Dino Marcaccio
President
Former Texas Comptroller State Tax Auditor
Why do Dentists get audited by the Texas Comptroller?
Answer: Because 61% of the audits are ‘tax due’ (mostly based on purchases)
Please go to link the following 2 links:
- Completed – Dentist Sales Tax Audits (since 1-1-2020) Qty. 115
Click here to view PDF - Active – Dentist Audits In-Progress
Click here to view PDF
What does this mean? It means 70 out of the 115 dentists audited owed sales/use tax (see link above). 61% of Texas Dentists audited owed additional tax.
Discussion
Asset and Expense Purchases are looked at ‘in detail’ including even the smallest of purchases. For instance, if you bought from the internet or used a credit card you must have the underlying invoice which shows TEXAS sales tax charged (or you owe ‘use tax’). Or your accountant entered in ‘batch’ entries for certain expenses with no easy backup to ID the purchase invoice, then the auditor will tax that transaction. And the auditor can always choose to ‘sample’ purchases which could cause inflated false taxes due to audit results.
Warning
Once you provide the auditor with a detailed General Ledger the auditor can simply set up an excel spreadsheet and list 100% of all purchase and expense category items.
In some cases, it can be hard to find invoices from 4 years ago (i.e., the audit look-back period is 4 years, or up to 7 years if the business does not have a sales tax permit). Missing invoice, then tax due. Taxable Invoice available with no tax, then tax due.
In some extreme (but not unheard of) cases, the auditors will select all transactions from non-relevant accounts such as Travel, Insurance, Rent, etc., and send the dentist (or representative) a ’30 Day Demand Letter’ to provide the underlying documentation to prove the entry is not for a taxable good or service. Yes, this happens. And the auditor can do it. This is why we don’t recommend providing the auditor CARTE BLACHE to all accounting records before you have conducted certain ‘pre-audit’ activities. Texas Tax Group conducts pre-audits and CONTROLS access to records the auditor needs to conduct the audit. No more. NO less.
Note: Texas Tax Group (TTG) physically manages the audits if they are being conducted in either HOU, DFW, AUS or SA (we have offices in these cities). If located outside of these 4 we manage the audits remotely / electronically. TTG has successfully represented dentists around the State of Texas.
REASONS FOR TAXATION
PURCHASES (ASSETS) REAL PROPERTY IMPROVEMENTS. ANY repairs or remodeling done to existing real property improvement is taxable – from fixing a doorknob to replacing the entire roof. This category also includes permanent replacement/installation or repair of dental equipment (chairs, lights, ancillary equipment) unless it can be proven these are ‘initial new improvements or complete replacements of an existing ‘real property improvement’. Yes. It gets tricky. Keep in mind that if your taxable contract does not include a line item for sales tax for the entire amount or does not include the term ‘Sales Tax Included’, then you owe the tax. The contract cannot simply state that TAX is included.
- PURCHASES (ASSETS) FURNITURE & FIXTURES – Any tangible purchase (not real property improvements) is subject to sales tax unless you have the invoice or contract to prove sales tax paid – or accrued. From artwork, furniture, and non-permanent dental equipment you must have a ‘sales tax’ paid invoice or you will be taxed.
- PURCHASES (BULK ASSET PURCHASE) – If the dentist has purchased the bulk assets of another dentist’s practice the auditor can tax the transaction unless (1) there is a contract that states that all ‘operating assets’ have been purchased and (2) a requirement for signed ‘occasional sale exemption’ is required if either the buyer or seller has a sales tax permit.
- PURCHASE (EXPENSES) REAL PROPERTY SERVICES (Janitorial Services, Landscape services – yes….. your janitor and grounds maintenance services are taxable unless you have all the invoices and they all show sales tax. Just showing the auditor a ‘few’ taxable invoice is often not enough. It’s called Nit-Picking.
- INTERCOMPANY EXPENSES / LEASES / RENTALS In some cases dentists have multiple entities and have certain ’intercompany’ transactions (including leases of equipment). A lease or rental of tangible personal property between related entities is taxable (no exemptions allows) If you are unfortunate enough to combine these inter-company transactions with other non-taxable services (i.e., rents, payroll, property taxes, etc.) the entire charge will likely to taxed by the auditor. If this amount is significant and the dentist does not have an active sales tax permit, then the auditor can go back as far as 7 years. This could add up. And it does happen.
- FRANCHISE TAX If an auditor has access to all accounting data they can sometimes ‘sneak’ a peek at your Franchise Tax returns and methods of filing. Although technically the auditor cannot review Franchise Tax taxpayer records while conducting only a sales tax audit…..it has happened. Worst case scenario the auditor ‘spins off’ an FTAX audit. Keep in mind that sometimes a Franchise Tax audit is generated at the same time as a sales tax audit.
Thanks, and it was my pleasure to give your dental professional some insight into these matters. If you receive an audit notice we’d be glad to handle it. If needed we can send you a reference client list of dentists that have hired us in the past.
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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