A guy in the class worked for a poultry processor. The auditor busted them on the carbon dioxide gas that they injected into the meat. The company had always assumed that this gas was exempt from sales tax because it was an ingredient. Ingredients are almost always exempt.
"Sounds good to me," I said. "But why do you inject carbon dioxide into the meat?" All I could think of was fizzy turkey.
The guy said, "I don't know, I work in accounts payable." I kid you not. Absolutely true.
This is one of my favorite stories, frankly because the AP piece is the funny part. When I told it in a different seminar, another poultry processor told me that the CO2 is a preservative. And, since it's the stuff that gives your Coke the bubbles, it's gotta be safe.
Anyway, the auditor said it didn't qualify for the exemption, and they were nicked for the sales tax. The amount was BIG - the assessment hurt. Now, the carbon dioxide IS an ingredient in the meat. They inject it into the chicken. So why was it taxable?
The auditor said that, in order for the CO2 to be considered an ingredient, it must be present in the final product when opened by the final consumer. And by the time you take your chicken home from the store, and open up the package, the carbon dioxide is gone. So, according to the auditor, it's not an ingredient - it's taxable.
But is the auditor right? I looked at the statute and the regulations after the seminar. There is no restriction, in that particular state's laws, saying the the ingredient must be present in the final product when opened by the consumer.
Some states do require that the ingredient be in the product sold at retail. To me, this means the CO2 must be there when the customer picks up the package from the cooler. And other states merely say that the ingredient must be in the final product, not specifying the point in time. Which could mean when the product is packaged and moved to the shipping department. But I've seen no state that specifies that the ingredient must be there when the customer opens the package.
Since the law, in this state, didn't even specify that the ingredient must be present when sold at retail, the taxpayer could have fought it. The assessment was big enough to make it worthwhile to hire some expensive professionals to appeal. But the taxpayer made the big mistake: he assumed the auditor was correct. He didn't even ask to see the law. He just wrote the check to the state.
So the morals of this particular parable are:
1. Know the rules for what qualifies as an ingredient in your state and adjust your procedures accordingly,
2. Have a better understanding of your processes, even if you work in accounts payable,
and most importantly,
3. Never assume that the auditor is right. Make them prove it!
Sales Tax Guy
See disclaimer and research the issues thoroughly before making decisions
Here's information on our upcoming seminars and webinars And we do coaching!
And please don't forget to visit our advertisers!
Picture note: the picture above is hosted on Flickr and is pretty funny. If you'd like to see more, click on the picture.