Thursday, September 16, 2010

Illustrations and Parables: The Steel Mill

You know you want it.I’ve told this story for years in my seminars, so if you’ve heard this one, I'm sorry. Just move along, nothing to see here.

A guy in the seminar was the controller for a steel mill – a BIG steel mill. They take raw iron ore and turn it into steel ingots. Since there’s not a big consumer demand for big chunks of steel, everything they sell is to other processors – for resale.

“We get resale certificates from all of our customers so we’re good there. Every month, we report something like $50,000,000 in sales on our return [it’s a BIG steel mill] and then, on the next line, $50,000,000 in exempt sales."

“We still send the state a fair amount of money every month, but it’s use tax on our purchases.”

One day, the sales tax auditor showed up. After an initial meeting where the controller and auditor seemed to hit it off, he showed the auditor to the usual conference room, gave him some starting audit fodder, and then left him to it.

After lunch, the auditor stopped by the controller’s office. “I think I gotcha,” were his opening words.

“What? You haven’t been here long enough to have ‘gotten us;’ you’ve only been at it for an hour or so.”

“Ah, but I had lunch in your cafeteria. Nice one and the food's good - cheap too.”

“Well, we’re out here in the sticks, so we’ve got to provide all those guys with some decent food. But what do you mean?”

The auditor inhaled, “They charged me $5.00 for the lunch. I also chatted with the manager there, and he said they’re all employees of the mill…you haven’t hired a management company to run the cafeteria.”

“Yeah…” the controller responded suspiciously.

“You are operating a restaurant. You’re making retail sales to your employees, albeit at a pretty reasonable amount. Now I just looked at your returns for the last few years, and you have NEVER reported a taxable sale. Not one dollar. Which makes sense given your business model. But you HAVE been making retail sales – out of that restaurant you’ve got downstairs. Where are you reporting those sales?”


The final assessment was in the neighborhood of $200,000.

This amount wasn't catastrophic for a big company. But it certainly was embarrassing for that controller and not a particularly career-enhancing situation. You need to look at EVERY class of transaction and determine if it’s taxable or not taxable. This company didn’t even THINK of the cafeteria – they’re a steel mill! But over time, those $5.00 meals for three shifts add up.

The Sales Tax Guy

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