IA-TAXRPTR, ¶201-053, (Iowa Supreme Court, October 10, 2001).  Taxpayer agreed to include 39 expense accounts in the audit of its purchases.  The audit showed no errors in two expense accounts for chemicals purchased, one with $2.4 million and one with $60,000.  Auditor projected the results over all 39 accounts including those with no errors.  Taxpayer protested and asked to exclude those two accounts from the projection.  The Supreme Court held  the assessment was proper because the taxpayer agreed to the inclusion of the accounts.
  

Kansas

Statutes

See Kansas Department of Revenue Public Information Library at  www.ink.org/public/kdor/pilrd.html

• Chapter 79, Article 36, Section 79-3610, Examination of Returns.  Any determination may be made on the basis of a generally recognized valid and reliable sampling technique, whether or not the person being
  audited has complete records of transactions and whether or not such person consents. In any such case, the director shall notify the taxpayer in writing of the sampling technique to be utilized, including the design and population of such sample. If the taxpayer demonstrates that any such technique used was not in accordance with generally recognized sampling techniques, the audit shall be dismissed with respect to that portion of the audit based upon such technique, and a new audit shall be performed.
  
• Chapter 79, Article 36, Section 79-3611, Investigations and hearings.  Authorizes director of taxation to examine records and conduct hearings.
• Chapter 79, Article 36, Section 79-3652, Rights and privileges of audited taxpayers.  The secretary of revenue shall promulgate rules and directives for audits and taxpayer's rights during audits.
• Chapter 79, Article 36, Section 79-3661, Managed audit agreements.  The taxpayer will be provided with written procedural guidelines to be included as part of the managed audit agreement, including, but not limited to: (1) The audit period covered by the managed audit; (2) the general scope of the managed audit; (3) what records will be examined and what types of sampling techniques will be used; (4) the specific procedures the taxpayer is to follow in determining any liability; (5) the time period for completion of the managed audit; and (6) the time period for payment of the tax, penalty and interest.
• Chapter 79, Article 37, Section 79-3707, Administration of Kansas Compensating Tax.  The secretary of revenue shall adopt rules and regulations for the administration of this act.

Regulations

See Kansas Department of Revenue Public Information Library at  www.ink.org/public/kdor/pilrd.html

• Kansas Administrative Regulations section 92-19-4b.  Recordkeeping requirements.  Requirements for production of paper and electronic records of taxpayer.
• Kansas Administrative Regulations section 92-19-44. Sampling methods. At the discretion of the director of taxation, sampling principles or methods may be used in lieu of a 100% examination of records in conducting a sales or use tax audit. (Authorized by K.S.A. 79-3618, 79-3707; implementing K.S.A. 79-3609, 79-3707; effective May 1, 1987.)
• Kansas Administrative Regulations section 92-19-49a. Refund requests.  Clause (j)(2) of this regulation: "If a business pays a liability or accepts a refund that was determined under an audit assessment that applied a sampling technique to an established population, the population that served as the base for the sampling portion of the assessment shall be closed to all additional assessments and refunds."

Department of Revenue pronouncements

• Audit Sampling Guide - Non-CAA / Non-statistical Sampling (effective September 1, 1999).  Based on non-statistical sampling methods of the Texas Comptroller of Public Accounts.
• Computer Assisted Audit - Roles, Responsibilities, and Procedures, (revised September 1999).
  
• Computer Assisted Audit - Statistical Sampling for Sales and Use Tax, Pub KS-1900 (revised September 1999).
• Notice 00-09 (September 19, 2000, reissued August 8, 2001), implementing Kansas Statutes Annotated, Chapter 79, Article 36, Section 79-3661.  Managed audit agreements explained.  The explanations state the director of taxation will provide written guidelines on what records will be examined, what types of sampling techniques will be used, and other procedures.
  
• Opinion Letter O-1999-19 (issued January 24, 2000, published February 15, 2000). The administrative appeals process provides for a review of the Department of Revenue's sampling techniques.  Questions regarding the sampling technique should be raised during that appeal process.  Once a taxpayer’s appeal rights are exhausted, additional review of the underlying sampling technique is not available.  Kansas law does not permit refund requests to be submitted based on sampling techniques.  The Department of Revenue does not have the resources to pay for review of refund requests based on sampling techniques.  Additionally, no regulations exist that instruct taxpayers regarding which sampling method should be used when a business conducts a self audit.
• Opinion Letter O-2000-037 (issued November 30, 2000; published December 12, 2000).  Discusses use of block sampling.  Refund claims cannot be based on a sampling methodology.
• Opinion Letter O-2002-007 (issued March 29, 2002, published April 19, 2002). Taxpayer submitted sales tax refund claims to a vendor based on sampling to determine percentage of exempt use.  The Department of Revenue does not allow refund claims on the basis of a sample.  Each refund request submitted to a vendor must identify specific line items on specific invoices.

Kansas Tax Cases

•  Acker Electric, Inc., BOTA Docket No. B422-87-DT, (Kansas Board of Tax Appeals, September 23, 1987).  Taxpayer installed electrical systems in connection with the original construction.  Taxpayer erroneously paid sales tax from its own funds.  Department asserted refunds should be paid to the customers, not the taxpayer.  BOTA ruled in favor of taxpayer since it paid the sales tax with its own funds and did not bill the customers for the sales tax.
  

Kentucky

Reviews

• Mark F. Sommer, "Sales/Use Tax Audit Sampling in Practice - An Overview of One States' Case Law", presented at ABA/IPT Advanced Sales/Use Tax Seminar, New Orleans, March 22, 2000.

Statutes

Online at http://162.114.4.13/krs/titles.htm

• Kentucky Revised Statutes 131.240, http://162.114.4.13/KRS/131-00/240.PDF (Added by Ch. 184 (H.B. 497), Laws 2005, effective June 20, 2005.) If taxpayer maintains records in paper and electronic form, then Revenue Cabinet may requests those records in electronic form.
• Kentucky Revised Statutes 139.640, http://162.114.4.13/krs/139-00/640.PDF , Revenue Cabinet may offset overpayments against underpayments.
• Kentucky Revised Statutes 139.720, http://162.114.4.13/krs/139-00/720.PDF, Records required to be kept in acceptable format for four years.

Regulations

Online at www.lrc.state.ky.us/kar/TITLE103.HTM

• 103 Kentucky Administrative Regulations 31:020, Records.  Taxpayer's records must include the normal books of account ordinarily maintained by the average prudent business man engaged in the activity in question, together with all bills, receipts, invoices, cash register tapes, canceled checks, bank statements, or other documents of original entry supporting the entries in the books of account, as well as all schedules or working papers used in connection with the preparation of tax returns and all "resale certificates," "agricultural certificates," and other approved certificates received from purchasers.

Administrative Guidance

• Kentucky's Computer Assisted Audit Program, (July 2005).

Cases

• Banbury Equipment Corp. v. Department of Revenue, File No. K73-R-15, Order No. K-3594, CCH-STATE-CASE-TAX-CT, 54--86 KY-TAXRPTR-TB ¶201-301, (Kentucky Board of Tax Appeals, May 6, 1974).  In assessing an equipment corporation for a sales tax deficiency for the period of January 1, 1967 through December 31, 1970, the Department of Revenue acted within the proper period of limitations on sales and use tax assessments. Although KRS 139.620 provides for a deficiency sales and use tax assessment to be made within four years from the date the return was filed, the time may be extended by agreement between the taxpayer and the Department. The waiver document signed by the corporation's comptroller was an effective document, even though it was not signed by an authorized representative of the Department. The Department of Revenue correctly used a three month sampling period method of assessment since the taxpayer agreed to the use of this method and the method yielded a corrected assessment. Also, it was proper procedure for the Board of Tax Appeals to require the taxpayer to proceed with the production of its testimony and evidence prior to production of proof by the Department.
• Bobby Goullon Bulldozing and Trucking Service v. Revenue Cabinet, File No. K87-R-38, Order No. K-12866, 1989 Ky. Tax LEXIS 44 (KBTA 1989).
• Brown's Superior Market, Inc. v. Revenue Cabinet, Ky. App., Case No. 90-CA-479-MR (1990) (unpublished).
• Brown's Superior Market, Inc. v. Revenue Cabinet, File No. K87-R-18, Order No. K-12845, 1989 Ky. Tax LEXIS 16 (KBTA 1989).
• Convenient Food Mart No. 156 v. Revenue Cabinet , Ky. App., Case No. 87-CA-002023 - MR, CCH-STATE-CASE-APP-CT, 86--97 KY-TAXRPTR-TB ¶202-046 (Kentucky Court of Appeals, October 28, 1988).  In a case not designated for publication, a Kentucky court of appeals held that, in an audit of a food mart by the Revenue Cabinet, the food mart's cash register tapes and tax returns were sufficient to prove its gross receipts for sales tax purposes under Sec. 139.200. Although the tapes did not identify the items sold, they did show taxable and nontaxable sales. The Revenue Cabinet assessed additional sales tax against the food mart after using a purchase markup on a sample basis as the method to determine the food mart's gross receipts. During the audit, the Cabinet had refused to rely on the taxpayer's cash register tapes. The court of appeals held that the "bottom line results" of the audit were adversely affected by deficiencies in the audit procedure. Thus, the court remanded the case for consideration of other issues raised by the Revenue Cabinet.
• Revenue Cabinet v. Convenient Food Mart No. 156, Civil Action No. 86-CI-1058, CCH-STATE-CASE-TRL-CT, 86--97 KY-TAXRPTR-TB ¶201-942, (Franklin Cir. Ct., Div. I, July 28, 1987).  A retailer was assessed additional sales tax on the basis of a purchase markup audit performed on a sample basis. The taxpayer failed to present factual information to prove that the "bottom line results of the audit" were adversely affected by alleged errors and omissions in the audit procedure. Since the taxpayer neither met its burden of proof regarding the adverse effect of the audit methodology nor presented expert testimony to establish the extent of losses prevalent in the industry, the original assessment, which had been reversed by the Kentucky Board of Tax Appeals, was reinstated.
• Convenient Food Mart No. 156 v. Revenue Cabinet , File No. K85-R-12, Order No. K-11026, 1986 Ky. Tax LEXIS 280, CCH-STATE-CASE-TAX-CT, 54--86 KY-TAXRPTR-TB ¶201-875, (Kentucky Board of Tax Appeals, April 17, 1986).  An audit of a franchise food market that overestimated gross receipts was invalid. The audit employed a purchase mark-up method on a test or sample basis whereby certain groups of items were presumed to be marked up by certain percentages and all items were presumed to be sold. The audit took no account of reduced mark-ups or of loss through spoilage or breakage. The audit also failed to take into account an increase in inventory during the test year or a trend from more nontaxable sales toward more taxable sales during the relevant period.
• GTE South v. Revenue Cabinet and Board of Tax Appeals, No. 2003-CA-000773-MR, http://162.114.92.72/COA/2003-CA-000773.pdf (Kentucky Court of Appeals, April 2, 2004).   Taxpayer was initially assessed $11.3 million in sales and use tax.  Appeals Court held the Revenue Cabinet's assessment notice failed to meet the proecudral requirements.  GTE South had an outstanding refund request for a period that partially overlapped the assessment period.  Case remanded for further proceedings.
  
• Henry A. Petter Supply Co.  v. Department of Revenue, File No. K81-R-53, Order No. K-8530, 1982 Ky. Tax LEXIS 558, CCH-STATE-CASE-TAX-CT, 54--86 KY-TAXRPTR-TB ¶201-626, (Kentucky Board of Tax Appeals, October 8, 1982).  A taxpayer acquiesced in the use of a sample audit during the audit, but challenged the audit procedure after the audit was completed and the deficiency assessment had been issued. Because the taxpayer did not challenge the sample audit procedure during the audit, he waived his right to object to it, and the use of the procedure was upheld.
• Hinkle & Helton Food Mart v. Revenue Cabinet , Ky. App., Case No. 88-CA-2607-S (1989) (unpublished).
• Hinkle & Helton Food Mart v. Revenue Cabinet, File No. K85-R-56, Order No. K-11087, 1986 Ky. Tax LEXIS 226 (KBTA 1986).
• Jerry Lipps, Inc. v. Transportation Cabinet , File No. K87-R-25, CCH-STATE-CASE-TAX-CT, 86--97 KY-TAXRPTR-TB ¶201-997, (Kentucky Board of Tax Appeals, March 17, 1988).  Since the carrier had agreed that the month of December 1985 would be used by the Transportation Cabinet's auditors as a representative sample of the three year audit period ending December 31, 1985, the additional assessment for tax, penalty, and interest resulting from that audit was sustained.
• Olin Wooten Transport Co., Inc. v. Transportation Cabinet, File No. K97-R-14, CCH-STATE-CASE-TAX-CT, KY-TAXRPTR ¶202-524, (Kentucky Board of Tax Appeals, January 20, 2000).  A motor carrier was liable for an additional assessment of Kentucky highway use tax based on a sample audit because the carrier did not present any specific facts to contradict the assessment. The carrier's contention that calendar quarters other than the one used in the auditor's sample would show a different deviation in reported miles was not a material fact dispute because the Transportation Cabinet had the authority to conduct a sample audit and base its assessments on such procedures. The Transportation Cabinet entered specific evidence, including affidavits and attached work papers, to support the factual basis for the assessment, while the carrier made only a general allegation that the Transportation Cabinet's facts were wrong.
• Progress Paint Mfg. Co., Inc. v. Revenue Cabinet, File No. K85-R-51, Order No. K-11387, 1987 Ky. Tax LEXIS 643 (KBTA 1987).
• Thomas v. Holmes, Ky. 208 S.W. 2d 969 (1948).
• Trane Co. v. Department of Revenue, File No. K74-R-23, Order No. K-4003, CCH-STATE-CASE-TAX-CT, 54--86 KY-TAXRPTR-TB ¶201-347, (Kentucky Board of Tax Appeals, July 23, 1975). The procedure used in assessing the original liability was the "percentage of error method." This procedure entailed the use of a sampling period of selected months to determine the percentage of sales in those months that were, according to the auditors view, improperly deemed by Trane to be exempt. The auditor then spread the percentage across sales to Kentucky, for the four years of the total audit period in question, to compute the total liability. Trane does not contest the use of the "percentage of error method" by the department.
• Williams Grocery & Gas v. Revenue Cabinet, File No. K92-R-10, Order No. K-15172, Ky. Tax LEXIS 105 (KBTA 1994).
• Zerkle Trucking Company v. Transportation Cabinet, File No. K87-R-2, CCH-STATE-CASE-TAX-CT, 86--97 KY-TAXRPTR-TB ¶201-965 (Kentucky Board of Tax Appeals, October 15, 1987).  Oral testimony by the trucking company's president was neither sufficient to shift tax liability to the owner-operators who leased their power units to the company, nor competent to prove that a sample test audit applied to the three year audit period was incorrect.

Louisiana

Statutes

Online at www.legis.state.la.us/

• Revised Statutes section 33:2719. Contracts for purpose relating to collection of sales and use taxes.  Local governments may contract with private auditing firms to examine taxpayer's records.  If the cost of a sales tax compliance audit is to be borne by the taxpayer, the cost to the taxpayer shall not exceed thirty percent of the amount of the additional taxes determined to be due as the result of the audit.
• Revised Statutes section 47:307. Collector's authority to determine the tax when taxpayer's records are not adequate or tax return is grossly wrong.
• Revised Statutes section 47:309. Dealers required to keep records.
• Revised Statutes section 47:309.1. Requirement to furnish list of purchasers.
• Revised Statutes section 47:310. Wholesalers and jobbers required to keep records.
• Revised Statutes section 47:311. Collector's authority to examine records of transportation companies.
• Revised Statutes section 47:1511. Power to make rules and regulations.
• Revised Statutes section 47:1541. Collector's duty to determine correct tax.   As soon as practicable after each return or report is filed under any of the provisions of this Title the collector shall cause it to be examined and may make such further audit or investigation as he may deem necessary for the purpose of determining the correct amount of tax.
• Revised Statutes section 47:1541 (B). [Added by 2001 Regular Session, Act 201, SB 668, signed by Governor on May 31, 2001, effective June 4, 2001, http://www.legis.state.la.us/leg_docs/01RS/CVT3/OUT/0000ISGG.PDF .]  The taxpayer and the secretary or his designee may enter into a binding agreement to use a sampling procedures conforming to generally recognized sampling techniques, which may result in either an underpayment or overpayment of tax.
• Revised Statutes section 47:1541 (C). [Added by 2001 Regular Session, Act 201, SB 668.]  Specifies conditions for sampling procedures.
• Revised Statutes section 47:1542. Power to examine records and premises of taxpayer.  Tax collector or assistants may examine any records of the taxpayer.
• Revised Statutes section 47:1562. Determination and notice of tax due.  If a return or report made and filed does not correctly compute the liability of the taxpayer, the secretary shall cause an audit, investigation, or examination to be made to determine the tax, penalty, and interest due.  [As amended by 2001 Regular Session, Act 201, SB 668.]
• Revised Statutes section 47:1621. Refunds of overpayments authorized.

Administrative

• Opinion of the Attorney General, No. 97-86, CCH-AGO, LA-TAXRPTR ¶201-331, (March 25, 1997). A parish should retain submitted sales and use tax returns for three years.
• Opinion of the Attorney General, No. 98-110, CCH-AGO, LA-TAXRPTR ¶201-379, (April 15, 1998). A taxpayer may not refuse to produce records or submit to an audit by a private firm if a valid contract exists between the political subdivision or entity and the audit firm. When authorized by contract, the firm may examine or investigate the taxpayer's place of business, tangible personal property, books, records, papers, vouchers, accounts, or documents. Also, the audit firm and its employees must comply with confidentiality provisions. Proper notice of the intent to audit must be given to the taxpayer by the political subdivision or entity.

Cases

• Lafayette Parish School Board v. C&B Sales and Service, Inc., 735 So2d 6, CCH-STATE-CASE-APP-CT, LA-TAXRPTR ¶201-415, (Louisiana Court of Appeal, Third Circuit, February 3, 1999).  Trial court heard conflicting testimony from parish's expert (Gary Lambert) and a court appointed expert (E. M. LeBlanc) regarding taxpayer's use of oil and gas compressors. Trial court accepted report of its expert who personally reviewed the records instead of the parish's expert who relied on oral representations.  Appellate court upheld trial court's decision to determine which expert's report was more credible.
• Bill Roberts, Inc. v. Shirley McNamara, Secretary, Department of Revenue and Taxation, 527 So.2d 459, CCH-STATE-CASE-APP-CT, LA-TAXRPTR ¶201-034, (Louisiana Court of Appeal, Fifth Circuit, June 7, 1988).  Department's determination of tax liability against the taxpayer could not be sustained, because the Department presented no documentary evidence to support its claim. Absent such evidence, the court was precluded from rendering a decision favorable to the Department. Additionally, the auditor who reviewed the taxpayer's records was not called to testify. Since the Department did not establish a prima facie case, the taxpayer was relieved of tax liability.
• Schwegmann Bros. Giant Super Markets, Inc. et al. v. Mouton, Collector of Revenue, 309 So.2d 686, CCH-STATE-CASE-APP-CT, 48--85 LA-TAXRPTR-TB ¶200-491, (Louisiana Court of Appeal, Fourth Circuit, November 7, 1974).  Court sustained the Department of Revenue's audit methods that relied on three factors: (1) analysis of the collected sales tax bracket schedule used by the taxpayer; (2) the actual experience of similar businesses; and (3) an audit of some of the retailer's cash register receipts.
• St. Gabriel Industrial Enterprises, Inc., and Industrial Fill Materials, Inc. v. Arnold Broussard, Secretary, Department of Revenue and Taxation, 602 So2d 1087, CCH-STATE-CASE-APP-CT, LA-TAXRPTR ¶201-183, (Louisiana Court of Appeal, First Circuit, June 29, 1992). The Department of Revenue was not barred from using a "rate of error" uncovered in another part of the audit to project a deficiency for a period for which there were no taxpayer records. According to the the State's auditor, the projection was used only when there was an absence of taxpayer's records. The auditor explained that where records were provided, he did a "one hundred percent" audit. Only in the absence of records was the error rate used to project a figure for the taxes owed to the State.  The taxpayer's argument that the "error rate" method was rejected by the legislature is not convincing. Although the legislature failed to adopt proposed legislation to sanction the method, it did not prohibit the use of the method.
• Tax Collector of St. Tammany Parish v. Wal-Mart Stores East, Inc., No. 98-CA-2287 and No. 98-CA-2888, unpublished opinion, (Louisiana Court of Appeal, First Circuit, November 5, 1999).  The Tax Collector of St. Tammany Parish made an arbitrary determination of sales tax due when it alleged that Wal-Mart failed to respond to a request for production of 1991-1994 sales records.  Wal-Mart protested and refused to pay the tax.  Trial court ruled in Wal-Mart's favor.  The appellate court affirmed in favor of Wal-Mart.  The appellate court held, "Neither the parish rules not the state laws contain a specific rule that denies a defendant a right of defense as the result of a "fatal" or "uncontestable assessment," or for the taxpayer's failure to pay under protest. ... The collector's representative did not ask for additional information for audit, did not submit any evidence of a discrepancy in the sales report, and submitted no evidence of underreported income from a review, investigation, or audit.  ... Admittedly, the collector's representative had no evidence; he had only an unsubstantiated belief that Wal-Mart underreported.  The assessment was a derived from a fantasy calculation of what a company might be able to hide, if it chose to hide sales income.  A jeopardy or arbitrary assessment procedure was not supportable under the facts here."
  

Maine

Statutes

Online at http://janus.state.me.us/legis/statutes/36/title36ch00sec0.html

• 36 Maine Revised Statutes section 141(1), Authority to audit. return, When a return is filed, the State Tax Assessor shall cause it to be examined and may conduct such audits or investigations as he believes necessary to determine the correct tax liability.
• 36 Maine Revised Statutes section 2011, Overpayments; refunds.

Cases

• Bouchard v. Johnson, 170 A.2d 372, (Maine 1961).
• Farrar Brown Co. v. Johnson , 207 A.2d 406 (Maine 1965).
  

Maryland

Statutes

• Maryland Code Annotated, Tax-General section 11-302. Tax stated and charged separately. Sales and use tax shall be stated and charged separately from the sale price
• Maryland Code Annotated, Tax-General section 11-504. Records Vendors are required to keep records for 4 years.
• Maryland Code Annotated, Tax-General section 13-302 (a-1). Determination using scientific random sampling techniques. If the Comptroller determines that the taxpayer's records are so detailed, complex, or voluminous that an audit of all detailed records would be unreasonable or impractical, the Comptroller may compute the sales and use tax by using scientific random sampling techniques.

Code of Maryland Regulations (COMAR)

• COMAR 03.01.03.03,http://taxpros.marylandtaxes.com/guides/comar/sub1.asp Record-keeping requirements for computer and paper records.
• COMAR 03.01.03.03,http://taxpros.marylandtaxes.com/guides/comar/sub1.asp Record-keeping requirements. If a taxpayer retains records required to be retained by the Comptroller in both machine-sensible and hard-copy formats, the taxpayer shall make the records available to the Comptroller in both formats upon request of the Comptroller.
• COMAR 03.06.03.02,http://www.dsd.state.md.us/comar/03/03.06.03.02.htm Administrative and procedural requirements: Record-keeping. Taxpayers must keep records for 4 years in connection with sales and purchases. If the taxpayer fails to keep the records required, the Comptroller may compute the taxes due by using a factor that the Comptroller develops by other means.

Publications

• SVE: Statistical Variation Estimation Programs, Developed by Towson State University's Applied Mathematics Laboratory for Estimating Sales & Use Tax Liabilities, User's Manual, (revised August 10, 1996).  Describes a spreadsheet application for determining sample size, selecting a sample, and estimating from the sample to the population.

Cases

• Shelly S. Wright, t/a T & M Cut Rate & Lounge vs. Comptroller of Treasury, Maryland Tax Court No. 03-SU-00-0416 unreported. Taxpayer failed to meet its burden of proof to provide evidence on a correct mark-up percentage. The court implied the taxpayer should show the Comptroller's result is incorrect and what the correct amount should be.

Massachusetts

Statutes

• Massachusetts General Laws Chapter 62C, section 24, www.state.ma.us/legis/laws/mgl/62C-24.htm    If the books, papers, records, and other data of the taxpayer are so voluminous as to make a complete audit thereof impractical and inefficient, the commissioner may use such statistical sample methods in conducting such audit as may be agreed to by the parties and project the audit findings derived therefrom over the entire audit period to determine the proper tax. If, after a good faith effort, the parties cannot reach such an agreement, the commissioner may utilize such statistical sample methods which he deems appropriate and which comply with the provisions of the Internal Revenue Code.

Administrative Documents

• Letter Ruling 1982-116, CCH-ADMN-RUL, 67--84 MA-TAXRPTR-TB ¶200-850, (December 3, 1982).  A taxpayer that sold printed material in and out of state requested permission to use a periodic statistical sampling of its sales to determine the portion of its sales that is taxable.  Department stated that the company may apply for a classified permit to determine its percentage of exempt sales, but such a permit does not relieve the company of the obligation to collect the proper tax from its customers.

Cases

• Chef Chang's House, Inc., v. Commissioner,  Docket No. 152100, CCH-STATE-CASE-TAX-CT, MA-TAXRPTR ¶400-310, (Appellate Tax Board, December 18, 1996).  The Commissioner of Revenue conducted an audit of the taxpayer’s books and records which resulted in an assessment of additional sales tax.  In order to conduct the audit, the Commissioner requested that the taxpayer, a restaurant, provide an extensive amount of documentation of its sales.  From those documents, the Commissioner's auditor randomly picked out bundles of guest checks for nine sample days.  The auditor selected those dates without a sampling or other agreement with the taxpayer.  No evidence was presented showing that the dates selected were representative of the 35 month audit period or that there was any basis for their selection.  The Appellate Tax Board found that the sampling method was not justified given the extensive records maintained and supplied by the taxpayer.  Specifically, the Board found that the audit methods were statistically invalid, unreliable and unreasonable.
• Circuit City Stores, Inc. v. Commissioner of Revenue, Massachusetts Appellate Tax Board, Dkt. No. F251413, (February 11, 2002).  The transactions at issue here involved sales made in Massachusetts, which were picked up in New Hampshire. The taxpayer was audited using the statistical sampling of two weekend days with 23 transactions at three stores in Massachusetts near the border with New Hampshire out of the taxpayer's 18 Massachusetts stores. After an audit, the Revenue Commissioner assessed the taxpayer sales tax on these transactions.  The Board ruled that the 2-day statistical sampling method used by the auditor was proper.
  
• In Re: Healthco International, Inc., Debtor, Docket No. 93-41604, CCH-ADMN-RUL, STATE-ARD ¶400-689, (United States Bankruptcy Court District of Massachusetts, February 14, 2001).  The Chapter 7 bankruptcy trustee disputed an audit assessment by the Massachusetts Department of Revenue for sales tax periods between 1989 and 1993.  On or about December 11, 1999, the Department destroyed the records connected with the audit. The court held that when the taxpayer produces prima facie evidence that standing alone and unexplained establishes its position, the burden of proof shifts to the Department.  The bankruptcy court denied the Department's claim because the Department could not produce adequate proof.
• Rule Industries, Inc. v. Commissioner, Docket Nos. 205338 through 205341, CCH-STATE-CASE-TAX-CT, MA-TAXRPTR ¶400-382, (Appellate Tax Board, October 23, 1997).  The auditor requested that the taxpayer provide all of its invoices and purchase journals for the three year audit period.  The taxpayer, however, provided the auditor with records for only one year.  After failing to agree on a sampling method, the auditor conducted a statistical sample to complete the assessment based on those records.  The Appellate Tax Board found that the sampling method was reasonable and appropriate given the large volume of records involved, the taxpayer’s providing only one year of records for a three year audit period and the taxpayer’s failure to cooperate with the auditor in choosing a sampling method.

Michigan

Statutes

• Laws Section 205.3. State commissioner of revenue; powers and duties generally. Commissioner or duly appointed agents may examine books and records.
• Laws Section 205.4. Standards for fair and courteous treatment of the public; informal conferences and audits; handbook.  Department shall provide handbook of audit procedures to the public.
• Laws Section 205.5. Brochure listing and explaining taxpayer's protections and recourses; communication concerning determination or collection of tax.

Department of Treasury Rules

Online at http://www.state.mi.us/orr/emi/admincode.asp?admincode=Department&Dpt=TY

• Rule 205.4101, Tax Electronic Recordkeeping and Retention Rules

Department of Treasury Publications

• Audit Sampling Manual, March 2007.
• The Routine Audit (January 10, 2002), www.michigan.gov/treasury/0,1607,7-121-1750_2143_2159-8040--,00.html .  Generally the auditor’s first step is to review the accounting, tax accrual and reporting systems and evaluate the internal controls within each. If tax errors are identified either of two types of audit can be performed.
  
• Detailed audit: The auditor will examine all business records for the entire audit period.
• Sample audit: The auditor will use sampling methods. Errors found in representative samples of business records are projected over the entire audit period. Sampling provides accurate results with significant savings of time and manpower for the state and you the taxpayer.
• In either method, if the records are inadequate the audit is based on the best information available.

Cases

• Bonessa v. Department of Revenue, Michigan Board of Tax Appeals, Docket No. 473 (1959).
• Byers v. Department of Revenue, Michigan Board of Tax Appeals, Docket No. 173 (1949).
• Mid-Sibley Party Store, Inc. v. Michigan Department of Treasury, Docket No. 230821, CCH-STATE-CASE-TAX-CT, MI-TAXRPTR ¶400-731, (Michigan Tax Tribunal, April 23, 1998). The Michigan sales tax liability of a party store was properly determined by an audit based on a four month test period because the store owner failed to maintain adequate records. The owner was unable to support his allegation that the abnormally high proportion of nontaxable food sales reported was due in part to large soft drink contracts without a complete set of records pertaining to those contracts. Without producing all pertinent records for the tax period audited, the store owner could not carry his burden of refuting the correctness of the sales tax assessment.
• Saucedo v. Department of Treasury, Michigan Tax Tribunal, Docket No. 84413 (1986).  The audit sample was 14 days projected over a three year period.  The tribunal determined the sample was too small and ordered the error rate be recalculated using a six month test period.
  
• Wm. J. and Wm. A. Schleimer, d/b/a Wm. Schleimer and Sons v. Department of Revenue,  Docket No. 692, CCH-STATE-CASE-TAX-CT, 58--74 MI-TAXRPTR-TB ¶200-317, (Michigan Board of Tax Appeals, December 15, 1966).  A deficiency sales tax assessment based on an examination of taxpayers' invoices for two months of a thirty month audit period and applying a resulting average percent of error to the entire audit period is improper, since the taxpayers maintained adequate business records. However, claimed sales for resale made to an unlicensed retailer are taxable.
• Skope v. Department of Revenue, Michigan Board of Tax Appeals, Docket No. 197 (1950).

Minnesota

Statutes

• Minnesota Annotated Statutes section 270C.03, Subdivision 1, Powers and duties. www.revisor.leg.state.mn.us/stats/270C/03.html. The commissioner shall have and exercise the following powers and duties:
  • (1) administer and enforce the assessment and collection of taxes;
  • (2) make determinations, corrections, and assessments with respect to taxes, including interest, additions to taxes, and assessable penalties;
  • (3) use statistical or other sampling techniques consistent with generally accepted auditing standards in examining returns or records and making assessments;
• Minnesota Annotated Statutes 289A.50, Claims for refunds, www.revisor.leg.state.mn.us/stats/289A/50.html

Minnesota Department of Revenue documents

• Sales Tax Audit and Collection Activities, (February, 1993).
• The Audit Process:  Minnesota Taxpayer Rights Advocate, (April 2002), http://www.taxes.state.mn.us/individ/other_supporting_content/english_audit.pdf,  at page 2.  "If we need to review numerous records, we may use a document sampling method to determine the tax due.  We must explain our sampling technique to you.  You have the right to have another person, such as a CPA or statistician, review our sampling method."
  

Cases

• Anacker v. County of Cottonwood, Minnesota Supreme Court, Docket No. 50703, 302 N.W.2d 342, CCH-STATE-CASE-HIGH-CT, 57-83 MN-TAXRPTR-TB ¶201-043, (January 9, 1981).  Court upheld county's property valuation method based on sampling of property sales.
• F-D Oil Company, Inc., et al. v. Commissioner of Revenue, Minnesota Supreme Court, No. C1-96-1589, CCH-STATE-CASE-HIGH-CT, MN-TAXRPTR ¶202-732, (March 27, 1997).  Court upheld assessment of income tax when taxpayer records were inadequate and auditors relied on the records of one store to determine the underreported income of another store.
• New Corner Bar, Inc. v. Commissioner of Revenue, Minnesota Tax Court Docket No. 7221 R, CCH-STATE-CASE-TAX-CT, MN-TAXRPTR, (August 29, 2001).  Tax Court upheld use of indirect method of estimating sales of a bar and applying that to a six year audit period when the taxpayer could not produce sufficient records.
• NorAm Energy Corp. (formerly known as Arkla, Inc.)  v. Commissioner of Revenue, Minnesota Tax Court Docket No. 6728, CCH-STATE-CASE-TAX-CT, MN-TAXRPTR ¶202-767, 1997 Minn. Tax LEXIS 58 (October 22, 1997), www.taxcourt.state.mn.us/published%20orders/1997/noram%20energy%20corporation%20fka%20arkla%20inc%20v%20cor%20dec%2010-22-1997.doc.  Tax court heard conflicting testimony from expert witnesses (both professors at the University of Minnesota) on whether the Department of Revenue had used statistically valid procedures to estimate the total tax deficiency from a stratified random sample. Court upheld the Department of Revenue's use of spreadsheets and an accounting firm's licensed statistical sampling computer program and the results that were achieved were consistent with generally accepted accounting principles (GAAP). The taxpayer argued that the combined ratio method should not have been used, because the audit produced 17 strata of samples with no detected errors. The taxpayer also argued that the simple extension method and adjustment rule should have been used. Strict compliance with the GAAP is not required at every stage of an audit. However, there must be a standard that is ascertainable by the taxpayer, as there was in this case. Also consistent with the GAAP was the adjustment to the point estimate rather than lower bound of the precision interval.
• NorAm Energy Corp. (formerly known as Arkla, Inc.)  v. Commissioner of Revenue, Minnesota Tax Court Docket No. 6728, (Decision on motion to strike,  August 25, 1997),  www.taxcourt.state.mn.us/published%20orders/1997/noram%20energy%20corporation%20formerly%20known%20as%20arkla%20inc%20v%20cor%20ord%2008-25-1997.doc .  During the trial in March 1997, the appellant-taxpayer presented Professor Gordon Duke as an expert on audit sampling.  Professor Duke quoted certain passages from a treatise by Professor Don Roberts.  In a post-trial memorandum, the appelle-tax commissioner submitted more complete excerpts from the treatise by Professor Don Roberts and another Neter and Loebbecke.  The appellant-taxpayer objected to these additional exhibits since they were not quoted by Professor Duke in his testimony and should not be part of this decision.  The tax court judge agreed and ordered the appelle-tax commissioner to strike these exhibits.
  
• Wilson v. Commissioner , 493 NW.2d 566, (1992).  Court sustained assessment of sales tax on accrual method of accounting even though the business was authorized to report sales tax liability under the cash method.

Mississippi

Statutes

• Code Annotated Section 27-3-63, www.mscode.com/free/statutes/27/003/0063.htm. Audit of books and records located outside of state.
• Code Annotated Section 27-65-43, www.mscode.com/free/statutes/27/065/0043.htm.  Record-keeping requirements.  The commissioner may require any information or records from computer information systems on media common to those systems. Taxpayers' records may be sampled for audit purposes at the discretion of the commissioner and any assessment rendered as a result of same shall be considered prima facie correct.

Missouri

Reviews

• CCH-EXP, SALES-TAX-GUIDE MO ¶61-420, Audit Procedures.

Statutes

• Missouri Revised Statutes section 136.076, Prohibition of contingent fee contracts for state and county tax audits, added by HB 129, Laws 2001, effective August 28, 2001, http://www.moga.state.mo.us/statutes/C100-199/1360000076.HTM
• Missouri Revised Statutes section 136.120, Powers of director to prescribe rules and regulations, http://www.moga.state.mo.us/statutes/C100-199/1360000120.HTM
• Missouri Revised Statutes section 136.300, Burden of proof, http://www.moga.state.mo.us/statutes/C100-199/1360000300.HTM

Regulations

Missouri Code of Regulations Title 12, section 10-3.568, (Amended May 11, 1990).  The use of sound audit sampling techniques generally benefit both the taxpayer and the director of revenue. Audit sampling techniques generally reduce the time necessary to complete audit field work and reduce the taxpayer's time and effort in retrieving documents for audit purposes.  The director of revenue or his/her duly authorized agent may use statistical sampling methods in lieu of a one hundred percent (100%) examination of records in conducting a sales/use tax audit.  Statistical sampling methods include those procedures which utilize random selection and are capable of projecting population values with a known reliability.  Upon written agreement by the taxpayer, the director of revenue or his/her duly authorized agent may utilize nonstatistical sampling methods in lieu of a one hundred percent (100%) examination of the records in conducting a sales/use tax audit.

Cases

• Cadwell Supermarket Inc. v. Director of Revenue, 98 STN 20-24, (Missouri Administrative Hearing Commission, January 1998). Hearing officer upheld auditor's use of test period sample when many of taxpayer's records had been destroyed.
• Evergreen Lawn Service, Inc. v. Director of Revenue, Docket RS-80-0187, CCH-STATE-CASE-TAX-CT, 83--89 MO-TAXRPTR-TB ¶201-097, (Missouri Administrative Hearing Commission, July 13, 1987).  In estimating the sales and use tax liability of a lawn service corporation that had neglected to file returns under Sec. 144.665 RSMo. 1978, the Director of Revenue must base his estimate on either the corporation's books and records or any information in his possession. [Note: The provision in Sec. 144.665 authorizing the Director to make an estimated assessment of use tax if a taxpayer fails to file a return, was deleted by H.B. 10, Laws 1983, effective January 1, 1984.] The Director could not estimate taxes based on records or data pertaining to periods other than the periods in question without showing what information was used, how it related to the periods in question, how the estimate was derived from the information, and why it was credible. The director had no carte blanche power to arbitrarily impose tax liability based upon irrelevant data and undisclosed formulae.
• Fo-Jo Studio, Inc. v. Director of Revenue, Docket RS-86-1463, CCH-STATE-CASE-TAX-CT, 83--89 MO-TAXRPTR-TB ¶201-264, (Missouri Administrative Hearing Commission, December 30, 1988).  The Director's assessment of sales tax on all of the taxpayer's gross receipts was improper, because the record indicated that the bulk of the gross receipts were from out-of-state sales. The Director justified the assessment on the ground that the taxpayer kept inadequate records, which made it difficult to distinguish the difference between Missouri sales and out-of-state sales. The law permits the Director to estimate tax liability on the basis of available information. The evidence indicated that the Director's auditor noted that approximately 80% of the taxpayer's receipts were derived from out-of-state mail-order sales, yet the Director assessed sales tax on 100% of the gross receipts. The Commission felt that the Director's assessment was arbitrary and unreasonable. The Director's dissatisfaction with the taxpayer's recordkeeping method did not authorize total disregard of the records that were kept.
• May Department Stores Co. d.b.a. Famous-Barr Co. v. Director of Revenue, Docket RS-80-0285, CCH-STATE-CASE-TAX-CT, 83--89 MO-TAXRPTR-TB ¶201-093, (Missouri Administrative Hearing Commission, July 13, 1987).  The use of a "cluster sampling" technique, whereby the transactions of a particular month were analyzed and the results applied across the board for the entire period, did not satisfy the requirements of Regulation 12 CSR 10-3.568 for a "generally accepted sampling method." This method requires random samples. Since the regulation does not provide for the use of alternative sampling methods, the taxable amounts determined according to the "cluster sampling" technique had to be discarded.   [Note:  This regulation was subsequently amended.]
• Sprint Communications Co. v. Director of Revenue, Case No. SC83820, (Missouri Supreme Court, January 22, 2002).   Taxpayer was barred from seeking refund from state of sales tax overpaid to vendors.  The vendors must file for the tax refund on the taxpayer's behalf.
  
• Trans World Airlines, Inc. v. Director of Revenue, Docket 89-001013RS, CCH-STATE-CASE-TAX-CT, 90--95 MO-TAXRPTR-TB ¶201-381, (Missouri Administrative Hearing Commission, January 10, 1990).  The taxpayer was denied a refund because it voluntarily agreed to use the cluster sampling audit method to determine its tax liability and was barred by the doctrine of res judicata from contesting an issue that was necessarily a part of prior litigation.

Nebraska

Statutes

• Nebraska Revised Statutes 77-2703.  The Tax Commissioner is authorized to adopt appropriate rules and regulations for collection of sales and use tax.
• Nebraska Revised Statutes 77-2705, added by LB 169, effective September 1, 2001.   The Tax Commissioner is authorized to enter into managed compliance agreements with direct pay permit holders.

Department of Revenue publications

• Publication 7-149-79, Procedures for Reviewing and Appealing A Notice of Deficiency Determination, www.nol.org/revenue/info/7-149.pdf

Nevada

Statute

• Nevada Revised Statutes 360.300, paragraph 1.  If a taxpayer's returns are not satisfactory, the department may compute and determine the amount required to be paid upon the basis of:  (a) The facts contained in the return; (b) Any information within its possession or that may come into its possession; or, (c) Reasonable estimates of the amount.
• Nevada Revised Statutes 372.630, Overpayments and refunds.    Any overpayment of the use tax by a purchaser to a retailer must be credited or refunded by the state to the purchaser.
  

Department of Taxation Publications

• Preparing for an Audit, http://tax.state.nv.us/taxnew/audit.htm

Cases

• Jim L. Shetakis Distributing Inc. d/b/a Shetakis Wholesalers v. Nevada Department of Taxation , 108 Nev. 901, 839 P.2d 1315, 1992 Nev. LEXIS 165, (Nevada Supreme Court, 1992).   Court allowed Nevada Department of Taxation to use six test periods totaling 45 days as a representative and reasonable method, even though taxpayer had sufficient records for a complete census of all records.  Court held that requiring a detailed examination of every invoice would place an undue burden on the government. [Discussed in  Samuel C. Wisotzkey, "Use of Test Periods Approved for Sales Tax Audits", 3(2) Journal of Multistate Taxation & Incentives (May/June 1993).]
  

New Jersey

Division of Taxation publications

• Publication ANJ-7, Use Tax In New Jersey, www.state.nj.us/treasury/taxation/pdf/pubs/sales/anj7.pdf

Cases

• Alpha I, Inc., v. Robert K. Thompson, Director, New Jersey Division of Taxation , 19 N.J. Tax 53; 2000 N.J. Tax LEXIS 23, CCH-ADMN-RUL, STATE-ARD ¶400-727, (New Jersey Tax Court, June 13, 2000).   Taxpayer requested that the Division examine one month from each of various quarterly periods to obtain the audit sample. Taxpayer selected March 1994 as representative of first quarter 1994, and the auditor agreed with that selection.  When the auditor requested purchase and expense records for that month, the taxpayer could not comply because it had discarded its purchase records for that quarter. The auditor applied the error rate from the available records (from January 18, 1996 to June 2, 1997) to estimate the use tax liability for the first quarter of 1994. Taxpayer requested the assessment projected for the first quarter of 1994 be withdrawn because it was not required to produce records after the three year statutory period expired. The Tax Court denied the taxpayer's motion and ruled in favor of the Division of Taxation.
• Duncan Truck Stop v. Director, New Jersey Division of Taxation , 4 N.J. Tax. 367, (New Jersey Tax Court, 1982).  Tax court judge held that the sampling period should bear a reasonable relationship to the the audit period.
• Peoples Express Co. v. Director, New Jersey Division of Taxation, 10 N.J. Tax. 417, (New Jersey Tax Court, 1989).
  
• Ridolfi v. Director, 1 N.J. Tax 198, (New Jersey Tax Court, 1980).
• Yilmaz, Inc. v. Director, New Jersey Division of Taxation, Docket No. 000240-2003, CCH-STATE-CASE-TAX-CT, STATE-ARD, ¶401-076, (New Jersey Tax Court, April 1, 2005).  Held that auditor could use a markup analysis method when the taxpayer's records were inadequate.  The taxpayer cannot overcome the presumption of the audit's correctness simply by impugning the Director's methodology.  In this case the taxpayer did not meet its burden of proof to show the Director's methodology was incorrect.
  

New Mexico

Statute

• New Mexico Statutes Annotated 7-1-10.  Records required of taxpayers.
• 7-1-10 (E), new subsection added by HB 154, Laws 2001, effective June 15, 2001.  Authorizes Department to enter agreements with taxpayers to remit gross receipt taxes on an estimated basis (managed compliance).
• New Mexico Statutes Annotated 7-1-11. Inspection of taxpayer records.
• 7-1-11 (D), new subsection added by HB 154, Laws 2001, effective June 15, 2001.  Department is required to write and maintain policies and procedures concerning audit notification, scheduling, records that may be examined, analysis that may be done, sampling procedures, gathering information or evidence from third parties, policies concerning the rights of taxpayers under audit and other related matters. Department audit policies and procedures shall be made available to a person who requests them.
• New Mexico Statutes Annotated 7-1-17(C).  Burden of proof is on taxpayer to prove sampling is in error.
• New Mexico Statutes Annotated 7-1-26.  Refund claim procedures.
• New Mexico Statutes Annotated 7-1-29.  Department's authority to make refunds of tax overpayments.
• New Mexico Statutes Annotated, new section added by HB 154, Laws 2001, effective June 15, 2001. Department ia authorized to enter into managed audit agreement with taxpayers who satisfy Department's conditions.

Department of Taxation & Revenue Audit Manuals

• General Audit Manual
• www.state.nm.us/tax/acd/pdffiles/generalauditmanual.doc
• www.state.nm.us/tax/acd/pdffiles/generalauditmanual.pdf
• Audit Sampling Manual
• www.state.nm.us/tax/acd/pdffiles/auditsamplingmanual.doc
• www.state.nm.us/tax/acd/pdffiles/auditsamplingmanuals.pdf
• Corporate Income Tax Audit Manual
• www.state.nm.us/tax/acd/pdffiles/citauditmanual.doc
• www.state.nm.us/tax/acd/pdffiles/citauditmanual.pdf

Department of Taxation & Revenue Public Decisions and Orders

• Public Decision and Order No. 96-28, McClintlock Paper, Inc., www.state.nm.us/tax/d&o/dno9628.htm    (December 16, 1996).  Hearing officer denied taxpayer's assertion that use of judgmental sampling and non-statistical sampling is invalid.  Taxpayer failed to establish assessment or method utilized was incorrect.
• Public Decision and Order No. 97-10, Morgan Buildings & Spas, Inc. and Morgan Buildings and Spas, www.state.nm.us/tax/d&o/dno9710.htm   (March 20, 1997).  Taxpayer was able to exclude an “unusually large” sale from the calculation of the percentage of error in a sample-and-projection audit.  The hearing officer found that a $123,000 sale listed as an audit exception skewed the percentage of error and resulted in an improper assessment of tax, when most sales made by the taxpayer were in the $4,000 to $15,000 range.  The hearing officer determined that the proper way to handle such transactions was to assess them separately on a detailed basis.  The auditor's sample selection method was to pick the high, low, and average months of sales for each year in the audit period.
• Public Decision and Order No. 99-06, West Texas Express,  www.state.nm.us/tax/d&o/dno996.htm   (February 2, 1999).  Hearing officer found taxpayer had provided convincing alternative evidence and abated a highway use tax assessment by the Department.  The Department's audit procedures do not require auditors to make a 100 percent disallowance in the absence of records, but allows auditors to exercise their judgment in determining whether it is possible to use other records and extrapolate the information in those records to the period for which records are missing. There is nothing in the audit report to indicate whether the field auditor considered using alternative records or what factors led him to conclude that the use of alternative records was not a viable option.  The exercise of discretion must be reasonable.

Cases

• Johnson & Johnson v. Taxation and Revenue Department , New Mexico Court of Appeals, No. 17, 279 (March 7, 1997). Court held that only the attorney general's office has the authority to sign binding agreements for the state.  Although this opinion did not specifically deal with sampling methods, it could be interpreted that only the attorney general's office can bind the state to a particular sampling method.
• Torridge Corp. v. Commissioner of Revenue , 84 N.M. 610, 506 P.2d 354 (1972).
  
• Vivigen v. Minzner, 870 P.2d 1382 (1994).  Court allowed auditor to use corporate income tax return to estimate transaction tax liability.

New York
 

Review articles

• Brown, E. Parker, II, "State Taxation", 33 Syracuse Law Review 457 (1982).
• Kutcher, Howard, "The Use of Statistical Sampling in a Sales Tax Audit," 63 The CPA Journal 64 (March 1993). (discusses Marine Midland Bank (1992) decision by New York Division of Tax Appeals).
• Locke, James A., and Martha L. Salzman, "1993-1994 Survey of New York Law," 45 Syracuse Law Review 629 (1994).
• Murphy, Joseph H., and E. Parker Brown, II, "Taxpayers Reap Estimated Sales Tax Savings as Estimated Audits Are Voided," 54 New York State Bar Journal 434 (November 1982).
• Soshnick, Harold F., Jerrold H. Gattegno, Philip L. Krevitsky, Alan J. Preis, et al., "Sales Tax Compliance Study Released", 63 The CPA Journal 67 (May 1993).  Includes comment on New York State Tax Commissioner's request for authority to use statistical sampling in audits.
 

Statute

• McKinney's Tax Law section 1138(a). Authorizes the Commissioner of Taxation to use any information available, including estimation based on external indices or other information. When the tax is estimated, the taxpayer must be informed of the amount of tax estimated and allowed to challenge that estimate through the hearing process.
• McKinney's Tax Law section 3004-a.  (Added by Senate Bill 1327, Laws of New York 2001, chapter 307, enacted September 21, 2001).  Requires when the department of taxation and finance discovers any information regarding tax overpayments that information must be provided to the taxpayer.  Provides taxpayers with one hundred twenty days after they receive such notice to apply for a refund of such overpayment of taxes.

New York State Department of Taxation & Finance documents

• Computer-Assisted Audits: Guidelines and Procedures for Sales and Use Tax Audits, Publication 132 (revised October 2001),  www.tax.state.ny.us/pdf/publications/sales/pub132_1001.pdf .  Describes procedures for computer-assisted detail (CAD) audit, computer-assisted statistical sample (STAT) audit, and sales data analysis.
• Sales Tax Bureau Memo STB-01-1, Adjustments for Overlapping Audit Periods,(February 1, 2001).  This memo describes how auditors should treat untaxed items discovered in an audit to avoid duplicate taxation of the seller and purchaser on the item.

Cases disallowing auditor's sampling method

• Efstathios Adanides v. Chu, New York State Tax Commissioner, 134 AD2d 776, 521 NYS2d 826 , lv denied 71 NY2d 806 , 530 NYS2d 109, CCH-STATE-CASE-APP-CT, 87--88 NY-TAXRPTR-TB ¶251-831, (New York Supreme Court Appellate Division - 3rd Department, November 25, 1987).  Court canceled a portion of the assessment because the auditor did not request records for that period of the audit.  The auditor improperly failed to request the taxpayer's books for two quarters during which the taxpayer maintained accurate records, and incorrectly applied an error percentage to these quarters.
• Allied New York Services, Inc. v. Tully, 83 A.D.2d 727, 442 N.Y.S. 2d 624, (New York Supreme Court Appellate Division - 3rd Department, 1981). Court denied auditor's reliance on a one month test period when taxpayer's records were available for the 81 month examination period.
• Babylon Milk & Cream Co. , 5 A.D.2d 712, 168 N.Y.S.2d 124 (1957).  Court upheld assessment for period when taxpayer lacked adequate records, but deined projection for period when records were adequate.
  
• Benak Corp., DTA Nos. 808633, 808638, 809435, http://www.nysdta.org/Determinations/808633.DET.pdf (Division of Tax Appeals, Tax Appeals Tribunal, August 10, 1995).  Taxpayer successfully challenged an assessment on the basis that overlapping audits should preclude assessment.  An overlapping audit occurs when both the vendor and customer are simultaneously audited.  The Division of Taxation's audit guidelines direct that the same invoices may not be included in the sample periods for both the vendor and customer.  If the taxpayer can prove that the same invoices are included in the sample periods of both the vendor and the customer, those invoices will be excluded from the tax period.
• Chartair, Inc. v. State Tax Commission , 65 A.D.2d 44, 411 N.Y.S. 2d 41, (New York Supreme Court Appellate Division - 3rd Department, 1978). Court denied auditor's reliance on a three month test period when taxpayer's records were available for entire 43 month examination period.
• Christa Cella, Inc. v. State Tax Commission , 102 A.D.2d 352, 477 N.Y.S. 2d 858, (New York Supreme Court Appellate Division - 3rd Department, 1984).  Court denied assessment based on projections when auditor could not show the taxpayer's records were insufficient for complete testing.
• Garnet Wines and Liquors, Inc.,  File No. 805253, CCH-STATE-CASE-TAX-CT, NY-TAXRPTR, ¶253-868, (Division of Tax Appeals, Administrative Law Judge Unit, April 25, 1991).  A test period audit of a New York retail wine and liquor business improperly rejected a 2% allowance for inventory shrinkage resulting from theft and breakage. Although the taxpayer maintained adequate records, it agreed to a test period audit, which consisted of an analysis of purchase invoices for a five-day period and the application of markup percentages to those purchases. Using this method, estimated taxable sales projected over 13 sales tax quarters exceeded reported taxable sales forthe same period by only a 1.3% error rate. However, the taxpayer sustained its burden of showing that a 2% inventory shrinkage allowance was typical of retail stores. Consequently, the error rate of 1.3% determined by the auditor was offset by the allowance for inventory shrinkage. Furthermore, since the wine-to-liquor ratio was based on the invoices for only five days and the markup percentages were computed from selling prices of only the 20 most popular brands of wine and liquor, the limited accuracy of this analysis made it unreasonable to assess additional taxes based on a 1.3% error rate.
• Grecian Square, Inc. v. State Tax Commission, 119 AD2d 948 , 501 NYS2d 219, (New York Supreme Court Appellate Division - 3rd Department, 1986).  Court denied auditor's projection that appeared to be arbitrary and unsupported.
  
• Hard Face Welding and Machine Company, Inc., v. State Tax Commission, 81 AD2d 967 , 439 NYS2d 744, (New York Supreme Court Appellate Division - 3rd Department, 1981).  Court overturned auditor's reliance on one month test period when the taxpayer had records available.
  
• James G. Kennedy & Company, Inc. v. Chu as Commissioner of Taxation and Finance, 125 A.D.2d 773, 509 N.Y.S. 2d 199, (New York Supreme Court Appellate Division - 3rd Department, 1986).  Court denied auditor's assessment based on a test period when the taxpayer had adequate records and did not consent to a waiver of its right to a full examination rather than the use of a test period.
• Marine Midland Bank, N.A. , New York DTA No. 807533, CCH-STATE-CASE-TAX-CT, 91--92 NY-TAXRPTR-TB ¶400-521, 1992 WL 175837, (New York Division of Tax Appeals, 1992).  Administrative law judge denied auditor's reliance on computer assisted statistical sampling for periods where the taxpayer had adequate records for complete examination. The ALJ denied the use of sampling where the taxpayer had not given its consent to sample.  This decision includes extensive discussion of New York case law and expert testimony on the Division of Taxation's statistical methodology.
• Marine Midland Bank, N.A. , (New York Division of Tax Appeals Tribunal, May 13, 1993), New York DTA No. 807533, CCH-STATE-CASE-TAX-CT, 93-94 NY-TAXRPTR-TB ¶401-076.  Tribunal sustained decision of administrative law judge.
• Mohawk Airlines, Inc, v. Tully , 75 A.D.2d 249, 429 N.Y.S. 2d 759, (New York Supreme Court Appellate Division - 3rd Department, 1980).  Court denied auditor's use of test period method when taxpayer had adequate records available.
• Names in the News, Inc. v. State Tax Commission , 75 A.D. 145, (New York Supreme Court Appellate Division - 3rd Department, 1980).  Court denied auditor's use of test period method when taxpayer had adequate records available.
• Reader's Digest Association, Inc., v. Friedlander, 100 A.D.2d 871, 474 N.Y.S. 2d 131, (New York Supreme Court Appellate Division - 2nd Department, 1984).  Court denied auditor's reliance on a one month test period when the taxpayer's complete records were available. However, the taxpayer must exhaust its administrative remedies prior to a declamatory judgment action.
• James Waite, DTA 806363, 806419, (Division of Tax Appeals, November 24, 1993).  Taxpayer had inadequate records for some but not all of the audit period.  ALJ cancelled the assessment for the projection onto the extended period because the auditor had not specifically requested records for that extended period.  The taxpayer did not consent to sampling for the extended period.
  
• Yonkers Plumbing and Heating Supply Corp. v. Tully, 62 A.D.2d 18, 402 N.Y.S. 2d 792 (New York Supreme Court Appellate Division - 3rd Department, 1978).  Court denied auditor's reliance on one month test period to project over 58 month period when taxpayer had adequate records for full examination.

Cases upholding auditor's sampling, projection, or mark-up methods

• Arnmart Wholesale Beer Distributors, Inc. v. State Tax Commission, 140 A.D.2d 900, 528 N.Y.S. 2d 923, (New York Supreme Court Appellate Division - 3rd Department, 1978). Court upheld use of test period.
• Mohamed Ibn Mohamed Assana, 2002 STT 19-24, DTA No. 818063, (New York Division of Tax Appeals, January 10, 2002). Administrative law judge upheld audit estimation method when taxpayer, a grocery store operator, had inadequate records. Auditors observed sales at the checkout counter for one 12-hour period and projected results over 43-month audit period.
• Babylon Milk & Cream Co. , 5 A.D.2d 712, 168 N.Y.S.2d 124 (1957).  Court upheld assessment for period when taxpayer lacked adequate records, but deined projection for period when records were adequate.
• Bonanno v. State Tax Commn., 534 NYS2d 829, (New York Supreme Court Appellate Division, 1988).
  
• Center Moriches Monument Co. v. State Tax Commission, 621 NYS2d 720 (New York Supreme Court Appellate Division, 1995).
• Club Marakesh v. State Tax Commission, 151 AD2d 908, 542 NYS2d 881, lv denied 74 NY2d 616 , 550 NYS2d 276 (New York Supreme Court Appellate Division, 1989).  Court upheld a one day observation of a club's operations and employees.
• Constantini v. State Tax Commission, DTA No. 820590, (New York Division of Tax Appeals, February 1, 2007). \ Court upheld an estimate of pizzeria's taxable sales based on the amount of runt paid for the location. Taxpayer failed to present clear and convincing evidence to invalidate the auditor's method.
• Continental Arms Corp. v. State Tax Commission, 530 N.E.2d 1282 (N.Y. 1988).
• Cook,(Rosalind) et al, as officers of Tango Boutique, Inc., v. Tax Appeals Tribunal, 222 A.D.2d 962, 635 N.Y.S. 2d 355, (New York Supreme Court Appellate Division - 3rd Department, 1995). Court held taxpayer's records were inadequate for complete examination, and auditor was justified in using an estimation method.
• Cronos Enterprises, Inc., DTA Nos. 819477, 819479, and 819480, (New York Division of Tax Appeals, Administrative Law Judge Unit, March 10, 2005).  Held that auditor could extrapolate results of one-day test over a multi-year audit period when books and records were inadequate to support reported sales.
  
• Del's Mini Deli Inc. v. Commissioner of Taxation and Finance, 205 A.D.2d 989, 613 N.Y.S. 2d 967, (New York Supreme Court Appellate Division - 3rd Department, 1994).  Court held taxpayer's records were inadequate for complete examination, and auditor was justified in using an estimation method.
• Ali N. Dhalai, DTA No. 817629, (New York Division of Tax Appeals, September 27, 2001).  Administrative law judge upheld auditor's estimation method when taxpayer, a convenience store operator, had inadequate records.  Because fraud was involved, the tax assessment was not barred by the statute of limitations.
• Amboy Quick Service, Inc., DTA No. 820063 and 820064, (New York Division of Tax Appeals, October 19, 2006).  Administrative law judge upheld auditor's estimation method when taxpayer, a convenience store operator, had inadequate records.
• Dubonnay’s Café, Ltd. , TSB-H-86(150)S, N.Y. State Tax Commission, (July 3, 1986).
• Family Deli of Bellmore, Inc., TSB-D-97(16)S, N.Y. Tax. App. Trib. (April 3, 1997).
• Gifts by Gallego, 1993 WL 57208, affirmed, 1993 WL 542493, (New York Division of Tax Appeals, 1993).  Administrative law judge allowed the auditor considerable discretion in sampling method when the taxpayer's records are inadequate.
• Giordano v. State Tax Commn. , 145 AD2d 726, 535 NYS2d 255.
• Grecian Square, Inc., 119 A.D.2d 948, 501 N.Y.S.2d 219, (1986).
  
• W. T. Grant v. Joseph, 2 N.Y.S. 2d 196, 159 N.Y.S. 2d 150, (New York Court of Appeals, 1957), cert. denied 355 U.S. 869, 2 L Ed 2d 75.  Court allowed auditor to use estimation or external indices.
• Ashley Jarwood, Officer of Wizard Petroleum, Inc., DTA No. 811098 ((New York Division of Tax Appeals, January 26, 1996). Tax Appeals Tribunal found that the Division of Taxation properly used estimates to determine tax due.  The Division's estimates were based on the taxpayer’s own calculations of sales tax prepayments due on its importation of motor fuel.  The Division adjusted the estimate only to disallow audits claimed on sales for immediate export.
• Hilweh d/b/a Albany Restaurant Supply, DTA No. 818465, CCH-STATE-CASE-TAX-CT, NY-TAXRPTR, ¶404-326, (New York Division of Tax Appeals, September 26, 2002).  Since a taxpayer's books and records were inadequate to permit an exact computation of the New York sales and use taxes due, the Division of Taxation was authorized to estimate the taxpayer's tax liability using any audit methodology reasonably calculated to reflect taxes due. The taxpayer failed to provide any evidence to show that the test period audit method used by the auditor was unreasonable or incorrect.
• Himed Deli Corp., Nos. 814493 and 815244, (N.Y. App. Div., March 30, 2000).
  
• Karay, No. 84457, (N.Y. App. Div., June 6, 2000).  Upheld assessment based on three-day observation of restaurant's operations.
  
• King Crab Restaurant v. State Tax Commissioner, 134 AD2d 51, 522 NYS2d 978 (New York Supreme Court Appellate Division, 1987).
• Korba, 84 A.D. 2d 655, 444 N.Y.S. 2d 312 (1981).
  
• Licata v. Chu, 64 A.D.2d 873, 487 N.Y.S. 2d 552, 476 N.E. 2d 997, 193 NYLJ No. 37, p. 17, (New York Court of Appeals, 1985).  Court upheld auditor's use of test period when taxpayer's records were inadequate.
• Lionel Leasing Indus. Co. v. State Tax Commissioner, 105 AD2d 581, 481 NYS2d 520, CCH-STATE-CASE-APP-CT, 83--87 NY-TAXRPTR-TB ¶251-107, (New York Supreme Court, Appellate Division, Third Department, October 25, 1984).  Court upheld auditor's assessment of highway use tax when taxpayer was unable to provide convincing proof to overturn auditor's allocation of in-state and out-of-state miles traveled.
• Guiseppe Logiudice & Joseph Logiudice d/b/a Nino's Pizzeria of Patchogue, DTA Nos. 817210 and 817211, 2002 STT 49-30, (New York Division of Tax Appeals, February 1, 2001; New York Division of Tax Appeals, Tax Appeals Tribunal, November 29, 2001).  Administrative law judge allowed auditor to use a 1 day observation test to estimate the taxpayer's sales tax liability was reasonable when the taxpayer's books and records were insufficient to properly determine the tax liability. The use of an observation test is one of the indirect or estimation audit methods available to the Division of Taxation. While the taxpayer argued that the projections based on a single day's observation were unacceptable, the judge noted that 1 day observation has been upheld in other cases. In addition, the judge found that the taxpayer did not appear to maintain, and could not provide, any sales invoices, cash register tapes, or other original records of sales for his business. The taxpayer, therefore, did not meet his burden in showing that the estimate was unreasonable.
• Franceso Lombard v. v. Commissioner of Taxation and Finance , 197 A.D.2d 799, 602 N.Y.S. 2d 972, (New York Supreme Court Appellate Division - 3rd Department, 1993).  Court held taxpayer's records were inadequate for complete examination, and auditor was justified in using a one day test period.
• Markowitz v. State Tax Commn. , 54 AD2d 1023, 388 NYS2d 176 (1976), affd 44 NY2d 684 , 405 NYS2d 454.
• Mera v. Tax Appeals Tribunal of State of New York, 204 A.D.2d 818 (N.Y. Div. 3 Dept. 1994).
  
• Meskouris Brothers, Inc. v. Chu , 139 A.D.2d 813, 526 N.Y.S. 2d 679, (New York Supreme Court Appellate Division - 3rd Department, 1988).  Court held that when taxpayer's records were inadequate, the auditor could use a two day test period to project an assessment over 1300 days.
• Murray Hill Greenery & Florist, Ltd., No. 814875, N.Y. App. Div. (April 9, 1998).
  
• Murray's Wines & Liquors v. State Tax Commission, 78 A.D.2d 947, 433 N.Y.S. 2d 250, (New York Supreme Court Appellate Division - 3rd Department, 1980).  Court held taxpayers records were inadequate and allowed auditor to sample a two month test period and estimate over a three year projection period.
• Queens Discount Appliances , 1992 WL 202303, (New York Division of Tax Appeals, 1992), ; affirmed (New York Division of Tax Appeals, 1993), 1993 WL 547658.  Administrative law judge held auditor could use estimation method based on inadequate records made available during initial audit. The taxpayer could not require auditor to do complete examination when additional records were made available after the assessment was issued.
• Omar Shukry v. Tax Appeals Tribunal , 184 A.D.2d 874, 585 N.Y.S. 2d 531, (New York Supreme Court Appellate Division - 3rd Department, 1992).  Auditor was allowed to use an external rental market index to estimate deficiency when taxpayer's records were inadequate.
• Ristorante Puglia, Ltd. v. Chu , 102 AD2d 348 , 478 NYS2d 91.
• Kenneth Schuck Trucking, Inc. , DTA No. 816129, CCH-STATE-CASE-TAX-CT, NY-TAXRPTR ¶403-552, (New York Division of Tax Appeals,  January 13, 2000).   Administrative law judge upheld auditor's assessment of highway use tax based on a sample from one calendar quarter projected to the entire audit period, because taxpayer did not have adequate records for the entire audit period.  Taxpayer did not offer what result should be reached in the absence of its own retention of proper records, and did not provide proof that the sample period was not representative.  A statistical expert for the taxpayer testified that the projection method did not adequately consider whether the sampled quarter was representative of the audit period.   The administrative law judge ruled that the statistical expert's criticism of the auditor's method was not relevant when the taxpayer had inadequate records for the entire audit period.
• Shukry et al v New York, 184 AD 2d 874 (NY 1992).
  
• Sloan's Supermarkets, Inc. v. Chu , 140 A.D.2d 794, 527 N.Y.S. 2d 889, (New York Supreme Court Appellate Division - 3rd Department, 1988).  Court held auditor could use the representative test period audit method when the taxpayer consented to the use of estimation and waived its rights to a full examination of its adequate records.
• Spartacus of Thraki, Inc., DTA No. 819589, (New York Division of Tax Appeals, February 3, 2005).  Auditor could use an observation period from a prior audit of a restaurant business to estimates sales and use tax liability in the current audit period.
  
• Anthony Stodut, DTA No. 817172, CCH-STATE-CASE-TRL-CT, STATE-ARD ¶403-802, (New York Division of Tax Appeals, November 21, 2000).  Administrative law judge upheld auditor's use of purchases markup method when taxpayer's records were not adequate.
• Surface Line Operators Fraternal Organization. v. Tully , 85 AD2d 858, 446 NYS2d 451.
• Tak Wing Tam and Xian Ming Rong, DTA Numbers 817213 and 817214, CCH-STATE-CASE-TRL-CT, STATE-ARD ¶403-982, (New York Division of Tax Appeals, July 26, 2001).  Upheld the Division of Taxation's use of a test period to estimate sales taxes for audit months where the taxpayer corporation did not provide complete records.
• Top Shelf, Inc. t/a Burns Park Deli , Tax Appeals Tribunal, (February 6, 1992).
• James Waite, Officer of Harrison Radio Corp., 1993 WL 498235, (New York Division of Tax Appeals, 1993); appealed (New York Division of Tax Appeals, 1993) .  Administrative law judge upheld auditor's use of a test period for 1976-1979 rather than a detailed examination of all available records. The judge denied the auditor's assessment for the 1979-1980 examination period since the auditor simply projected the 1976-1979 error rate onto the 1979-1980 sales population.
• Sidney Wallach, as an Officer of Wallach Sons of Eastchester v. Tax Appeals Tribunal, 206 A.D.2d 696 (New York Supreme Court Appellate Division - 3rd Department, 1994).  Court held auditor could use the representative test period audit method when the taxpayer consented to the use of estimation and waived its rights to a full examination of its adequate records.
• Your Own Choice, Inc., DTA No. 817104, (New York Division of Tax Appeals, April 25, 2002).  Administrative law judge upheld auditor's method of using extenal indices for the portion of the audit where the taxpayer failed to supply records requested by the Division.  However, the audit method was improper during the subsequent period into which the audit had been extended, because the Division failed to request records for this extended period.
  

North Carolina

Statutes

• General Statutes of North Carolina Sec. 105-241.1. Additional taxes; assessment procedure.  The Secretary of Revenue must base a proposed assessment on the best information available. A proposed assessment of the Secretary is presumed to be correct.

Department of Revenue Publications

•     Computer Assisted Auditing brochure prepared by Computer Audit Section.
  

Cases

• North Carolina Secretary of Revenue, Decision No. 94-162, CCH-ADMN-RUL, NC-TAXRPTR ¶201-896, (November 1, 1994).  Sales be a vendor were reclassified as taxable because the vendor's records were not adequate.
• North Carolina Secretary of Revenue, Decision No. 95-23, CCH-ADMN-RUL, NC-TAXRPTR ¶201-890, (April 20, 1995).  Auditor used an appropriate method of estimating sales of a motel and restaurant operation when taxpayer records were inadequate.

North Dakota

Statutes

• North Dakota Century Code 57-01-02.  Powers and duties.  The Tax Commissioner has authority to enforce tax laws.
• North Dakota Century Code 57-40.2-07.  Collection of use tax.  Taxpayers must keep records of purchases.  Tax Commissioner is authorized to examine records and enforce use tax.

Ohio

Statutes

• Ohio Revised Code section 5703.54, Taxpayer's remedies against Department of Taxation, commonly referred to as "Taxpayer Bill of Rights".  Taxpayers may file suit for damages in state court against the Department, if an auditor disregards a provision of the law during an audit or collection action.
• Ohio Revised Code section 5739.13, Assessment of Sales Tax
• Section 5739.13(A), When information in the possession of the commissioner indicates that the amount required to be collected or paid under this chapter is greater than the amount remitted by the vendor or paid by the consumer, the commissioner may audit a sample of the vendor's sales or the consumer's purchases for a representative period, to ascertain the per cent of exempt or taxable transactions or the effective tax rate and may issue an assessment based on the audit. The commissioner shall make a good faith effort to reach agreement with the vendor or consumer in selecting a representative sample period.
• Ohio Revised Code section 5741.10, (Senate Bill 200, effective September 6, 2002). Refund of sales tax paid to vendor in error can be requested from Department of Taxation.
  
• Ohio Revised Code section 5741.13, Assessment of Use Tax
• If information in the possession of the commissioner indicates that the tax paid by any consumer is less than that due, the commissioner may audit a sample of that consumer's purchases for a representative period and may issue an assessment based thereon. The commissioner shall make a good faith effort to reach agreement with the consumer in selecting a representative sample period.

Regulations

• Ohio Administrative Code section 5703-9-02. Maintenance of Records
• Ohio Administrative Code section 5703-29-03 Sampling
• (A) As authorized pursuant to division (G) of section 5751.09 of the Revised Code, the Tax Commissioner hereby prescribes sampling methods for the commercial activity tax that the commissioner may use in lieu of a complete examination of records. The sampling methods include, but are not limited to, the following:
• (1) Statistical sampling. Statistical methods of sampling are those procedures that utilize random selection and are capable of projecting population values with a known reliability; and
• (2) Non-statistical sampling. Non-statistical sampling includes methods such as block sampling.
• (B) The commissioner shall make a good faith effort to reach agreement with the taxpayer to select the most appropriate sampling methodology.
• (1) The failure of the commissioner to reach an agreement with the taxpayer does not preclude the commissioner from sampling.
• (2) In accordance with section 5751.12 of the Revised Code, a taxpayer that keeps records electronically is required to provide those records electronically to the Department of Taxation upon the commissioner’s request.

Administrative Guidance

• Information Release Commercial Activity Tax CAT 2005-09, http://tax.ohio.gov/divisions/communications/information_releases/cat200509.stm, (October 2005). CAT Sampling. Department may use statistical or non-statistical sampling to audit CAT. Department shall make a good faith effort to reach agreement with the taxpayer to select the most appropriate sampling methodology. Taxpayer must make electronic records available in electronic form for audit.
• Information Release Commercial Activity Tax CAT 2007-01, http://tax.ohio.gov/divisions/communications/information_releases/cat_2007-01.stm, (January 2007). Commercial Activity Tax: Rule Estimation and Statutory Estimation Procedures, Compared. For purposes of the commercial activity tax (“CAT”), taxpayers are required to calculate their taxable gross receipts and pay the tax due within forty days of the end of the calendar quarter. Ohio Adm. Rule 5703-29-09 allows quarterly taxpayers to estimate their taxable gross receipts for a calendar quarter. Alternatively, taxpayers may follow a statutory-based estimation procedure to estimate their taxable gross receipts or a quarter pursuant to R.C. 5751.051(A)(2)(b). Because there is some confusion concerning the differences between these two methods, the Tax Commissioner is issuing this release to explain each method in detail and to provide spreadsheets that can be used to calculate a taxpayer’s taxable gross receipts using each method. Additionally, all statutory-based estimators must complete and print or e-mail the corresponding spreadsheet in order to properly file their annual reconciliation return.
• Sales and Use Tax Information Release ST 2003-01, http://tax.ohio.gov/divisions/communications/information_releases/st200301.stm, (January 2003). Direct Payment Program Authority.
• "Q3. What are the record keeping requirements for a direct payment permit holder?"
• A direct payment permit holder must maintain all records that are necessary for a determination of the correct tax liability. The direct payment permit holder must make the required records available to the Department upon request as required under R.C. section 5739.031(D).
  
• Required records include but are not limited to purchase invoices, bills of lading, asset ledgers, project folders and authorizations, depreciation schedules, transfer journals, accounts payable ledgers, and any other such primary and secondary records and documents created in the course of business. The permit holder must maintain records in an electronic format and when under audit provide the electronic records to the Department. Additionally, the permit holder agrees to complete the audit using statistical sampling for expenses.
  
• A taxpayer granted a direct payment authority must maintain a record keeping system in a manner that allows the Department to efficiently and effectively identify the values upon which tax is reported and the amount of tax reported thereon. In addition, whenever a taxpayer has a direct payment authority covering more than one facility, the taxpayer must keep its records in a manner that allows the Department to identify the purchases and tax reported for each facility.
•  Minimum penalties will be applied under audit, including 7.5% for compliance between 80% and 90%, and a 15% penalty when compliance is below 80%.
  

Board of Tax Appeals Decisions

• A & J Food Mart v. Zaino, BTA Case No. 99-S-1608, 2001 Ohio Tax LEXIS 1386, (Ohio Board of Tax Appeals, August 17, 2001).  Sustained auditor's retail mark-up method when taxpayer had inadequate records.
• Anheuser-Busch Companies, Inc. v. Zaino, BTA No. 2003-K-699, 2004 Ohio Tax LEXIS 995, CCH-STATE-CASE-TAX-CT, OH-TAXRPTR, ¶403-329, (September 24, 2004).  Taxpayer used a sampling methodology to support its claim that the value of drawings were exempt from personal property taxes.  The taxpayer's engineer reviewed invoices and estimated the amount of time involved in the production of drawings and estimated the amount of time involved in the production of drawings and the cost associated with that time.  The Board of Taxation found that such estimated methodology as a matter of law was insufficient to establish the amount of exemption, regardless of the availability of actual records to support the claim.  Estimates, developed through a "myriad of subjective determinations" failed to satisfy the taxpayer's burden of proof.
• Antoun, Inc. v. Roger W. Tracy, Tax Commissioner of Ohio.  BTA Case No. 96-J-846, CCH-STATE-CASE-TAX-CT, OH-TAXRPTR ¶402-558, (Ohio Board of Tax Appeals, August 1, 1997).  A sales tax audit of a convenience store was properly conducted by calculating the percentage of the store's 1993 purchases from suppliers that would be taxable (75.54%) and applying this to calculate taxable sales for October 1990 through October 1993. The convenience store had not used a cash register accurately programmed to charge and collect sales tax, but instead, had arbitrarily estimated its monthly taxable sales as between 17% and 24% of its total sales. Although ownership of the convenience store changed in December of 1992, 1993 records were properly applied to determine the taxable sales for 1990 through 1992 because the convenience store did not submit evidence showing that taxable sales differed during these years. The convenience store also failed to provide evidence that the audit procedure violated the United States and Ohio constitutions.
• Aurora Market, Inc. d/b/a Shop N Go , BTA Case No. 99-S-293, CCH-STATE-CASE-TAX-CT, OH-TAXRPTR ¶402-931,  (Ohio Board of Tax Appeals, 2000). Board held taxpayer had insufficient evidence to overturn audit results.
• Beaver Office Products, Inc., n/k/a BOP USA, Inc. v. Tax Commissioner ,  BTA Case No. 97-J-776 (Ohio Board of Tax Appeals, June 25, 1999).  The Board of Tax Appeals found that the Tax Commissioner may make an assessment based upon an audit of a sample of the vendor's sales for a representative period.  It is rebuttably presumed that the action of the Commissioner was performed in good faith and with sound judgment.  Once an assessment is made, the burden shifts to the taxpayer to prove in what manner and to what extent the assessment was in error.
• Dennison Beverage & Produce Inc. v. Tracy, No. 99-M-2088, Ohio Bd. Tax App., (March 2, 2001).
  
• Dunhall Pharmaceuticals, Inc. v. Tracy , BTA Case No. 94-T-1340, CCH-STATE-CASE-TAX-CT, 94--96 OH-TAXRPTR-TB ¶402-239, (Ohio Board of Tax Appeals, October 27, 1995).  Board held that to successfully challenge an audit based on a test check the taxpayer must show that the selected test check period is not representative of normal business conditions.
• Forest Hills Supermarket, Inc., d/b/a Forest Hills Eagle v. Tax Commissioner, BTA Case No. 97-J-1508 (Ohio Board of Tax Appeals, April 5, 1999). The Board of Tax Appeals found that the Tax Commissioner was authorized to perform a sample audit of a supermarket's business over a representative period for sales tax compliance and assess tax against the taxpayer on the basis of that sample audit.  Even though the taxpayer maintained complete records and made them available to the auditor prior to the audit, the Commissioner possessed information that suggested that the taxpayer was not paying the appropriate amount of tax.  If the Commissioner possesses information indicating that a vendor has remitted less sales tax than the law requires, the Commissioner may audit a sample of the vendor's sales for a representative period and assess tax against the vendor on that basis.  Furthermore, the Board held that the Commissioner's audit findings were presumed correct and the taxpayer failed to provide evidence to substantiate its allegations that the Commissioner's findings were in error.
• Gruen Enterprises, Inc., d/b/a Avenue Beverage v. Roger W. Tracy, Tax Commissioner of Ohio, BTA Case No. 99-T-361, CCH-STATE-CASE-APP-CT, STATE-ARD ¶402-920, (Ohio Board of Tax Appeals, June 30, 2000).  Sustained a use tax assessment for 1994-1997 based on a sample from 1995.  Taxpayer had inadequate records for entire audit period and did not provide evidence sufficient to reduce the assessment.
• Handl-It, Inc. v. Wilkins, BTA No. 2006-M-492, March 7, 2008, unreported. Handl-It was subject to a sample audit. The BTA upheld removing an item from the taxable base of the sample when the taxpayer could not produce the invoice in question but proved that it was the practice of the vendor to collect tax. This common-sense conclusion is consistent with the terms typically used in sampling agreements.
• HRP Auto Centers, Inc. v. Tax Commissioner, BTA Case No. 93-J-989 (Ohio Board of Tax Appeals, May 5, 1995). The Commissioner is authorized to perform a test check when a vendor's records are inadequate or when there is reason to believe that the full amount of tax collected has not been remitted by the taxpayer.  The taxpayer has the burden of establishing in what manner and to what extent the Commissioner's determination is in error.
• Juva De, Inc. v. Roger W. Tracy, Tax Commissioner of Ohio, BTA Case No. 98-D-382, CCH-STATE-CASE-TAX-CT, OH-TAXRPTR ¶402-926, (Ohio Board of Tax Appeals, July 14, 2000).  Estimated taxable sales made by a bar and carry-out ready-to-eat food outlet that were derived by an Ohio Department of Taxation auditor for Ohio sales and use tax purposes were upheld because the taxpayer failed to maintain sales invoices or daily cash register tapes to verify total taxable sales. The auditor used the taxpayer's purchase invoices for a sample period to estimate the number of drinks sold at estimated prices.
• Khan (Shirley) v. Thomas M. Zaino, Tax Commissioner of Ohio, Docket No. 00-A-108, CCH-STATE-CASE-TAX-CT, OH-TAXRPTR ¶403-000, (Ohio Board of Tax Appeals, April 6, 2001).  An Ohio sales tax assessment against an owner and operator of a convenience store was upheld because the owner failed to maintain and provide complete and accurate records of taxable sales showing that the assessment was inaccurate. The state employed an alternative audit methodology, using whatever records were available, and the owner failed to prove that the audit methodology was erroneous.
• Maplerow Supermarket Inc. v. Lawrence, No. 99-S-352, (Ohio Board of Tax Appeals, August 16, 2000). 
  
• Rental Transport, Inc., and Beatrice Foods Co., Inc. v. Lindley, Nos. 78-A-133, 78-D-449, CCH-STATE-CASE-TAX-CT, OH-TAXRPTR, ¶200-766, (Ohio Board of Tax Appeals, June 29, 1981).  Board rejected the taxpayer's arguments that sales tax was assessed in an overlapping audit.
  
• R.K.E. Trucking, Inc. v. Tracy, No. 98-S-1316, (Ohio Board of TaxAppeals, May 24, 2002).  A trucking company's purchases of trucks to haul construction materials and the repair, maintenance, and parts for these vehicles were subject to Ohio sales and use tax because the taxpayer was not primarily engaged in transportation of property for hire.  The taxpayer did not provide a time and revenue study regarding the usage of the trucks, and only offered a random sampling of invoices to represent its transportation activities. Such a random sampling did not constitute sufficient competent and probative evidence that the trucks were used primarily in the transportation for hire aspect of its business operations.
  
• Sears, Roebuck and Co. v. Lindley, Docket No. F.323, CCH-STATE-CASE-TAX-CT, 76--82 OH-TAXRPTR-TB ¶200-762, (Ohio Board of Tax Appeals, June 30, 1981).  Board held the taxpayer's agreement with the auditor on the audit sampling and grouping methodology is binding on the taxpayer.  Heard on other issues by Ohio Supreme Court, 70 Ohio St. 2d 249, 436 N.E.2d 1029, 24 Ohio Op 3d 339, CCH-STATE-CASE-HIGH-CT, 76--82 OH-TAXRPTR-TB ¶200-927, (Ohio Supreme Court, June 23, 1982).
• T&D Tavern, Inc., d/b/a Cagny’s v. Tax Commissioner , BTA Case No. 97-S-1179 (Ohio Board of Tax Appeals, August 6, 1999). The auditor used a sampling method to reconstruct the taxpayer’s sales figures on the basis of purchase information.  The taxpayer did not present any sales records or other relevant information as to its amounts of sales.  The taxpayer, a tavern, maintained that the total sales figure calculated in the audit was too high and did not reflect discounted sales of drinks or alcohol that were stolen or given away.  The Board of Tax Appeals upheld the assessment because the Tax Commissioner has the authority to use any information in the Commissioner's possession to calculate a deficiency assessment when the taxpayer does not have records sufficient to determine the accuracy of reported taxable sales and tax collected and remitted.
• Wooley Bulley's Inc. v. Zaino, Tax Commissioner of Ohio, Nos. 99-M-1362 and 99-M-1363, CCH-STATE-CASE-TAX-CT, OH-TAXRPTR ¶403-006, (Ohio Board of Tax Appeals, May 11, 2001). Post-audit Ohio sales tax assessments against a nightclub operator were upheld because the evidence presented by the operator neither accurately estimated liquor sales nor was not supported by competent and probative data.
• 24 Hours, Inc. v. Zaino, Tax Commissioner, BTA Case No. 00-G-112 (Ohio Board of Tax Appeals, February 22, 2002).  Upheld alternative estimation audit methodology used to assess sales and use tax on a conveneince store when the taxpayer lacked adequate records.  Taxpayer failed to present adequate evidence to rebut auditor's findings, except for lottery sales and cigarette returns.
  

Court Cases

• Akron Home Med. Services, Inc. v. Lindley, 25 Ohio St.3d 107, 495 N.E.2d 417, (Ohio Supreme Court, 1986).  Court held that when a vendor signs a test period agreement with the Tax Commissioner, it waives any objections covering the test period.
  
• Ali v. Tracy, Docket No. 78331, CCH-STATE-CASE-APP-CT, STATE-ARD ¶403-010, (Ohio Court of Appeals, Eighth Appellate District, June 7, 2001).   An inner-city retail grocery store failed to keep adequate records of taxable sales.  Auditor used a mark-up method on a sample of transactions to estimate tax assessment.  Taxpayer's accountant submitted a different sample to estimate the mark-up percentage.  The Board of Tax Appeals sustained the auditor's method and sample period.  The Appellate Court sustained the Board of Tax Appeals.
• Basic Distribution Corp. v. Ohio Department of Taxation, Docket No. 2000-1911, 94 Oh.St.3d 287, 2002 STT 42-47, http://www.sconet.state.oh.us/rod/documents/0/2002/2002-ohio-794.doc, (Ohio Supreme Court, February 27, 2002).  The Supreme Court held that Ohio R.C.5739.13(A) expressly authorizes the sample method for audits, and that the Ohio Department of Taxation was expressly authorized to project a sample over the audit period in the taxpayer's audit.  Taxpayer may challenge assessment of sales and use tax under the remedial provisions of the Ohio Taxpayers' Bill of Rights before exhausting the Ohio Department of Taxation's administrative process.
• Basic Distribution Corp. v. Ohio Department of Taxation, Docket No. 99AP-1309, 2000 Ohio App. LEXIS 3874, CCH-STATE-CASE-APP-CT, STATE-ARD ¶402-948, (Ohio Court of Appeals, Tenth Appellate District, August 29, 2000). 
  
• Belgrade Gardens, Inc. v. Kosydar, 311 N.E.2d 1, 38 OS2d 135, 67 Ohio Op 2d 147, (Ohio Supreme Court, May 8, 1974).  The finding of an erroneous overpayment of sales tax upon completion of a mandatory test check of a restaurant's business is substantive evidence of the amount of overpayment even though the restaurant had no primary records to support a claim for refund.  Neither party contested the accuracy of the test check.  In accordance with Sec. 5703.05(B) of the Revised Code, the Tax Commissioner had the duty of ascertaining the amount of overpayment and, since the restaurant did not contest the amount of overpayment established by the test check, the Commissioner could not deny its use to support a refund claim.
• Brandy's Inc., d/b/a Brandy's Cafe v. Zaino, Tax Commissioner of Ohio,  No. 5-01-43, (Ohio Court of Appeals, Third Appellate District, April 18, 2002).  Sustained sales tax assessment against a nightclub owner whose records were incomplete.
  
• Cherry Street Corp. v. Porterfield , 272 N.E.2d 124, 27 O. S. 2d 260, 56 Ohio Op 2d 156, CCH-STATE-CASE-HIGH-CT, 68--72 OH-TAXRPTR-TB ¶200-410, (Ohio Supreme Court, July 21, 1971).  The Tax Commissioner's test checks of hamburger restaurants that failed to maintain adequate sales tax records were not defective on the ground that customers were not asked whether the food purchased was for consumption off the taxpayer's premises when the taxpayer did not ask this question of customers during the audit period in question.
• Dean Supply Co. v. Roger W. Tracy, Tax Commissioner, Docket No. 77834, 2000 Ohio App. LEXIS 5602, CCH-STATE-CASE-APP-CT, STATE-ARD ¶402-975, (Ohio Court of Tax Appeals, Cuyahoga County, Eighth Appellate District, November 30, 2000).  Upheld a one month sample of a restaurant and bar supplier's sales revenues to estimate revenue for a 36 month audit period.  Denied taxpayer's assertion that the month was not representative.  The sampling agreement was not executed under duress as it is uncontroverted that the taxpayer's representative voluntarily chose the sample month used by the tax commissioner in the audit and expressly agreed to the methodology used.
• Federated Department Stores, Inc., Rike-Kumler Division v. Lindley , 450 N.E.2d 687, 8 OS 3d 35, CCH-STATE-CASE-HIGH-CT, 82--86 OH-TAXRPTR-TB ¶201-193, (Ohio Supreme Court, June 29, 1983), affirming Ohio Board of Tax Appeals, No. 79-B-640, October 4, 1982.  Although the Tax Commissioner may issue a sales tax assessment based on any information in his possession, the assessment is not conclusively correct. When the Tax Commissioner issued an assessment based on the amounts of money placed in a sales tax clearing account within the taxpayer's department store, the taxpayer was able to meet its burden of showing in what manner and to what extent the Commissioner's investigation and audit and the findings and assessments based thereon were incorrect. The taxpayer met this burden by showing that the clearing account was used only as an internal management tool and that the records were not fully accurate. Actual tax returns were filed from audited sales records.
• Foster v. Evatt, 144 Ohio 65, 56 N.E.2d 265 (1944).
  
• J.B.L. Construction Co., Inc. v. Joanne Limbach, Tax Commissioner of Ohio, CCH-STATE-CASE-APP-CT, 89 OH-TAXRPTR-TB ¶400-101, (Ohio Court of Appeals, 4th District, Lawrence County, No. 1846, December 22, 1988), affirming Ohio Board of Tax Appeals, No. 84-D-138, January 7, 1987.  Because a construction company operating in several states failed to keep accurate records of items purchased and used in Ohio as required by Sec. 5741.15, the Tax Commissioner was authorized to estimate the taxpayer's Ohio sales and use tax liability on the basis of available records. The taxpayer had used an "800" prefix on purchases to designate an Ohio use or storage and thus was assessed on all such items. The company unsuccessfully argued that certain "800" items were allocable among several states. The taxpayer could not use the proposed methodology in lieu of keeping accurate records.
• King Drug of Dayton v. Bowers, 171 Ohio 461, 172 N.E.2d 3 (1961).
  
• S. S. Kresge Co. v. Bowers, 206 N.E.2d 905, 2 O. S. 2d 2d 113, 31 Ohio Op 2d 188, CCH-STATE-CASE-HIGH-CT, 64--68 OH-TAXRPTR-TB ¶200-602, (Ohio Supreme Court, April 28, 1965).  A taxpayer that fails to maintain complete and accurate sales tax records, as required by Sec. 5739.10, R. C., may not use the test check method unless this method is employed by the Tax Commissioner in rejecting the taxpayer's report of its taxable sales. A taxpayer is not entitled to a sales tax refund based on a claimed overcancellation of prepaid tax receipts (under prior law) if, due to its failure to keep the required records, the taxpayer is unable to prove this allegation. Since the taxpayer has failed to carry the burden of proving that it did not actually collect money from customers as taxes in the amount of stamps canceled, it has no choice but to pay the money presumably collected to the state, regardless of its actual liability.
• Lubrizol Corporation v. Tracy, Case No. 94-L-151, 1195 CCH-STATE-CASE-TAX-CT, 94--96 OH-TAXRPTR-TB ¶402-073, Ohio App. LEXIS 3092,1995 WL 453125 (Ohio Court of Appeals - 11th District, 1995). Court held that Ohio statute expresses authorizes sampling even when the taxpayer has all records available for a a complete audit. The taxpayer was given an opportunity to participate in the audit planning, and cannot challenge the auditor's account selection after the completion of the audit. The commission is not required to find and correct errors that result in a refund to the taxpayer.
• McDonald's of Springfield, Ohio v. Kosydar, 43 Ohio 2d 5, 330 N.E. 2d 699 (1975).
  
• Narmac, Inc. v. Tracy, 614 NE2d 1042, 66 O.S.3d 637, CCH-STATE-CASE-HIGH-CT, 92-94 OH-TAXRPTR-TB ¶401-682,  (Ohio Supreme Court, July 14, 1993).  Court held that the assessment for a 33 month audit period was valid because there was no evidence that the restaurant's sales on the two test check days were unusual or differed in any way from its sales under normal business conditions.
• Owens-Illinois, Inc. v. Joanne Limbach, Tax Commissioner of Ohio, CCH-STATE-CASE-APP-CT, 88 OH-TAXRPTR-TB ¶202-614, (Ohio Court of Appeals, Sixth District, No. L-86-258, September 30, 1987), affirming in part and reversing in part Ohio Board of Tax Appeals, June 23, 1986.  The Tax Commissioner did not have the authority to assess sales taxes against a consumer on the basis of a test check, because at the time of the assessment, Sec. 5739.13 only subjected vendors to a test check. Although case law authorized the Commissioner to make assessments on the basis of a test check when inadequate records were maintained, in this case, there was no evidence that the taxpayer failed to maintain adequate records. In addition, the taxpayer never consented to the use of a test check for making a retroactive assessment. Thus, the Commissioner's use of the test check was unlawful.
• Pato Foods, Inc. v. Lindley , 7 Ohio App. 3d 22, 453 N.E.2d 1274 (1982).
  
• Quality Food and Vending Co. v. Lindley, Case No. CA 9261, CCH-STATE-CASE-APP-CT, 82--86 OH-TAXRPTR-TB ¶201-739, (Ohio Court of Appeals,  July 22, 1985).  Taxpayer had inadequate records to determine taxable on premises sales and nontaxable off premises sales from vending machines.  Court upheld audit method of observing machines for 12 hour test check periods.
• Shugarman Surgical Supply, Inc. v. Zaino, 97 Ohio St3d 183, 777 NE2d 244, http://www.sconet.state.oh.us/rod/documents/0/2002/2002-ohio-5809.doc, (Ohio Supreme Court, November 6, 2002).  Court upheld assessment of sales tax against retail medical equipment supplier.  Taxpayer agreed in writing to a four month test period of April through June 1991 as representative of a 31-month audit period December 1988 through June 1991. Court held that when taxpayer signed sampling agreement, it waived any objection to that period.  Taxpayer did not produce exemption certificates or acceptable letters of usage within the grace periods allowed by the auditor.
• United Telephone Co. of Ohio v. Tracy, No. 97-2462, 84 Ohio St. 3d 506, 705 N.E.2d 679, 1999 Ohio LEXIS 408, CCH-STATE-CASE-HIGH-CT, OH-TAXRPTR, ¶402-768,
  (Ohio Supreme Court, February 24, 1999).  Because United Telephone had failed to retain accurate records specifically delineating the amount of non-taxable personal property (unused cable, also known as "dark fiber")  for the years in question, it extrapolated data from a random sampling of information available to it for subsequent years.  Supreme Court held taxpayer's estimation method was not sufficient to overcome its lack of records.
• Zapitelli v. Lindley, 1981 Westlaw 4376 (Ohio App. 1981).

Reviews

• Johnson, Bernard E., "Sales and Use Tax Compliance: Redefining the Relationship Between States and Taxpayers", Proceedings of Georgetown State and Local Tax Institute, (Washington, DC: Georgetown University Law Center, Continuing Legal Education Division, May 16-17, 1996), pp. 319-340.

Oklahoma

Statutes

• Oklahoma Statutes section 68-206.  Examinations or investigations.  Authorizes Tax Commission to examine books and records.

Regulations

• Oklahoma Administrative Code, Sales and Use Tax Rules section 710:65-5-2, www.oktax.state.ok.us/rule65.html , An auditor for the Commission may suggest a sample sales/use tax audit rather than a detailed audit. The auditor shall select the periods to sample and apply the results to all the periods of the audit. The auditor shall prepare forms to be signed by the taxpayer stating they agree with the periods and method chosen for the sample.

Pennsylvania

Reviews

• CCH-EXP, SALES-TAX-GUIDE PA ¶61-420, Audit Procedures.

Statutes

• Pennsylvania Statutes, Title 72, Section 9915-A. Authorizes Department of Revenue to use sampling in examinations.

Regulation

• 61 Pennsylvania Administrative Code section 6.22 (superseded by Regulation section 8a)
• 61 Pennsylvania Administrative Code section 8a. http://www.pacode.com/secure/data/061/chapter8a/chap8atoc.html (Revised, March 28, 1998). This regulation authorizes auditors to use either block sampling or statistical sampling. Specifies procedures for sample selection, sample size, outliers, and confidence intervals. Allows taxpayers to appeal the accuracy of a test audit by providing clear and convincing evidence that the method used for selecting a statistical sample or block sample test period and determining the tax liability is erroneous, lacks a rational basis or produces a different result when the complete records are considered.
• Reg. Sec. 8a.1. Definitions.
• Reg. Sec. 8a.2. Examination of books and records.
• Reg. Sec. 8a.3. Audit types.
• Reg. Sec. 8a.4. Determination of liability.
• Reg. Sec. 8a.5. Determination of audit method.
• Reg. Sec. 8a.6. Selection of sample.
• Reg. Sec. 8a.7. Statistical estimation and software.
• Reg. Sec. 8a.8. Test audit plan.
• Reg. Sec. 8a.9. Audit findings.
• Reg. Sec. 8a.10. Taxpayer appeal.
• Reg. Sec. 8a.11. Applicability.
61 PPennsylvania Administrative Code section 34.2. Keeping of Records. http://www.pacode.com/secure/data/061/chapter34/s34.2.html
• Reg. Sec. 34.2(a)(2)(iii)(B).  The burden which would be placed on vendors whose businesses involve a large number of mixed sales if they were required to maintain complete records of the tax incurred on every individual sales transaction as described in this paragraph have long been recognized by the Department. Therefore, vendors shall be permitted to keep records of tax incurred on a sample basis pursuant to standards discussed in detail in subsection (b) of this section.
• Reg. Sec. 34.2(a)(2)(iii)(C).  If a vendor, for his own convenience, computes and reports his tax incurred on the basis of a formula derived from part-time, sample or test check recordkeeping, complete records of the amount of tax actually collected at each outlet together with a record of sales at each outlet, provide a practical basis for comparison with the results of the formula. This continuous check is useful both to the vendor and the tax agency in gauging the reliability of the formula, and the tax consciousness of store personnel.
• Reg. Sec. 34.2(b)(1).  The Department upon application by a vendor may authorize him to use a sample record keeping system from which a formula may be derived to account for his tax due with reasonable accuracy and simplicity without the necessity of maintaining full-time detailed records as described in subsection (a) of this section. Such authorization is not to be construed as relieving the vendor from remitting the full amount of tax collected.
• Reg. Sec. 34.2(b)(1)(ii).  If a vendor wishes to set up a formulary record system without prior concurrence by the Bureau, there shall be nothing to prevent his doing so, but in acting unilaterally he shall proceed at his own risk. Upon audit, the Bureau and subsequent reviewing bodies may find that his sample records and formulary system are not sufficiently representative or adequate. If he operates without a prior agreement, where the time comes for an examination of his accountability his records shall speak for themselves. If the records which he has maintained are such that his nontaxables and rate of tax incurred on taxable sales cannot reliably be ascertained, he shall be in no position to contend that he has kept adequate sales tax records. Rather, he shall be in the same position as any other vendor who lacks adequate sales tax records.
• Reg. Sec. 34.2(b)(1)(iii).  Any formula method shall be based upon representation samplings, tests, of the vendor's transactions, and application or projection of the results of such samplings in such manner as to reliably establish the amount of tax incurred on his sales. Samplings may be employed to determine the percentage ratio of nontaxable and taxable sales to gross sales, and the percentage ratio of tax incurred to taxable sales. Ordinarily, an applicant will be expected to provide for a sample of at least one of each of the normal business days of the week during each calendar quarter. This shall be done by testing all transactions on two days a month and rotating the test days to include, in each calendar quarter, all selling days of the week. Vendors operating more than one store or sales outlet shall test all stores or outlets on each test day, and separately apply test results in each store to the sales of that store, except where a vendor demonstrates by experience with sampling that a smaller sample or modified procedure is adequate and reliable, the Department will consider his specific written proposal and may authorize further adjustments on such basis.
• 61 Pennsylvania Code of Regulations section 35.1 (Now refers to new Regulation section 8a.)
• 61 Pennsylvania Code of Regulations section 304. Examine Books and Records of Taxpayers.

Administrative

• Sales and Use Tax Ruling No. SUT-00-016 (August 23, 2000).  Permits a retailer whose size makes in unreasonable to to provide all the delineated data related to a sales tax refund claim on bad debts, to calculate the refund using any method that fairly apportions the the taxable and nontaxable elements of the bad debt.  The retailer is not required to document individually every uncollectible account.
• Sales Tax Bulletin 2004-02 (May 14, 2004), http://www.revenue.state.pa.us/revenue/lib/revenue/Sales_Tax_Bulletin_2004-02.DOC.  Provides guidance on how auditors will handle overpayments of sales and use tax discovered during the course of an audit effective November 19, 2003, after the Pennsylvania Supreme Court decision in McNeil-PPC, Inc. v. Commonwealth of Pennsylvania.  If it is determined by the auditor a sales or use tax overpayment exists the auditor may grant a credit. If the taxpayer during the examination discovers an overpayment made to a vendor it must provide the auditor with the following:
• 1. A copy of the source document for the transaction (invoice).
• 2. Proof of payment.
• 3. A valid reason for the exemption and documentation as to why it is exempt.
• 4. The vendor’s attest that no credit memo, tax refund or similar reimbursement for the overpayment was provided to the taxpayer.
• If any of the above are lacking the auditor may deny the credit.

Cases

• AWACS, Inc. v. Commonwealth of Pennsylvania , 1995 Pa. Tax LEXIS 2046, (Commonwealth Court of Pennsylvania, 1995).   The auditor followed the Department's procedures in selecting a block sample.  The auditor reviewed the procedures with the taxpayer, and the taxpayer agreed to the test audit procedures.   Later the taxpayer failed to show that the block sample selected by the Pennsylvania Department of Revenue was not representative of the entire period.
• Carroll Motor, Sales Tax BR, Case No. A-004111, CCH-PA St. Tax Rep. [1956 - 1959 Transfer Binder], ¶200-827 (July 18, 1958). When a taxpayer maintains highly accurate records, a test audit must be more reasonably accurate and detailed than when records are inadequate.
• Cleland Simpson Co., STBR Docket No. 230, Case No. A-002660, July 16, 1958; CCH PA St. Tax Rep. [1956 - 1959 Transfer Binder], ¶200-811 (Sales Tax Board of Review, July 16, 1958).  This taxpayer operated two department stroes and did not have adequate records that facilitated auditing sales tax.  The Board of Board of Review rejected the particular sampling technique used by the auditor.  The assessment was vacated without prejudice, allowing the state to make another assessment on the basis of the best available information.  The Board gave a dicta on sampling, "A test check is a sampling method of generalizing from the particular to the whole. Certain characteristics are ascribed to a series of items from an examination of a limited number of these items. The inferences drawn from the sample can never be said to exactly represent the whole. Rather, a sample establishes a finding which is limited by a margin of error, plus or minus. Subject to measurable probabilities of error, the exact answer is said to be contained within the interval between the minus error and plus error."
• Commonwealth v. Robert L. Guinther, (1963, Pa Court of Common Pleas, Dauphin County), 81 Dauph 11; CCH-PA St. Tax Rep. [1962 - 1965 Transfer Binder], ¶200-396.  Court upheld projection by Board of Finance and Revenue when taxpayer's records were inadequate.  The Board of Finance and Revenue reduced a projection made by an auditor from the Bureau of Sales and Use Tax, Department of Revenue.
• J and R Transport Co., DC, In Bankr, July 21, 1962, 54 Berks Co. L. J. 274; CCH PA St. Tax Rep. [1962 - 1965 Transfer Binder], ¶200-335.  Court upheld Department's projection of a test audit over the period the taxpayer had inadequate records.
• McNeil-PPC, Inc. v. Commonwealth of Pennsylvania, J-53-2003, No. 99 MAP 2002, www.courts.state.pa.us/OpPosting/Supreme/out/J-53-2003mo.pdf  (Pa. Supreme Court, Middle District, October 22, 2003).    Supreme Court held that a sales and use tax audit requires the Department of Revenue to correct both underpayments and overpayments of tax for the audit period.  On a sales and use tax audit of 1991-1994 purchases, the taxpayer had overpaid some sales tax to vendors and assumed the auditor would take those overpayments into account when determining net deficiency.  After the taxpayer was notified of the assessment, it identified specific overpayments to vendors that were not in the audit report.  Taxpayer's request for a reduction in the assessment was denied on the grounds the claim was not filed within 3 years.  The Supreme Court unanimously overturned the Department and the lower court.  The Supreme Court held, "Once a taxpayer is audited, it doesn't have to seek a refund for overpayments during the audit period because it is the duty of the auditor to ensure that the proper amount of tax was collected, which necessarily requires that the audit take into account situations where the taxpayer overpaid tax or paid tax it did not have to during the audit period."
• McNeil-PPC, Inc. v. Commonwealth of Pennsylvania, No. 353 F.R. 1998, www.courts.state.pa.us/opposting/cwealth/out/353fr98_6-28-02.pdf (Commonwealth Court of Pennsylvania, June 28, 2002).  Decision was overturned by Pennsylvania Supreme Court on October 22, 2003.
  
• Petition of Anonymous, Docket No. 1015, CCH-STATE-CASE-TAX-CT, 59--62 PA-TAXRPTR-TB ¶200-22, (Sales Tax Board, August 20, 1959). A sales tax deficiency based on a sample audit by the Commonwealth, in which a tally sheet record of sales at 13 of the 127 stores of the taxpayer was obtained for a one week period, is upheld since the vendor failed to keep adequate and auditable records. The taxpayer's unauthorized test checks and records do not overcome the prima facie correctness of the audit.
• Unpublished Decision, Pennsylvania Board of Appeals (October 13, 2000).

Rhode Island

Statutes

• General Laws of Rhode Island section 44-19-27.1  Examination of taxpayer's records.  The tax administrator is authorized to examine the taxpayer's records.

Cases

Administrative Hearing Decision No. 97-38 (October 23, 1997).  The Division of Taxation and auditor’s methodology in assessing sales and use taxes against a restaurant and bar owner was appropriate because, in the absence of appropriate taxpayer documentation, the auditor was authorized to recompute the tax using any information available to assure that the appropriate tax was paid.  Although the owner, who operated on a cash basis, filed sales and use tax returns, he took excessive and inappropriate deductions and grossly underrepresented sales.  More than half of the auditor’s assessment was based on the improper deductions, with the remainder based on markup percentages used by the auditor to recompute food and beer sales.  Those markup percentages were based on conservative industry standards and the owner's advice regarding past practice and were appropriate under the circumstances.

Administrative Hearing Decision No. 98-26 (December 28, 1998).  When the taxpayer and the Division of Taxation agree on a test period for sampling purposes, the taxpayer cannot successfully challenge that test period after the assessment.

South Carolina

Statutes

• Section 12-54-100, Authority to Examine.  The director may employ proper and reasonable audit methods necessary to the examination or investigation, including the use of sampling.
• Section 12-54-210, Records Requirements.  Taxpayers required to keep records as the department prescribes.

Regulations

• Reg. 117-7, Record Keeping and Retention.  Defines requirements for keeping paper and electronic records.

Department of Revenue publications

• Computer Assisted Audit System

South Dakota

Statutes

Online at  legis.state.sd.us/statutes/index.cfm

• South Dakota Codified Laws 10-45-45.  Records preserved by persons subject to tax.
• South Dakota Codified Laws 10-45-47.1.  Promulgation of rules. The Secretary of Revenue may promulgate rules for record keeping and audit methods.
• South Dakota Codified Laws 10-59-35.  Written requirements for audit.  Any audit performed by the Department of Revenue shall be in accordance with generally accepted auditing standards as published by the American Institute of Certified Public Accountants in their publications entitled Statements of Auditing Standards in effect on January 1, 1994.

Regulations

• South Dakota Administrative Regulations 64:06:01:35.04,  legis.state.sd.us/rules/rules/6406.htm#64:06:01:35.04 Sample periods for audits. An auditor conducting an audit for the Department of Revenue may choose to do a sample audit, random or judgmental, rather than a detailed examination of all records for the audit period. The auditor shall determine the sample size based on the records available, internal controls, changes in the accounting system, and changes in business operations. If the auditor uses a judgmental block sampling method and the taxpayer does not agree to a different percentage, the auditor shall select no less than ten percent of the taxpayer's sales and use tax reporting periods to determine whether sales and use tax was properly charged. The auditor shall apply the error factor, if any, calculated from the sample to all periods of the audit.

Cases

• Doctor's Associates Inc. v. South Dakota Department of Revenue and Regulation, No. 23744-a-JKK, http://sdjudicial.com/opinions/downloads/y2006/23744.pdf, (South Dakota Supreme Court, March 1, 2006). Plaintiff Doctor's Associates Inc. owns the international Subway fast food restaurant franchise with 53 restaurants in South Dakota. After the audit, the department determined that plaintiff's royalty fees constitute taxable gross receipts that should be reported in plaintiff's sales tax returns pursuant to South Dakota Codified Laws Sections 10-45-2 and 10-45-4. Plaintiff had 60 days to present materials to the department that would reduce, deduct, or exempt the royalty fees from tax. The deadline was extended, but expired without plaintiff having submitted any evidence to support a reduction, deduction, or exemption of any portion of the royalty fees from sales taxation. The department issued plaintiff a certificate of assessment for $270,660.70 on June 21, 2001. The plaintiff attempted to submit additional testimony later. The hearing examiner, cirucit court, and Supreme Court sustained the assessment because the evidence was not submitted within the required 60 days.

Tennessee

Statutes

• Tennessee Code Annotated sec. 67-6-402. Authorizes commissioner of revenue to make reasonable rules and regulations.
• Tennessee Code Annotated sec. 67-6-517. Delinquency - Determination and collection of tax.  If dealer fails to make an adequate report, the commissioner is authorized to make an assessment, which shall be considered prima facie correct, and the burden to show the contrary shall rest upon the dealer.

Department of Revenue

• Audit Division, Statistical Sampling for Sales and Use Tax Audits, revised April 1999.
• Audit Division, Statistical Sampling for Sales and Use Tax Audits, revised June 2003.
• Audit Division, Statistical Sampling for Sales and Use Tax Audits, revised January 2004, www.state.tn.us/revenue/tntaxes/statisticalsampling.pdf
  

Cases

• Edmonson Management Services, Inc. v. Woods, Tennessee, 603 S.W. 2d 716 (Tennessee Supreme Court, 1980).  The burden is on the appellant to disprove the assessment by the Commissioner.
• James v. Huddleston , 795 SW.2d 661 (Tennessee Supreme Court, 1990).  Court upheld auditor's mark-up method in assessing an auto repair business.
• The Aerostructures Corporation v. Revenue Commissioner, Loren Chumley, No. 03-1412-III (Tennessee Chancery Court, 20th Judicial District, Davidson County, Part III, November 8, 2004)  This case is being appealed.  The Tennessee Department of Revenue conducted a statistical sample of taxpayer's purchases and determined the result was a "no change" audit.   Taxpayer engaged a consultant who used a statistical sampling method to determine there was a $300,000 refund.  Both sides relied on testimony of statistical experts.  Chancery Court held that the taxpayer had standing to challenge the refund in court.  Chancery Court found the government's expert more persuasive and held that the taxpayer had not met its burden of proof.
  

Texas

Vernon's Texas Statutes Annotated

• Texas Tax Code Section 111.0041, Records
• Sec. 111.0041(a), Taxpayers shall keep those records open to inspection by the comptroller, the attorney general, or the authorized representatives of either of them for four years.
• Texas Tax Code Section 111.0042, Sampling in Auditing and Projecting Assessments,
• Sec. 111.0042 (a), This subsection was repealed.
• Sec. 111.0042 (b),  Sampling auditing methods are appropriate if:
• (1) the taxpayer's records are so detailed, complex, or voluminous that an audit of all detailed records would be
         unreasonable or impractical;
• (2) the taxpayer's records are inadequate or insufficient so that a competent audit for the period in question is not
         otherwise possible; or
• (3) the cost of an audit of all detailed records to the taxpayer or to the state will be unreasonable in relation to
         the benefits derived, and sampling procedures will produce a reasonable result.
• Sec. 111.0042 (c), Before using a sample technique to establish a tax liability, the comptroller or his designee must notify the taxpayer in writing of the sampling procedure to be used.
• Sec. 111.0042 (d), The sample must reflect as nearly as possible the normal conditions under which the business was operated during the period to which the audit applies.  If a taxpayer can demonstrate that a transaction in a sample period is not representative of the taxpayer's business operations, the transaction shall be eliminated from the sample and be separately assessed in the audit.  If records are inadequate to reflect accurately the business operations of the taxpayer, the comptroller or his designee shall determine the best information available and base his audit report on that information.
• Sec. 111.0042 (e), If the taxpayer demonstrates that any sampling method used by the comptroller was not in accordance with generally recognized sampling techniques, the audit will be dismissed as to that portion of the audit established by projection based upon the sampling method, and a new audit may be performed.
• Texas Tax Code Section 111.104(b), as revised by 2003 Regular Session, House Bill 2425, effective June 20, 2003, Thus, purchasers who overpay sales tax to a vendor must request the vendor file a refund claim with the Comptroller. This law change was enacted in response to Fleming Foods of Texas, Inc. v. Rylander, 6 S.W. 3d 278 (Texas Supreme Court, 1999), that would have allowed purchasers to request the refund directly from the Comptroller.
• Texas Tax Code Section 151.023, Authority of Comptroller to inspect books and records, (revised by Senate Bill 1123, effective September 1, 2001)
• Texas Tax Code Section 151.0231, Managed Audits, (Senate Bill 1319, effective October 1, 1999),
• Texas Tax Code Section 151.0232, CPA Audit Program, (Senate Bill 1037, effective September 1, 2001).  Allows Comptroller to contract with independent certified public accountants to audit qualified taxpayers under guidelines established by the Comptroller.
• Texas Tax Code Section 151.025, Record keeping requirements on taxpayers, (revised by Senate Bill 1123, effective September 1, 2001)
• Texas Tax Code Section 151.4171, Sales and use tax compliance agreement with the optional percentage based reporting method, (Senate Bill 1319, effective October 1, 1999)
• Texas Tax Code Section 151.430, Determination of overpaid use tax (Senate Bill 1319, effective October 1, 1999)
• Sec. 151.430 (b), A person to whom this section applies may compute the amount of overpayment by use of a projection based on a sampling of transactions. The sampling method used must comply with generally accepted sampling methods as approved by the comptroller.

Administrative Rules

• Texas Administrative Code Title 34, Section 1.40.  Burden of Proof.  February 26,1992. STARS 9206R1200C13.  In a contested case the burden of proof is on the taxpayer:   (A) by clear and convincing evidence, if he claims a transaction is exempt from taxation; or (B) by a preponderance of the evidence, if he contends that an action, or proposed action, of the tax division is otherwise unwarranted.
• Texas Administrative Code Title 34, Section 3.282.  Auditing Taxpayer Records.  Revised September 19, 2000. STARS 200009700R.
• Section 3.282(c).  The comptroller may use a detailed auditing procedure or a sample and projection auditing method to determine tax liability. Sampling procedure may include manual sampling techniques and computer-assisted audit techniques, whichever produce the most accurate results in the most efficient manner.
  
• Section 3.282(d).  A sample and projection auditing method is appropriate if: 
• (1) the taxpayer's records are so detailed, complex, or voluminous that an audit of all detailed records would be unreasonable or impractical; 
• (2) the taxpayer's records are inadequate or insufficient, so that a competent audit for the period in question is not otherwise possible; or 
• (3) the cost of an audit of all detailed records to the taxpayer or to the state will be unreasonable in relation to the benefits derived, and sampling procedures will produce a reasonable result.
  
• Section 3.282(e).  Before using a sample technique to establish a tax liability, the comptroller must notify the taxpayer in writing of the sampling procedure to be used.
  
• Section 3.282(i).  A taxpayer who holds a permit issued under Tax Code, Chapter 151, who has paid Texas tax in error on purchases of taxable items, whether sales tax was remitted directly to this state or to a retailer holding a permit under Tax Code, Chapter 151, may compute the amount of overpayment by use of a projection based on a sampling of transactions.
• (1) The sampling method must be one that has been approved by the comptroller.
• (2) The taxpayer must record the method by which the projection and computation were performed and must make available, on request by the comptroller, information explaining the method employed and the records on which the projection and computation were based.
  
• Texas Administrative Code Title 34, Section 3.285.  Resale Certificates; Sales for Resale.
• Texas Administrative Code Title 34, Section 3.286.  Seller's and Purchaser's Responsibilities.
• Texas Administrative Code Title 34, Section 3.287.  Exemption Certificates.
• Texas Administrative Code Title 34, Section 3.288.  Direct Payment Procedures and Qualifications.
• Texas Administrative Code Title 34, Section 3.302.  Accounting Methods, Credit Sales, Bad Debt Deductions, Repossessions, Interest on Sales Tax, and Trade-Ins. (Revised December 4, 2000)  STARS 200011938R.
• Texas Administrative Code Title 34, Section 3.325.  Refunds, Interest, and Payments Under Protest.  (Revised May 28, 2001)  STARS 200105264R.  Further revisions to be made after enactment of HB 2425 in June 2003. This revision substantially reverses the refund procedures set forth in the Fleming Foods decision. These revisions will require that refunds of sales tax paid in error must be claimed by the vendor that paid the tax to the Comptroller - not the purchaser who paid the sales tax to the vendor.

Comptroller of Public Accounts - Audit Manuals

The main menu for audit manuals is at  www.window.state.tx.us/taxinfo/audit/auditman.htm

• Auditing Fundamentals: A Sales Tax Reference Manual (revised June 2008), www.window.state.tx.us/taxinfo/audit/auditfun/index.htm
• Preface
• Chapter 1. Introduction
• Chapter 2. Pre-Audit Research
• Chapter 3. Audit Planning and Documentation
• Chapter 4. Entrance Conference
• Chapter 5. Audit Procedures
• Chapter 6. Managed Audit Policy and Procedures
• Chapter 7. Sampling
• Chapter 8. Exit Conference and Adminstrative Remedies
• Chapter 9. Audit Finalization
• Chapter 10. Disclosure Policies
• Appendix
• Glossary
• Audit Sampling Training and Development Course (October 1991).
• Computer Audit Menu System (CAMS) Application Guide (February 1995).
• Computer Audit Menu System (CAMS) Theory Manual (February 1995).
• Managed Audit Program (June 2002), www.window.state.tx.us/taxinfo/map/index.html
• Sales Tax Policy/Procedures Manual, (revised May 1999).
• Chapter 1. Audit Procedures and Documentation
• Sampling
• Computer Assisted Auditing
• Multistate Tax Credit
• Resale and Exemption Certificates
• Enterprise Projects & Defense Readjustment Projects
• Bankruptcy
• Penalties
• Audit Referral Report
• Chapter 2. Taxability
• Chapter 3. Local Jurisdictions
• Chapter 4. Audit Completion
• Chapter 5. Quick Reference
• Sampling Manual (revised September 2008), www.cpa.state.tx.us/taxinfo/audit/sampling/sampling.pdf
• Chapter 1.  Purpose & Requirements of Sampling for Tax Auditing
• Chapter 2.  Overview of the Sampling Process
• Perform an Initial Evaluation
• Chapter 3.  Transaction Sample - Dollar-Stratified
• Chapter 4.  Transaction Sampling - Manual
• Chapter 5.  Cluster Sampling
• Chapter 6.  Time Period Sampling
• Chapter 7.  Written Notification of Sampling & Estimation Procedures
• Chapter 8.  Evaluation & Analysis
• Chapter 9.  Special Topics
• Avoidance of Double Taxation. Describes Comptroller's policy on overlapping audits where the same transaction could be covered by an audit of the seller and purchaser.

Comptroller of Public Accounts - Audit Memos, Procedures, and Letters

Some of these documents are available on the Texas Comptroller's State Tax Automated Research System (STARS) at http://cpastar2.cpa.state.tx.us/

• Sales Tax Ruling No. 002 "Auditing Taxpayer Records", (effective December 31, 1975).  The audit may examine in detail all transactions of the taxpayer or may employ sample audit methods in accordance with standard auditing procedures. Sampling or projected audits will examine in detail sufficient records to determine compliance or to establish a reliable factor or percentage of error which may be projected as a basis for assessments in unaudited periods.
• Audit Memo 1312 (1988), Recommendations on sampling procedures.
  
• Audit Memo 1437 (June 21, 1990), Treatment of negative transactions in samples.
• Audit Memo 1449 (September 17, 1990), Follow-up on treatment of negative transactions in samples.
• Audit Memo 1478 (March 11, 1991), Follow-up on treatment of negative transactions in samples.
• Audit Memo 1491 (June 12, 1991). Summarizes guidelines on sampling under Statement of Auditing Standards Number 39 (SAS 39) as adapted from a Journal of Accountancy article published in May 1991.
• Audit Memo 1494 (July 3, 1991). Summarizes American Institute of CPAs guidelines for non-statistical sampling.
• Audit Memo 1685 (November 1, 1994). This audit memo followed the Comptroller's settlement of the Texas Instruments district court case in 1994. The memo specifies conditions under which tax overpayments may be included in a sample and projection.  [This memo was superseded by  Texas Tax Code Section 151.430, effective October 1, 1999.]
• Audit Memo 1719 (May 9, 1995). Specifies procedures for sales and use tax refunds including refund requests based on samples and projections.
• Audit Memo 1761 (February 15, 1996).  Recommends that auditors follow sampling procedures set by Audit Division. "If we do the work wrong the first time, we are going to get to do the work again."
• Audit Memo 1762 (February 22, 1996), STARS 9602065L. Provides guidelines for stratification procedures for computer assisted audit management system (CAMS) audits.  Recommends of a minimum sample of 100 items per stratum. Implies auditors can use their own judgment in selecting sample size.
• Audit Memo 1770 (April 4, 1996). Provides guidelines on how taxpayers may obtain copies of their computer data files from the CAMS group in the Audit Division.
• Audit Procedure 32 (October 16, 1998). Audit sampling should use the smallest sampling unit available and should select sample items distributed across the entire audit period.
• Audit Procedure 46 (February 25, 2000). Describes procedures for managed audits and percentage based reporting.
• Audit Procedure 52 (February 1, 2000). Reminder to auditor on procedures for the Notification of Sampling.
• Audit Procedure 55 (February 16, 2000). Specifies requirements for refund claims submitted on the basis of a sample.  Computer samples must have a minimum of 100 items per sample strata.  Transactions samples must have a minimum of 250 items of interest.  Day or batch samples must have a minimum of 30 random sample units.
• Audit Procedure 72 (May 28, 2002 with subsequent revisions).  Describes policies on taxpayer managed audits authorized by Texas Tax Code Section 151.0231.
• Position Letter 8206P0437E01 (June 11, 1982), STARS  8206P0437E01, Comptroller's position regarding a hearing.  Taxpayer has not demonstrated that the months chosen in the random sample are unrepresentative or result in inflating its deficiency abnormally. Vague allegations alone are not enough to overcome the presumption of the audit's correctness.
• Position Letter 8510P0669B12 (September 9, 1985), STARS 8510P0669B12, Comptroller's position regarding Hearing No. 18,217.  Taxpayer contends that the sample used to determine the audit deficiency is invalid because invoices used in the random sampling involved a company which was not a regular customer for the audit period, and that, therefore, the use of these invoices in the random sampling greatly distorted the percentage of error calculations used to determine the deficiency.  It is the position of the Tax Division that the audit was performed in a proper manner and should be upheld. The "large" invoice the taxpayer referred to is not unusually large in comparison with other sales made in the regular course of the taxpayer's business.
• Position Letter 8703P0801B05 (March 18, 1987), STARS 8703P0801B05, Comptroller's position regarding Hearing No. 16,481 and Hearing No. 16,822.  Response to taxpayer includes discussion of why sample stratification is more useful than a detailed audit.
• Position Letter 9205P1181D01 (May 7, 1992), STARS 9205P1181D01. Comptroller's position regarding Hearing No. 28,610.  The auditor chose a random sample of 275 invoices. This was more than the number needed for an appropriate sample and allowed for void or missing invoices to be deleted. As Petitioner points out, 257 invoices were actually used.  The resulting sample appears to have been representative and fair to all concerned.
• Letter 9505L1349E02 (May 9,1995), STARS 9505130L, Procedures for handling the manufacturing phased-in exemption in a sample.  "If separate projections are performed for any of the phased-in periods, each of the samples must be evaluated. Due to the short time frame of the periods, the samples may not evaluate. As long as the manufacturing items evaluate within agency guidelines in the aggregate, the individual samples will be considered representative."
  
• Letter 9904337L (April 5, 1999), STARS 9904337L, Procedures for expanding a sample at the request of a taxpayer.
• Letter 9907599L (July 28, 1999), STARS 9907599L, Acceptance of electronic exemption certificates as meeting taxpayer's burden of proof.
• Letter 200011997L (November 17, 2000), STARS 200011997L, Comparison of Comptroller's policy on tax overpayments before and after the Fleming Foods decision.  Note this policy is changed again after enactment of HB 2425 in June 2003.
 

Comptroller Administrative Law Judge (ALJ) Hearings

• Comptroller Hearing No. 10,064, 1982 WL 12854 (Tex.Cptr.Pub.Acct.), (May 3, 1982).  Taxpayer contends that the audit sample period selected incorrectly reflects the projected period, that the sample is not statistically valid, that certain sales were sales for resale, and that interest should be waived.  ALJ held the taxpayer had not proved that the sample was not representative and had not proved the Comptroller used an invalid method of sampling.
• Comptroller Hearing No. 17,610, STARS 8712H0881B05, (December 18, 1987).  Taxpayer contended certain sales and purchases that were scheduled in its audit should be deleted because taxpayer's customer or vendor was audited for an overlapping period of time.  Taxpayer asserted that the assessment against it would constitute double taxation.   Taxpayer submitted evidence to prove that its vendors and customers were audited by the Comptroller of Public Accounts. Taxpayer did not show that tax on the transactions in question was accounted for in those audits.  The ALJ concluded that the taxpayer had not met its burden of proof.
  
• Comptroller Hearing No. 21,201, not on STARS (April 15, 1987).  ALJ sustained the Comptroller's sampling method as satisifying the provisions of Texas Tax Code section 111.0042.
• Comptroller Hearing No. 21,371, STARS  8803212H, (March 4, 1988).  ALJ held that STRATA software and stratified random sampling procedures with nonstatisical evaluation met the requirements of a "generally recognized sampling technique" as required by Texas Tax Code section 111.0042.
• Comptroller Hearing No. 24,582, STARS 9211860H,  (November 5, 1992).   The auditor performed 21 statistical samples on accounts payable, examining, in the process, some 21,000 randomly chosen documents. Of the 21,000 documents selected, 188 invoices were missing.  Two specific groups of invoices were misfiled or lost.  One of the groups was later discovered, and was found to have the same error rate as the rest of the exam. ALJ held the tax should be assessed based on the overall rates established by the auditor, rather than assuming a 100% error rate for missing invoices.
• Comptroller Hearing No. 25,976, STARS 9111H1143B01,  (November 21, 1991).  ALJ held auditors should bear in mind that the wording of Tax Code Section 111.0042(c) states that the auditor "must" inform the taxpayer of the sampling procedure to be used, and must do so in writing.
• Comptroller Hearing No. 28,480 , STARS 9307149H, (July 28, 1993).  ALJ held taxpayer failed to prove by a preponderance of the evidence that the disputed sample item is unrepresentative of the transactions in the taxpayer's business.
• Comptroller Hearing No. 28,509, STARS 93030255.H08, (May 15, 1992).  Taxpayer was assessed for failure to collect sales tax on its sales to a particular customer.  The taxpayer asserted the Comptroller had already audited these sales when it audited that customer's purchases.  The ALJ recognized overlapping items do sometimes occur in audits, and the Comptroller makes appropriate deletions when they are found. However, there is no presumption that overlapping audits overlap transactions between the parties. The Comptroller's office examined the two audits, and that examination disclosed no purchases made by that customer from the present taxpayer.  Therefore, the ALJ held that in this case there was no evidence that the Comptroller was collecting the same tax from both the taxpayer and its customer.
  
• Comptroller Hearing No. 28,753, STARS 9407484H, (July 18, 1994).  The taxpayer's business was a job shop, and the auditor randomly selected 309 "jobs" out of 910 within the 44 month audit period.  With regard to the 601 unexamined jobs there was a degree of risk that they would be under-assessed or over-assessed, and that the number of lump-sum jobs to FOB jobs in the sample might not be proportional to the population. The taxpayer (in its post-hearing submission) stated that no law had been cited "which defines how or whether a sample audit should be performed and its related projection calculated."  Up until that time, i.e., before hearing and at hearing, sampling had been treated as appropriate but the actual methodology used and results obtained had been contested. A lot of smoke was generated, but after considering and weighing all the evidence and all the arguments in light of the law, the ALJ concludes that petitioner has failed to meet its burden. The taxpayer bears the burden not simply of discrediting to some degree (or casting some doubt upon) the accuracy of the tax deficiency determined via sampling and projecting, but of demonstrating by a preponderance of the evidence just what the error in the sample-and-projection is.
• Comptroller Hearing No. 30,010A, STARS 9703754H, (second rehearing, March 14, 1997).  Taxpayer could not locate 110 purchase invoices out of 3,450 requested by auditor. Taxpayer contended that the tax rate from the overall sample should be applied to the missing invoices in accordance with Hearing No. 24,582.   ALJ held that Decision No. 24,582 involved unique and compelling circumstances not found in the present case.  ALJ affirmed the Comptroller's practice of treating all missing invoices as taxable.
• Comptroller Hearing No. 30,637, STARS 9405378H, (May 26, 1994).  Taxpayer cannot defeat an audit or an assessment by merely withholding his records.  Auditor may use other information, such as sales reported on federal income tax return, to estimate sales tax liability.
• Comptroller Hearing No. 31,253, STARS 9808645H  (July 2, 1998).  ALJ found the taxpayer presented no evidence that the items represented by the missing invoices were of an extraordinary nature or that they were missing because of any unique or special circumstances.
• Comptroller Hearing No. 32,242, STARS 9807246H, (issued February 10, 1998, published July 2, 1998).  Auditor selected two sample months out of 47 months in audit period.  One of taxpayer's contentions was that two months in the sample were not representative.  ALJ found taxpayer has not shown that the sample months selected are unrepresentative. There are errors apparent in all the sample months selected and it would be normal to assume from the evidence that any other months selected would yield the same type of errors.  The sample and projection methods were in accordance with Comptroller procedures, and given the incompleteness of the records, provide a reasonably accurate estimate of the purchase transactions in question.
• Comptroller Hearing No. 32,318, STARS 9712128H, 98 State Tax Notes 30-40, (December 17, 1997).  Taxpayer argued Comptroller's methodology did not follow generally recognized sampling techniques because the Comptroller's computation of the error percentage in the sample included credits when calculating the denominator and excluded credits when calculating the numerator. Taxpayer argued that procedure's effect is to increase the fraction by which the error percentage is determined and thereby increase tax liability. The ALJ denied taxpayer's contention on this issue and upheld the Comptroller.
• Comptroller Hearing No. 33,746, STARS 9705465H, (May 12, 1997).  ALJ ruled that it was the taxpayer’s responsibility as a direct payment permit holder to accrue and pay tax on all of its purchases of taxable items.  Moreover, to require the Comptroller to audit all tax accrued items would place an unreasonable burden on the auditor.  Since the purchases are presumed to be subject to tax, the auditor was not obligated to examine the taxpayer’s tax accrued vouchers to look for over-accrual errors.
• Comptroller Hearing No. 33,750, STARS 9712991H, 98 State Tax Notes 11-44, (December 2, 1997).  Taxpayer argued that when sampling and projection techniques are employed in a Texas sales and use tax audit, the records reflecting erroneously over-accrued tax must be included in the population to properly determine the taxpayer's liability. ALJ held that since the taxpayer was a direct-pay permit holder, the Comptroller's Tax Division was not required to examine taxpayer's tax-accrued vouchers to look for errors.  The Tax Division would have allowed the taxpayer to use sample and projection methods to project a tax credit, but the ALJ found the taxpayer had not produced any evidence to show that over-accruals occurred during the current audit period.
• Comptroller Hearing No. 34,519, STARS 9707590H, (July 8, 1997).  ALJ held taxpayer failed to provide sufficient evidence that the asset purchases sampled by the auditor were not representative of the population.
• Comptroller Hearing No. 34,671, STARS 9910963H, (October 8, 1999). ALJ denied taxpayer's argument that in determining the estimated liability, the Audit Division's methodology should have determined a ratio of taxable to non-taxable transactions found in the records produced during this proceeding, and projected that ratio out for the entire audit period. The difficulty with this position is that taxpayer has offered insufficient evidence to show that transactions which have been shown by documentation to be non-taxable are representative of the entire population of transactions at issue in this proceeding.
• Comptroller Hearing No. 35,660, (April 22, 1997).  ALJ held there are two methods of challenging the accuracy of a sample audit. First, if a taxpayer can show that a certain transaction within a sample period is not representative of its business operations, then that transaction will be withdrawn from the sample and assessed separately.  Second, the taxpayer can attempt to have the sample dismissed by showing that the technique used by the auditor was not in accordance with generally recognized sampling techniques.  If a taxpayer proves that an auditor’s sampling technique is flawed, the Comptroller of Public Accounts has the option of performing a new audit or taking steps to cure specific problems either through modification or separate treatment of the troubling area.
• Comptroller Hearing No. 35,703, STARS 9711878H, (November 12, 1997).  Taxpayer was audited on its sales and contended that many of its customers had already been audited and assessed on those transactions.  Taxpayer contended these overlapping audit assessments on both the seller and purchaser would result in double taxation.  ALJ concluded that Petitioner has submitted insufficient evidence to support its arguments. More specifically, Petitioner did not submit any documentation to show its customers had been audited and remitted sales and use tax on the same transactions assessed in the audit, nor did Petitioner submit a list of customers that had been audited by the Comptroller for any overlapping segment of the taxpayer's audit period so that the Tax Division could attempt to verify taxpayer's contention. Taxpayer failed to meet its burden of proof under Rule 1.40, which requires taxpayer to prove that it is entitled to the relief requested by a preponderance of the evidence. As the record shows, taxpayer has failed to prove its case with the required specificity. Bare assertions, without any supporting evidence, are not sufficient to overcome the presumption of validity afforded to the Comptroller's assessment.
• Comptroller Hearing No. 36,585, STARS 200006509H, (June 6, 2000).  ALJ held that when taxpayer had insufficient records, the auditor was justified in using a sample of available records.  Taxpayer provided no evidence that sampling method was invalid.
• Comptroller Hearing No. 36,774, (December 22, 1998).  ALJ rejected taxpayer's arument that its purchases from telecommunications companies would have been included in the Comptroller's audits of those companies for the same or overlapping periods of time. Taxpayer suggested that it would be more equitable to apply the error rates found in the vendor's audits to the missing invoices in its own audit. ALJ held that taxpayer had not shown its transactions with the vendors were actually examined in the audits of the vendors, assuming for the moment that the pertinent periods were even selected for sampling.
• Comptroller Hearing No. 36,985, STARS 200103248H, (March 28, 2001).  One of the taxpayer's contentions was that some of the sample items with missing invoices represented nontaxable out-of-state transactions.  ALJ held that the missing invoice items are to be treated as taxable.
• Comptroller Hearing No. 37,041, STARS 9812102H, (December 22, 1998).  The taxpayer argued that the population examined in the sample period was too broad and produced severely distorted results.  The taxpayer offered to produce supporting evidence but failed to do so.  The Comptroller of Public Accounts held that alleging that a sample is flawed, without supplying evidence, is not sufficient to overcome the presumption of validity afforded to an audit.
• Comptroller Hearing No. 37,067, STARS 200501041H, (January 24, 2005). A multistate cellular telephone service provider was not entitled to a bad debt deduction from Texas sales and use tax because it failed to provide adequate records. The taxpayer argued unsuccessfully that it should be allowed to use a sampling audit method from a year outside the audit period to calculate the amount for the bad debt deduction because it would be impractical and costly to compile the voluminous records. If a taxpayer's records during an audit period do not adequately reflect its business operations, the Comptroller must determine the best information available and base the audit report on that information. In this case, the taxpayer's records during the audit period were not inadequate or incomplete. Rather, the taxpayer chose not to spend the time and funds to make the records available.
• Comptroller Hearing No. 37,256, STARS 200010987H, (October 13, 2000).  Taxpayer was assessed on purchases and claimed that those transactions were audited in the audit of the seller.  The auditor has reviewed the audits alleged to overlap and found that both audits resulted in no additional taxes due.  The ALJ held that the taxpayer had not met the burden of proof required under Rule 1.40(2)(B).
• Comptroller Hearing No. 37,276, STARS 200001076H, (January 31, 2000).  ALJ agrees with taxpayer that the Tax Division's argument seems to suggest "result-oriented decision making." Basically, the Tax Division is saying that the fact that the month may be unrepresentative for the assessment sample can be ignored because it would work to the taxpayer's advantage, but that same unrepresentativeness cannot be ignored for the refund claim sample because it would also work to the taxpayer's advantage. Either the month should be used in both samples or in neither. ALJ agrees that the month is unrepresentative, and, therefore, recommends that it be deleted from the assessment schedule as well.
• Comptroller Hearing No. 37,954, STARS 9910004H, (October 14, 1999). Moreover, when a taxpayer's records are incomplete and inadequate, as in the case at hand, the Comptroller will utilize the best information available. Rule 3.282(e).
• Comptroller Hearing No. 38,028, STARS 200101129H, (January 25, 2001). Among other issues, the ALJ held a sampling or estimation methodology cannot be attacked as invalid merely because there are insufficient records to verify its accuracy.
• Comptroller Hearing No. 38,045, STARS 200003213H, (March 3, 2000).  Taxpayer experienced difficulty with prior audit using Computer Audit Menu System (CAMS), and proposed that current audit be based on a one month block sample.  After a delay, the auditor agreed to using a block sample sample rather than CAMS.  CAMS is preferred by the Comptroller's Office because even though it does not derive a true statistical sample any more than a one month block sample, it randomly selects and stratifies data by dollar layers over the entire audit period. Similarly, a six month sample is preferable to a one month sample. This is so because the snapshot of information examined is greater than one month. This provides greater reliability because the longer the sampling period the greater the likelihood that it will compensate for personnel or technology changes that may impact estimates of a taxpayer's tax liability based on a one month block sample.
• Comptroller Hearing No. 38,052, STARS 9911110H, (November 5, 1999).  ALJ found that given taxpayer's lack of records, it was entirely appropriate for the auditor to use sampling techniques in ascertaining the tax liability.  The auditor's methodology should be upheld, with one modification. This modification does not entail adjusting for those days which were lost because of weather. Even though the method did not specifically adjust for that, the days when the count was made were not optimal weather for purposes of a business such as taxpayer's and, as such, the lost days arguably would average out against the reduced business on the weekend on which the count was made.
• Comptroller Hearing No. 38,078, STARS 9910925H, (October 6, 1999).  Taxpayer, owner of a nightclub, submitted no evidence in support of its contention that the audit percentages were too high.  The Comptroller held that based on the inadequacy of the records, the best information available was taxpayer’s prices from its previous audit.
• Comptroller Hearing No. 38,301, STARS 9911011H, (November 18, 1999).  The taxpayer's records are incomplete and provided no additional records during the hearing process. The Audit Division has correctly exercised the agency's statutory authority to estimate the Petitioner's sales tax liability based on the best information available to the auditor.
• Comptroller Hearing No. 38,459, STARS 200004565H, (April 20, 2000).  When taxpayer's only records were monthly operating reports and annual financial statements, the auditor used a mark-up method to estimate a tax deficiency.  Taxpayer protested that inadequate notice of sampling was provided.  ALJ held auditor was not using a sampling method, but a method allowed by the statute to compute an estimated audit based on the best information available.
• Comptroller Hearing No. 38,932, STARS 200108562H, (February 7, 2001).  Taxpayer argued that the sample is skewed because although the one large transaction represents only .28% of the sample it represents 10.93% of the taxes. This one invoice was one of nine transactions over $6,000.  The ALJ ordered this invoice ber removed from the sample and projection, and a new detail schedule be prepared for all invoices over $6,000.
• Comptroller Hearings No. 38,961 and 38,962, STARS 200207489H, (July 19, 2002).  The taxpayer's contention that the auditor did not use an adequate sample size to determine the taxpayer's sales tax liability was rejected. Based on the taxpayer's request, the auditor had increased the sample from 100 to 250 randomly selected invoices and adjusted the stratification. The resulting error percentage decreased from 61% to 39%. The taxpayer failed to establish that the sampling method used by the auditor was not in accordance with generally recognized sampling techniques. However, the taxpayer's request that several errors caused by an extraordinay problem with its computer systems be removed from the population and separately stratified was granted because the transactions were not representative of the taxpayer's overall business.
• Comptroller Hearing No. 39,277, STARS 200509336H, (September 16, 2005). Taxpayer contends the auditor did not provide adequate notice of sampling method used, did not determine if the Petitioner's records were sufficient for a "sampling methodology," and failed to use a proper sampling method. Taxpayer did not maintain complete records of transactions occurring during the audit period. The disparity between receipt amounts reported to the IRS and on franchise tax returns, as compared to sales totals reported by Petitioner on sales tax reports and sales amounts per available invoices, along with the absence of records needed to test internal controls, sufficiently demonstrated the inadequacy of taxpayer's records. ALJ denied taxpayer's protest.
• Comptroller Hearing No. 39,765, STARS 200305976H, (May 14, 2003).  ALJ held that Comptroller may assess when taxpayer has missing records in a sample.
• Comptroller Hearing No. 42,121, STARS 200308104H, (August 5, 2003).  Taxable sales during the audit period were determined by sampling bank deposits from records the taxpayer was ultimately able to provide, for 30 randomly selected deposit days during the audit period. An error percentage was calculated by dividing the dollar value of errors revealed by the sample by the total dollar value of deposit transactions for the sample days, which was applied to the total dollar value of deposit transactions for the audit period to arrive at audited taxable sales and tax due.  Taxpayer did not challenge sampling method.
• Comptroller Hearing No. 42,176, STARS 200308105H, (August 5, 2003).  ALJ held auditor was clearly allowed to estimate under the statute since the taxpayer failed to maintain and provide adequate records for a complying to be performed.
• Comptroller Hearing No. 42,592, STARS 200308123H, (August 21, 2003).  For the purpose of apportioning Texas franchise tax, the auditor needed to verify the gross receipts factor of a corporation doing business in many states.  Taxpayer did not have complete records for 1996 to 1999 due to an accounting system conversion.  The ALJ held that the auditor could use the best available evidence to estimate the receipts factor for the period without available records.
• Comptroller Hearing No. 42,702, STARS 200306130H, (June 4, 2003).  The auditor obtained distributor records of Petitioner's purchases of beer, soft drinks, and cigarettes for 2001. The auditor prepared an estimate based on those records. The total dollar amount of taxable goods available for sale was multiplied by a markup percentage to get projected taxable sales for the sample base. The reported taxable sales were subtracted from the projected taxable sales for the sample period. A 5% allowance was given for spoilage, theft, and etc. The difference between the two figures was divided by the reported sales for the sample base to get an error rate of 146.0388%. This error rate was then multiplied by the population base to calculate additional taxable sales for the audit period. The additional taxable sales were then multiplied by the appropriate sales tax rate to get additional sales tax due.
• Comptroller Hearing No. 42,761, STARS 200312338H, (December 5, 2003). Taxpayer asserted that 12 sampled invoices had offset credits issued in the same sample period. The sales reversals generally referred to by taxpayer were not specifically identified. ALJ held taxpayer failed to meet its burden of proof.
• Comptroller Hearing No. 43,887, STARS 200510384H, (October 28, 2005). Taxpayer contends that several exams should be deleted because the auditor improperly issued the notifications of sampling and estimation procedures. The auditor used both sampling and estimation procedures. The Comptroller has the authority to use sampling methods to audit a taxpayer under certain enumerated circumstances. See Section 111.0042(b); Rule 3.282(b) and (c). The Comptroller also has the authority to estimate tax based on best information available if the taxpayer has no or incomplete records. See Section 111.0042(d); See also, Rule 3.282(k). Petitioner does not challenge the applicability of those authorities to its audit, but instead contends all exams based on sampling or estimation should be deleted because the auditor did not timely issue the official written notifications of sampling and estimation, as required by Rule 3.282 and the Audit Division's Sampling Manual. Alternatively, Petitioner contends two exams, Exam No. 6 and Exam No. 21005, should be deleted because they were not included in any of the official written notifications. The Tax Division contends that the Comptroller gave the required written notifications. After reviewing the arguments and evidence in the record, it is concluded that Petitioner's contentions should be denied.

Court Cases

• Baker v. Bullock, 529 S.W. 2d 279, (Texas Court of Appeals - Austin Division, 1975).  Court held taxpayer's vague allegations were insufficient to establish the auditor's method was incorrect or inapplicable.
• Bullock v. Foley Brothers Dry Goods Corporation, 802 S.W. 2d 835, No. 3-89-124-CV, CCH-STATE-CASE-APP-CT, TX-TAXRPTR, ¶401-327, (Texas Court of Appeals - Austin Division, unpublished opinion, December 19, 1990, rehearing denied, 1991).  The Texas Court of Appeals reversed a District Court judgment and held that, under Texas Tax Code Sec. 151.515, the Comptroller could sue a consumer to collect the sales tax due on a taxable sale to the consumer without collecting the tax from the vendor first. Sales and use taxes are transaction taxes for which both vendors and buyers are liable. The District Court had erred in concluding that the Comptroller may not assess sales tax against a consumer without first proving that its Texas vendor had not paid the tax. Court held that taxpayer failed to meet its burden of proof that the auditor used invalid sampling techniques and failed to approve the state benefited from overlapping audits of the seller and purchaser.
• Bullock v. National Bancshares Corp., 584 S.W. 2d 268, (Texas, 1979). Court held that taxpayer's claims for tax exemptions must be raised affirmatively. Doubts about exemptions are to be resolved in favor of the taxing authority and against the claimant.
• Chambers, Mary Ann f/d/b/a Today's Signs, Appellant v. State of Texas and City of Denton, 2001 Tex. App. LEXIS 1253, 2001 WL 193852, CCH-STATE-CASE-APP-CT, STATE-ARD ¶402-155, (Texas Court of Appeals - Austin Division, February 28, 2001).  Court held that a vendor who erroneously collects taxes from a customer may seek a refund from the Comptroller only after the vendor demonstrates that the taxpayer was reimbursed for all taxes collected.  Merely crediting customer's accounts for overpaid sales tax is insufficient to establish that tax has actually been refunded to customers.
• Fleming Foods of Texas, Inc. v. Rylander, 6 S.W. 3d 278 (Texas Supreme Court, 1999).  Court held taxpayer seeking reufnd of sales tax overpaid to vendor could file its claim directly with Comptroller. This decision was essentially reversed by the Legislature in 2003 when it enacted HB 2425 amending Texas Tax Code Section 111.104(b) requiring that only the party that directly paid the tax could file the claim with the Comptroller.
• Hylton v. State of Texas, 665 S.W. 2d 571, (Texas Court of Appeals - Austin Division, 1984).  Court held taxpayer failed to present a preponderance of evidence that the auditor's determination was incorrect.
• Phelan Company v. Sharp, Travis County District Court Cause No. 98-00504, (2001).  Comptroller's sampling methodology resulted in an incorrect audit assessment because the sample did not represent actual business connections.  Court awarded attorney fees to taxpayer.
• Site Work Group v. Chemical Lime, No. 10-05-00081-CV, CCH-STATE-CASE-APP-CT, TX-TAXRPTR, ¶402-936, (Texas Court of Appeals, Tenth District, July 27, 2005). Supplier sued a building contractor for failure to pay for materials on which Texas sales tax had been charged. Contractor notified the supplier that the materials were purchased for a tax exempt church sanctuary. The appellate court majority held that the supplier was required to collect sales tax because it did not have an exemption certificate at the time of the transaction. The dissenting justice noted that although a seller should have a completed exemption certificate at the time of sale, it is not mandatory. The Texas Comptroller will not disallow a deduction claimed by a seller based on an exemption certificate, so long as the certificate is in the seller's possession within 60 days from the date the Comptroller gives notice to the seller.
• State v. Glass, 723 S.W. 2d 325, (Texas Court of Appeals - Austin Division, 1987, rehearing denied).  Court held taxpayer's vague allegations were insufficient to establish the auditor's method was incorrect.
• Texas Instruments v. Sharp, Texas 345th District Court, Cause No. 91-2823, (1994).   Taxpayer sought to include vendor overpayments discovered in the sample projected into audit population. The Comptroller settled the case in the taxpayer's favor and issued Audit Memo 1685 (November 1, 1994) describing when overpayments could be projected.

Utah

Statutes

• Code Ann. Section 59-12-111, Licensee to keep records, http://www.le.state.ut.us/~code/TITLE59/htm/59_0D017.htm
  

Rules

• R861-1A-35. Manner of Retaining Records, http://www.tax.utah.gov/research/effective/r861-01a-035.htm
• R865-19S-22. Sales and Use Tax Records, http://www.tax.utah.gov/research/effective/r865-19s-022.htm

Vermont

Statutes

• Vermont Statutes Title 32, Chapter 103, section 3101.  Powers and duties of commissioner.  The commissioner is authorized to administer and enforce all taxes within his or her jurisdiction.

Virginia

Statutes

Online at http://leg1.state.va.us/cgi-bin/legp504.exe?000+cod+TOC5801000

Regulations

• 23 VAC 10-20-90. Retention of records by taxpayer, http://leg1.state.va.us/cgi-bin/legp504.exe?000+reg+23VAC10-20-90
  

Guides

• Virginia Audit Sampling Procedures http://www.townhall.state.va.us/L/GetFile.cfm?File=E:\townhall\docroot\GuidanceDocs\161\GDoc_TAX_3851_v1.pdf

Administrative Decisions

• Commissioner Ruling, P. D. 95-2, (January 4, 1995). The Tax Commissioner ordered the Department of Taxation to revise its audit of the taxpayer because certain capital expenditures during the sample period were extraordinarily high.  The Department performed its audit by sampling the taxpayer’s expense purchases for 1990, and extrapolating those findings over the entire audit period of March, 1985, through February, 1991.  The Commissioner found that the sample was inaccurate because certain capital expenditures made during the sample period were 416% higher than any other year of the audit.  Those capital expenditures were removed from the sample and the Commissioner ordered an analysis of all similar purchases for the entire audit period.
• Commissioner Ruling, P. D. 95-112 (May 11, 1995).  The Tax Commissioner found that even though only sporadic sales were made to certain customers during the audit period, the sample was accurate.  The Commissioner held that those sales are of the same nature as sales made to other customers during the sample period and should be remain in the sample.
• Commissioner Ruling, P. D. 96-235, (September 16, 1996). While the assessment based on a sample period was upheld, the taxpayer was allowed to examine in detail all taxable sales in the audit over a certain dollar value to support a recalculation of the audit liability.
• Commissioner Ruling, P. D. 96-351, (November 17, 1996).  The Tax Commissioner held that a sampling audit technique in which sales during one sample year are extrapolated over the entire audit period was used properly where the taxpayer accrued use tax and filed tax returns for only a portion of the audit period.  Relying upon the previous year's purchases in order to estimate liability for the audit period was the correct method given that complete records for the audit period were not available and the taxpayer was unable to demonstrate that the sample used was not representative or flawed in some other manner.
• Commissioner Ruling, P. D. 97-177, (April 16, 1997).  The Tax Commissioner held that an audit sampling did not result in an accurate representation of the taxpayer’s normal business activity because three exceptions, sales for which valid exemption certificates were missing, out of a total of 24 exemption certificates comprised over one-half of the measure found in the sample.
• Commissioner Ruling, P. D. 97-363, (September 9, 1997). Sampling is used to determine tax liability when the volume of transactions is great.  In this case, the taxpayer’s large volume of sales during the audit period would have made it impractical to perform a detailed audit.  Using statistical sampling when there is a large volume of transactions reduces compliance costs for both the Department of Taxation and taxpayers without adversely impacting accuracy.
• Commissioner Ruling, P. D. 99-35, (March 29, 1999).  Taxpayer argued that certain sales made during the sample month were isolated and not representative of its operations during other periods of the audit.  The sales represented less than one percent of the taxpayer’s sales made during the sample month.  The Tax Commissioner found that even though those transactions represented a small volume of sales when compared to the taxpayer’s overall sales for the sample month, that  does not demonstrate that those sales were isolated.
• Commissioner Ruling, P. D. 99-39, (March 31, 1999).  The auditor and taxpayer selected a three month sample that represented high, medium, and low sales. The auditor determined an error factor for the representative sample period selected, and the error factor was extrapolated over gross sales for the audit period.  The taxpayer did not present sufficient evidence to show the sample was not valid.
• Commissioner Ruling, P. D. 99-63, (April 13, 1999). When increases and decreases in gross sales vary directly with purchases, the use of gross sales to extrapolate the results of a purchase sample is an acceptable audit procedure.
• Commissioner Ruling, P. D. 99-66, (April 15, 1999). Before requiring that a detailed audit be conducted or a sample period be adjusted or extended, the taxpayer must demonstrate that the sample is not representative of the audit period or that it is flawed in a manner which would invalidate the sample.
• Commissioner Ruling, P. D. 99-250, (August 30, 1999).  Isolated or nonrecurring purchases are defined to mean those that are not part of the taxpayer’s “normal business operations”.
• Commissioner Ruling, P. D. 00-49, (April 10, 2000).  The Department of Taxation will remove an item from an audit sample if the taxpayer proves that the transaction is isolated in nature and not a normal part of its business activity.
• Commissioner Ruling, P. D. 00-62, (April 26, 2000).  For items to be removed from the audit sample and taxed separately, the Taxpayer must be able to prove that each purchase in question is isolated in nature or nonrecurring (as opposed to infrequent) and not a normal part of the taxpayer's course of business.
• Commissioner Ruling, P. D. 00-75, (May 12, 2000).  Public Document 00-62 constitutes the Department's “policy” regarding isolated/nonrecurring purchases.  Block and random sampling are valid audit techniques.
• Commissioner Ruling, P. D. 00-85, (May 17, 2000). The auditor chose a two month period to identify sales made during the audit period.  The auditor found errors in which the taxpayer failed to charge tax on sales that were taxable.  Among the sales assessed was an untaxed sale in which the taxpayer was unable to collect payment from the customer.  The Tax Commissioner held that the fact that the taxpayer can show that the sale was worthless does not invalidate the sample.  Even though that sale may be worthless, the taxpayer failed to charge tax on a taxable sale.  The Commissioner found that similar transactions outside the sample period on which tax was not charged probably occurred.  To remove the sale in question from the sample period would skew the sample and nullify its validity.
• Commissioner Ruling, P. D. 00-87, (May 18, 2000).  Taxpayer argued that certain account balances were improperly included in the extrapolation of the audit sample and requested that those balances be removed from the sample calculation.  When the audit sample was calculated those account balances were not available, so a larger population was used in the sample.  The Tax Commissioner found that once those account balances became available, the taxpayer was entitled to review the audit and recalculate the sample with the auditor.
• Commissioner Ruling, P. D. 00-164, (August 31, 2000).  Sampling is used where a detailed audit would not benefit the auditor or the taxpayer.  When sampling techniques are properly applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit.  For an item to be removed from the audit sample, the taxpayer must show that the transaction was isolated in nature and not a normal part of the taxpayer’s operations.  In this case, the Tax Commissioner found that the taxpayer did not show that any of the purchases from a certain vendor were unique which would justify removal from the sample for separate taxation.  Rather, the Commissioner found that the sample demonstrates that the taxpayer made regular purchases of materials from that vendor.  The Commissioner held that absent contrary evidence, other periods not sampled probably would render results similar to the sampled period regardless of whether purchases were made mostly from that vendor or other vendors.
• Commissioner Ruling, P. D. 02-103, (June 24, 2002).  An item will be removed from an audit sample only when it is shown that the transaction is isolated and not a normal part of the taxpayer’s business activity. Taxpayer’s purchase of promotional pens were not removed from the audit sample because the taxpayer had an advertising budget and the purchase of advertising items were assumed to be an integral and normal part of taxpayer’s business. The taxpayer, however, was allowed to submit additional evidence to show that promotional purchases were not part of its normal business activity.
• Commissioner Ruling, P. D. 04-84, (August 27, 2004).  Although use tax accrued and paid in error has been included in some of the Department's audit samples in the past, the Department does not have to include those overpayments if they would distort the audit sample.
• Commissioner Ruling, P. D. 04-99, (September 8, 2004).  The Department did not allow a taxpayer to offset overpaid use tax against sales tax undercollected from its Virginia sales.
  

Cases

• Clinchfield Coal Co. v. Ronnie L. Robbins, Commissioner of Revenue, Dickenson County , Virginia Supreme Court, No. 0700, www.courts.state.va.us/txtops/1000700.txt, (January 12, 2001).  A county revenue commission hired a public accounting firm to audit coal severance taxes and appointed some of the accountants as deputy commissioners.  The Virginia Supreme Court ruled the commissioner lacked authority to appoint members of an accounting firm as deputy commissioners. A summons requiring production of business tax records for use by the accounting firm is quashed.

Washington

Statutes

• RCW 82.32.070, http://apps.leg.wa.gov/RCW/default.aspx?cite=82.32.070 Records to be preserved
• RCW 82.32.110, http://apps.leg.wa.gov/RCW/default.aspx?cite=82.32.110 Examination of books or records
• RCW 82.32.330, http://apps.leg.wa.gov/RCW/default.aspx?cite=82.32.330 Disclosure of return or tax information.

Regulations

• WAC 458-20-229 (5), http://apps.leg.wa.gov/wac/default.aspx?cite=458-20-229, allows statistical sampling for refunds.

Department of Revenue Tax Determinations

• Determination No. 87-17, 2 WTD 143 (January 22, 1987).  A correlation generally exists between a taxpayer's purchases of consumable supplies and its income. If a taxpayer believes a test period used by an auditor to arrive at a percentage to use for computing amounts subject to tax is not representative of other periods, it may compute the amount of use tax owing for another period. The assessment will be reduced if the taxpayer can show the percentage used by the auditor resulted in a higher tax than was due.
• Determination No. 88-233, 6 WTD 59 (June 10, 1988).  The use of test periods is an appropriate audit procedure if proper consideration is given to factors which could lead to other than reasonable results. In this case the use of an uncharacteristic year as part of a test period was disallowed because it did not reasonably represent what probably happened in an earlier year.
• Determination No. 89-53, 7 WTD 137, (January 27, 1989).  Persons engaged in business are required to keep adequate records or are estopped to question a Department assessment of tax during an audit or a later proceeding. Where taxpayer produces no daily sales records of operations or records of sales from street fairs in which the business participated, the auditor's assessments based on visual observations and conversations with taxpayer's landlords and fair organizers must be upheld.
• Determination No. 90-213, 9 WTD 292-5, (1990).  Department will rely on sample projections when records are unavailable.
• Determination No. 91-260, 11 WTD 423, (September 17, 1991).  The taxpayer stated that its numerical invoices would not provide an accurate sales figure, because many of them have been voided, reversed, or uncollected.   The auditor agreed that voided, reversed, or uncollected invoices should and will be adjusted upon the presentation of the proper documentation.
• Determination No. 95-138, 16 WTD 33, (July 25, 1995). Taxpayers are required to maintain adequate records so that tax liability may be correctly determined.  When a taxpayer fails that requirement, a projection based upon the available records is necessary to complete the assessment.  The Interpretation and Appeals Division of the Department of Revenue will not favorably entertain an argument that a test period is unrepresentative when a taxpayer fails that record-keeping requirement.
• Determination No. 98-224, 19 WTD 212, (December 29, 1998).  Both the taxpayer and the Department of Revenue must be satisfied that the test period chosen for an audit constitutes a true and accurate representation of the error factor throughout the audit procedure.  If the taxpayer is dissatisfied with the test period, the Appeals Division of the Department of Revenue will remand the claim to the Audit Division for an expansion of the test period.

Department of Revenue Publications

• Statistical Sampling Manual, (revised 2008). Available on request to Computer Assisted Audit Program (CAAP) managers in the Washington Department of Revenue.
  

West Virginia

Regulations

• West Virginia Code Section 110, Regulations section 15-14B.2. The Tax Commissioner may use a detailed auditing procedure or a sample and projection auditing method to determine tax liability.
• West Virginia Code Section 110, Regulations section 15-14B.3.  A sample and projection auditing method is appropriate if (1) the taxpayer's records are so detailed, complex, or voluminous that an audit of all detailed records would be impractical or unreasonable; (2) the taxpayer's records are inadequate or insufficient, so that a competent audit for the period in question is not otherwise possible; or (3) the cost of an audit of all detailed records to the taxpayer or the State will be unreasonable in relation to the benefits derived, and sampling procedures will produce a reasonable result.
• West Virginia Code Section 110, Regulations section 15-14B.4.  If records are inadequate to accurately reflect the business operations of the taxpayer, the auditor will determine the best information available and will base the audit report on that information.
• West Virginia Code Section 110, Regulations section 15-15B.

Administrative Decisions

• Administrative Decision  90-4735C (April 13, 1998).  Pursuant to an audit of the Petitioner's daily invoice summary, cash sales invoices, and charge sales invoice register maintained for the months of March 1987, December 1987, September 1988, and April 1989, it was determined that the Petitioner had erroneously accepted exemption certificates from customers, who were not eligible for such exemptions. Using this statistical sampling, the subject assessment was issued covering the entire period in question during which the Petitioner had accepted invalid exemption certificates.
• Administrative Decision  97-315C (February 7, 2000).  Since the taxpayer had inadequate records, the auditor was allowed to use sampling and projection audit methods and the best information available to determine the taxpayer's business operations.
•  Administrative Decision 98-187C (March 22, 1999).  For purposes of computing a tavern owner’s tax liability, the Tax Examiner’s use of a sample and projection auditing method was appropriate because the tavern owner’s records were not adequate to conduct a competent audit.  The tavern owner did not have accounting records sufficient to verify sales made or taxes collected, leaving the examiner with no alternative but to employ a sampling method.
• Administrative Decision 98-408U, 98-409C, 98-410HP, 98-411U, 98-412RHP (April 16, 1999).  A sample and projection auditing method may be used where the taxpayer’s records are too voluminous or insufficient to conduct a detailed audit or if the cost of doing a detailed audit is unreasonable and sampling will produce a reasonable result.  The Tax Examiner’s decision to use sampling rather than perform a detailed audit is not a proper basis on which to nullify a tax assessment.
• Administrative Decision 00-083U (March 27, 2002).  The audit sample method was appropriate for determining West Virginia sales and use tax liability because the taxpayer's records were detailed, complex, and substantial. The month selected to apply to the audit sample was appropriate, even though it was during a period of unusual change for the corporation that included the sale and closure of facilities, warehouses, and offices and a reduction in employees, because the assessment did not include transactions regarding the sales of those facilities. Also, the taxpayer failed to provide evidence supporting its claim that there were nontaxable lease payments that should have been excluded from the assessment.

Wisconsin

Statutes

Online at www.legis.state.wi.us/rsb/stats.html

• Wisconsin Statutes Annotated 77.59(2),  The department may, by field audit, determine the tax required to be paid to the state or the refund due to any person under this subchapter.  The determination may be made upon the basis of the facts contained in the return being audited or upon any other information in the department's possession.  The determination may be made on the basis of sampling, whether or not the person being audited has complete records of transactions and whether or not the person being audited consents.  The department may examine and inspect the books, records, memoranda and property of any person in order to verify the tax liability of that person or of another person.  The department may subpoena any person to give testimony under oath before it and to produce whatever books, records or memoranda are necessary in order to enable the department to verify the tax liability of that person or of another person.  The determination shall be presumed to be correct and the burden of proving it to be incorrect shall be upon the person challenging its correctness.

Administrative

• Non-statistical Sampling, Publication 515, Miscellaneous Taxes, Wisconsin Department of Revenue, (revised February 2006), www.revenue.wi.gov/pubs/pb515.pdf This publication provides information about non-statistical sampling used in field audits by the Wisconsin Department of Revenue. It explains when and why sampling is used, the factors considered in determining if sampling will be used, how sampling results are calculated and special situations that can affect sampling results. The two most common non-statistical sampling methods used in audits, the alpha sample and the time-based sample, are explained in Part V. Throughout this publication the word sampling refers to non-statistical sampling.
• Tax Bulletin No. 128, Wisconsin Department of Revenue, (January 2002).  Item 8 states the Department may use statistical or nonstatistical sampling in a field audit if a review of 100% of the taxpayers' records is not efficient, regardless of whether the taxpayer has complete records or whether the taxpayer consents to sampling. Vehicle sales by an automobile dealership are usually not sampled, but other areas of such a business may be sampled.

Cases

• Boggis-Johnson Electric Co. v. Wisconsin Department of Revenue , 11 WTAC 264, WTAC Docket No S-7782, CCH-STATE-CASE-TAX-CT, 79--82 WI-TAXRPTR-TB ¶202-005, (Wisconsin Tax Appeals Commission, April 23, 1982).  Notice of nonacquiescence in decision filed by Wisconsin Department of Revenue, May 19, 1982.  The taxpayer had 27 file drawers of complete records.  Without the taxpayer's permission, the auditor audited a sample of only 25% of the records.  Because the taxpayer had not given consent and the method was prejudicial to the taxpayer, the Appeals Commission reversed the assessment.   [Note: After enactment of  Wisconsin Statutes Annotated 77.59(2), sampling may be used without the taxpayer's consent and even if the taxpayer's records are complete.]
• Briggs & Stratton Corporation v. Wisconsin Department of Revenue , Docket No. S-7892, CCH-STATE-CASE-TAX-CT, 82--86 WI-TAXRPTR-TB ¶202-308, (Wisconsin Tax Appeals Commission, December 29, 1983). The Tax Appeals Commission found that there were genuine issues of fact as to whether the taxpayer had complete and accurate records, whether it agreed to the Department's use of sampling, whether sampling was an accepted part of auditing, and whether the Department's assessment was arbitrary.  The Department of Revenue conducted a sales and use tax field audit of the taxpayer using a statistical sampling method. The taxpayer did not agree to the use of this method, and claimed that it was unauthorized by Wisconsin law and, hence, that the results obtained from the audit should be cancelled. The taxpayer also claimed that the audit was not conducted properly because the auditor failed to consider invoices from the sample where sales or use taxes were paid erroneously by the taxpayer, resulting in an overstatement of the taxpayer's total tax liability.  [Note: After enactment of  Wisconsin Statutes Annotated 77.59(2), sampling may be used without the taxpayer's consent and even if the taxpayer's records are complete.]
• DOR v. Moebius Printing Co. 89 Wis. 2d 610, 279 N.W.2d 213, CCH-STATE-CASE-HIGH-CT, 66--79 WI-TAXRPTR-TB ¶201-603, (Wisconsin Supreme Court, May 30, 1979). A "spot check" by the department of a taxpayer's records for a single month was a "field audit" covering that period only. [Note: After enactment of  Wisconsin Statutes Annotated 77.59(2), sampling may be used without the taxpayer's consent and even if the taxpayer's records are complete.]

Wyoming

Statutes

• Wyoming Statutes 39-11-102.  Administration.  Sets forth taxpayer's rights and duties of the Department of Revenue.

Cases

• Amoco Production Company v. Department of Revenue and Board of County Commissioners of Uinta County, 2004 WY 89, 94 P.3d 430 Case Number: 02-171, http://wyomcases.courts.state.wy.us (Wyoming Supreme Court, July 23, 2004). In a dispute regarding the underpayment of severance taxes and increasing gross product valuation on gas production, the Supreme Court ruled on the tax auditor's use of sampling. At paragraphs 46-49 of this opinion, the Court summaized the dispute between the taxpayer and auditor regarding the auditor's method of sampling expenses. The Court held, "Amoco has not met its burden of proof that any of the actions of the auditor were arbitrary, capricious, constituted an abuse of discretion or are unsupported by substantial evidence."
• Nobel/Sysco Food Services Co. Docket No. 91-136, (Wyoming State Board of Equalization, April 19, 1993).  Although the Department of Revenue’s used sampling in an audit without the benefit of rules and regulations as later adopted and filed with the Wyoming Secretary of State, the methodology utilized was consistent with generally accepted accounting and audit principles.  The audit assessment was upheld.

Maintained by Will Yancey. Please e-mail any comments or suggestions to will@willyancey.com