Motor Fuels Tax Audit Procdedures Manual - Ch. 153
CHAPTER 9 - PURCHASES
- Gross and Net
- Gallons on Gross or Net Basis
- Tax-Paid Purchases
- Unreported Purchases
- Records Examined
- Third Party Verification
One of the most important elements of auditing distributors and suppliers is determining that all fuel acquired has been reported and can be accounted for. All fuel acquired includes:
- Tax-free purchases
- Tax-paid purchases
- Fuel refined
- Blending materials
In order to arrive at a true or actual account, all of the above should be computed at gross gallons although it may not be necessary in every audit.
GROSS AND NET
Gross Gallons may be defined as real, true, actual, physical, and volumetric or non-temperature corrected gallons.
Net Gallons may be defined as gross gallons corrected or adjusted to a temperature of 60 degrees Fahrenheit.
GALLONS ON GROSS OR NET BASIS
The fuels industry for many decades has generally sold, or accounted for fuel corrected to a temperature of 60 degrees Fahrenheit, commonly referred to as a net basis. Fuel at an actual volumetric quantity is referred to as gross gallons. The net gallons of fuel above 60 degrees will be less than the gross amount and the net gallons of fuel below 60 degrees will be greater than the gross amount.
The following table indicates the approximate difference between gross and net gallons of gasoline at a gravity of 62. There are several different tables that result in slightly different figures.
These amounts were computed from the "Gasoline and Diesel Management Standards," booklet #96-194. The Comptroller no longer prints this booklet. These charts are also available in the American Petroleum Institute's Table 6B.
The specific gravity of the product also affects the amount of difference. Diesel fuel does not expand or contract as much as gasoline. In most of Texas, the gross amount will exceed the net amount except for December, January, and February.
Most vendors and/or out-of-state vendors maintain their records on a net basis and some even use both net and gross. In order to arrive at true or actual gallons to account for, all gallons have to be computed or converted to gross. Although the agency would like a distributor, supplier, AG user, or DD user to report all purchases on gross basis, it has not been a requirement or rule. Beginning September 1, 2000 purchases are reported on both net and gross on the supplemental schedules.
Generally, tax-paid purchases should be audited in detail even if other elements of the audit are conducted on a test basis. An exception would be if all purchases from a certain supplier or distributor was always tax-paid.
A distributor, supplier, bonded user (through 9/1/2000), AG user or DD user may purchase all of his fuel tax-free within the requirements of the statutes. However, either the purchaser or seller may want tax to be charged. If tax is charged on the invoice, verify that the tax was actually paid. Also, a good practice would be to check the permit lists on the CICS system and the web site to insure that the person collecting the tax was properly permitted. Sometimes when a supplier or a distributor has a new customer, he will initially charge tax if he is unsure about the customer permit status and then later credits the tax. Also if the tax was charged, it has to be Texas tax. Unlike the sales tax law, the fuels tax law does not allow reciprocal credit for any fuels tax paid to other states.
Often, taxpayers operating in multiple states include all business done everywhere on their reports. If a tax-paid purchase on which another state's tax has been paid is found, then verify whether the fuel was sold out-of-state. If it was then both purchases and sales should be omitted from the Texas return.
New Facilities or Reorganization of Business
Tax-paid gallons can be created by the taxpayer purchasing new facilities or changing his/her business organization (i.e., jobber to distributor). Under these circumstances, it will be necessary to review the sales contracts or reorganization documents to determine the tax-paid inventories that the taxpayer acquired. The gallons of fuel and tax will seldom be reflected on the same invoice in this situation.
If a reorganization of the business occurs, be certain that the taxpayer is reporting actual and not book inventories. Verify that the company did not refund tax on the ending inventory as part of the reorganization transaction. Also, reorganization conversions, such as from jobber to distributor, should be carefully examined; bookkeepers used to dealing in tax-paid purchases from a particular vendor may not enter the conversions to tax-free purchases for two or three months. An invoice should be required for every reported tax-paid purchase so that any errors can be detected.
Unreported purchases do not necessarily mean that additional tax is due. It usually depends on the method of reporting that the taxpayer uses.
BEGINNING INVENTORY + PURCHASES -
TAX-FREE SALES - ENDING INVENTORY =
Then the missed purchases directly affect the
taxable sales amount.
ACTUAL TAXABLE SALES AND GAINS
AND/OR LOSSES ARE REPORTED
Then the missed purchase may only cause an
Adjustment in the gain and loss column.
EXAMPLE FOR SITUATION 2:
During an audit, it was found that the taxpayer had underreported purchases by 1,000 gallons.
If the taxpayer had reported net purchases, then a missed purchase or a net to gross adjustment could have caused the underreporting.
Supplemental histories can be of great help in identifying errors in tax-free purchases, especially in relation to missed purchases.
Journals or other records showing total purchases may be used to verify that reported figures are properly stated. These records should be verified as being correct by test checking posted amounts against invoices. Test months, can be chosen by using the supplemental schedules.
Although adjustments on other elements of fuels audits may be conducted on a projected basis, projections of purchases should be avoided whenever practical. Of course, a high volume of purchases would prohibit a detail audit.
THIRD PARTY VERIFICATION
When a taxpayer's records are inaccurate, incomplete, suspect, or not made available, it is sometimes desirable to use the records of the taxpayer's suppliers to determine purchases by the taxpayer and use those figures to project the taxable sales by the taxpayer.
|NOTE:||When using the records of suppliers to determine the purchase of the taxpayer, use only those records that could later be copied and introduced into evidence, in case of a hearing. In other words, rely on actual documents that can later be obtained from the supplier; do not rely on verbal communications.|
The following information is also useful:
- The address of the vendor.
- The person contacted to obtain the records, and the person's title.
- The date the information was requested.
Specific sales made by the vendor to the taxpayer should be well documented in the audit. Avoid using only totals as documentation whenever possible even though the taxpayer has no records and does not object to using his vendors records.
The auditor's report or schedules should include a complete description of the exact supplier's records used, including dates and locations. The following information from supplier's records may be used in an audit:
- Detail invoice-by-invoice listing.
- Specific totals if they exist as totals, in the supplier's record.
- Amounts from copies of the "Supplier's or Distributor's Schedule of Tax-Free Sales" supplements which accompany monthly returns.
If the taxpayer disagrees with the audit figures taken from the supplier's records, then advise the taxpayer of his rights. The documentation included in the audit should be useful to a hearings attorney to determine what the actual sales figures for the supplier are and in what period these sales to the taxpayer occurred.
Supplements are a good tool to use when comparing the amounts reported by the taxpayer with the amounts reported by the seller or purchaser.
Prior to September 1, 2000, amounts reported by the seller and purchaser do not balance. Several factors may cause these differences. Some are:
- Timing or cut-off date differences.
EXAMPLE: The seller may consider the shipping date as the cut-off date whereas the purchaser may use the invoice date.
The seller may use the 28th day of each month as the cut-off date while the purchaser may use the last day of the month.
NOTE: These differences should offset in successive months.
- The seller may report net gallons while the buyer reports gross.
- The seller or purchaser may be reporting on the wrong seller or purchaser.
- A taxpayer may report a transaction as a purchase or sale to or from a permit holder whereas it should have been reported as an import or export. This is common among suppliers and distributors who are permitted in several states or operate as brokers.
EXAMPLES: A person with a Texas distributor's permit sells gasoline to another person who also has a Texas distributor's permit. The gasoline is delivered from the seller's storage in Louisiana to a common carrier barge destined for Houston. The correct reporting method is for the buyer to report the transaction as an import. The seller would not report the transaction since the transaction was not a Texas sale.
Gulf refines and sells 2,000,000 gallons of gasoline to Texaco. Texaco sells it to Arco. Arco sells it to Koch and Koch sells it to Northeast. The fuel leaves the refinery in Port Arthur by pipeline and is transferred to Colonial Pipeline in Pasadena and delivered to Northeast in New Jersey. All have Texas distributor permits and the transactions are simultaneous. The correct method of reporting is an acquisition by refining and a tax-free sale by Gulf; tax-free purchase and tax-free sale by Arco; tax-free purchase and export by Koch; Northeast would not report the transaction.
In either of the examples above, if either the seller or purchaser reports the transaction differently than the suggested way, then the purchaser and seller supplement history will not balance. However, erroneous reporting would not cause the transactions to become taxable.
- A taxpayer may have used the wrong supplement form when reporting (i.e., gasoline or diesel, purchases or sales).
- A taxpayer may not have completed or included a supplement when the report was filed.
- A supplier reports sales to prepaid users on the supplement whereas the prepaid user is not required to file a report.
- The supplier reports on a monthly basis whereas the bonded user reports quarterly or annually.
- There may be errors in reporting exchange agreement transactions.
Consequently, the amounts shown on the supplements should not be used to make audit adjustments without first determining why the differences exist or if the amounts are accurate.
However, if a purchaser is being audited and has no records or does not make records available, and the seller's records are not available or the seller has gone out of business, then the supplement history of sales made to this purchaser would be the best records available and could be used for audit purposes.
Beginning September 1, 2000
- Tax-free purchases, sales, imports and exports will be reported using the American Petroleum Institute PIDX (Petroleum Industry Data Exchange) product codes. For example: 065 is gasoline, 124 is gasohol, 160 is undyed (clear) diesel fuel, and 228 is dyed diesel fuel.
- Tax-free purchases, sales, imports and exports must be reported in the month that the fuel is removed from the terminal rack or bulk plant rack; not according to the invoice date, billing date or the date the fuel is received.
- The net and gross gallons of tax-free purchases, sales, imports and exports will be reported. This reporting requirement will have no effect on calculating the tax due on taxable sales.
- When the fuel is transported by cargo tank (in trucks), details of imports and exports will be reported identifying the purchaser and seller, origin and destination states, and the common or contract carrier.
- An importer that acquires motor fuel for import by truck must obtain an import verification number from the Comptroller (Sec.153.018) (Rule 3.187)
- An importer or exporter who wants to divert the delivery of a truck load of fuel from the destination state must obtain a diversion number from the Comptroller. (Sec.153.018) (Rule 3.187)
Maintained by the Audit Division