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Grocery Stores

Revised 02/2013

Chapter VI - Auditing Procedures


This chapter will deal with auditing procedures, with emphasis on the Purchase Ratio Method of auditing grocery stores and with Markup Procedures of auditing grocery stores. Various auditing issues encountered throughout the years will also be discussed.


Purchase Ratio Method

Briefly, under this auditing method, an analysis will be made of the grocer's purchases of inventory items for a representative sample period. A percentage relationship between taxable merchandise (items, when sold, on which the grocer must collect tax from the customer) and total purchases will be established. This percentage will then be applied to the grocer's gross sales throughout the audit period.


Gross Sales

Since the percentage ratio will be applied to the grocer's gross sales, less any adjustments, it is extremely important for the auditor to verify gross sales. If gross sales were not correctly reported, the auditor must establish the correct amounts for gross sales for the entire audit period. At the very least, a close approximation to the grocer's gross sales must be obtained utilizing available accounting records and auditing techniques.

Adjustments, where applicable, need to be made to Audited Gross Sales. The taxable percentage ratio obtained must be applied only to sales that are attributable to the grocery store operation. Such items, previously discussed, as delivery charges, commissions, deli/restaurant operation, lotto sales, hunting/fishing licenses, etc. must be deducted from Audited Gross Sales/Total Receipts before applying the taxable percentage.

Below is an example of a schedule that was performed with some examples of adjustments made to Audited Gross Sales. This schedule is for illustration purposes only and does not represent all of the potential adjustments to Audited Gross Sales.

Schedule of Grocery Purchases (2)
NOTE:   The taxable ratio percentage will be applied to the amounts in Col. 5 on a period-by-period basis.

Computing the Taxable Percentage

Once the auditor has verified Gross Sales, or obtained Gross Sales amounts by other means, the taxable percentage to be applied to the sales amounts must be computed. Utilizing Comptroller sampling standards, a sample period is obtained. As in any other type of sales and use tax audit, the sample period selected must be representative of the entire audit period. The invoices for purchases of merchandise resold through the grocery operation will be examined for the sample period. A percentage relationship will be established between merchandise items that are taxable when resold and total purchases for the sample period.

As mentioned in a previous chapter of the manual, over-the-counter drugs and medicines became exempt from sales tax effective April 1, 2000. In order to take this fact into account, the auditor must schedule these "tax change items" separately and arrive at two taxable percentages:

  • One for the periods prior to April 1, 2000 and
  • One for those periods April 1, 2000 and after.

Below is a sample schedule that could be prepared to compute the taxable percentage to be applied to sales. The auditor must prepare an Excel spreadsheet in order to schedule the merchandise purchases for the sample period. This schedule is for illustration purposes only as the auditor may need to tailor the schedule to fit his/her audit's needs.

Schedule of Grocery Purchases (4)
*   (Col. 5 + Col. 6)/Col. 7
**   Col. 5/Col. 7
***   If an invoice lists both taxable and nontaxable merchandise, list examples of both in the "Description" column.

NOTE:   For the above example, a two-month random computer-generated sample was utilized (Audit Period is 0001 thru 00012).

Application of the 5% Allowance

The 5% allowance is applied to Audited Gross Taxable Sales for each period in the audit, even if a period results in a credit amount. However, if after application of the 5% allowance, the audit results in an overall credit, the audit becomes a "No Tax Due" audit. Application of the 5% allowance will never result in an overall credit audit.

Example of Application of 5% Allowance - utilizing the previous examples of Worth Corporation

Additional Taxable Sales

Credit for Food Stamps

In the example above, food stamps (Lone Star Card) were not an issue. If the grocer is qualified to accept and if customers have made purchases with food stamps, credit needs to be given for these sales. In the example above, credit would be given after Adjusted Audited Taxable Sales. Please refer to AP78 for the allowable amount of credit for food stamp sales.

Taxable Sales Before Adjustments

In order to assess the tax on the above amounts, WATS Exam #1 would consist of the auditor entering the amounts of the Additional Taxable Sales, on a period-by-period basis, onto the WATS Exam. The Comptroller's automated audit system would then assess the additional tax, penalty, and interest due.


Exhibit - Transactions Entry


Exhibit - Transactions Entry

Markup Methods

The Purchase Ratio Method cannot be used when the auditor determines that sales and purchases cannot be verified using traditional auditing methods. The auditor must estimate taxable sales from whatever information is available. A markup method is the preferred method of auditing grocery/convenience stores when the records are unavailable, inadequate, or unreliable. The ABC Dictionary for Accountants (Fifth Edition) defines markon as "the amount added to cost, in setting selling prices, to cover operating expenses and profit; also, the ratio of the added amount to cost or selling price." What the dictionary refers to as "markon," this manual will refer to as "markup." This ratio of the added amount to cost is expressed as a percentage. This markup percentage is the factor by which cost of sales is multiplied to determine, for our purposes, taxable sales. The markup percentage obtained is applied to the taxpayer's purchases - those merchandise items, when resold through the grocery store, would be subject to sales tax. Some of the most common markup methods will be discussed in this section.

Shelf Test

A shelf test is a general term for procedures used to determine the unit price of merchandise sold. The auditor arrives at the grocery/convenience store on a predetermined date and performs an actual physical examination on the products being sold through the grocery/convenience store. Procedures are used to determine the unit sales price of the merchandise on the shelves of the grocer. The auditor would physically view the sales price that is being charged for an item. Purchase invoices are examined for a current period in order to determine wholesale cost of the items purchased by the grocer. If the auditor finds that the grocer's purchase records are incomplete, unavailable, or unreliable, some or all of the purchases should be obtained from suppliers. Because some items have a higher sales volume than others the auditor should take a weighted average when computing our markup percentages.

AP 92, dated August 17, 2004, mandates that, if the taxpayer is still in business, any markup percentage utilized must be based on a shelf test performed utilizing purchase information obtained from the taxpayer and/or vendors. “Auditors should not employ estimates or percentages from other sources in completing audits.”

If an audit is being performed on a convenience store, please refer to the section dealing with the markup based on purchase segregation later in this chapter.

A brief example of a shelf test follows.

Shelf Test

In the above example, the auditor performed the Shelf Test in April 2013. The shelf price was then compared with current purchase invoices which the grocer had on hand.

This markup percentage is then forwarded to another exam where it is applied to the purchases amounts. An example of this exam follows.

Beer Purchases

For the above example, the auditor obtained the beer, soft drinks, cigarette, and candy purchases amounts from the vendors, and these amounts are documented on separate exams.

If there are not any further adjustments to Audited Taxable Sales, the 5% Allowance would be applied at this point.

Audited Grocery

In the above example, Food Stamp Sales are documented on another exam, and the amounts allowed are in accordance with AP 78.

If Audited Taxable Sales is to include other categories of items, then these items must be added in before applying the 5% Allowance. For example:

Video Rentals

In the above example, the amounts for Video Rentals and Phone Card Sales were based on reasonable estimates utilizing generally recognized Comptroller auditing methods. The amount of credit allowed for Food Stamp Sales is in accordance with AP 78, and the amounts are documented on another exam.

As in the prior example of the Purchase Ratio Method of auditing grocery stores, the monthly amounts for Additional Taxable Sales would be entered onto a CATS exam in order to have the Comptroller's Automated Audit Program assess the tax, penalty, and interest due for each month.

Markup Based on Purchase Segregation

Briefly, individual markups will be computed for each class/category of merchandise. The percentages of markup computed will be applied to their respective purchase category over the entire audit period. Before using this method, the auditor must determine that an accurate segregation of purchases can be made over the entire audit period. This method is better-suited to convenience stores whose merchandise categories are few in number and with a wide variance in markup. In fact, this is the preferred markup method to be utilized when auditing convenience stores. As in the shelf test example above, many, if not all, of the purchases amounts may have to be obtained from the various vendors.

Utilizing the same information as in the previous example, an example of such a shelf test follows. Again, this is only a brief example. The auditor must utilize an adequate product mix.

Coca Cola

Bud, Budlight

In the above example, the auditor performed the Shelf Test in April 2013. The shelf price was then compared with current purchase invoices which the grocer had on hand. The above markup factors are then forwarded to another exam which computes Additional Taxable Sales.

Based on the shelf test utilizing purchase segregation, an example of an exam computing Audited Taxable Grocery Sales follows.

Beer Purchases 2

The subsequent exams would follow the same format as in the prior shelf test example.

Taxpayer is no longer in business, and a shelf test cannot be performed? See section below regarding Alternative Markup Factors.

Shelf Test Basics

The section pertains to both the shelf test markup and the markup based on purchase segregation.

  • If vendors must be contacted in order to estimate an audit liability, all suppliers within a particular purchase category, if available, must be contacted. For example, all soft drink suppliers must be contacted in order to estimate soft drink sales.
  • There will be price fluctuations within any given category of purchases. The auditor needs to get a good mix of product sizes and high and low dollar value items. This good mix of products should overcome any of these price fluctuations.
  • Grocery/convenience stores generally change their prices as their costs change. Audit experience of the industry has shown that convenience stores, at least the smaller entities, do not maintain a pricing history. Out of necessity, we use current sales prices versus current costs at the time the shelf test is performed.
  • Experience has shown that, when auditing convenience stores, 15% of total sales are nontaxable. The remaining 85% are considered taxable sales. Of this latter percentage (85%), the sales of beer, cigarettes, and soft drinks account for approximately 70% of total taxable sales. Auditor judgment must be used in order to determine if it is worth pursuing the additional 15% of the total taxable sales, especially if numerous vendors must be contacted.
  • A shelf test must be conducted on each active outlet. It should have a minimum of 10 different high/medium volume items for each category. These 10 items can be a mix of the different variety of sizes and brands available for sale (for example, 12 pack, 6 pack, 18 pack, 20 oz, one liter bottles, quart bottles, smokeless tobacco, cigar products, domestic beer, imported beer, Coors, Budweiser, etc.) as these are often sold with different markups. If the taxpayer does not offer a variety of sizes and brands, this must be documented to explain why 10 items were not used.

Lack of Taxpayer Records

Taxpayers may claim that they do not possess the records necessary for an audit of their business activity. Before performing an estimated audit, vendors need to be contacted. In situations with incomplete records the audit should follow the most current audit policy. Currently, that policy is contained in AP 92 which has been updated in AP 122, dated July 22, 2009.

Below is an example of a letter sent by a Comptroller auditor to a vendor in order to obtain purchases made by a grocery store.


Exhibit - Letter to Vendor

Austin Audit Office
1711 San Jacinto, Suite 410
Central Services Bldg.
Austin, Texas 78711-3003
(512) 305-9800
Fax (512) 305-9875
November 1, 2002

Mr. Sam Smith
Beer Distributor of Austin
111 Pony Dr.
Austin, Texas 78701


RE:   Request for purchase information for ABC's Convenience Store, Inc.
5809 Longhorn Ave.
Austin, Texas 78709

Dear Mr. Smith:

I am requesting monthly totals of purchases for the above account for the period of August 1, 1998 through July 31, 2002. Please fax the information to the number listed above.

If you have any questions, please call me.



Ralph Norton
Auditor

The above letter must be sent out on the Comptroller's letterhead. At times it may be necessary to follow this letter with a telephone call or a personal visit to the vendor's location.

Vendors should have the necessary records for a four-year audit period. At the least, enough records should be available to allow a representative sample audit of the taxpayer.

Below is an example of a beer vendor's response to a Comptroller auditor's request for records.


Exhibit - Vendor's Records

Exhibit - Vendor's Records
Exhibit - Vendor's Records

NOTE:  HB 11, as passed by the 80th Texas Legislative Session, requires wholesalers of alcoholic products and cigarette/tobacco products to file reports with the Comptroller, summarizing a grocery/convenience store's purchases. Beginning with January 2008, the Comptroller has data of a store's purchases of alcoholic and tobacco products. Contact of the applicable vendors will no longer be necessary.

If records necessary for the audit cannot be obtained from vendors, an estimated audit may have to be performed. However, before estimating an audit, the detailed instructions per AP70, dated March 26, 2002, must be followed. Briefly, the following steps must be followed:

  • Letter 1 - first request for records must be issued to the taxpayer or to the taxpayer's authorized representative
  • Letter 2 - second request for records must be issued to the taxpayer or to the taxpayer's authorized representative
  • Auditor fills out a Request for Subpoena of Records form, listing
    • Type of subpoena: first party or third party
    • Name and address of the person or entity to whom subpoena will be served
    • Name and address of person or entity for whose records subpoena will be served
    • Detailed description of records for which subpoena will be served
    • Time period of records
    • Name of person who will serve the subpoena
    • Title of person and the Comptroller field office

Please refer to AP70 for more detailed instructions and copies of the necessary letters and form.

If, after following the above steps, taxpayer records have not been obtained, an estimated audit should be performed. However, estimated amounts must be based on some reasonable basis. These estimated audits would most probably have to be defended in an administrative hearing and/or in District Court.

Below is an example of a Notification of Estimation issued to a convenience store.


Exhibit - Notification of Estimation

Notification of Estimation
  1. Reason for estimation (including a description of records which the taxpayer failed to provide after notification from the auditor by letter or subpoena):

    Estimation is necessary due to incomplete records. Although some records were provided, there were several missing months as well as missing vendors.

  2. The records to be examined in performing the estimation will include (but not limited to):

    Vendor records will be used in conjunction with HB11 data to obtain a more accurate representation of the beer, wine, candy, soda, and tobacco purchases.

  3. List periods (they may or may not be the entire audit period) being estimated:

    January 1, 2008 through August 31, 2010

    The periods listed in number 3, under audit are being estimated based on the best information available due to your failure to maintain/provide adequate records for a sample in compliance with Comptroller policy. Since adequate records were not maintained/provided, no credit projections will be allowed based on the estimation procedures used by the Comptroller.

  4. Describe procedures taken to perform estimate:

    An average estimated taxable sales will be computed for the entire audit period. Actual beer and tobacco purchases were obtained from your vendors and HB 11 data to insure accuracy. Taxable items being sold include beer, general merchandise, soft drinks, candy, other miscellaneous taxable items, and tobacco. An average markup or profit margin of 128.19% for beer, 181.82% for general merchandise, 166.67% for soft drinks, 181.82% for candy, 158.91% for other miscellaneous taxable items, and 118.37% for tobacco was calculated during a shelf test. Estimated beer sales will be calculated by multiplying beer purchases by the average markup for beer calculated during the shelf test. Estimated tobacco sales will be calculated by multiplying tobacco purchases by the average markup for tobacco calculated during the shelf test. A product mix percentage of 66.0691% was calculated by examining three complete month's worth of purchase records for the months of August 2010, September 2010, and October 2010. The product mix for beer and tobacco was calculated by dividing the total estimated beer and tobacco sales for the periods of August 2010, September 2010, and October 2010 by the estimated taxable sales made in that same period (which was calculated by multiplying beer, general merchandise, soft drink, candy, other miscellaneous taxable items, and tobacco purchases by their corresponding markup percentages previously calculated during the shelf test). Estimated total taxable sales for the entire estimation period will be estimated by dividing estimated beer and tobacco sales by the product mix percentage for beer and tobacco. Estimated total taxable sales will be reduced by 7% to account for the fact that there are no eating facilities in the store. Estimated total taxable sales will then be further reduced by 5% for theft/spoilage per Comptroller guidelines to arrive at net estimated additional taxable sales for the audit period. Per Comptroller guidelines, 18% of net estimated additional taxable sales for the audit period will be reduced by an allowance for food stamps percentage (2.3544%). This food stamp percentage was calculated by dividing the total food stamps processed during the entire audit period by the estimated total sales for the same period. Reported taxable sales will then be subtracted from net estimated taxable sales (after the food stamp allowance) to arrive at estimated additional taxable sales. Additional tax due will then be calculated by multiplying the applicable state and local tax rates to estimated additional taxable sales for each period within the audit.


Notification of Estimation

Beer, Wine & Tobacco Vendor Data

HB 11, as passed by the 80th Legislative Session, amended tax codes Chapter 151 (Limited Sales, Excise, and Use Tax), Chapter 154 (Cigarette Tax), and Chapter 155 (Cigars and Tobacco Products Tax) by requiring wholesalers and distributors of beer, wine, and malt liquor, cigarettes, and cigars and tobacco products to file monthly reports with the Comptroller. The wholesaler or distributor shall file the report on or before the 25th day of each month. The report must contain the following information for the preceding calendar month's sales made to each retailer:

The name of the retailer and the address of the retailer's outlet where delivery was made, including the city and zip code The sales tax permit number assigned by the Comptroller to the retailer The retailer's permit or license number assigned by the Texas Alcoholic Beverage Commission, the cigarette permit number, or the tobacco permit number, whichever applicable The monthly net sales made to the retailer by outlet, including the quantity and units sold to the retailer The wholesalers/distributors began filing these reports with the Comptroller beginning with sales made for January 2008. Thus, the first report was due from the wholesalers/distributors by February 25, 2008. A link was added on the Audit Division internal website:

Beer, Wine & Tobacco Vendor Data

The link can be found under the heading of “Taxes & Research.” The auditor enters the retailer's sales tax permit number or the retailer's physical address and the beginning and ending periods, by month, needed. The auditor will be able to obtain all of the beer and other alcoholic beverages and cigarettes and tobacco products purchased by the retailer for the period requested. This data can then be exported into an Excel spreadsheet. However, until vendor data is available for an entire audit period, vendors will continue to have to be contacted for retailer sales amounts.

Alternative Markup Factors

AP 92, dated August 17th, 2004, was issued by Audit Division due to the lack of uniformity in auditing convenience stores, especially where the taxpayer failed to provide the necessary records to perform an audit. Guidelines for auditing convenience stores were updated in AP 122, dated July 22, 2009.

The following are guidelines. Each audit is different, and any extraordinary situations will be handled on a case-by-case basis.

Two methods are to be used to perform audits in cases when records are unavailable, inadequate, or unreliable.

  • 1) Markup Method – Taxpayer Records Available

    Purchase information for the entire audit period is obtained from the taxpayer and/or the taxpayer's vendors. The auditor performs a shelf test and computes a markup percentage. The markup percentage is applied to the purchase amounts obtained from the taxpayer and/or the third-party vendors. Please refer to the section dealing with the shelf test and the section dealing with markup based on purchase segregation above.

  • 2) Markup Method (Average Taxable Sales Method) – Taxpayer Records Not Available

    This method is to be used only when purchase invoices are not available for any or all product categories. For example, beer and tobacco product invoices can be obtained from the vendors and/or from HB 11 data at Audit Division’s website, but purchases cannot be obtained from other suppliers. Taxable sales would be estimated using the table that follows.

Exhibit: Alternative markup method average taxable sales method

When audits are estimated using the attached percentages, the auditor must state in the Notification of Estimation that the percentages were obtained from the AP memo.

Example #1 - Purchases Available for Beer and Tobacco Products/Taxpayer Out of Business

  • The taxpayer's convenience store is out of business when the audit is generated
  • The taxpayer's purchase invoices are incomplete or not made available to the auditor
  • Taxpayer's beer and cigarette vendors are known

The auditor contacts the taxpayer's beer and tobacco products vendors and the HB 11 information on Audit Division’s website in order to obtain the necessary purchase information for the audit period. A shelf test cannot be performed since the convenience store is out of business. The auditor would use the markup percentages above for the appropriate product category. The example below assumes that the convenience store does not have eating facilities.

REPORT PERIOD (1) BEER PURCHASES (2) MARKUP (3) ESTIMATED BEER SALES (4) CIGARETTE PURCHASES (5) MARKUP (6) ESTIMATED CIGARETTE SALES
Footnote #1 From AP 122 Col. 1*Col. 2 Footnote #1 From AP 122 Col 4*Col. 5
0801 29,756.05 124.07% 36,918.33 37,146.75 118.02% 43,840.59
0802 28,885.10 124.07% 35,837.74 38,154.00 118.02% 45,029.35
0803 31,615.78 124.07% 39,225.70 38,723.25 118.02% 45,701.18
0804 31,157.90 124.07% 38,657.61 35,396.25 118.02% 41,774.65
0805 32,467.88 124.07% 40,282.90 40,584.85 118.02% 47,898.24
0806 37,135.50 124.07% 46,074.01 46,419.40 118.02% 54,784.18
0807 40,589.25 124.07% 50,359.08 50,736.50 118.02% 59,879.22
0808 34,088.25 124.07% 42,293.29 42,610.30 118.02% 50,288.68
0809 33,238.50 124.07% 41,239.01 41,548.10 118.02% 49,035.07
0810 34,,035.75 124.07% 42,228.16 42,544.70 118.02% 50,211.25
0811 33,665.25 124.07% 41,768.48 42,081.55 118.02% 49,664.65
0812 35,514.75 124.07% 44,063.15 44,393.45 118.02% 52,393.15
0901 32,358.75 124.07% 40,147.50 40,448.45 118.02% 47,737.26
0902 32,109.75 124.07% 39,838.57 40,137.20 118.02% 47,369.92
0903 32.387.25 124.07% 40,182.86 40,484.10 118.02% 47,779.33
0904 32,841.00 124.07% 40,745.83 41,051.25 118.02% 48,448.69
0905 34,149.75 124.07% 42,369.59 42,687.20 118.02% 50,379.43
0906 36,515.25 124.07% 45,304.47 45,644.10 118.02% 53,869.17
TOTALS $602,511.71 $747,536.28 $750,791.40 $886,084.01

(7) ESTIMATED BEER & CIGARETTE SALES (8) ESTIMATED TAXABLE SALES (9) ESTIMATED TAXABLE SALES EXCLUDING CHIPS (10) LESS: 5% ALLOWANCE (11) NET ESTIMATED TAXABLE SALES (12) LESS: REPTD. TAXABLE SALES (13) ADDTL. TAXABLE SALES
Col. 3+Col. 6 Col. 7/54% Col. 8*93% (100%-7%) Col. 9*Col. 10 Tax History Col. 11-Col. 12
80,758.92 149,553.56 136,093.74 95% 129,289.05 35,800.30 93,488.75
80,867.09 149,753.87 136,276.02 95% 129,462.22 34,459.85 95,002.37
84,926.88 157,272.00 143,117.52 95% 135,961.64 35,120.30 100,841.34
80,432.26 148,948.63 135,543.25 95% 128,766.09 35,603.95 93,162.14
88,181.14 163,298.41 148,601.55 95% 141,171.47 36,850.05 104,321.42
100,858.19 186,774.43 169,964.73 95% 161,466.49 39,844.60 121,621.89
110,238.30 204,145.00 185,771.95 95% 176,483.35 40,170.15 136,313.20
92,581.97 171,448.09 156,017.76 95% 148,216.88 42,268.80 105,948.08
90,274.08 167,174.22 152,128.54 95% 144,522.12 42,615.60 101,906.52
92,439.41 171,184.09 155,777.52 95% 147,988.65 39,058.35 108,930.30
91,433.13 169,320.61 154,081.76 95% 146,377.67 40,073.25 106,304.42
96,456.30 178,622.78 162,546.73 95% 154,419.39 44,974.35 109,445.04
87,884.76 162,749.56 148,102.10 95% 140,696.99 36,673.25 104,023.74
87,208.49 161,497.20 146,962.46 95% 139,614.33 36,391.05 103,223.28
87,962.19 162,892.94 148,232.58 95% 140,820.95 36,705.55 104,115.40
89,194.52 165,175.04 150,309.28 95% 142,793.82 37,219.80 105,574.02
92,749.02 171,757.44 156,299.27 95% 148,484.31 38,703.05 109,781.26
99,173.64 183,654.89 167,125.95 95% 158,769.65 41,383.95 117,385.70
$1,633,620.29 $3,025,222.76 $2,752,952.71 $2,615,305.08 $693,916.20 $1,921,388.88

Footnote #1: Amounts from HB 11 Data from Comptroller’s Website and Confirmed by Vendors

Example # 2 - Purchases Available for Beer & Tobacco Products/Taxpayer Still in Business

  • The taxpayer's convenience store is still in business when the audit is generated
  • The taxpayer's purchase invoices are incomplete or not made available to the auditor
  • Only known vendors are the taxpayer's beer and cigarette distributors

The auditor contacts the taxpayer's beer and tobacco products vendors and the HB 11 information on Audit Division’s website in order to obtain the necessary purchase information for the audit period. A shelf test must be performed since the convenience store is still in business. The auditor would apply the shelf test markup percentages for beer and tobacco products to the beer and tobacco products purchases amounts in order to arrive at the estimated dollar value of beer sales and for tobacco products for the audit period. The estimated dollar amount of beer sales and of tobacco products sales for the audit period will be divided by the applicable product mix percentages per AP 122 (above). The example below assumes that the convenience store does not have eating facilities.

REPORT PERIOD (1) BEER PURCHASES (2) MARKUP (3) ESTIMATED BEER SALES (4) CIGARETTE PURCHASES (5) MARKUP (6) ESTIMATED CIGARETTE SALES
Footnote #1 Footnote #2 Col. 1*Col. 2 Footnote #1 Footnote #2 Col. 4*Col 5
0801 29,756.05 129.55% 38,548.96 37,146.75 117.35% 43,591.71
0802 28,885.10 129.55% 37,420.65 38,154.00 117.35% 44,773.72
0803 31,615.78 129.55% 40,958.24 38,723.25 117.35% 45,441.73
0804 31,157.90 129.55% 40,365.06 35,396.25 117.35% 41,537.50
0805 32,467.88 129.55% 42,062.14 40,584.85 117.35% 47,626.32
0806 37,135.50 129.55% 48,109.04 46,419.40 117.35% 54,473.17
0807 40,589.25 129.55% 52,583.37 50,736.50 117.35% 59,539.28
0808 34,088.25 129.55% 44,161.33 42,610.30 117.35% 50,003.19
0809 33,238.50 129.55% 43,060.48 41,548.10 117.35% 48,756.70
0810 34,035.75 129.55% 44,093.31 42,544.70 117.35% 49,926.21
0811 33,665.25 129.55% 43,613.33 42,081.55 117.35% 49,382.70
0812 35,514.75 129.55% 46,009.36 44,393.45 117.35% 52,095.71
0901 32,358.75 129.55% 41,920.76 40,448.45 117.35% 47,466.26
0902 32,109.75 129.55% 41,598.18 40,137.20 117.35% 47,101.00
0903 32,387.25 129.55% 41,957.68 40,484.10 117.35% 47,508.09
0904 32,841.00 129.55% 42,545.52 41,051.25 117.35% 48,173.64
0905 34,149.75 129.55% 44,241.00 42,687.20 117.35% 50,093.43
0906 36,515.25 129.55% 47,305.51 45,644.10 117.35% 53,563.35
TOTALS $602,511.71 $780,553.92 $750,791.40 $881,053.71

(7) ESTIMATED BEER & CIGARETTE SALES (8) ESTIMATED TAXABLE SALES (9) ESTIMATED TAXABLE SALES EXCLUDING CHIPS (10) LESS: 5% ALLOWANCE (11) NET ESTIMATED TAXABLE SALES (12) LESS: RPTD. TAXABLE SALES (13) ADD’L TAXABLE SALES
Col. 3+Col. 6 Col. 7/54% Col. 8*93% Col. 9*Col. 10 Tax History Col. 11- Col. 12
82,140.67 152,112.36 141,464.49 95% 134,391.27 35,800.30 98,590.97
82.194.37 152,211.79 141,556.96 95% 134,479.12 34,459.85 100,019.27
86,399.98 159,999.96 148,799.96 95% 141,359.96 35,120.30 106,239.66
81,902.56 151,671.41 141,054.41 95% 134,001.69 35,603.95 98,397.74
89,688.46 166,089.74 154,463.46 95% 146,740.29 36,850.05 109,890.24
102,582.21 189,967.05 176,669.36 95% 167,835.89 39,844.60 127,991.29
112,122.66 207,634.55 193,100.13 95% 183,445.12 40,170.15 143,274.97
94,164.51 174,378.73 162,172.22 95% 154,063.61 42,268.80 111,794.81
91,817.17 170,031.80 158,129.57 95% 150,223.10 42,615.60 107,607.50
94,019.52 174,110.22 161,922.51 95% 153,826.38 39,058.35 114,768.03
92,996.03 172,214.87 160,159.83 95% 152,151.84 40,073.25 112,078.59
98,105.07 181,676.06 168,958.74 95% 160,510.80 44,974.35 115,536.45
89,387.02 165,531.51 153,944.31 95% 146,247.09 36,673.25 109,573.84
88,699.19 164,257.75 152,759.71 95% 145,121.72 36,391.05 108,730.67
89,465.77 165,677.36 154,079.94 95% 146,375.95 36,705.55 109,670.40
90,719.16 167,998.44 156,238.55 95% 148,426.62 37,219.80 111,206.82
94,334.43 174,693.39 162,464.85 95% 154,341.61 38,703.05 115,638.56
100,868.86 186,794.18 173,718.59 95% 165,032.66 41,383.95 123,648.71
$1,661,607.63 $3,077,051.16 $2,861,657.58 $2,718,574.70 $693,916.20 $2,024,658.50

Footnote #1: Amounts obtained from vendors and/or from Comptroller HB 11 data information.
Footnote #2: From shelf test performed at taxpayer’s place of business. See Exam X.

Example #3 – Auditor Unable to Obtain Purchase Information for Entire Audit Period

  • The taxpayer’s convenience store is still in business when the audit is generated
  • The taxpayer’s purchase invoices are incomplete or not made available to the auditor
  • The auditor was only able to obtain the HB 11 data for beer and tobacco products at the Audit Division’s website

The auditor obtains the HB 11 information on Audit Division’s website. The HB 11 information is only available beginning January 2008, and the audit period includes periods prior to 2008. A shelf test must be performed since the convenience store is still in business. The auditor would apply the shelf test markup percentages for beer and tobacco products to the beer and tobacco products purchases amounts obtained in order to arrive at the estimated dollar value of beer sales and of tobacco products sales for the applicable periods. The estimated dollar amount of beer sales and of tobacco products sales for the applicable periods will be divided by the product mix percentages per AP 122 (above). An “Average Estimated Taxable Sales” amount will be computed and applied to the periods for which purchases amounts could not be obtained. The example below assumes that the convenience store does not have eating facilities.

REPORT PERIOD (1) BEER PURCHASES (2) MARKUP (3) ESTIMATED BEER SALES (4) CIGARETTE PURCHASES (5) MARKUP (6) ESTIMATED CIGARETTE SALES
Footnote #1 Footnote #2 Col. 1*Col. 2 Footnote #1 Footnote #2 Col. 4*Col 5
0801 29,756.05 129.55% 38,548.96 37,146.75 117.35% 43,591.71
0802 28,885.10 129.55% 37,420.65 38,154.00 117.35% 44,773.72
0803 31,615.78 129.55% 40,958.24 38,723.25 117.35% 45,441.73
0804 31,157.90 129.55% 40,365.06 35,396.25 117.35% 41,537.50
0805 32,467.88 129.55% 42,062.14 40,584.85 117.35% 47,626.32
0806 37,135.50 129.55% 48,109.04 46,419.40 117.35% 54,473.17
0807 40,589.25 129.55% 52,583.37 50,736.50 117.35% 59,539.28
0808 34,088.25 129.55% 44,161.33 42,610.30 117.35% 50,003.19
0809 33,238.50 129.55% 43,060.48 41,548.10 117.35% 48,756.70
0810 34,035.75 129.55% 44,093.31 42,544.70 117.35% 49,926.21
0811 33,665.25 129.55% 43,613.33 42,081.55 117.35% 49,382.70
0812 35,514.75 129.55% 46,009.36 44,393.45 117.35% 52,095.71
0901 32,358.75 129.55% 41,920.76 40,448.45 117.35% 47,466.26
0902 32,109.75 129.55% 41,598.18 40,137.20 117.35% 47,101.00
0903 32,387.25 129.55% 41,957.68 40,484.10 117.35% 47,508.09
0904 32,841.00 129.55% 42,545.52 41,051.25 117.35% 48,173.64
0905 34,149.75 129.55% 44,241.00 42,687.20 117.35% 50,093.43
0906 36,515.25 129.55% 47,305.51 45,644.10 117.35% 53,563.35
TOTALS $602,511.71 $780,553.92 $750,791.40 $881,053.71
(7) ESTIMATED BEER & CIGARETTE SALES (8) ESTIMATED TAXABLE SALES (9) ESTIMATED TAXABLE SALES EXCLUDING CHIPS (10) LESS: 5% ALLOWANCE (11) NET ESTIMATED TAXABLE SALES (12) LESS: RPTD. TAXABLE SALES (13) ADD’L TAXABLE SALES
Col. 3+Col. 6 Col. 7/54% Col. 8*93% Col. 9*Col. 10 Tax History Col. 11- Col. 12
82,140.67 152,112.36 141,464.49 95% 134,391.27 35,800.30 98,590.97
82.194.37 152,211.79 141,556.96 95% 134,479.12 34,459.85 100,019.27
86,399.98 159,999.96 148,799.96 95% 141,359.96 35,120.30 106,239.66
81,902.56 151,671.41 141,054.41 95% 134,001.69 35,603.95 98,397.74
89,688.46 166,089.74 154,463.46 95% 146,740.29 36,850.05 109,890.24
102,582.21 189,967.05 176,669.36 95% 167,835.89 39,844.60 127,991.29
112,122.66 207,634.55 193,100.13 95% 183,445.12 40,170.15 143,274.97
94,164.51 174,378.73 162,172.22 95% 154,063.61 42,268.80 111,794.81
91,817.17 170,031.80 158,129.57 95% 150,223.10 42,615.60 107,607.50
94,019.52 174,110.22 161,922.51 95% 153,826.38 39,058.35 114,768.03
92,996.03 172,214.87 160,159.83 95% 152,151.84 40,073.25 112,078.59
98,105.07 181,676.06 168,958.74 95% 160,510.80 44,974.35 115,536.45
89,387.02 165,531.51 153,944.31 95% 146,247.09 36,673.25 109,573.84
88,699.19 164,257.75 152,759.71 95% 145,121.72 36,391.05 108,730.67
89,465.77 165,677.36 154,079.94 95% 146,375.95 36,705.55 109,670.40
90,719.16 167,998.44 156,238.55 95% 148,426.62 37,219.80 111,206.82
94,334.43 174,693.39 162,464.85 95% 154,341.61 38,703.05 115,638.56
100,868.86 186,794.18 173,718.59 95% 165,032.66 41,383.95 123,648.71
$1,661,607.63 $3,077,051.16 $2,861,657.58 $2,718,574.70 $693,916.20 $2,024,658.50

Footnote #1: Amounts obtained from vendors and/or from Comptroller HB 11 data information.
Footnote #2: From shelf test performed at taxpayer’s place of business. See Exam X.

For those periods without records:

Net Estimated Taxable sales (from Column 11) $2,718,574.70
Available Periods 18
Average taxable Sales for Months with Records $151,031.93
REPORT PERIOD ESTIMATED AVERAGE TAXABLE SALES LESS: REPORTED TAXABLE SALES (From Tax History) ESTIMATED ADDITIONAL TAXABLE SALES
0609 151,031.93 40,916.90 110,115.03
0610 151,031.93 39,774.59 111,257.34
0611 151,031.93 39,226.45 111,805.48
0612 151,031.93 41,011.95 110,019.98
0701 151,031.93 38,550.92 112,481.01
0702 151,031.93 37,664.10 113,367.83
0703 151,031.93 38,912.55 112,119.38
0704 151,031.93 39,047.65 111,984.28
0705 151,031.93 40,118.69 110,913.24
0706 151,031.93 41,595.35 109,436.58
0707 151,031.93 42,314.85 108,717.08
0708 151,031.93 40,861.30 110,170.63
0709 151,031.93 41,726.35 109,305.58
0710 151,031.93 38,417.50 112,614.43
0711 151,031.93 38,926.10 112,105.83
0712 151,031.93 41,655.55 109,376.38
TOTALS $2,416,510.88 $640,720.80 $1,775,790.08

Total Additional Taxable Sales for the above scenario:

Periods 0609 – 0712 $1,775,790.08
Periods 0801 – 0906 2,024,658.50
Total Additional Taxable Sales $3,800,448.58

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