Grocery Store Audit Was Based on a Two Month Sample
In SMK LLC v. Department of Treasury, Michigan Tax Tribunal, No. 409504, September 26, 2011, an assessment of sales and use tax against a Michigan convenience store was cancelled because the taxpayer's records were adequate and suitable to determine the amount of tax due. The taxpayer's daily Z tapes and sales sheets were provided to an outside CPA who used these source documents to determine the monthly sales tax. Furthermore, the taxpayer had adequate internal controls to ensure that tax was properly collected, as the taxpayer utilized in-store cameras, had the outside CPA reconcile bank accounts on a monthly basis, and produced a purchases journal, a sales journal, a general ledger, and a trial balance on a monthly basis. The Department of Treasury's calculations did not result in reliable estimates, as they were based on a two-month sample of purchase invoices, extrapolated over a four-year period, using an estimated average mark-up. The department's audit methodology did not consider inventory fluctuations or shrinkage occurring in retail businesses.