�� ������������������������������� - �������� ������������������������������������� Workshop NN Statistical Sampling in Sales & Use Tax Audits … Best Practices and How States are Using These Techniques Wednesday, January 29, 2020 2:00 p.m. to 3:00 p.m.
Biographical Information John Null, CMI, Sr. Manager – Indirect Tax, The Home Depot 2455 Paces Ferry Rd., B12, Atlanta, Georgia 30339 (770) 384-4555 Mobile (404) 245-4217 JOHN_A_NULL@homedepot.com John Null, CPA, CMI, is the Senior Tax Manager of Indirect Tax at The Home Depot in Atlanta, GA. He has 25+ years of state sales & use tax experience in the telecommunications, retail and manufacturing industries with both private and public firms. Prior to joining The Home Depot, John was a consulting manager at Deloitte Tax LLC working in the Tax Management Consulting group. He has worked for several telecommunications companies throughout his career and has assisted telecommunications companies with the implementation and maintenance of various transaction tax software systems. John is a Vertex Certified Professional and has worked with TaxWare, Avalara, and other tax calculation engines. He was a frequent presenter at the Telestrategies Tax Conference. In his current role, John has shifted into the retail industry and manages the audit, compliance and systems areas for The Home Depot. John earned a BS in Accounting from The Ohio State University. Bradley W. Tomlinson, Senior Manager (non-attorney professional) Zaino Hall & Farrin LLC, 41 South High Street, Suite 3600, Columbus, OH 43215 614-349-4818 Mobile: 614-580-9149 Fax: 614-754-6368 (Fax) btomlinson@zhftaxlaw.com Brad has more than 36 years of experience in state and local taxation, specializing in statistical sampling techniques for multiple taxes. From 2007 until joining the firm, Brad was an assistant administrator for the Ohio Department of Taxation, Audit Division, while also serving as the manager of the Computer Assisted Audit Group for more than 11 years. In that position he was responsible for the formulation, implementation, and oversight of the Department's statistical auditing practices; including the approval of data populations, sample designs, and the review of all statistical sampling procedural agreements. Prior to that, Brad spent several years auditing fortune 500 companies in manufacturing, telecommunications, computer services, and retail for sales and use tax compliance. Brad was instrumental in the design and implementation of the Audit Division's computerized auditing program used by multiple divisions to audit personal property, corporate franchise, employer withholding, pass-through entity, and sales and use taxes; as well as managing quarterly updates and releases of the application. Brad's other responsibilities included the establishment of single rate reporting procedures for taxpayers as well as assisting in reviewing and approving the Department's PARSA (Previous Audit Representative Sampling Analysis) agreements. During his tenure, Brad was a frequent presenter on statistical sampling at the Ohio Tax Conference and the Federation of Tax Administrators national computer and technology workshops. He is a graduate of Columbus State Community College (Computer Programming) and The Ohio State University (Business Administration).
Statistical Sampling in Sales and Use Taxes LINK Best Practices and How States Are Using These Techniques John Null, CMI Bradley Tomlinson Senior Manager – Senior Manager Indirect Tax/The Home Zaino Hall & Farrin LLC Depot Columbus, OH Atlanta, GA btomlinson@zhftaxlaw.com john_a_null@homedepot.com
Learning Objectives Obtain a basic understanding of common statistical sampling terminology Understand the impact of differences in applications and policies among states See actual examples of audit scenarios among various states
Run Through • In discussing sampling practices, three states’ sampling methods are explored • Ohio, Texas, & Tennessee (design only) • Agreements • Sample Plans • Estimation Methods • Sample Error Assessment
When to Sample • Sampling is appropriate when: • Records are voluminous • Retrieving supporting documents is costly • Audit period includes some unavailable records • Auditor and taxpayer reach agreement on method of sampling and projection • Sampling is not appropriate when: • Cost of sampling exceeds cost of complete examination (detail) • Unable to identify population to be sampled • No agreement on method of sampling and projection
Common Terms • Non‐statistical sampling methods: • No measure of sample risk is provided (e.g., Texas) • Statistical sampling requires assessment of the associated sample risk: • Confidence interval, confidence bound, relative precision, etc. • Example for statistical sampling terms using $100,000: • Confidence interval: We are 95% confident population assessment is between $80,000 and $120,000 • Confidence bound: We are 95% confident population assessment is at least $84,000 • Relative precision: We are 95% confident that projected assessment is within plus or minus 10% of population assessment
The Home Depot Statistical Sampling Audit Policy 6
The Home Depot Statistical Sampling Policy Large Volume Retailer • Hundreds of millions of transactions • Brick & Mortar store sales – 2,000 U.S. locations • Online Sales • Installed services – remodels and appliance installations • Pro Customers (remodelers, carpenters, plumbers, contractors,…) • Tool & Vehicle rentals • Seasonal Sales – garden center, Christmas decorations, … • Customer friendly tax exemption platform 7
The Home Depot Statistical Sampling Policy Examples of bad auditing outcomes • Insufficient population size – 4 weeks selected for a 4 year audit – Only initial data provided was used, later data provided was ignored – One transaction distorted the entire population • Insufficient number of strata – Only 2 strata resulted in nonrepresentative results • States not able to handle data size • States without adequate statistical sampling experience 8
The Home Depot Statistical Sampling Policy Rules • Require the population to include entire audit period – If not possible, no less than one full year of data • No block sampling • Populations must be homogenous – Problem areas must be placed in separate populations • No less than 5 strata 9
The Home Depot Statistical Sampling Policy Sales populations segregated by error rates • Cash & Carry / POS Register – Highest volume (90+%), very low error rate – Do not want to “contaminate” with higher error rate populations • Online Sales – Low error rate, but slightly higher than POS sales – Delivery address errors – Larger volume of products for tax mapping 10
The Home Depot Statistical Sampling Policy Sales populations segregated by error rates • Problem areas must be placed in separate populations • Installed Services (Remodeling) & Deliveries – Higher error rates; ambiguity in interpretation of capital improvements; sales agents remove taxes • Exempt Customers – Highest error rates; customer friendly platform, fraudulent intent, missing certificates 11
Sampling Agreements • Agreements used to jointly prepare and agree on sampling plan, sample design, estimation method, and treatment of special cases (e.g., missing documentation) • Planning and agreements can be useful to insure agreement on the sample plan and a key to a successful sample audit • Types of agreements • Binding (e.g., Ohio) • Non‐binding (most other states using agreements) • Model agreement (California – CDTFA form 472) • http://www.cdtfa.ca.gov/formspubs//cdtfa472.pdf
Sampling Agreements Be sure to read and understand all components of the agreement Excerpts from Ohio agreements: • Taxpayer has opted to forego allowing use tax overpayment offsets in the sampling procedure. Therefore, tax overpaid items will be classified as non‐errors and comprehensive refunds must be submitted for transactions where tax was remitted in error. • Tax overpaid to vendors or sellers will not be offset and will require a separate refund claim to be filed by the taxpayer with documentation based on a comprehensive review of all tax overpaid • Tax overpaid items will be classified as negative errors and will offset positive errors if the provisions stipulated in the "Overpayments Procedure" of this agreement are all met.
Polling Question 1 tEST • The best policy for signing sampling agreements is: A. Always sign agreements to show cooperation B. Never sign agreements because too many bad things can happen C. Only sign them if they are not binding D. Base every decision on the agreement content and specific scenario 14
Know Your Data • Availability of supporting documents is your best defense in any audit of sales and use tax, unclaimed property, or types of other transactions • Do a preliminary investigation before auditors arrive • Conduct a “walk‐through” to discover and document what supporting documents are available and retrievable • Examine electronic and paper files • Identify potential exposure areas
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