Texas Comptroller of Public Accounts    STAR System


200408423L



AP 92

Date: August 17, 2004
To: All Audit Personnel
From: David Rock
Subject: Alternative Audit Methods, Mark-Up Percentages and Product Mix 
Percentages for Convenience Stores.


Our Administrative Hearings Section and Administrative Law Judges have voiced 
concern about the lack of uniformity in estimated convenience store audits. 
Percentages were developed utilizing data from the Texas Petroleum Marketers 
and Convenience Store Association (TPCA), Robert Morris & Associates Annual 
Financial Statements (RMA), and National Association of Convenience Stores 
(NACS). These mark-up percentages and product mix percentages should only be 
used when necessitated by lack of reliable records. A shelf test must be 
conducted if the taxpayer is still in business. Auditors should not employ 
estimates or percentages from other sources in completing audits.

Effective immediately the following methods should be used to perform an audit 
in cases when records are unavailable, inadequate or unreliable:

1. Mark-up method: Purchase information is obtained from the taxpayer and/or 
vendors (such as beer distributors and/or cigarette distributors). A mark-up is 
established by performing a shelf test. The resulting mark-up is applied to the 
purchase information received from the taxpayer and/or third party vendors.

2. Average taxable sales method: This method should only be used when purchase 
invoices for all categories of purchases cannot be obtained from the vendor. 
For example, beer invoices are obtainable; no other purchase invoices are 
available; taxable sales should be estimated using the appropriate 
percentage(s) from the attachment. (Note: The auditor should always request and 
utilize actual taxpayer purchase invoices to determine specific product 
categories if the taxpayer records are reliable).

When audits are estimated using the attached percentages, the auditor should 
include language in their notice of estimation that these percentages were 
obtained from this AP memo.

If the auditor does not use the mark-up method, it must be documented why this 
method was not used.

Example 1 - Purchases Available/No Shelf Test

* The taxpayer's convenience store is out of business when the audit is 
generated. 
* The taxpayer's purchase invoices on hand are incomplete. 
* Taxpayer vendors are known.

The auditor identifies the taxpayer's vendors and obtains purchase information 
for the audit period. No shelf test can be conducted since the store is closed. 
The auditor should use the attached mark-up percentages for the appropriate 
category of purchases.

Example 2 - Purchases Available for Only One Product Category/No Shelf Test

* The taxpayer's convenience store is out of business when the audit is 
generated. 
* Only known vendor(s) and purchase invoices are from beer distributor(s). 
* Records on hand are the FIT returns for the audit period. 

No shelf test can be conducted since the taxpayer is out of business. The 
auditor should use the attached percentage(s) for the appropriate product 
category.

The auditor obtains purchase information from the beer distributor(s) and 
applies the mark-up percentage for beer (Column B: 125.00 percent) to arrive at 
the dollar value of estimated beer sales for the audit. The auditor will divide 
the estimated dollar value of beer sales for the audit by the percentage of 
beer sales to average total sales (Column C: 27 percent) to calculate estimated 
total sales for the audit. Estimated total sales for the audit will be 
multiplied by 85 percent to calculate estimated taxable sales for the audit.

For example:

Beer purchases from beer distributors X 125.00 percent = $ value of estimated 
beer sales (EBS) for the audit 

EBS for the audit / 27 percent = Estimated total sales (ETS) for the audit

ETS for the audit X 85 percent = Estimated Taxable Sales for the audit
(85 percent considered taxable sales; 15 percent allowance for non-taxable 
sales)

Product Category: Beer/Wine
Markup Percentage: 125.00
Percentage of Avg Sales to Total Sales For Stores That Sell Beer: 27
Percentage of Avg Sales to Total Sales For Stores That Do Not Sell Beer: 0

Product Category: Candy
Markup Percentage: 163.93
Percentage of Avg Sales to Total Sales For Stores That Sell Beer: 9
Percentage of Avg Sales to Total Sales For Stores That Do Not Sell Beer: 13

Product Category: Cigarettes/Tobacco
Markup Percentage: 117.65
Percentage of Avg Sales to Total Sales For Stores That Sell Beer: 27
Percentage of Avg Sales to Total Sales For Stores That Do Not Sell Beer: 39

Product Category: Chips/Snacks
Markup Percentage: 149.25
Percentage of Avg Sales to Total Sales For Stores That Sell Beer: 7
Percentage of Avg Sales to Total Sales For Stores That Do Not Sell Beer: 4

Product Category: Other Taxable Food/Drinks
Markup Percentage: 204.08
Percentage of Avg Sales to Total Sales For Stores That Sell Beer: 6
Percentage of Avg Sales to Total Sales For Stores That Do Not Sell Beer: 7

Product Category: General Merch/HBC
Markup Percentage: 147.06
Percentage of Avg Sales to Total Sales For Stores That Sell Beer: 8
Percentage of Avg Sales to Total Sales For Stores That Do Not Sell Beer: 17

Product Category: Soft Drinks
Markup Percentage: 144.93
Percentage of Avg Sales to Total Sales For Stores That Sell Beer: 16
Percentage of Avg Sales to Total Sales For Stores That Do Not Sell Beer: 20

Comments:
(1) Total sales consist of taxable and non-taxable items. Of these sales 85 
percent are considered taxable and 15 percent are considered non-taxable.

(2) The mark-up percentage is the same for convenience stores that sell beer 
and for convenience stores that do not sell beer.

As STAR is the Comptroller's research system for Texas tax policy issues,
only tax-specific audit policy memos (AP Memo) are included here. AP memos
not on STAR can be found on Window on State Government on the
Audit Memos web page.




ACCESSION NUMBER: 200408423L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 08/17/2004
TAX TYPE: SALES