Chapter V - Miscellaneous Grocery Store Topics
- 5% Audit Allowance
- Actual Substantiated Losses
- Penalty and Interest Application
- Allowance for Bad Debts
- Consignment and Commission Sales
- Coupons and Premiums
- Trading Stamps
- Vending Machine Sales
- Soft Drink Returnable Bottle Deposits
- Items Purchased by Customers with Food Stamps / Lone Star Card
- Combination Grocery and Snack Bar or Delicatessen
- Items Withdrawn from Inventory for Use
- Wrapping and Packaging Supplies
5% Audit Allowance
An allowance of 5% of audited gross taxable sales must be allowed as a deduction for pilferage, shrinkage, spoilage, and any possible errors inherent in projection techniques for grocery store audits completed using the purchase ratio method (Method B) and any audits using a markup or estimation method.
THE 5% ALLOWANCE IS FOR AUDIT PURPOSES ONLY AND CANNOT BE USED FOR REPORTING PURPOSES BY A TAXPAYER UNDER ANY CIRCUMSTANCES.
As previously mentioned, it is important to take this 5% factor into consideration when determining whether to continue with the audit field work after performing a sample examination of the taxpayer's purchase invoices. As an example, a grocer has taxable sales that are 30% of audited gross sales. A 5% allowance of taxable sales amounts to 1.5% of gross sales (.30 X .05). This percentage increases as the amount of the grocery's reported percentage of taxable sales to gross sales increases.
Actual Substantiated Losses
If the grocer can substantiate actual inventory losses above the 5% allowance previously described, the purchases percentage computation is adjusted for the substantiated loss. However, the taxpayer must be able to substantiate what items were lost. For example, in cases of theft, the grocer must be able to provide a police report listing the items stolen.
|NOTE:||If the Mark-Up audit, rather than the Purchase Ratio Method, is performed, the purchase amounts still have to be taken into account. Again, the taxpayer must be able to substantiate a loss and what items were lost (spoiled, stolen, etc.). The purchases of taxable items would be reduced by the substantiated losses before applying the mark-up percentage.|
Losses must be substantiated with proper documentation: police reports, fire reports, insurance claims, inventory studies, etc. The grocer may further substantiate the loss by performing a physical inventory.
Grocers may establish losses for:
- Taxable purchases
- Nontaxable purchases
- An overall loss on purchases
|NOTE:||The grocer would not be allowed both substantiated losses and the 5% Allowance. Auditors will allow either the substantiated losses or the 5% Allowance, whichever is greater.|
Penalty and Interest Application
A taxpayer utilizing one of the optional special reporting methods for grocers must pay penalties and/or interest if a tax report is not filed on or before the due date or the correct amount of tax due is not remitted with the report. The only exception to penalty and interest is:
- Penalty and interest will not be assessed on additional taxes found to be due by audit when the taxpayer uses Method B (Purchase Ratio Method) for reporting purposes. This penalty and interest exemption will be lost if the taxpayer has not recomputed the taxable percentage each year.
Allowance for Bad Debts
A grocer, like any other taxpayer, is entitled to take a deduction for bad debts if the taxable transaction was previously reported or if the transaction occurred in the current reporting period. The bad debt must also be recorded and have been or will be written off for federal income tax purposes.
A grocer's bad debts generally consist of insufficient fund checks and unpaid charge accounts for which the grocer does not have itemized listings of taxable and nontaxable sales. The grocer may apply the same percentage computed under the Purchase Ratio method to bad debts to determine the amount of deduction, or if the 15% Method is being properly used, 15% of allowable bad debts may be deducted.
The following factors must be considered before allowing bad debts:
- Examine original or copies of all insufficient fund checks
- Determine whether the insufficient fund checks represent sales of merchandise or whether they represent check cashing. Losses for insufficient checks will not be allowed if the loss was for cashing a check
|NOTE:||Allowances for bad debts are made in addition to any other allowances previously mentioned (5% Allowance, tax included in gross sales, and substantiated losses).|
Consignment and Commission Sales
Consignment means that goods are in the physical possession of the consignee (grocer) but title remains with the consignor (vendor). Title passes to the customer through the consignee at the point of sale. The grocer only receives either a fixed amount or a percentage of the sales. The consignee may record in gross sales the amount of the full retail price to the customer and may record in purchases the amount of the wholesale price. If the grocer handles consignment sales in this manner, include the consignment purchase transaction in the total purchases and the taxable or nontaxable purchases (depending on the item) amounts for the Purchase Ratio Method.
Another method utilized by grocers regarding consignment and commission sales is whereby the grocer only records the commissions received in income and does not record the sale or purchases amounts in the accounting books. Consequently, the commission transaction would not be included in the Purchase Ratio Method computations. An adjustment to gross sales may be necessary if commission receipts are included in reported gross sales.
Coupons and Premiums
Coupons redeemed by the grocer fall into two categories:
- Those for which the grocer is reimbursed for the face value of the coupon plus a handling fee (manufacturer's coupons)
- Those for which there is no reimbursement to the grocer (in-store coupons)
Both of the above coupons are handled in the same manner. The coupons represent a reduction of the item purchased by the customer. Tax is to be collected by the grocer on the net price (price after allowing for reduction of the face value of the coupon).
Periodically, a grocer may, as an inducement to attract customers, offer to double or triple the face value of manufacturers' coupons. These promotions would also qualify as reductions of the sales price and the tax would be due on the reduced sales price.
Verification must be made that the grocer is handling the tax implications of coupons correctly. If the taxpayer is collecting tax on the gross sales price of the item, before reducing the price for coupons, this constitutes tax collected in error, and the total amount of this tax is due and is to be allocated to the state.
A premium is an item offered by retailers to attract customers.
- If the premium is given and there is no additional charge for the premium, the purchase of the premium by the grocer is not for resale. The grocer should pay tax to the vendor of the premium or report and pay the tax on the Taxable Purchases section of the sales and use tax report.
- If the premium is given and there is an additional charge for the premium, the purchase of the premium is for resale. Tax is due on either the retailer's cost or the amount charged the customer, whichever is greater.
The "gimmick" of grocers giving trading stamps to customers is virtually nonexistent today. However, if trading stamps are encountered during the course of an audit, the purchases of the stamps by the grocer are not taxable to the grocer. Also, the giving of trading stamps to customers in conjunction with sales does not incur any sales tax consequences to either the grocer or the customer.
Vending Machine Sales
Some examples of vending machines located in grocery stores are soft drink machines, postage stamp machines, gumball machines, candy machines, and newspapers sold through a rack. All sales of postage stamps and newspapers are not taxable. In addition, sales of food, gum, and candy sold through bulk vending machines for $.50 or less are exempt.
Items sold through vending machines in grocery/convenience stores must be addressed separately. Separate records should be maintained by the taxpayer in order to substantiate vending machine sales. The taxpayer should be able to itemize not only the sales amounts but also what items were sold through vending machines. If the Purchase Ratio Method of auditing is performed, adjustments to purchases are necessary for the merchandise sold through the vending machines. If a mark-up percentage method is utilized, purchases of merchandise sold through the vending machines must be excluded before applying the percentage.
If the taxpayer does not maintain records to substantiate vending machine sales, then include vending machine receipts in gross sales and apply the taxable percentage appropriately if performing a Purchase Ratio Method audit. If performing some type of mark-up audit, include the purchases of items sold through vending machines and apply the applicable mark-up percentage.
Soft Drink Bottle Deposits
Grocery/convenience stores do not sell very many soft drinks in returnable bottles. However, this issue may be encountered in an audit situation. The purchase invoice from a soft drink distributor will generally reflect the amounts for product, including, bottles, and then reflect a reduction for bottles returned. The net amount of the invoice is the amount payable to the distributor.
Due to immateriality and the decreased significance of soft drinks sold in returnable bottles, the net amount of the purchase invoice is to be scheduled.
Items Purchased by Customers with Food Stamps
Food stamps may be used by customers to purchase both items exempt from sales tax (food items) and items, if qualifying, which are subject to sales tax (soft drinks, candy, ice cream novelties, etc.). When a customer uses both food stamps and cash to pay for a purchase of both taxable and non-taxable items, the food stamps should first be applied to taxable items.
A customer purchases multiple items totaling $10, $5 of which consists of soft drinks and candy - both items are subject to sales tax, but they may be legally purchased with food stamps. If the customer pays for the entire purchase with food stamps, the grocer would not report any taxable sales on the transaction. However, if the customer only has $3 in food stamps, the grocer should apply the $3 in food stamps to the first $3 of the charge for soft drinks and candy and collect tax on the remaining $2.
In order to qualify to accept food stamps for payment of sales, the grocer must maintain records supporting food stamp sales. The grocer must also maintain adequate records to support reported taxable and non-taxable sales.
|NOTE:||In Texas, qualifying individuals utilize the Lone Star Card for making the qualifying purchases.|
Interoffice Memo AM1377, dated March 24, 1989, allowed all food stamp sales to be a reduction of AUDITED TAXABLE SALES. Interoffice Memo AP78, dated March 20, 2003, changed Audit Division's policy regarding the allowance of credit for food stamp sales.
Policy Effective 04/01/2003
If a grocer's records do not provide enough information to enable the auditor to separate out the taxable items between products that can be purchased with food stamps and products that cannot be purchased with food stamps, only a percentage of food stamp sales will allowed. This "allowable percentage" is calculated as follows:
During the audit period, a grocer had $100,000 in gross sales, $60,000 in taxable sales, and processed $50,000 worth of food stamps. The auditor could not determine what items were included in the taxable sales amount.
Any verified amounts of non-qualifying items in Taxable Sales should be subtracted before applying the percentage. Utilizing the above example, if the auditor determined that $20,000 of the Taxable Sales amount consisted of beer (not qualified for food stamp purchase), the amount would be subtracted from the $60,000, and the Allowable Offset for Food Stamp Sales would be $20,000 ($60,000 - $20,000 X 50% = $20,000).
If the auditor utilizes the Purchase Ratio Method, the Allowable Offset for Food Stamp Sales must not exceed the amount of sales associated with qualifying purchases.
During the audit period the grocer's total purchases was $100,000. Of that amount, $50,000 was purchases of taxable items. In addition, the grocer had accepted $40,000 in food stamps during the audit period. The auditor determined that of the $50,000, $20,000 consisted of non-qualifying items (beer, cigarettes, etc.). The Allowable Offset for Food Stamp Sales would be $30,000 and not the $40,000 ($50,000 - $20,000).
Combination Grocery and Snack Bar or Delicatessen
If a grocery store has a separately identifiable snack bar or delicatessen with food for immediate consumption, all sales and purchases of each must be segregated and audited independently.
- Audit of sales
- If separate sales records for the snack bar/delicatessen are maintained either through a separate cash register or tax key, segregate these sales from the grocery sales
- If separate sales records are not maintained, a reasonable estimate of sales should be made utilizing test periods and any available records
- Audit of purchases
- Separate those purchases made directly for the snack bar/delicatessen so that they will not be included in the Purchase Ratio percentage or mark-up percentage computation
- A reasonable estimate will have to be made for any portion of grocery items such as bread, meat, etc. which are withdrawn from grocery inventory for use in the snack bar/delicatessen
Items Withdrawn from Inventory for Use
A grocer's liability for Taxable Purchases is generally limited to:
- Merchandise withdrawn from inventory for business use
- Consists of such taxable items as cleaning supplies, brooms, paper products, etc. - these items should be scheduled separately as Adjustments to Taxable Purchases
- Merchandise withdrawn from inventory for personal use
- Many grocers, especially small proprietors, will withdraw both taxable and exempt merchandise for home use. Unless the grocer maintains records that list the items withdrawn for home use, the same percentage factor utilized in the Purchase Ratio Method audit of the grocery store can be applied to these withdrawals. These items should also be scheduled separately as Adjustments to Taxable Purchases.
|NOTE:||Amounts for merchandise withdrawn may be obtained from the Cost of Goods Sold section of the taxpayer's Federal Income Tax return.|
Wrapping and Packaging Supplies
A grocer must pay tax on all boxes, paper sacks, and plastic bags used to package or repackage items for sale. A grocer can claim an exemption for any wrapping and packaging materials used in processing items resold (items for the meat department, deli department, and bakery department). The grocer must pay tax on all paper and plastic bags used to package products purchased by customers. Make adjustments to Taxable Purchases for any non-qualifying tax-free purchases of wrapping/packaging materials purchased by the grocer.
Maintained by the Audit Division