taxes

Audit Procedures for Cigarette Tax

Chapter 5 – Audit Procedures for Out-of-State Distributors

Audits of out-of-state distributors differ from those of in-state distributors. Tax is assessed on cigarette sales or distributions into Texas rather than on the purchases of cigarettes. While a Manufacturer' Comparative Reconciliation is prepared in an audit of a Texas distributor, this analysis is not performed for an out-of-state distributor. To measure taxes owed, the amount of cigarettes sold into Texas are compared to the amount of stamps affixed.

Internal Controls

As in any audit, test internal controls before proceeding with fieldwork. Randomly select six months to use as test months. Evaluate the taxpayer' process of recording sales and reconcile the amounts to the summary records and to the reports. Analyze the effect of any discrepancies.

Inventories

For out-of-state distributors, a physical inventory is taken only when the distributor has a segregated area for cigarettes designated to Texas customers (stamped and unstamped).

Cigarette Sales

Actual sales into Texas are used to measure the amount of cigarettes on which taxes are owed. An out-of-state permitted distributor cannot sell unstamped cigarettes to a distributor in Texas. The first sale in Texas occurs when the cigarettes are shipped from the out-of-state distributor to the Texas distributor.

Verify the number of total cigarettes stamped for Texas by using the distributor' sales reports. They may calculate the number of cigarettes stamped by using the number of cartons sold as shown on their sales reports. Remember that out-of-state distributors may not reduce their sales by returns from the customer.

Since out-of-state distributors only complete Line 12 of the Texas Distributor Monthly Report of Cigarettes and Stamps (Form 69-100), there are no exemptions or deductions to take into consideration.

Reconciliation of Reported Stamps

As mentioned in Chapter 2, Pre-Audit Research, the auditor should prepare a "stamp reconciliation" prior to starting fieldwork. By using the list of exceptions prepared during the pre-audit reconciliation, the auditor can quickly reconcile any differences with the taxpayer records. Run a credit stamp credit report to see if any stamps were returned by the distributor because of damaged stamps or called backs.

Inventory of Stamps

Stamps are packaged in rolls of 30,000 and 7,200, as well as in sheets of 100 and 150. The rolls of 30,000 are affixed to packages of cigarettes containing 20 sticks. They contain 2000 rows of stamps with 15 stamps per row. The rolls are marked with numbers on every 300th stamp. The top number indicates the number of stamps used on that roll while the bottom number indicates the number of stamps remaining on the roll. The rolls of 7,200 stamps are affixed to packages of cigarettes containing 25 sticks. This series is segregated into groups of 240.

Complete an actual inventory of all unused stamps by state. The unused Texas stamps will be used as the ending inventory of stamps on hand. Pay attention to the most current stamps delivered by the Comptroller' office to verify the receipts of the distributor. The purpose of the inventory of all state stamps is to ensure that the distributor has enough stamps on hand to cover the unstamped packs of cigarettes. To facilitate the inventory process, a partial roll can be counted by determining the descending number on the edge of the roll that reflects the number of stamps remaining on the roll. Record the serial numbers of each partial roll in the audit plan. The distributor should remove partially used rolls from the stamping machine(s) for counting. Only full stamps are allowed for inventory. Stamps are considered full if two-thirds of the original stamp is intact and all the digits are fully legible.

If a taxpayer has an outlet that is closing or an entity change involving a closeout audit , the unused stamps should be returned to the Comptroller' Office, Account Maintenance (cigarette & tobacco section) via any means of traceable transportation.

Stamps Lost, Stolen, or Mutilated

Only stamps that have been lost or stolen are reported on the return. The comptroller does not authorize credit for stamps lost due to theft, negligence, or any unaccountable loss. No credit is allowed for stamps affixed over stamps already on the package of cigarettes (double stamping).

Obtaining Credit for Stamps

In order to receive credit for stamps, the distributor must provide the following information:

  • Stamps that have been destroyed by vandalism, fire, flood, or other natural disasters: The distributor must present evidence to the Comptroller that the stamps were purchase by the distributor and were subsequently destroyed by a natural disaster.
  • Stamps affixed to cigarette carton flaps rather than the cigarette packs: The distributor must submit the stamped carton flaps to the Comptroller in order to obtain credit.
  • Stamps that have been torn or damaged by stamping machines: The distributor must submit the damaged stamps to the Comptroller in order to obtain credit.
  • Stamps affixed to packages of cigarettes that become damaged or are unfit for sale and return to the manufacturer: The manufacturer must send the distributor an affidavit which states the cigarettes and stamps have been destroyed. The distributor must file this affidavit with the Comptroller to receive credit on their stamp purchases.

Sampling Procedures

Sampling procedures may be utilized when auditing out-of-state distributors' sales into Texas. Sampling procedures are not used for errors involving the stamp inventory.

TOC | 1 | 2 | 3 | 4 | 5 | 6

(Revised 09/2010)