TEXAS TAX GROUP SIGNIFICANTLY REDUCES TAX ASSESSMENT
1 – TAX RULE 3.356 – REAL PROPERTY SERVICES
2 – TAX RULE 3.291 – CONTRACTORS
3 – TAX RULE 3.357 – NONRESIDENTIAL REAL PROPERTY REPAIR, REMODEL
4 – Texas Comptroller – Auidt Procedures – Auditor Training Manual – Contractors
5 – 20021058l – LETTER RULING (OCT 11, 2002) NEW – EXISTING – COMM – RESID
6 – 200005315L – LETTER RULING (MAY 16, 2000) HARDSCAPING
7 – 200210518L – LETTER RULING (OCT. 11, 2002) RETAINING WALL – NEW CONSTRUCTION
Texas Tax Group (TTG) works with small, family-owned taxpayers as well as giant, international companies to defend their Sales & Use tax audits. This story is how TTG reduced a tax assessment from $126,615.29 to $1,660.36 for a small landscaping business. This narrative will help explain why TTG should be your trusted partner when facing the State Comptroller and all its resources.
The main job of State Comptroller tax auditors is to find uncollected sales and use tax. Unfortunately for Texas taxpayers, auditors often make mistakes, whether from being undertrained, overworked, having an overly aggressive supervisor’s stance on “taxing everything”, or all of the above.
When this small-business taxpayer engaged Texas Tax Group, the Comptroller had already started the audit.
After TTG management assigned Nick to the client audit, a TTG consultant who previously worked six years for the State Comptroller, he met with the TTG management and client representative. This meeting produced the following: the strategy to prevent a significant liability, discussion of taxability issues, identifying records needed, confirming the client’s permit status, and starting the communication with the auditor. An issue identified to possibly use as an audit defense for this client, was that a general contractor could collect sales tax from the property owner but does not need to if it is new construction. Tax does not need to be paid on the purchase of materials for real property services if the materials are transferred to the care, custody, and control of the end-user.
Nick started with the pre-audit activities that helped to identify potential sales tax exposure and resolve it before resuming the audit with the auditor. In this case, TTG’s pre-audit work allowed the consultant to resolve most of the issues that would lead to tax liabilities before this audit re-started and prepare the audit for the auditor before inviting them into the TTG offices to present the pre-audit work to them.
The TTG director then called a meeting with the client, lead consultant, and assisting consultant to discuss that a second audit would be generated, thus allowing us “to cut them off at the pass.” With the TTG team on the same page and agreeing on strategy, the consultant then applied for the statutory-based extension. The consultant touched base again with the client rep by clarifying one of the main taxability issues of tax paid on materials, when the general contractor should collect the tax, etc.
The TTG consultant reconciled the taxable and total sales numbers with the amounts reported to the State. The consultant then held the introductory conference with the auditor and audit supervisor to discuss records on file, the nature of the business and how it relates to sales tax, the audit scope, and reported back to the client representative.
The TTG consultant then received, reviewed, and organized the records sent by the auditor and client rep making sure everyone had the same records and pinpointing which records were still needed by the state auditor. Nick saw a trend and verified that many of the invoices were nontaxable in nature because either a general contractor was being used or the work in question was new construction work. Nick verified new construction work by referring to various websites, such as Google (street view), appraisal district websites, and Zillow/HAR.com. TTG consultants always take the time to dig in and provide the supporting information, whether from the internet, state laws, or their experience gained from working at the State Comptroller.
The audit settled into the usual back-and-forth of submitting documents, arguments, and communication and replying to them as time permits. This is where it sometimes becomes evident that state auditors are overworked making it very difficult for them to see the details necessary to understand and study the defense presented by the TTG consultant.
The TTG consultant also makes the time to dive into the documents found on the STAR system, an important online policy resource provided by the State Comptroller as a public service. Tax laws are complex and subject to change. Interpretations of the laws may be affected by administrative hearings, court opinions, attorney general opinions, and similar authorities. STAR is a research tool, not a substitute for legal advice, and is where the TTG consultant experience provides additional value. Time and experience a client’s staff may not have.
The STAR documents did not prove direct support, so Nick updated the client rep and contacted several client vendors to obtain resale certificates. Unfortunately, some client vendors hesitated because they misunderstood the resale certificate purpose. Reasons for their hesitancy ranged from thinking that providing a resale certificate to a subcontractor means that they would have to have collected and remitted the tax, which is not valid, to another vendor thinking should only provide a certificate if remodeling work is provided. With these misunderstandings in mind, Nick conducted STAR document research and found one tying to another rule stating that commercial new construction is nontaxable in nature and forwarded it to the client rep.
Nick then requested and received an extended deadline from the auditor, thus adding valuable time to explain and obtain the valuable resale certificates from the uncooperative vendors. Additional information was added to the auditor’s spreadsheet by including comments on whether or not the property appears in Google historical imagery and whether the property is new construction or repair/remodeling.
Nick updated the client rep with the current strategy, and both agreed to ask the auditor to attach tax policy letters to future communication, supporting her position. Nick then sent this letter to the unhelpful general contractors that outlined the auditor’s faulty reasoning on the taxability at hand.
Two major vendors still refused to help, and Nick asked the auditor for help explaining why a resale certificate needed to be obtained. Nick also asked if the client could supply purchase invoices only, understanding this would not be acceptable but to at least show the vendors what the auditor’s standing on the issue was. In his research, Nick discovered an email chain between the current auditor and an auditor involved in another similar audit. Nick reached out to the other auditor and asked for her help, but she declined because she could not volunteer comments on Nick’s current audit.
Nick updated the client rep after receiving a revised schedule and assessment from the auditor. After discussing strategy, both agreed that credits were the best avenue to pursue at this stage of the audit. Nick then contacted the auditor and continued to ask her which resale certificates and credit documentation she would accept. Some vendors sent additional records but after close examination by Nick, were found to be incorrect and incomplete.
With the clarifications obtained from the auditor, Nick was able to finalize what was still needed to reduce the tax assessment and gathered invoices, credit card receipts, and resale exemption certificates for a final assault on the auditor’s judgment. Nick spoke with the auditor and discussed whether the auditor could obtain her supervisor’s approval to submit this as a no-tax audit, mainly due to the low actual tax due.
Nick spoke with the auditor to discuss the final audit results. The State Comptroller waived the penalty, and the final audit liability was $1,660.36. Nick then contacted the client rep for their acceptance of the final assessment and provided instructions for paying off the final amount after confirming the process with the auditor.
At a post-audit review with the client, Nick outlined ways to best prevent similar audit-related issues from occurring in the future.
Dino Marcaccio, President (ex-Texas Comptroller Auditor, 16 Years)
TEXAS TAX GROUP, INC.
9950 Westpark Drive, Ste 430
Houston, Texas 77063
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