Audit Procedures for Cement Production Tax
Chapter 3 – Audit Procedures
- Pre-Audit Research and Review
- Entrance Conference
- Records to Examine
- Exit Conference
- Audit Plan
PRE-AUDIT RESEARCH AND REVIEW
This chapter covers some of the activities that will be helpful when conducting these audits. This chapter is by no means meant to be exhaustive or exclusive.
The following terminal inquiries are available on the CICS system. These are inquiries that may prove useful and provide information on your specific taxpayer identification number. Inquiries on related entities may also provide information on outlet locations and business activities pertinent to your audit.
- XICOLL.taxpayer #.tax type. - displays period and audit collection balances, both open and closed.
- MTSUMM.taxpayer #. - displays master inquiry and summary status for all applicable taxes, indicating the taxes the taxpayer is currently set up for on the system
- MTBALS.taxpayer#. – displays the current outstanding tax balance.
- XIXREF.taxpayer#. - cross-references assigned refunds and successor/predecessor liabilities.
- XIREFS.taxpayer#.tax type.sub-type#. - displays refunds for a specified period.
- MTIGDI.taxpayer#. - displays multi-tax document index transactions by taxpayer.
- LISUMM.indicator.case id or bankrupt id. - displays bankruptcy summary information.
- NAMNUM.search code.exactness code.zip code.taxpayer name. – displays name vs. number.
- Search Code:
- 1 - Personal
- 2 - Business
- 3 - Bond Company
- Exactness Code
- 1 - Personal Code Match
- 2 - Narrow Search
- 3 - Wide Search
- Search Code:
The Audit History is a computer-generated summary of all transactions relating to a particular tax account. Each report filed by a taxpayer becomes a part of the history. The Audit History is divided into the following sections:
- Summary Page
- Report Information
- Data Information
- Payment Information
- Collection Information
- Status of Refund Claims
The history information in the Auditing Fundamentals Manual is also applicable to Cement Production. An audit should not be started without a current Audit History. As with all other taxes, an Audit History for the Cement Production Tax is requested via XIRPTS on the CICS System.
Summary Information Page Example
Besides useful taxpayer information, prior audit information would be listed on this page.
The Report Information section will list any “Estimated Returns.” “Non-Filer Returns,” “Late Returns,” “Valid Judgment Periods,” or “Valid Certification Periods” during the requested period. An “X” will appear in the applicable period and category. XIDATA or XIPMTS inquiries on CICS should be run to ensure that there were not any amended returns during the period. The DUEDAY inquiry can be used to determine the correct due date for a report period. Returns should not be considered late if no Taxable Tons were reported (“zero returns”).
Data Information Example
The Data Information will list the “Total Long Tons,” “Taxable Tons,” “Tax Rate,” and “Tax Due” by period. In addition, the “Postmark Date” for the report filed will be listed. The auditor should examine all reported amounts for any fluctuations that appear to be unusual. These fluctuations may indicate a change in personnel, accounting procedures, or internal control. These fluctuations need to be considered when choosing periods for preliminary testing or sampling.
Payment Information Example
NOTE: This page would continue and would list a grand total of payments of 751,281.15
The above report lists the postmark dates and types of payments made during each period. Cement Production Tax is due on a monthly basis.
Collection Information Example
This section of the Audit History lists any collection activity for the taxpayer during the requested period for all taxes.
Status of Refund Claims
This section of the Audit History lists the status of refund claims by the taxpayer for all taxes.
The entrance conference section (Chapter 4) of the Auditing Fundamentals Manual also applies to the Cement Production Tax. Some items to discuss with the taxpayer’s representative(s) that are peculiar to Cement Production would be:
- In the audit plan, list the taxpayer’s representatives who attend the entrance conference.
- Does the taxpayer understand the taxability of cement and the exemptions?
- Does the taxpayer understand the difference between taxability of masonry cement and masonry mix?
- Does the taxpayer understand that the use of cement in making other cement products is taxable if the cement used was manufactured, produced, or imported into Texas?
- Is cement being imported?
- Is cement being purchased? If the cement is being purchased from a Texas vendor, obtain the name and address of the vendor.
- How does the taxpayer account for the total intrastate distribution, sale, and/or use of cement?
- Does the taxpayer deliver cement to out-of-state customers or does the customer take possession of the cement in Texas?
- Determine all activities performed by the taxpayer:
- Is the cement being manufactured or produced?
- Determine all locations of facilities.
- What are all of the products the taxpayer sells?
- What other distribution or use of cement does the taxpayer make in Texas?
- Discuss audit procedures
- Audit period
- Sampling and projection procedures
- Possibility of obtaining statute extension agreement (Be sure to use the correct due dates of the returns extended, when completing the agreement – i.e. the last day of the calendar month following the end of the quarter).
RECORDS TO BE EXAMINED
Generally, the records to be examined consist of:
- Production reports
- These reports may be maintained on a daily, weekly, or monthly, basis by the taxpayer
- Production reports should show the quantity of cement produced within the given time period
- What cut-off date is the taxpayer using to record production?
- Inventory records
- These records should show the quantity of cement on hand at any given time, detailing increases and decreases to the inventory.
- Purchase records
- These should indicate the name and location of vendor, location of cement prior to shipment, and the quantity purchased. Records of cement imported may or may not be included.
- Sales records
- Purchase orders
- Shipping documents
- Sales ledger
- Beginning Inventory + Production + Purchases – Ending Inventory – Cement Used = Sales of Cement
- The records listed above should be used to determine quantity of sales, locations of customers, and delivery points of cement sold (intrastate versus interstate)
- Use Records
- Inventory records of withdrawals of cement for own use
- Intra-company invoices
- Expense records of withdrawals
- Cost records of manufacturing components
- The records listed above should be used to determine withdrawals of cement for own use, intra-company transfers, etc.
Verify the taxpayer’s method of reporting the following:
- Total pounds of cement manufactured in Texas
- Total pounds of cement imported into Texas
- Total pounds of cement exported from Texas
- Total pounds of cement distributed, sold, or used in intrastate commerce
- Tax due
Verify the different weights of each type of cement
- Cement may be sold in bulk by tons (2,000 pounds), in sacks of Portland cement (94 pounds each), or in sacks of masonry cement (70 pounds each).
- Verify the taxpayer’s computations of taxable tons.
- Are conversions from sacks or hundredweights to tons correct?
- Are fractions of tons counted as a whole?
- Are weights of the sacks themselves erroneously deducted from the quantities of cement?
Is the taxpayer using the calendar month for reporting the monthly tax returns or is an earlier cut-off date being used?
For each test period, the auditor should compare all manufacturing or production reports, inventory records, purchase records, sales records, and use records to the tax returns.
- Manufacturing or production reports should be examined to determine the quantity of cement, in pounds, manufactured or produced in Texas or imported into Texas from manufacturing or production facilities located outside of Texas.
- Inventory records should be examined to determine sources of increases to inventory and disposition of decreases to inventory.
- Purchase records should be examined to determine the quantity of cement imported into Texas. All cement shipped into Texas (imported) would be taxed upon the first sale, distribution, or use of cement in Texas. This includes:
- The purchase of cement from outside of Texas or outside the United States and shipped into Texas, and
- The intra-company shipment of cement into Texas from a facility outside of Texas for sale, distribution, or use.
- Purchase records should be examined to determine the quantity of cement purchased from the Texas vendors. If cement is being purchased from other Texas vendors, as well as being manufactured and/or imported into Texas, the cement purchased from other Texas vendors is not subject to tax by the purchaser since the tax should have been paid by the seller. However, if the cement purchased from other Texas vendors is commingled with the cement manufactured and/or imported and it cannot be identified when sold, then an allowance will not be given for the cement purchased in Texas, and previously taxed, when it is sold, distributed, or used intrastate unless the amount sold, distributed, or used intrastate exceeds the amount manufactured and/or imported. This will occur when bulk cement is purchased and commingled with manufactured and/or imported bulk cement.
- This should be determined for the entire audit period rather than on a monthly basis.
- Two general rules can be used in calculating the credit or allowance for cement purchased in Texas:
Rule #1: If intrastate sales are less than the total manufactured plus imported + beginning inventory, then a credit or allowance is not given.
Rule #2: If intrastate sales exceed the total manufactured + imported plus beginning inventory, then a credit or allowance can be given for all intrastate sales in excess of the total manufactured + imported + beginning inventory.
Beginning Inventory 50,000 lbs. Imported into Texas 500,000 lbs. Manufactured in Texas 100,000 lbs. 650,000 lbs. Purchases from Texas Vendors 800,000 lbs. Total 1,450,000 lbs.
If intrastate sales are equal to or less than 650,000 pounds, credit cannot be given.
If intrastate sales exceed 650,000 pounds, then credit can be given for all sales in excess of 650,000.
Note #1: Beginning inventory is assumed to be manufactured and/or imported into Texas unless otherwise proven.
Note #2: The given figures are a total for the entire audit period.
Note #3: Any credit given is prorated on a monthly basis for the entire audit period unless a more equitable basis can be established.
- Sales records should be examined to determine the quantity of cement distributed or sold in intrastate commerce. “Distributed or sold in intrastate commerce” is considered to be a transaction in which possession has been transferred within Texas from the manufacturer or importer to the customer. The customer’s address should not be relied upon to determine transfer of possession. Shipping documents should be examined to determine destination. This would include:
- Sale or distribution of cement from Texas vendor to Texas customer;
- Sale or distribution of cement from Texas vendor to out-of-state customer where the out-of-state customer takes possession in Texas;
- Sale or distribution of cement from Texas vendor to Texas customer when the cement is manufactured in Texas, stored in the vendor’s warehouse out-of-state, and subsequently delivered to the Texas customer at a Texas destination. This may be shown as an export on the taxpayer’s books, but it would be taxable when delivered back into Texas;
- Sale or distribution of cement from Texas vendor to out-of-state customer where the destination point is located within Texas.
If the audit is conducted based on sales, then purchased and manufactured cement records should also be audited to determine if all cement is accounted.
In auditing intrastate sales of cement, purchases from Texas vendors are not to be included in the total amount subject to tax if identifiable.
- Use records should be examined to determine the quantity of cement used in Texas. Taxable uses would include cement manufactured, produced, or imported into Texas and used for:
- Combinations to produce different products such as “ready-mix”, “pre-mix”, or any mixture of cement and other ingredients
- Performing a service such as cementing operation in well servicing companies
All reported and audited monthly totals should be rounded up to the next highest ton. Do not round down.
- Explain to the taxpayer the audit procedures performed. This would include a discussion of the following:
- All records examined
- A detail description of audit procedures utilized, audit adjustments and flow of audit package
- Minor errors for which no adjustments were made
- Applicable law, rulings and proper reporting procedures
- Additional information the taxpayer may obtain to reduce the liability
- Taxpayer's disagreements with the audit - these should be clearly understood by the auditor and documented
- The reconciliation conference should be offered if the taxpayer disagrees.
- The “What If I disagree with my audit results” brochure should be given to the taxpayer.
- Other procedures which should be discussed with the taxpayer include:
- The billing process (whether penalty waiver will be recommended and policies and procedures pertaining to penalty and interest). The “What If I disagree with my Audit” brochure should be given to the taxpayer.
- Payment should be requested.
- Redetermination procedures must be explained.
The Record of Audit Planning, Activities, and Results is the form that documents the audit plan for every audit and should be completed as the audit progresses. Continuation pages are available for use and generally will be necessary to record all information. It is important for the auditor to document all appropriate and pertinent information. Refer to the Auditing Fundamentals Manual for documentation that is required.