Dino Marcaccio
President
Former Texas Comptroller State Tax Auditor

ISSUE AT HAND
State auditor lacked Texas tax code/tax policy knowledge, almost costing a Texas taxpayer approximately $1.8 million in an incorrect sales tax assessment. Texas Tax Group was not engaged until AFTER the audit was completed by the State auditor.
The taxpayer was interviewed by a State auditor without proper representation by an experienced sales tax consultant.

SOLUTION
Experienced Texas Tax Group consultant who knew the Texas Tax code as well as the Comptroller policies (e.g., asked for a Redetermination extension) was hired to defend taxpayer. Texas Tax Group used its proprietary software. Texas Tax Group consultant obtained valid resale certificates from client vendors. Texas Tax Group team worked on many fronts to defend clients through the entire process.

RESULT
Texas Tax Group saved the taxpayer approximately $1.8 million in incorrect tax assessment.

AUDIT JOURNEY
Because Texas Tax Group (TTG) was engaged late in the process, the TTG consultant (Nick) was challenged by an aggressive preliminary tax due assessment from the auditor with limited time to reduce the assessment. After conducting an in-progress audit review of the initial documents provided by the client, the results led the TTG consultant to immediately ask his in-house tax analyst to draft a Statement of Grounds (SOG). This SOG is required to submit a Hearing Request for Redetermination, which would allow the TTG consultant an additional 60 days to prepare a defense for our client against the tax due assessment.

When Nick contacted the auditor to verify that he had received the Statement of Grounds, the auditor could not confirm receiving it but was willing to discuss the audit. The auditor’s stance was initially aggressive, rejecting Nick’s findings and relying on their interviews with the client as proof that the tax due assessment was valid. This led Nick to immediately request an in-person meeting at the TTG office to continue building his defense against the tax assessment.

Nick used the auditor feedback folder as a guide to begin building his case against the auditor and started the process of collecting supporting documentation addressing the state auditor’s objections. Nick quickly found documentation specific to the defense of each item in question. Nick started with the Trial Balance and Chart of Accounts, and resale certificates were Nick’s first priority.
At this point, Nick updated the client now that he had a foundation to work from and let the client know the auditor was using the interview conducted by the auditor with the client against them and as proof to issue a tax assessment.

Nick then contacted the auditor after speaking with the client and quickly identified that the auditor had misunderstood many of the items discussed in the initial interview with the client. The auditor, being aggressive in nature, quickly objected to Nick’s findings. Nick then set out to correct the misunderstanding by collecting supporting documentation for specific vendors, identifying discrepancies in vendor names/certificates, clarifying the age of permits, clarifying applicable rulings and statutes, explaining which shipments were out-of-state shipments, and emphasizing that a reimbursement expense is not taxable.

Meeting with the client also helped form the plan for contesting the audit after the redetermination timeframe, especially if the auditor would not accept the supporting documentation. A meeting with TTG management resulted in the recommendation that the consultant request an extension for the redetermination period based on the following reasons: auditor never notified the client of their rights to contest disagreed audits and were ignored during the main portion of the audit, and audit was not included in the auditor’s assignment inventory until about a month after the 60-day letter was received. Also recommended were a reconciliation conference and an Independent Audit Review conference be requested because the taxpayer’s rights were ignored during the main portion of the audit. It was decided that denial of these requests would require escalation to Audit Headquarters.

TTG developed sophisticated custom software to help our clients by tracking their audit history and every Texas Comptroller auditor’s work history, tax due ratio, and time at the agency. With this information combined with JD Field’s audit history, Nick developed a winning strategy that Texas Tax Group could only employ because of our proprietary tracking software. Nick discovered that the previous audit resulted in an $18,000 assessment after an assessment of $700,000 in the initial audit.

Continued work by Nick helped document the arguments to use in the next meeting with the Comptroller auditor to reduce the assessment and serve as an update for the client on the audit. This documentation was included in emails to the auditor with a statement on why certain items in their amended adjustment schedule were not part of the current assessment, since they were not part of the tax package and there existed evidence that they were removed at the time of the Exit Conference.

The next meeting with the auditor resulted in more state auditor objections, specifically: transaction billed under different names (with one name not having a sales tax permit or direct pay number), and resale certificates rejected because of different names for a taxpayer at different locations. In the discussion, Nick mentioned that a reconciliation conference and an Independent Audit Review conference would possibly be necessary. Also mentioned by Nick was that he had a previous audit with the auditor’s supervisor, where it had been possible to conduct a phone conference after the redetermination timeframe had expired. It was also recorded that the auditor’s supervisor had not responded to an email from the client representative for the current audit. The auditor responded that most of the transactions would be removed after further research and discussion with another
auditor.

The auditor still included transactions that negatively impacted the client, and the TTG consultant persisted by presenting additional applicable rulings, statutes, plus the Wayfair Supreme Court decision, with which the auditor did not seem to be familiar. Again, this is another example of TTG’s advantage in actual Comptroller experience with State Sales & Use Tax agency procedures, rulings, statutes, and staying current on court decisions.

TTG consultant’s continued pressure on the Comptroller auditor and supervisor continued to pay off because more transactions were removed from the audit. Some transactions were removed because of the supporting documentation/arguments and some were removed because Nick pointed out that they were being included in a different audit.

The TTG consultant then received a surprise email. The Comptroller auditor had left the agency and the new supervisor was now in charge of the audit. Usually, a mid-audit personnel change negatively affects the client to different degrees because the relationship needs to be re-started and the auditor has to be caught up, thus adding more consultant time. In hindsight, this may have been a positive for the client because the new auditor in charge of the audit was more open to accepting the valid documentation and arguments that Nick had presented from the start.

Nick’s detailed documentation, detailed research, past Comptroller audit experience, and the consistent communication with the Comptroller personnel and client representative played a significant role in reducing the original assessment by $1.8 million! The quality of the consultant’s detailed documentation, supported with the applicable research findings, and the consultant’s professionalism in the face of continued unsupported objections were successful in defending the client.