OUR THOUGHTS ON:

Pennsylvania Department of Revenue Allows Projection of Sales and Use Tax Credits

State and Local Tax

By Jack Stewart

On May 28, 2013, the Pennsylvania Department of Revenue issued Sales and Use Tax Bulletin 2013-01 regarding stratified random sampling in audits, managed audits and audit appeals. The bulletin acknowledges a change in Department policy allowing the projection of both underpayments and overpayments based upon a stratified random sample of computerized records in certain circumstances.

The bulletin establishes the following requirements:

  1. The taxpayer is currently under audit by the Department or has entered into an agreement with the Department to conduct a managed audit to address sales and use tax compliance issues prior to audit selection.
  2. Verifiable electronic purchase records are made available to the Department to facilitate a stratified random sample of both underpayments and overpayments.
  3. The volume of records supports the need of sampling procedures.
  4. An agreement is reached by the Department and taxpayer on the use of the sampling method and procedures. The sampling agreement will include providing the population electronic records to the Department, verification of the population, and stratification and selection of the sample by the Department.
  5. Sufficient evidence is provided to allow the Department to determine whether the taxpayer has underpaid tax, that no tax is due, or that tax is overpaid for each transaction in the sample. This includes, (i) a copy of the source document for the transaction, (ii) proof of payment, (iii) a valid reason for exemption with adequate documentation, if exemption reason requires additional documentation and (iv) taxpayer’s attestation that no credit memo, tax refund, or similar reimbursement of tax overpayment was provided to the taxpayer.

Taxpayer may use an overpayment projection in a timely filed appeal of the denied credit at the audit level. In reviewing the appeal, the Board of Appeals will observe certain procedures.

  1. The Board will only project an overpayment if it relates to a sample selected by the Department during an audit or an agreed-upon managed audit process.
  2. For transactions that are included in the test sample, the petitioner must provide the electronic records used in developing the sample and a detailed electronic sortable spreadsheet listing all the transactions at issue. The electronic records must include the sample number assigned to the transactions contested.
  3. For transactions that are outside the test sample and within the population tested, the petitioner has the burden to prove that the credit requested exceeds the amount of credit due to the audit projections.
  4. For transactions that are outside of the test sample and outside the audit population tested, the petitioner must provide documentation for each transaction, such as copies of original invoices, and other information requested by the Board.

This bulletin replaces Sales Tax Bulletin 2004-02, Sales Tax Information Bulletin relating to Audit Examination.

Should you have any questions regarding these changes, please do not hesitate to contact your state and local tax professional

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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