If you are currently undergoing a sales tax audit in Tennessee, you have rights to appeal your final notice of tax liability. You have the opportunity to appeal a determination within 30 days of the final notice of tax liability at an informal review hearing. Then, you get another 60 days to appeal the decision from the informal review hearing at the State Tribunal level.
Case Example: Small Grocery Store Audit
In a recent case, our client owned a small grocery store which was audited for sales tax. The main problem with this audit was the books and records. According to the auditor, books and records were only supplied for one year, so the extrapolation of the numbers was of a narrow scope and may not represent the actual figures. This was agreed to by all parties.
Sales Tax Issues
- The auditor believed that the grocery items that do not require sales tax were overstated.
- He did not have proof either way, but the rebuttal presumption is in favor of the State.
- For this reason, all items claimed as food items that are exempt were not permitted.
- The z-tapes did not show proof of the food items.
- Since only one year of z-tapes was provided, this was difficult to credit.
Franchise and Excise Tax Issues
- The problem here was simply not having paid rent on the apartments.
- Our client had housing for his workers, which required an excise tax to be paid.
- Our client was again charged for this type of state and local tax for unpaid taxes.
Business Tax Issues
- Oddly enough, the auditor gave our client credit here for not having taken the credit themselves.
- It helps when federal tax returns are provided so that the auditor can apply tax credits if they are not easily attainable through books and records.
Tennessee Audit Factor of 8
As a matter of TN audit regulation, the rents are multiplied by a factor of 8 when there is no breakout of franchise tax and excise tax. Simply, it is just the way the law is set up.
Books and records of unreported rent could greatly help you here.
What To Do Next
If your business is undergoing a Tennessee sales tax audit, contact our firm to manage or appeal your audit.
Frequently Asked Questions
What should I do if I receive a final notice of tax liability in Tennessee?
You should act quickly and file an appeal within 30 days of receiving the final notice. This initiates an informal review hearing. If you’re unsatisfied with that outcome, you have an additional 60 days to appeal the informal decision at the State Tribunal level.
How can poor recordkeeping affect my sales tax audit?
If your records are incomplete or limited, auditors may extrapolate your data based on a narrow sample, which could lead to inaccurate assessments. Providing comprehensive records, including z-tapes and sales reports, is crucial to defend your position.
Are grocery items always exempt from Tennessee sales tax?
Not always. Although many grocery items are exempt, the burden of proof is on the taxpayer. If your records do not clearly document exempt sales, auditors may treat all sales as taxable, especially when backup like itemized z-tapes is missing.
Why would I owe franchise and excise tax on employee housing?
If your business provides housing for workers, that may trigger excise tax liabilities. Even if no formal rent is paid, Tennessee may impute rent and apply taxes accordingly, especially if no clear breakout is shown in your tax filings.
What is the Tennessee audit “factor of 8” rule?
When no documentation separates franchise and excise tax amounts, Tennessee auditors may multiply reported rents by 8 to estimate liabilities. This standard multiplier is used in the absence of more detailed records.