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(713) 880-2992Monshaugen & Van Huff, P.C.1225 North Loop West, Suite 640 | Houston, Texas 77008
Monshaugen & Van Huff

COMPTROLLER AUDIT DEFENSE & REDETERMINATION HEARINGS

Our attorneys and CPA's routinely handle Texas Comptroller mixed beverage gross receipts audits and mixed beverage sale tax audits. Unlike many of the "tax consultants" who regularly direct-market to businesses that are being audited, our attorneys are licensed by the Texas Supreme Court and are fully qualified to handle redetermination hearings before the Texas State Office of Administrative Hearings (SOAH) and any subsequent appeals in District Court, the Court of Appeals, and the Texas Supreme Court. The review of a SOAH decision in District Court is de novo (meaning that the court decides the issues without reference to any legal conclusions or assumptions made by the SOAH judge), rather than merely reviewing the SOAH decision for error.

Adverse comptroller audit decisions can be extremely costly for taxpayers, and are often in the six-figure range. In addition to taxes, the Comptroller will assess penalties and interest against taxpayers. The Tax Code also provides for Officer, Director, Manager, or General Partner liability in certain circumstances. In addition to handling audits, SOAH redetermination hearings and subsequent appeals, we have specific expertise in counseling clients regarding appropriate record keeping techniques to avoid adverse audit determinations. We also have specific expertise in counseling clients regarding multi-level corporate and limited liability company structures that will minimize the chances of Officer, Director, Manager, or General Partner liability leading to personal liability for the individuals involved. We also have significant experience in defending adverse Comptroller decisions against Officers, Directors, Managers and General Partners of businesses at SOAH redetermination hearings and subsequent appeals.

With regard to audit procedure, the Comptroller does not merely check to see if the Point of Sale (POS) system matches the daily reports, that the daily reports support the monthly sales data, and that the monthly sales data matches the monthly tax return filed with the State. Instead, the Comptroller will conduct a depletion analysis wherein the auditor will determine the amounts of beer, wine, and liquor that the taxpayer purchased from the suppliers during the audit period. The suppliers are required by law to provide the Comptroller with this information electronically on a monthly basis for all businesses in Texas that have mixed beverage permits issued by the TABC. One of the circumstances that will trigger an audit involves an automatic computer driven analysis of a taxpayer's reported sales versus the amount of alcohol purchased during certain time periods. If the cost of goods sold exceeds the industry standard, then the business will get flagged for an audit.

Once the auditor has ascertained the amount of beer, wine, and liquor the taxpayer has purchased during the audit period, the auditor will visit the taxpayer's business and conduct an unannounced "pour test." The auditor will show up undercover, order a mixed drink, and note the amount of liquor poured into the drink. The auditor will then identify himself to the bartender and conduct a series of pour tests to determine the rate of pour for liquor, wine, and draft beer. The impact of the pour test on the audit result cannot be understated, because the auditor will divide the ounces purchased for each category during the audit period by the pour test results to determine the units sold for each category. If a taxpayer receives a notice letter regarding the audit before the pour test has been conducted, then it is important that management meet with the bartenders and brief them on what to expect. Unfortunately, bartenders often panic when confronted by a Comptroller auditor, incorrectly thinking that there will be TABC implications if they pour too much, and underpour, which leads to disaster. Compare: 10,000 ounces purchased divided by 2 ounce pour, equals 5,000 units versus 10,000 ounces purchased divided by 1.25 ounce pour equals 8,000 units.

Once the auditor determines the number of units sold during the audit period, the auditor will request the POS system data from the taxpayer to determine the average sales price across the categories. The number of units sold are then multiplied by the average selling prices across the categories to determine the amount of sales during the audit period. These numbers are then compared to the reported sales, which almost always results in a deficiency whereby the taxpayer owes tax, penalties, and interest.

Here are a few important points, observations, and suggestions regarding Comptroller audits:

  • Although the initial pour test is determinative under applicable law, an auditor may re-do the pour test upon request by the taxpayer and average the two. The auditor has discretion on whether to re-do the pour test.
  • The auditor will assume that the beginning inventory is the same as the ending inventory for the audit period. If the taxpayer can show through documentary evidence that the ending inventory was greater than the beginning inventory, the auditor should give credit for the difference.
  • Draft beer: Document line cleaning and stale beer that was wasted or otherwise disposed of on a daily basis.
  • Foam on draft beer: Pour it into a bucket and note the amount on daily reports.
  • Complimentary drinks: You will get credit for complimentary drinks that are documented. Document them on a daily basis and note cost on the monthly sale tax returns. You are required to pay sales tax on the cost of complimentary drinks. If there are irregularities regarding the drinks you seek credit for in an audit and the drinks reflected on the sales and use tax returns, a sales and use tax with be initiated.
  • VIP charges / bottle service: These are complicated. Call me.
  • Average pour: 3 ounce martinis and specialty drinks effect the average pour, for example:
    75% 1.5 ounce highballs
    25% 3.0 ounce martinis and specials vs.
    100% 1.5 ounce highballs.
  • Drink recipes can be used to support higher pour rates.
  • Drink menus can be used to support sales prices.
  • Spills: Document them in POS and daily reports.
  • Theft: file police reports.
  • Inventory destroyed by natural disaster / fire / flood: file a report with the TABC and document internally.
  • The Comptroller should not charge tax on secondaries such as vermouth, triple sec, Grand Marnier, etc.
  • Cooking wine: Document it to avoid paying taxes on beer, wine, and liquor used in cooking and preparing desserts.
  • Complimentary champagne in the lobby / upon arrival: Document the bottles to avoid paying tax.
  • For hotels, document beer, wine, and liquor given away as amenities.
  • Procedurally, a taxpayer may request independent audit review prior to the finalization of the audit. However, the "independent" review is conducted by an employee of the Comptroller. There are pros and cons regarding requesting independent audit review. One of the pros is that it may cause the auditor to become more flexible on certain issues, because the auditor and his supervisor do not like scrutiny. One of the cons is that if the reviewer declines to adjust the audit in a favor of the taxpayer, the written report will provide the SOAH judge with a road map for his decision.
  • There is ongoing litigation in Texas District Courts and Courts of Appeal regarding the constitutionality of the statutory pre-payment requirement as a pre-requisite of de novo appeal to District Court from SOAH.

Please call us if you have any questions regarding Comptroller audits. All conversations are 100% confidential in accordance with Texas law regarding attorney-client confidentiality.

 

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