Overview of Sales Tax Audit Concerns
If you sell both high and low tax items, then, under a sales tax audit, the auditor will pay close attention to the amount that you are selling of each.
If you have a grocery store with very few low-tax items, the auditor may gross up your high tax sales to the industrial norm.
Transcript
Q&A with Mehir P from Hoover, AL
Question: Why is my auditor making a big deal over high and low tax items?
Thanks for your question, Mehir. From my understanding, you probably have some type of a convenience store or a gas convenience store inside of a gas station in Hoover, AL, and you’re being audited for sales tax.
Auditor’s Objective
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Determine whether you paid the correct sales tax on all items sold
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Understand the difference between high tax and low tax items and its implications
High Tax vs. Low Tax Items
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Retail Items (High Tax):
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Chocolate bars
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Chips
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Cans of coke
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Grocery Items (Low Tax):
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Lettuce
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Items typically found in a fresh market
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Why the Ratio Matters
Auditors compare your sales to the “industrial norm.”
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If you have a straight convenience store, it’s unusual for 90% of your items to be taxed as low-tax items
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A store mostly selling retail goods should reflect majority high-tax items
Industrial Norm Example
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In a fresh market, 90%+ of items might reasonably be low tax
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In a convenience store, the norm would be:
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90–95% high tax
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5–10% low tax
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If the auditor sees a 50/50 split between high and low tax items in your sales report, but the industrial norm expects 92% high tax, they will gross up your high-tax sales by 40% to meet expectations
Final Note
If it looks like you’re missing a certain percentage of high tax items, the auditor may adjust your records accordingly
If you have more questions, feel free to keep posting them. We’re here to help!
Frequently Asked Questions
Why does the sales tax auditor care about the ratio of high-tax to low-tax items?
The auditor uses this ratio to determine whether your reported sales align with the “industrial norm” for your type of business. A significant mismatch may suggest errors or omissions in your tax reporting.
What happens if my sales tax report shows an unusual split between high and low-tax items?
If your report shows an unusual split, like a 50/50 ratio where the norm expects 90% high-tax items, the auditor may adjust (or “gross up”) your reported high-tax sales to reflect industry standards.
What types of items are considered high-tax in a convenience store audit?
High-tax items typically include retail snack foods such as chocolate bars, chips, and cans of soda—essentially prepackaged and processed products.
How are grocery items treated differently in a sales tax audit?
Grocery items like lettuce and other fresh market goods are often taxed at a lower rate. These are categorized separately from typical convenience store retail goods during an audit.
How can I prepare for a sales tax audit if I sell both types of products?
Maintain clear and accurate records distinguishing between high-tax and low-tax items. Ensure your sales data reflects a ratio that aligns with industry norms to avoid adjustments during an audit.