Sales Tax Audit Survival Tips For the Glass Trade!
A lot of hard-luck stories in the glass trade — or any trade — start with the phrase: “A disgruntled ex-employee…”
This isn’t one of them, but it starts the same.
A disgruntled ex-employed call the state, reported my family’s glass business for sales tax evasion. One of the local state sales tax auditors called to schedule some time to pore through our books.
Now, we knew we were not trying to evade state sales taxes, and we also happen to know the local state sales tax auditor who scheduled the visit. He lives on my street; seems like a nice-enough guy. I even did a windshield repair for him last year.
You’d think that would count for something.
Think again.
The auditor and I were making small-talk on the first day of what would become a four-day investigation.
“I can’t wait to get my sales tax rebate check after your audit,” I joked at one point.
He didn’t get the joke.
“A rebate? That is not going to happen,” he said with finality. “In 25 years, I’ve never had that happen.”
The auditor going through your books doesn’t necessarily want to find a problem, but he has to find a problem. It’s his job, and he has to justify it, and the time he takes to do it.
And during the audit, our time became his. Our office staff spent as much time on the audit as he did, bring our books forward, submitting every dang invoice from the past three years for his scrutiny.
It was disruptive, to put it nicely, but we learned five lessons in those four days I want to pass along:
1. Learn the correct sales tax procedures from your state.
There are a lot of gray areas, and even your accountant may not be clear on all the codes.
2. Keep it on a need-to-know basis
Share as little information with your employees on your tax procedures as possible. It was a phone call — one phone call — from a disgruntled worker who thought he understood the tax laws better than we do that set off the audit.
3. Follow the rules
When you’re not sure what the rule is, err on the side of discretion. You’ll probably end up paying more than your fair share of taxes. Some states won’t credit it back to you if the mistake is discovered later, but the will come down hard if you make a mistake in your favor.
4. Be nice to the auditor
You know those gray areas in the tax law? The auditor can interpret them any way he wants. If you make the audit as unpleasant for him as it feels for you, those gray areas can turn black real fast. We had coffee and donuts every morning that week.
5. Check the tax codes every year
Go to your accountant and get a copy of the new tax codes and learn them. Tax laws can change at any time, and the state doesn’t send you a courtesy card outlining the impact for your business. Ignorance of the law may seem inevitable, but it is no excuse for breaking the law in the eyes of the state.
Our audit actually came out pretty well. True to his word, the auditor did find some mistakes.
For instance, we should have paid more sales tax on shop-produced items. If we took a piece of glass in our shop and made changes — cut it, drilled holes, polished the edges — that labor is subject to sales tax. We were only charging tax on the material itself and not adding tax to the cost of labor.
On the other hand, we learned that labor on the job site is not subject to sales tax. In my state. The cost of labor for installation and changes to the product done on-site are not taxable. The materials used are also only subject to tax on our cost (glass companies) of material. Not the marketed up price. The only restriction is that the tax has to be itemized on the invoice.
Also be aware that a job that is done in another state, a mobile auto glass installation for example, is subject to that states tax. Not your own state.
In the end, we ended up getting a sales tax credit of $1,288. That’s not a lot, but it beats paying more taxes, and interest, and penalty fees. Another shop owner I know had to pay almost $25,000 in interest and penalties after his audit that same year.
But better than the rebate is the memory of that fateful pronouncement at the beginning of my audit:
“A rebate? That’s not going to happen. In 25 years, I’ve never had that happen.”
It’s tempting to gloat, and it would be easy — the auditor lives just two doors down the street.
But then I remember Lesson Three.