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Grocery Stores

Revised 02/2013

Chapter IV — Special Reporting Methods

Three special reporting methods are available to retail grocers as outlined in the sales tax statute (TEX. TAX CODE ANN. 151.412, 151.413 and 151.416) and State Sales and Use Tax Rule 3.328 (Optional Reporting Methods for Grocers and Other Vendors).

The special reporting methods are commonly referred to as the:

  • Purchase Ratio Method (Method B)
    - A percentage ratio of taxable items purchased to total items purchased is applied to gross sales to determine taxable sales
  • 15% Method (Method C)
    - A retail grocer whose gross receipts do not exceed $100,000 per calendar year may report and pay tax based on 15% of gross receipts
  • Commingled Receipts Method (Method E)
    - Tax collected is commingled with the receipts from the sales of both taxable and nontaxable items

If a taxpayer is reporting under one of these methods and qualifies for the use of the method, the audit procedure is to verify returns and computations based on the method being used.

Purchase invoices must be maintained for at least four years to verify a grocer's sales tax returns regardless of the method chosen for reporting purposes.

The use of an optional special reporting method does not relieve the seller from the obligation and duty of collecting tax in the specific manner as prescribed in the statute and in accordance with the bracket system (TEX. TAX CODE ANN. 151.415).

Method B - Purchase Ratio Method

This method may be used by a grocer for reporting purposes only, and eligibility is restricted to:

  • Any retail grocer
  • Any vendor who maintains a separate grocery department with separate records which may be audited by the Comptroller, as applies to the grocery department only
  • Any vendor whose taxable receipts from the sale of taxable items are less than ten percent of his total receipts
NOTE:   Under the current definition of a retail grocer, most convenience stores and many grocers do not qualify. However, the Comptroller still allows them to use this method.

The following steps are used under this method:

  • Determine the total sum of merchandise purchased for resale during the preceding calendar or fiscal year
  • Determine the total sum of taxable merchandise purchased during the preceding calendar or fiscal year
  • Divide the total amount of taxable merchandise purchased by the total merchandise purchased for resale to obtain a percentage relationship
  • Multiply the percentage obtained times the total sales for the reporting period to obtain the taxable sales
  • Items which are purchased tax-free and used by the taxpayer (and which are subject to sales/use tax) must be included on the return as taxable purchases

An audit of a taxpayer who uses the purchase ratio method to compute taxable sales will generally be limited to verification of reported amounts based on summary records and computation procedures. The verification procedures should include:

  • An examination of the taxpayer's worksheets which were prepared to compute total purchases and segregate taxable and nontaxable item purchases - worksheet amounts for total purchases should be traced to summary records (purchases journal, cost of goods sold section of the Federal Income Tax Return, etc.)
  • Tracing purchase invoices for sample periods to verify proper inclusion and segregation - sample periods should include entire purchase cycles (weeks, months, etc.)
  • Comparing the purchasing patterns with the purchase invoices for the sample period - vendors may need to be contacted to verify purchases
  • Verifying any adjustments to taxable and gross purchases which would include:
    • Operating supplies
    • Wrapping and packaging items
    • Trading stamps
    • Finance, insurance, and other charges
    • Inventory variances
      • Method of inventory - actual physical inventory, gross profit method
      • Valuation of inventory - retail value, cost
      • Segregation by product line or department
    • Base stock inventories for new stores or departments
    • Interstore transfers
    • Personal purchase/use items (employee gifts, etc.)
    • Unusual losses due to theft, spoilage, fire, or other reasons which can be supported by police/fire reports, insurance claims, inventory studies, etc.
    • Significant purchase discounts and allowances which could include cash discounts, volume rebates, quantity discounts, promotional allowances, etc. - since these discounts can apply to taxable/nontaxable grocery items as well as non-grocery items, a segregation test of the discounts may have to be done
      • Cash discount - reduction from invoice price allowed for prompt payment
      • Volume rebate or quantity discount - an allowance or reduction of the price for volume purchases based on the number of units sold or purchased during a promotional period. The allowance is directly related to units sold or purchased although the grocer may incur some additional promotional expense. The retail price of the product may or may not be lowered during the promotional period. This term does not include display or other merchandising plan allowances or payments which are based on agreements not related to volume of purchases, or cooperative advertising allowances, which are based on national line rate advertising and are also not related to volume or purchases and sales. Cooperative advertising allowances are intended to reimburse a grocer for a portion of his advertising costs for a particular product or products.
NOTE:   Some of the discounts listed above may not be reflected on the purchase invoice but rather may be listed as a separate credit memo.
  • Verification of gross receipts which may have to include adjustments for the following;
    • Sales tax included in reported gross sales
      • EXAMPLE: Gross sales including tax = $104,950
        • Tax collected is unknown as taxpayer's cash register only accounts for total sales amount which may include any tax collected
        • The percentage relationship of taxable purchases to total purchases is determined by the auditor to be 60%
        • Taxable percentage                                .60
          Applicable tax rate                            X.0825
        • Subtotal                                        .0495
        • Total                                          1.0495
        • Gross Sales including sales tax$              104,950
        • Divided by percentage                          1.0495
        • Gross sales excluding sales tax              $100,000
        • Multiplied by taxable percentage                  .60
        • Audited taxable sales                        $ 60,000
        • Audited taxable sales of $60,000 x .0825 - $4,800 sales tax collected
    • Delivery charges
    • Vending machine sales
    • Sales of food for immediate consumption
    • Meat processing revenue
    • Commission receipts which may result from:
      • Money orders
      • Gasoline sales
      • Leased departments
      • Amusement machines
      • Vending machines
      • Movie rentals on a commission basis
    • Any departments where records are separately maintained
    • Video rentals
    • Rentals of equipment, such as steam-cleaning machines
    • Deposits on returnable items
    • Coupon handling fees
    • Verification of any deductions for bad debts
    • Any adjustments for other items noted
NOTE:   The receipts for the above-listed items must be deducted from Gross Sales/Total Receipts before applying the applicable taxable percentage.

If the preliminary tests indicate that the taxpayer's worksheet amounts (total purchases and nontaxable purchases) are correct, only the proper application and mathematical accuracy of reported amounts needs to be verified.

If the preliminary tests indicate that the taxpayer's worksheet amounts are not correct, then the tests should be expanded to determine if the potential audit adjustment warrants the additional time to perform the fieldwork.

NOTE:   For audit purposes only, the Comptroller permits a 5% theft and spoilage allowance on gross taxable sales. This should be taken into consideration when determining a potential audit adjustment. The application of the 5% allowance will be discussed later.

Exams and schedules prepared by auditors utilizing the purchase ratio method of auditing grocery stores/convenience stores will be discussed later in this manual.

Method C - 15% of Gross Sales

Under this method, a grocer may report and pay tax based on taxable sales equaling 15% of the gross sales. However, eligibility for the use of this method is restricted to:

  • Retail grocers, as previously defined, and whose gross receipts do not exceed $100,000 per calendar year
  • A retail grocer with one or more outlets, if all outlets under the same ownership qualify and if the combined gross sales of all the outlets do not exceed $100,000 per calendar year
NOTE:   If more than 5% of the receipts consist of sales of tangible personal property (beer & wine, cigarettes, gasoline, etc.), the grocer is not eligible for Method C.

The grocer's eligibility will be determined on a calendar year-by-calendar year basis.

The State Sales and Use Tax Statute Sec. 151.413 and State Sales and Use Tax Rule 3.328 provide the following procedures and requirements to be followed by a taxpayer who elects to use this method:

  • Gross sales per report period are multiplied by 15% to obtain the taxable sales
  • A grocer who elects to report under this method must continue to do so for three years unless the gross sales for a calendar year exceeds $100,000
  • When the receipts of a grocer who elects to use this method exceeds $100,000 for a calendar year, the grocer is ineligible to continue reporting under this method on the first day of the calendar month after the month in which the limitation is exceeded
    • EXAMPLE: Grocers using this method will be quarterly filers. If a grocer exceeds the $100,000 limit in October, the fourth quarter report is not eligible for the 15% method. In addition, the grocer is liable for assessment of all back tax, penalty, and interest under actual percentage for the other quarterly period of the calendar year.

If a retail grocer is eligible for filing under this method and actually files using the 15% method, any audits performed will be limited to verification through this same method. Additional taxes will not be assessed nor any refunds/credits will be allowed because this method differs from the amount that would have been paid under any other reporting method. This holds true if comparing taxes collected to taxes reported as in the example below. However, computational, transposition, and carry-forward errors may be adjusted for, such as using an incorrect or incomplete sales figure or multiplying by a wrong percentage.

  • EXAMPLE: Taxpayer's gross sales for a report period equals $20,000. Utilizing the 15% method, the taxpayer reported $3,000 as taxable sales and paid tax of $247.50 (@8 1/4%). Taxpayer's sales journal states that $200 sales tax was collected. The taxpayer is not due a refund.

This method cannot be substituted for another method previously elected, and it is prospective.

Audit Procedure - 15% Method

An audit of a retail grocer electing to report taxable receipts using this method will be limited to determining whether or not the grocer is eligible to use this method and the accuracy of the tax reports.

The following criteria must be considered for audit purposes:

  • The taxpayer must meet the definition of a "retail grocer" as covered above in the manual's introduction.
    • Sales of items other than food (not for immediate consumption), household supplies, and nondurable household goods must not exceed five percent of gross sales - such items include:
      • Beer and wine
      • Gasoline (not on commission)
      • Hardware
      • Automotive parts
      • Fishing/hunting supplies
      • Souvenirs/curios
      • Cigarettes, cigars, tobacco products
  • Gross sales must not exceed $100,000 per calendar year, even though the taxpayer may not have been in business for the full year
  • The method must be continuously used for three years unless the taxpayer becomes ineligible

Audit assessments will be based on the actual percentage of taxable sales for any calendar year(s) in which the taxpayer is not eligible. If an audit of a taxpayer who has not elected to use the 15% method discloses that the taxpayer could have used the method for any or all years in the audit period, the taxpayer will not be allowed to amend prior reports nor will the audit be performed using the method for any years in the audit period.

Method E - Commingled Receipts

A third method is provided by the statute and in Rule 3.328 for grocers who establish an accounting system in which sales tax collected is commingled with the receipts from the sale of taxable items. Method E establishes a method of backing out the tax from the gross sales.

The formula to be used to determine taxable sales using this method is:

Gross sales including tax
<Nontaxable/exempt sales>
Taxable sales including tax

The taxable sales amount including tax is then divided by 1.00 plus the applicable tax rate decimal factor to derive taxable sales excluding tax.

Taxable sales   =   Taxable sales
1 + Tax Rate        excluding tax

An examination of the records of a taxpayer using this method will include:

  • A verification of gross sales
  • Verification that tax is included in gross sales
  • Confirmation that the taxable or nontaxable sales are accurate through use of one of the other special reporting methods
  • Confirmation of the mathematical accuracy of computations

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