A client of our law firm recently underwent a sales tax audit at their restaurant located in San Antonio, Texas. The major issues surrounding this audit are as follows:
Key Issues in the Audit
- Client reset their POS terminal one month prior to the audit initiation notice
- Client did not keep record of their parking fees and instead included them in their gross sales
- Client combined two of his unrelated businesses on one Schedule C
Let’s discuss each problem in detail.
1. POS Terminal Reset Before Audit Notice
By resetting the POS terminal, the client lost all of his records for the business. Besides bank statements, there was no other way to verify how much our client earned in gross sales.
The auditor simply used the bank deposits and applied the sales tax rate to the gross amount.
What’s the problem?
Even a bank transfer unrelated to gross revenue or a non-taxable sale will be deemed a taxable sale.
2. Parking Fees Not Properly Recorded
Valet fees are subject to sales tax in Texas. However, since these were not separated and described as a different line item, the auditor grouped them into the taxable gross sales.
Our firm had to meticulously go through each valet notebook and match cars, customers, and payments to properly account for these fees.
3. Combining Unrelated Businesses on One Schedule C
This could be the worst mistake our client made. By including the gross revenue of two businesses into one Schedule C, our client was subject to double sales taxation.
How does that work?
- Business #2 deposits $500,000 into the bank account assigned to Business #1.
- Business #2 already paid sales tax on their gross receipts.
- The sales tax return for Business #1 only shows the sales tax paid on its own gross receipts.
To the naked eye, it appears that Business #1 had double the sales, which results in double the tax.
Our firm was able to show the source of the income, and this additional revenue was subtracted from the gross sales of Business #1.
The Importance of Experienced Representation
Sales tax audits require experience and depth in state and local taxation. This is not something that can simply be settled for less money.
Facing a Sales Tax Audit in Texas?
Contact our attorney for a consultation.
Frequently Asked Questions
What happens if you reset your POS terminal before a sales tax audit?
Resetting the POS terminal erases key sales records, leaving only bank statements as proof of income. Auditors may assume all deposits are taxable, including non-taxable or unrelated transfers, which can lead to overestimation of tax liability.
Are parking or valet fees subject to sales tax in Texas?
Yes, valet and parking fees are taxable in Texas. If these fees are not itemized separately from gross sales, auditors will typically include them as part of taxable sales, increasing the tax owed.
Why is it a problem to combine unrelated businesses on one Schedule C?
Combining two businesses on one Schedule C can result in double taxation. Income from one business might be taxed again if it’s counted in the sales tax return of the other business, especially if deposited into a shared account without clarification.
How can an attorney help during a sales tax audit?
An experienced attorney can challenge incorrect assumptions made by auditors, trace the origin of deposits, separate taxable from non-taxable income, and ensure proper documentation is provided, which can reduce or eliminate unjust tax assessments.
What should I do if I’m facing a sales tax audit in Texas?
You should consult with a knowledgeable sales tax attorney immediately. Handling an audit without professional guidance can result in costly errors, including overpayment due to misclassification or lack of proper records.