Overview
Our firm was dealt with a new predicament where a GDOR auditor levied sales tax on the winnings of a COAM (Coin Operated Amusement Machine).
At issue is the taxability of transactions stemming from the winnings of coin operated amusement machines, administered by COAM.
Applicable Rules
Rule 13.3 of COAM allows players of their coin operated machines to apply their winnings to the following three items without incurring a taxable transaction:
- Gas
- Grocery
- Lottery Replay
Audit Issue
The auditor determined that the use of winnings in these circumstances are taxable transactions. If a player went from one machine to another machine, the auditor applied sales tax to the replay. Clearly, the replay was levied sales tax.
Neither COAM nor the State Lottery Commission has rules and/or regulations regarding record keeping of such transactions.
Protest and Reasoning
For the reasons mentioned above, we protested the liability as a result of the contrast between the rules surrounding COAM versus the audit procedure that was used in his audit.
In essence, the auditor has determined all of the proceeds of the winnings were used to purchase fully taxable items that were simply not charged sales tax.
Current Status
As this case is still undergoing review at the GDOR (Georgia Department of Revenue), the Department’s attorney referred to this article and both stated that the story that we are explaining above is being used as an affirmative defense.
In addition, it is being used to advertise to prospective clients and for them to use it as an affirmative defense. This is not the case.
It clearly states the facts as to what happened to our client and how undefined rules can lead to troubles during an audit and even on appeal.
Key Takeaway
If you have read this article, I am certain that you would want to improve your bookkeeping on the winnings and exempt sales so that you do not land in the same predicament.
Frequently Asked Questions
What is the primary issue in this COAM audit case?
The central issue is whether the use of winnings from Coin Operated Amusement Machines (COAM) for certain purchases constitutes a taxable transaction. The GDOR auditor applied sales tax to these uses, despite COAM Rule 13.3 suggesting exemptions.
Are COAM winnings always taxable?
Not necessarily. Rule 13.3 permits COAM winnings to be applied to gas, grocery, or lottery replays without being taxed. However, the auditor in this case applied tax when winnings were replayed across machines, leading to a dispute.
Why did the auditor apply sales tax to replayed winnings?
The auditor reasoned that proceeds from one machine used to play another machine constituted a taxable purchase. This interpretation lacks clear backing from COAM or State Lottery regulations, which don’t outline replay tracking requirements.
What is the firm’s defense against the auditor’s decision?
The firm argues that there’s a discrepancy between the audit method and existing COAM rules. The protest highlights the lack of clear regulatory guidance on how replay transactions should be recorded and taxed.
How can operators avoid similar tax issues?
Operators should maintain accurate records of winnings and exempt transactions. Improved bookkeeping can help clarify the use of winnings and potentially avoid disputes during audits or appeals.