This information is not current and is being provided for reference purposes only
PS 93(4)
New Audit Examination Policy for Retail Transactions
This publication has been superseded by PS 2013(1)
BACKGROUND: The Connecticut Sales and Use Taxes Act imposes sales and use taxes on retailers and their retail customers. To determine whether or not proper taxes have been paid with respect to retail sales, the Department conducts audit examinations of both retailers and their retail customers. The possibility has always existed that, where proper taxes were not paid with respect to a particular retail sale, and where audit examinations were conducted both of a retailer and of one of its retail customers, an audit assessment might be made against both the retailer and the retail customer with respect to the same retail sale.
PURPOSE: This Policy Statement establishes a policy to minimize the potential multiple taxation of retail sales where audit examinations of a retailer and of a retail customer disclose that proper taxes were not paid with respect to a particular taxable sale made by the retailer to its retail customer.
STATUTORY AUTHORITY: Conn. Gen. Stat. Sections 12-415, 12-416 and 12-426.
EFFECTIVE DATE: Effective for audit examinations that commence on or after January 1, 1994.
DEFINITIONS: As used in this Policy Statement:
"Taxable retail sales" means those retail sales that are properly subject to, and not exempt from, sales and use taxes, whether or not those sales were treated as such by the retailer.
"Audit examination" means an examination that is conducted by the Audit Division of the Department of Revenue Services to determine whether the proper amount of taxes was reported on tax returns that are filed or required to be filed by a taxpayer.
"Audit examination period" means the taxable periods of returns that are under audit examination by the Audit Division of the Department of Revenue Services.
"Audit assessment" means an assessment that is made by the Department of Revenue Services as a consequence of an audit examination.
"Retailer" means a person that is engaged in the business of making sales, as defined in Conn. Gen. Stat. Section 12-407(2), at retail.
"Retail customer" means a person, who may or may not be engaged in business, to whom a retail sale is made by a retailer.
"Taxable period" means the monthly, quarterly or other period for which a tax return is required to be filed under Conn. Gen. Stat. Section 12-414.
"Perpetually audited taxpayer" means a retail customer whose tax returns for all taxable periods are always subjected to audit examination and who is designated as such by the Department.
"Sampling" means conducting an audit examination using one or more taxable periods as a test period, with errors in reporting taxable retail sales (or purchases) during such period to be extrapolated to the entire audit examination period. Sampling is to be contrasted with an audit examination involving a detailed examination of the books and records of the taxpayer and not involving the use of a test period.
"Tax returns" means tax returns that are required to be filed under the provisions of the Sales and Use Taxes Act, including tax returns that are required to be so filed by persons who are not retailers.
THE POLICY AS APPLIED IN EXAMINATIONS OF RETAILERS: In conducting an audit examination of a retailer for sales and use taxes, the Department will, on its own initiative, consider separately those taxable retail sales that were made by that retailer to every retail customer who is a perpetually audited taxpayer. If the Department determines that the retailer made taxable retail sales to a perpetually audited taxpayer and failed to collect tax on those sales, the Department will make an audit assessment in connection with such sales against the perpetually audited taxpayer, and not against the retailer (and, if the audit examination of the retailer is conducted by sampling, will not consider such sales as errors in reporting taxable retail sales). Pursuant to Conn. Gen. Stat. Section 12-15, the Department will not disclose the identity of perpetually audited taxpayers.
Where the retailer establishes, as described below, that, with respect to the taxable periods in its audit examination period, one of its retail customers (who the Department determines is not a perpetually audited taxpayer) has already been subjected to audit examination for sales and use taxes by the Department for some or all of the same taxable periods as the retailer, the Department will also consider separately those taxable retail sales that were made to that retail customer as follows:
If the audit examination period of the retailer is the same as the audit examination period of the retail customer, the Department will not make an audit assessment against the retailer in connection with such sales to such retail customer.
If the audit examination period of the retailer overlaps but is not the same as the audit examination period of the retail customer, and a detailed examination of the retailer's books and records is made, the Department will not make an audit assessment against the retailer in connection with such sales to such customer during the overlapping taxable periods.
If the audit examination period of the retailer overlaps but is not the same as the audit examination period of the retail customer, the Department conducts the audit examination of the retailer by sampling, and the taxable period or periods that are chosen as the test period were taxable periods within the audit examination period of the customer, the Department will not make an audit assessment against the retailer in connection with such sales to such customer (and, for sampling purposes, will not consider such sales as errors in reporting taxable retail sales).
However, if the audit examination period of the retailer overlaps but is not the same as the audit examination period of the retail customer, the Department conducts the audit examination of the retailer by sampling, and the taxable period or periods that are chosen as the test period were not taxable periods within the audit examination period of the customer, the Department will make an audit assessment against the retailer in connection with taxable retail sales made by the retailer to the retail customer during the audit examination period of the retailer (and, for sampling purposes, will consider such sales as errors in reporting taxable retail sales).
Establishing that the retail customer was subjected to an audit examination for one or more of the same taxable periods: The retailer may establish that, with respect to the taxable periods in its audit examination period, one of its retail customers has been subjected to audit examination for sales and use taxes by the Department for some or all of the same taxable periods as the retailer by obtaining from the retail customer an audit verification letter (Form AU-178) that has been issued by the Department to the retail customer.
However, if the retail customer has gone out of business and the retail customer's records (including the audit verification letter) are not available or if the retail customer will not provide a copy of the audit verification letter, the retailer may still be able to establish that taxes were subsequently paid (either to the retailer or directly to the Department) on taxable retail sales made by the retailer to the customer. (For example, the retailer may have billed the customer subsequent to, but on account of, one or more sales made to the customer for taxes not previously collected on those sales, and the retailer may have proof of such billing and proof of payment of these billed taxes by the retailer to the Department.) If the retailer is able to so establish that taxes were subsequently paid on such sales, the Department, for sampling purposes, will not consider such sales as errors in reporting taxable retail sales.
THE POLICY AS APPLIED IN EXAMINATIONS OF RETAIL CUSTOMERS: In conducting an audit examination of a retail customer who is a perpetually audited taxpayer for sales and use taxes, the Department will make an audit assessment against that retail customer in connection with taxable retail sales which were made to that customer but on which tax was not collected by the retailer, even though the retailer or retailers making those sales to such retail customer may already have been subjected to audit examination. (This is due to the fact that, in conducting the audit examination of a retailer who made taxable retail sales to a perpetually audited taxpayer, the Department does not choose to make an audit assessment against the retailer in connection with taxable retail sales that were made to such a customer.)
In conducting an audit examination of a retail customer who is not a perpetually audited taxpayer for sales and use taxes, where such customer establishes, as described below, that, with respect to the taxable periods in its audit examination period, a retailer that made taxable retail sales to the customer has already been subjected to audit examination for sales and use taxes by the Department for some or all of the same taxable periods as the customer, the Department will consider separately those taxable retail sales that were made to the customer by that retailer as follows:
If the audit examination period of the retail customer is the same as the audit examination period of the retailer, the Department will not make an audit assessment against the customer in connection with such sales made by the retailer to the customer.
If the audit examination period of the retail customer overlaps but is not the same as the audit examination period of the retailer, and a detailed examination of the customer's books and records is made, the Department will not make an audit assessment against the customer in connection with such sales made by the retailer to the customer during the overlapping taxable periods.
If the audit examination period of the retail customer overlaps but is not the same as the audit examination period of the retailer, the Department conducts the audit examination of the retail customer by sampling, and the taxable period or periods that are chosen as the test period were taxable periods within the audit examination period of the retailer, the Department will not make an audit assessment against the retail customer in connection with such sales by the retailer to the customer (and, for sampling purposes, will not consider such transactions as errors in reporting taxable retail purchases by the customer).
On the other hand, the Department will not refrain from making an audit assessment against any customer who induced the retailer, through the issuance of any certificate or other statement to the retailer (for example, a purchase order indicating that tax should not be collected on the sale) not to collect tax on those sales, or who made a taxable use of items sold by the retailer to the customer subsequent to the sale.
Furthermore, if the audit examination period of the retail customer overlaps but is not the same as the audit examination period of the retailer, the Department conducts an audit examination of the customer by sampling, and the taxable period or periods that are chosen as the test period for the customer were not taxable periods within the audit examination period of the retailer, the Department will make an audit assessment against the customer in connection with taxable retail sales made by the retailer to the customer during the audit examination period of the customer (and, for sampling purposes, will consider such transactions as errors in reporting taxable retail purchases by the customer).
Establishing that the retailer was subjected to an audit examination for one or more of the same taxable periods: The retail customer may establish that, with respect to the taxable periods in its audit examination period, a retailer by whom taxable sales were made to the customer has already been subjected to audit examination for sales and use taxes by the Department for some or all of the same taxable periods as the retail customer by obtaining from the retailer an audit verification letter (Form AU-178) that has been issued by the Department to the retailer.
However, if the retailer has gone out of business and the retailer's records (including the audit verification letter) are not available or if the retailer will not provide a copy of the audit verification letter, the customer may still be able to establish that taxes were subsequently paid (either to the retailer or directly to the Department) on taxable retail sales which were made to the customer by the retailer but on which the retailer did not collect tax. (For example, the retail customer may have been billed by the retailer subsequent to, but on account of, one or more sales made to the customer for taxes not previously collected on those sales, and the customer may have proof of such billing and proof of payment of the these billed taxes by the customer to the retailer, or schedules establishing that the customer reported and paid the tax directly to the Department.) If the retail customer is able to so establish that taxes were subsequently paid on such sales, the Department, for sampling purposes, will not consider such transactions as errors in reporting taxable retail purchases by the customer.
NOTIFICATION OF PERPETUALLY AUDITED TAXPAYERS: The Department will notify in writing those taxpayers whom it will treat, for purposes of this Policy Statement, as perpetually audited taxpayers. A person who is designated as a perpetually audited taxpayer shall not willfully induce or attempt to induce a retailer not to collect taxes on taxable retail sales made by such retailer to such person.
AUDIT EXAMINATIONS BEING CURRENTLY CONDUCTED ON A RETAILER AND A RETAIL CUSTOMER: Where a retailer or one of its retail customers can establish that the Department is currently conducting audit examinations of both the retailer and the retail customer, and the audit examination periods overlap, the Department will not make an audit assessment against the retailer in connection with taxable retail sales which were made to the customer by the retailer and on which the retailer failed to collect taxes; rather, the Department will make an audit assessment against the retail customer.
EFFECT OF THIS DOCUMENT: A Policy Statement is a document that explains in depth a current Department policy or practice affecting the liability of taxpayers. A Policy Statement indicates the Department's informal interpretation of Connecticut tax law and may be referred to for general guidance by taxpayers or tax practitioners.
EFFECT ON OTHER DOCUMENTS: None affected.
PS 93(4)
Sales and use taxes
Issued: 12/8/93