Sales and Use Tax and Meals Tax Vendors – Beware of Your Point of Sale System
On March 3rd, 2016, the Massachusetts Department of Revenue (DOR) published Directive 16-1, which is aimed at Recordkeeping Requirements for Sales and Use Tax and Meal Tax Vendors that use Point of Sale (POS) Systems. While the recordkeeping requirements are germane and typical, the Directive also requires that the POS system utilized by the Vendor must “provide enough detail to independently determine the taxability of each sale and the amount of tax due and collected.” (as required by M.G.L. c. 62C § 25) Most importantly, the Directive requires users of POS systems to “maintain auditable internal controls to ensure the accuracy and completeness of the transactions recorded in the POS system.”
DOR Presumes Your POS System Accurately Reflects Your Sales
This requirement to maintain auditable internal controls and to ensure accuracy and completeness creates a presumption on the side of the DOR that the POS system is accurate.
Restaurants, especially, can run into issues during a Meals Tax audit where the auditor will assume that the numbers being reported in the POS system are accurate. Restaurants that use the POS system mostly for taking orders and sending the orders back to the kitchen to be prepared can end up artificially inflating their sales number in a variety of situations. For example, if a customer orders a pepperoni pizza, but it comes out with sausage, the server might reenter the pizza into the POS system so that the kitchen remakes the pizza. In my practice representing restaurants in Meal Tax audits, such issues are very common, and they can often inflate POS sales numbers substantially.
DOR Will Try to Impose Penalties Based on the POS Sales Reports During a Meals Tax Audit
Under audit, the DOR will start with a presumption that the POS system is accurate and that the sales reported in POS reports are the sales that should have been reported for Meals Tax (and income tax) purposes. However, if the merchant knows that the POS system is inflating sales and is inaccurate and uses a different method for calculating sales (such as, counting cash and credit card receipts), then the audit will result in an initial adjustment, that is often quite large.
We have also seen the DOR begin to impose § 28 penalties, which is a penalty that is equal to the underreported tax, in addition to the § 35A 20% penalty. The DOR maintains that the §28 civil fraud 100% penalty is appropriate because the taxpayer is knowingly using a less accurate method of determining sales instead of using the POS sales reports.
Mitigating Potential Tax Penalties
Even if a merchant is using an accurate non-POS method for determining its tax reporting, the DOR will start with a presumption that the POS system is accurate. Under audit it is important to advocate from the beginning that the POS system is knowingly inaccurate and that the merchant reported its taxes using another, accurate method. McMahon & Associates has experience with POS audits and can help guide you through the audit process and work to mitigate potential penalties.
About the Author
Eric J. Rietveld represents individuals, estates and businesses before the Internal Revenue Service (IRS) and Massachusetts Department of Revenue. He received his Masters of Laws in Taxation from the Boston University School of Law and served as an intern for the Honorable F. Dennis Saylor IV in the United States District Court, District of Massachusetts.
He can be reached at 617-600-5400 or firstname.lastname@example.org