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REV (5/30/2024) Department of Revenue | Bureau of Audits | Sut Audit Manual
BUREAU OF AUDITS
Sales and Use Tax
Manual
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REV (5/30/2024) Department of Revenue | Bureau of Audits | Sut Audit Manual
BUREAU OF AUDITS
Sales and Use Tax
Manual
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Table of Contents
Introduction ................................................. 10
Department’s Purpose .............................. 10
Department’s Mission ............................... 10
Department’s Vision ................................. 10
Department’s Values ................................ 10
Audit’s Mission ......................................... 10
Audit Guide .............................................. 11
Quality Control ......................................... 11
Chapter 1- Tax Overview ............................ 12
Nexus ....................................................... 12
Physical Nexus ...................................... 12
Marketplace Nexus ................................ 13
Economic Nexus ................................... 14
Certified Service Providers .................... 14
Tax Types ................................................ 14
Sales, Use, and Hotel Occupancy Tax .. 15
Employer Withholding of Pennsylvania
Personal Income Tax ............................. 25
Chapter 2- Audit Function .......................... 28
Record Keeping Requirements ................ 28
Examination of Records ........................... 28
Confidentiality ........................................... 28
Data Governance ..................................... 29
Federal Tax Information ........................... 30
Measuring Compliance ............................. 30
Taxpayer’s Rights and Responsibilities .... 31
Chapter 3-Pre-Audit Procedures ............... 32
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 Enlarge image | Assignment Research .............................. 32 Audit Assignment................................... 32 Taxpayer Research ............................... 32 Tax Research ........................................ 37 Contacting the Taxpayer .......................... 41 Audit Engagement Letter ....................... 41 Telephone Contact ................................ 41 Confirmation Letter ................................ 42 Order to Appear Letter ........................... 42 Secretary’s Writ ..................................... 43 Taxpayer Delay ..................................... 44 Pre-Audit Conference ............................... 44 Preliminary Information .......................... 45 Statement of Purpose and Request for Cooperation ........................................... 45 Business Activities ................................. 45 System Survey ...................................... 46 Registration ........................................... 47 Requirement for the Audit Review of Third- Party Credits .......................................... 48 Discussion and Preliminary Conclusion . 48 Arrangements ........................................ 48 Direct Payment Permit Holders ............. 49 KOZ/KOEZ ............................................ 49 Plant Tour .............................................. 50 Chapter 4- Audit Procedures ..................... 51 Sales Tax ................................................. 51 Gross Sales ........................................... 51 Sales Tax Accrual.................................. 55 |
 Enlarge image | Taxed and Nontaxed Sales ................... 58 Hotel Occupancy Tax ............................... 63 General .................................................. 63 Types of Hotel Occupancy Tax Audits ... 64 Test Audits ............................................ 64 Use Tax .................................................... 65 Use Tax Accrual .................................... 65 Capital Purchases ................................. 66 Expense Purchases ............................... 67 Use Tax Credits Recognized by Auditors .............................................................. 69 Other Use Tax Consideration ................ 72 Conducting Plant Tours ............................ 74 Procedures ............................................ 74 E-911 PEMA ............................................ 74 Public Transportation Assistance Tax and Fees ......................................................... 75 Minimum Requirements ......................... 75 Obtaining Reported PTA Information ..... 76 PTA Audit Assignments ......................... 76 Vehicle Rental Tax ................................... 79 Minimum Requirements ......................... 79 Obtaining Reported VRT Amounts ........ 80 VRT Assignments .................................. 80 Employer Withholding of Pennsylvania Personal Income Tax ............................... 82 Minimum Requirements ......................... 82 Obtaining Reported EW Amounts ......... 85 EW Audit Assignments .......................... 85 |
 Enlarge image | Pennsylvania Personal Income Tax ......... 86 General .................................................. 86 Minimum Requirements ......................... 87 Required Audit Documentation .............. 88 Limited Liability Company-Filing Guidelines ............................................. 89 Chapter 5-Examination Methods ............... 90 Determination of the Examination Method ................................................................. 90 Factors in Determining Method ............. 91 Complete Audit ......................................... 92 Modified Complete Audit .......................... 92 Test Audit ................................................. 93 Taxpayer’s Concurrence with Test Audit Plan ....................................................... 93 Inclusion of Credits in the Test Period Audit Findings ........................................ 95 Test Methods ......................................... 96 Chapter 6- Post-Audit Procedures .......... 114 Concluding and Summarizing Audit Work ............................................................... 114 Pre-Review Procedures ......................... 114 Post-Audit Conference Requirements .... 116 Payments Received from the Taxpayer During an Audit .................................... 117 Post-Audit Conference by Phone ........... 117 Inability to Schedule Post-Audit Conference ............................................................... 118 Inability to Schedule Post-Audit Conference Letter ................................ 118 Other Post-audit Considerations ............ 119 |
 Enlarge image | Audit Referrals ..................................... 119 Criminal Tax Program .......................... 121 Major Penalties .................................... 124 Review and Submission of Audit Report to Headquarters ......................................... 125 Appeal Process ...................................... 126 Board of Appeals ................................. 126 Board of Finance and Revenue ........... 127 Commonwealth Court of Pennsylvania 127 Chapter 7-Audit Report ............................ 129 SLS Narrative Report and Audit Findings ............................................................... 129 General Rules ..................................... 129 Sections of the Narrative ..................... 130 Sales and Use Report ............................ 148 Tax Codes and Rate Categories ......... 148 Reports ................................................ 150 Schedules ............................................ 153 Exhibits ................................................... 161 Required Exhibits ................................ 161 Suggested Exhibits .............................. 162 Forms ..................................................... 162 Taxpayer Information ........................... 163 IRS Disclosure Limitations ................... 166 Audit Package Checklist (Index) .......... 166 Audit Report and Basis of Assessment 167 Conflict of Interest and Auditor’s Comments ........................................... 168 Taxpayer’s Acknowledgement of Post Audit Conference ................................. 168 |
 Enlarge image | Request for Financial Records ............ 169 Taxpayer’s Concurrence with Test Audit Plan ..................................................... 170 Taxpayer’s Acknowledgement of Precision Level-Stratified Random Sample ......... 172 Consent to Extend Time Limit for Assessment/Determination of Tax and to Extend Period of Time for Record Retention (Waiver) ............................... 172 Power of Attorney and Declaration of Representative (REV 667) ................... 174 Bureau of Audits-Registration Verification ............................................................ 175 Requirements for the Audit Review of Third Party Credits ............................... 178 Tally Sheet (REV-153) ......................... 179 Additional Headquarters Processing Request ............................................... 179 Business/Account Cancellation Form (REV-1706) ......................................... 179 Notice of Assessment .......................... 180 Secretary’s Writ ................................... 181 Penalty Abatement Forms ................... 181 Audit Staging and Attributes ................... 182 Multi-Region Audit Assignment .............. 182 Submission and Distribution of the Report ............................................................... 182 Corrections to the Findings .................... 183 Chapter- 8 Audit Policy ............................ 184 Audit Period-Statute of Limitations ......... 184 General ................................................ 184 Exceptions ........................................... 184 |
 Enlarge image | Extension of the Audit Period for Assignments ........................................ 185 Bankruptcy Audits .................................. 186 Procedures .......................................... 186 Multi-Court Voice Case Information System (McVCIS) ................................ 187 Field Bankruptcy Notification Form ...... 188 Billing for Out-of-State Audit Expenses .. 188 Bulk Sales Assessments ........................ 189 Business Activities Questionnaire .......... 189 Consolidation of Entities for Sales and Use Tax Audits .............................................. 190 Coupon Sales ......................................... 190 Credit Memos Issued by the Department ............................................................... 191 Determination of Fair Rental Amounts Between Affiliated Interest ...................... 191 Drop Shipments ..................................... 192 Erroneously Charged Sales Tax On Sales/Installation of Real Property ......... 193 Computation of Tax When Sales Tax Is Not Separately Stated ................................... 194 Interim/Temporary Storage .................... 194 Institutions of Purely Public Charity (IPPCs) ............................................................... 195 IPPC Audits ......................................... 195 Purchases by IPPCs ............................ 195 Agency Agreements with Exempt Entities ............................................................... 196 Locating Taxpayers ................................ 197 Mergers .................................................. 197 |
 Enlarge image | Assessments ....................................... 197 Consent/Waivers ................................. 198 Motor Vehicles ....................................... 200 Demonstrator Vehicles ........................ 200 Early Termination of Leases ................ 201 Reciprocity ............................................. 202 Audit Site & Records Location ................ 204 Removing Records from Audit Site...... 205 Remote Auditing .................................. 205 Requesting Records ............................... 205 Requesting Records from Taxpayer .... 205 Requesting Records from Third Party . 207 Penalty Abatement ................................. 207 Research & Development-Testing Laboratories ........................................... 208 Services-Employee Cost ........................ 209 Taxable Use of Equipment Purchased for Resale, Rental or Charter ....................... 209 Consent/Waivers .................................... 210 Issuing a Waiver and Waiver Extensions ............................................................ 210 Board of Appeals (BOA) and Board of Finance & Revenue (BFR) Decisions ..... 212 Audit Plan and Audit Status Worksheet .. 213 Procedures .......................................... 213 Entity Changes ....................................... 213 Refund of Sales Tax Paid – (REV-1890) 215 |
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INTRODUCTION
Department’s Purpose
Funding Programs and services to benefit all Pennsylvanians.
Department’s Mission
To fairly, efficiently, and accurately administer Pennsylvania tax and Lottery programs.
Department’s Vision
To be an innovative, customer-focused, and employee-centered agency.
Department’s Values
We act with integrity
We are inclusive
We are connected
We are service-oriented
We are adaptable
We are continuously learning
Audit’s Mission
To ensure and stimulate compliance with Pennsylvania tax laws and policies through an
equitable, efficient, and informative audit process.
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Audit Guide
The primary objective of this manual is to provide instructions on the performance of a
Pennsylvania sales, use and hotel occupancy tax compliance audit. In addition, minimum
requirements for taxpayers with exposure to the employer withholding tax, personal income tax,
public transportation assistance fund taxes and fees and vehicle rental tax are outlined.
Instructions are based on current state tax statutes, Department regulations and policies, court
cases, previous audits, appeal decisions, and general accounting and auditing principles.
This manual is intended as guidance to the audit staff. Auditing methods and techniques
suggested in the manual may not be necessary or applicable for every audit. This manual is not
authoritative and may neither be cited to support an audit position nor relied on by the taxpayer.
This manual and its auditing procedures will be continuously evolving as it is impacted by
changes in tax statutes, regulations, court cases, Departmental policies, and Information
Technology (IT) resources.
Quality Control
This manual is designed for use by Bureau personnel in maintaining quality control. Audit reports
must be in compliance with the requirements outlined herein as well as any additional regional
instructions prior to final approval and the issuing of an assessment. This process will help
ensure the audit reports prepared by the Bureau throughout the state are accurate, consistent,
professional, and sustainable through the appeal process.
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CHAPTER 1- TAX OVERVIEW
Entities that have nexus with Pennsylvania are required to charge, collect, report, and remit
various taxes on certain sales transactions. These taxes include the following:
Sales and Use Tax (SLS)
Hotel Occupancy Tax (HOT)
Public Transportation Assistance Taxes and Fees (PTA)
Vehicle Rental Tax (VRT)
In addition, Pennsylvania employers are responsible for the withholding of Pennsylvania
personal income tax from employee wages subject to the tax. The personal income withheld
from employees is also considered a business trust fund tax.
Nexus
“Nexus” is the term used to describe when an entity (business or individual) conducts sufficient
activities within the taxing jurisdiction (Pennsylvania) to create an obligation to collect and remit
its taxes. There are three types of nexus situations which can trigger an entity’s obligation to
charge, collect, and remit the previously mentioned taxes:
Physical Nexus
Marketplace Nexus
Economic Nexus
Each type of nexus is described below. Any questions relating to nexus determinations must be
reviewed with the Division. The regional staff should consult with the Division to identify the
questionnaires and additional information the taxpayer needs to provide.
Physical Nexus
An entity has nexus if it conducts activities within Pennsylvania that constitute maintaining a
place of business under 72 P.S. § 7201(b). One or more of the following activities conducted
within the Commonwealth constitutes maintaining a place of business in Pennsylvania:
An entity owns, rents, leases, maintains, or has the right to use tangible personal or real
property that is permanently or temporarily physically located in the Commonwealth.
An entity’s employees own, rents, leases, uses, or maintains an office, distribution house,
sales warehouse, service enterprise or other place of business in Pennsylvania.
An entity has goods delivered to Pennsylvania in vehicles the entity owns, rents, leases,
uses, or maintains or has goods delivered by a related party acting as a representative of
the entity.
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An entity’s agents, representatives, independent contractors, brokers, or others, acting
on its behalf, own, rent lease, use, or maintain an office distribution house, sales house,
warehouse, service enterprise or other place of business in Pennsylvania and this
property is used in the representation of the entity in Pennsylvania.
An entity’s agents, representatives, independent contractors, brokers, or others acting on
behalf of an entity, are regularly and systematically present in Pennsylvania conducting
activities to establish or maintain the market for the entity whether or not these individuals
or organizations reside in Pennsylvania.
Activities that establish or maintain the market in the Commonwealth. These activities
include soliciting sales; servicing property sold or to be sold; collection on accounts
related to the sale of tangible personal property or services; delivering property sold to
customers; installation at or after shipment or delivery; conducting training for employees,
agents, customers, or potential customers; providing customer support; providing
consultation services or soliciting, negotiating, or entering franchising, licensing, or similar
agreements.
Marketplace Nexus
Certain online marketplace sales first became subject to sales tax following the passage of Act
43 of 2017, effective March 1, 2018. Certain marketplace facilitators, remote sellers, and
referrers have the option to either collect and remit the sales tax that is due on taxable sales
within the Commonwealth or elect to notify their customers that use tax may be due, and report
to the Department the customers names, addresses, and aggregate dollar amounts of each
customer’s purchases . Effective July 1, 2019, Act 13 of 2019 now controls, but the provisions
of ACT 43 of 2017 were suspended and not repealed. Act 43 added the following definitions to
the Tax Reform Code.
Act 43 definitions:
Remote Seller
Anyone other than a marketplace facilitator, marketplace seller, or referrer, who does not
maintain a place of business in Pennsylvania, but who sells tangible personal property that would
be subject to sales tax here.
Marketplace Facilitators
Persons, including vendors, who list or advertise tangible personal property for sale in any forum,
directly or indirectly, collect the payment from the purchaser, and transmit the payment to the
marketplace seller.
Referrer
Receives consideration to advertise a seller’s products, and transfers a buyer to the seller,
facilitator, or other party to complete a sale, without collecting a receipt from the purchaser.
Marketplace Seller
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One who uses a marketplace facilitator to facilitate a sale.
Economic Nexus
Following the passage of Act 13 of 2019, taxpayers making more than $100,000 in gross sales
into the Commonwealth during the previous twelve months constitutes maintaining a place of
business in Pennsylvania and establishes economic nexus.
In determining gross sales for economic nexus purposes, a marketplace or remote seller
with no physical nexus should determine their gross sales using only their direct sales
and those made through a marketplace facilitator that does not collect on their behalf into
the Commonwealth.
The passage of Act 13 of 2019 resulted in the suspension of Act 43. Therefore, the
election to collect sales tax or comply with the use tax reporting requirement is not
available for vendors with economic nexus (gross sales > $100K).
If the vendor’s annual PA gross sales fall below the threshold in the following year,
vendors are encouraged to continue charging and collecting sales tax, but they are not
required.
A marketplace facilitator that does not have physical nexus but has economic nexus must
collect and remit the tax on their sales into the Commonwealth and those made on behalf
of marketplace sellers, even if the marketplace seller does not individually have any
nexus.
Certified Service Providers
Certified Service Providers (CSP) are third-party companies that work with the Department of
Revenue to collect and remit the tax of online sellers. CSPs also provide software that can help
an online seller determine what products they sell are subject to the tax. The Bureau of Audits
will periodically examine these reports to ensure the tax determinations are accurate.
Marketplace and remote sellers that do not have physical nexus in the Commonwealth may
outsource most of their sale tax administration responsibilities to a CSP. The CSP will facilitate
the registration process, file tax returns, and collect and forward tax payments to the Department
of behalf of their clients.
Tax Types
The audit of sales, use and hotel occupancy tax records is the auditor’s primary area of
responsibility. However, the auditor is also responsible for auditing records that deal with related
taxes. A brief description of each tax is given below.
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Sales, Use, and Hotel Occupancy Tax
State Sales, Use, and Hotel Occupancy Tax
Imposition and Reporting
Article II of the Tax Reform Code (TRC) of 1971 (passed as Act 2 of March 4, 1971) imposes a
six percent sales tax on the sale at retail in Pennsylvania of tangible personal property and
selected services (72 P.S. §7202(a)). This tax is normally charged, collected, reported, and
remitted by the vendor.
The code also imposes a six percent use tax upon the use of tangible personal property and
selected services within Pennsylvania (72 P.S. §7202(b)). Use tax is self-assessed, reported,
and remitted to the Commonwealth by the purchaser when the vendor does not charge the sales
tax.
In addition, the code imposes a six percent hotel occupancy tax on the rental charge for each
occupancy of a hotel room in Pennsylvania (72 P.S. §7210). Article II of the Tax Reform Code
of 1971 is published at Title 72 of the Pennsylvania Statutes.
Taxpayers must report the charging and self-assessment of these taxes, as well as their
Pennsylvania sales activity, on a PA-3, Sales, Use, and Hotel Occupancy Tax Return,
electronically either online through myPATH or by allingcthe business TeleFile phone system
at 1.800.748.8299. Any TeleFile users are required to complete the TeleFile Request Form
and cite the reason why they cannot use the online filing options. The request form must be
submitted to the Department 30 days prior to the due date of filing requirement. Taxpayers
with a recurring obligation should register for an account by registering online at
https://mypath.pa.gov/. Taxpayers that do not have a recurring obligation may self-assess use
tax on a PA-1, Use Tax Return, online at https://mypath.pa.gov/.
Taxpayers are required to pay amounts of $1,000 or more using an approved electronic funds
transfer (EFT) method. Failure to use an approved EFT method will result in additional penalty
equal to 3% of the amount of tax reported, not to exceed $500. Taxpayers may register for
electronic funds transfer online through myPATH at https://mypath.pa.gov/.
In addition, any taxpayer whose actual liability for the third calendar quarter of the preceding
year is more than $25,000 have a requirement to make accelerated sales tax payments
(prepayments). Taxpayer’s that remit more than $25,000 but less than $100,000 in the third
quarter of the previous year must remit 50% of the actual tax liability for the current period.
Taxpayers that remit over $100,000 in tax in third quarter of the previous year must remit 50%
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of the actual tax liability for the same month of the previous year. Prepayments are due the 20
of each month. Separate payments must be remitted for the current month’s prepayments and
the prior month’s remaining tax liability. Failure to properly calculate and pay the prepayment
will result in a penalty.
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Bracket schedule
The 6% Pennsylvania state sales, use, and hotel occupancy taxes are computed in accordance
with a bracket schedule detailed in 72 P.S. §7203 and on the Sales and Use Tax Rates (REV-
221) (pa.gov)).
The tax on purchases in excess of $1 is 6% of each dollar plus the amount from the bracket on
any fraction of a dollar.
Basic Rules
Situs
Situs, for tax purposes, refers to the jurisdiction that has the legal authority to tax a transaction.
The Commonwealth has jurisdiction to tax transactions reflecting sales to or use of tangible
personal property within the boundaries of the Commonwealth. Use includes a right to use,
possession, ownership, or custody. Goods or services that are delivered outside of the
Commonwealth are not subject to tax.
Tangible Personal Property
The TRC defines tangible personal property as corporeal personal property. It includes goods,
merchandise, digital products no matter how accessed or obtained, and other items. (See 72
P.S.§ 7201(m).) The sale, use, or service of cleaning, altering, or repairing of tangible personal
property is also subject to tax. The tax is due upon the total purchase price.
Services
In general, services are not subject to tax; however, the law has enumerated certain services
that are taxable. These include building maintenance or building cleaning services, lawn care
services, disinfecting or pest control services, help supply services, employment agency
services, lobbying services, credit-reporting services, secretarial and editing services, premium
cable services, adjustment and collection services, self-storage services and telecommunication
services.
Purchase Price
For taxable transactions, tax is applicable upon the total purchase price. The purchase price is
defined as the total value of anything paid or delivered, or promised to be paid or delivered,
whether it be money or otherwise, in complete performance of a sale a retail, without any
deductions on account of expenses incurred such as travel time or rental or rooms, or equipment
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even when those items are separately itemized in billing to customers (see 72 P.S. §7201(g)
and 61 Pa. Code §§32.1 & 33.2).
When the purchase price of taxable and nontaxable items are not separately stated on the
invoice, the entire amount billed is subject to the tax.
Statutory Exclusions
Certain items are excluded from sales and use tax by statute (see 72 P.S. §7204). These items
include such things as unprepared food, clothing for everyday wear, water, coal, medicine,
Pennsylvania state flags, and US flags.
Exemptions
Pennsylvania sales and use tax law exempts certain transactions based on the type of
transaction, the manner of use or the nature of the entity involved with the transaction. There
are also several exemptions for sales and use tax that are found outside of the Tax Reform
Code. These various exemptions are listed below. It is important to note that the specific criteria
used to determine the basis for an exemption might vary among the different taxes. Therefore,
the law and appropriate regulations must be consulted to determine proper application.
General Exemptions
The Tax Reform Code (TRC)includes several exemptions from the tax that are not dependent
on the nature of entity involved with the transaction, but with the type of transaction or manner
of use. These exemptions are listed below.
Sales For Resale
This exemption applies to property and/or services that will be resold or rented to another
party in the ordinary course of business by a vendor who is in the business of selling
those same goods and services (see 72 P.S. §7201(i) and 61 Pa. Code §32.3).
Note: Wholesalers prior to the implementation of prior Business Tax System (BTS) were
issued a license number prefixed with a “95” to signify that they may purchase items for
resale. After the implementation of BTS, the Department does not distinguish between
wholesale license number and sales tax license number.
Isolated Sales
This exemption applies to the infrequent, nonrecurring sale of tangible personal property
or services acquired by a business and not sold in the regular course of business or sold
by someone who is not engaged in a business. (See 72 P.S. §7204(1) and 61 Pa. Code
§32.4). The Bureau has typically considered any sales or series of sales conducted more
than three times or more than a total of seven days in any calendar year to no longer be
of an infrequent or nonrecurring basis.
Multi-State Sales
This exemption applies to property delivered to a location within the Commonwealth
solely for the purpose of being processed, fabricated, or manufactured into, attached to,
or incorporated into personal property and thereafter transported outside of the
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Commonwealth for exclusive use outside of the Commonwealth (see 72 P.S. §7201 (k)
and 61 Pa. Code §32.5). This exemption is referred to as “special resale” as it is deemed
to be a resale.
Wrapping Supplies
Returnable containers for the ultimate consumer and wrapping supplies may be
purchased exempt from tax by a seller/vendor when the use is incidental to the delivery
of property which the seller/vendor sells. (See 72 P.S. §7204(13) and 61 Pa. Code §32.6).
Nonbusiness Exemptions
There are several exemptions that are available based on who the entity is, not their business
activities. Generally, there is an exemption on sales made to instrumentalities of federal and
Pennsylvania state governments, municipal authorities, federal credit unions, and certain electric
and agricultural cooperatives. It also extends to federal employees for Hotel Occupancy tax (72
P.S. §7204(12)). In addition, a limited exemption applies to institutions of purely public charity,
volunteer fire departments, individuals holding diplomatic ID and tourist promotion agencies.
(72 P.S. §7204(10)).
Business Exemptions
A limited exemption applies to purchases made by taxpayers for direct use in an exempt
business activity. Examples include manufacturing, processing, mining, farming, dairying, public
utilities, etc. (72 P.S. §7201(k)). The exemption generally applies to equipment, machinery,
parts, and supplies used directly and predominantly in the exempt business activity.
Direct Pay Permits
Qualifying businesses may elect to obtain a direct pay permit. Some businesses are not
able to determine the manner in which items they purchase will be used at the time of
purchase. Direct pay permits allow taxpayers to purchase most goods and services
exempt from tax (72 P.S. §7237(d)) with the exception of those items listed in 61 Pa.
Code §34.45(e).
In order to qualify for a direct pay permit, companies must:
• Remitted at least $10,000 in use tax to Pennsylvania during the prior year.
• Must be in compliance with all Pennsylvania state tax requirements.
• Maintain auditable records.
• Direct Pay Permits are issued at the discretion of the Department.
Geographic Exemptions
An exemption applies to purchases made by a qualifying business located within a designated
geographic area. The geographic areas entitled to an exemption include Keystone Opportunity
Zones (KOZs), Keystone Opportunity Expansion Zones (KOEZ’s), Keystone Opportunity
Improvement Zones (KOIZs), and Strategic Development Areas (SDAs).
Generally, the exemption applies to the purchase of all tangible personal property and services
used exclusively within these designated areas (73 P.S. §820.511). It also applies to contractors
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making purchases for use within the area as part of a contract with an entity located in a
KOZ/KOEZ. For SDAs, the contractor may only purchase Building Machinery and Equipment
(BME) tax exempt pursuant to contraction contract with an entity located in SDA.
Effective January 1, 2019, items purchased for exclusive use by an employee assigned to a SDA
are exempt, even if the items may be taken out of the SDA.
Exemptions not Found in the Tax Reform Code
There are a number of exemptions from the tax that are not found within the Tax Reform Code
(TRC). These entities have an exemption from sales and use tax from a different section of the
law. The division maintains a list of entities at Sales Tax Exemption Not Found in the Tax Reform
Code .
Pennsylvania Exemption Certificate (REV-1220)
A purchase claiming an exemption on purchases of taxable goods and/or services is required to
provide the vendor with a properly completed Pennsylvania Exemption Certificate (REV-1220)
(72 P.S.§7237(c)). However, it is important to note that an exemption certificate is not required
for items specifically excluded by statute, items shipped out-of-state by the vendor, or for the
sale of taxable items where the sales invoice clearly shows the purchaser to be a federal or
Pennsylvania state agency.
Taxpayers use this form to claim an exemption from state or local sales and use tax, hotel
occupancy tax, PTA, and VRT taxes. Specific form requirements are provided in 61 Pa Code
§32.23. The auditor is required to review the taxpayer’s exemption certificates to determine if
each form provides a valid basis for exemption and the certificate was accepted in good faith.
The form is valid only when properly completed. The auditor is encouraged to make copies of
any exemption certificates disallowed in an audit and include them as exhibits in the audit report.
Completion of Form
Proper completion of the form is discussed below.
Type of Tax
The appropriate box must be checked to indicate the type of tax exemption for which the form is
intended.
Unit or Blanket Exemption
The appropriate box must be checked indicating whether the certificate applies to one or several
transactions.
Name of Seller or Lessor
The form must accurately provide the name and address of the seller or lessor.
Exemption Reason
The basis for exemption is indicated by marking the appropriate box.
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• If box #8-Other is marked, there must be a written explanation provided in the appropriate
space for the form to be valid.
Name, Address and Signature of Purchaser
This section of the form must correctly identify the purchase claiming the exemption.
Date
The date of the purchaser’s signature is the date used to determine whether or not the exemption
certificate was provided within 60 days of the related sale.
Exempt Organization Declaration of Sales Tax Exemption Form (REV-1715)
Exempt organizations can provide a vendor with an Exempt Organization Declaration of Sales
Tax Exemption Form (REV-1715) in connection with the REV-1220 to claim an exemption on
purchases of $200 or more of items that may appear not to be entitled to the exemption such as
for use in an unrelated trade or business or construction materials not used for routine
maintenance. The certificate and the form together create a presumption of good faith
acceptance on the part of the vendor and relieves the vendor from collecting sales tax. This
form is only used by registered charitable organizations (exempt organizations) with a valid “75”
number. The form may only be used for one invoice.
The use of the form is optional. Therefore, a vendor may elect to accept a properly completed
exemption certificate from an exempt organization without this form. However, the vendor may
later incur a tax liability if the Department determines that the transaction was subject to tax.
Completion of the form consist of both the vendor and the purchaser signing pre-written
declaration verifying the nature of the transaction and acknowledging potential liability. The
related invoice must be attached to the form.
Tax liabilities will be enforced against the purchaser if the vendor can demonstrate that the tax-
exempt sale was made “in good faith” in the following situations:
• Sales of less than $200 supported by a properly completed exemption certificate.
• Sales of $200 or more supported by properly completed and retained REV-1715 and
exemption certificate.
The auditor is required to document these types of transactions on a separate set of worksheets.
These worksheets are then sent with a cover letter to the Sales and Use Tax Program
Administrator. Complete names and addresses of the exempt organization making the
purchases are mandatory for documenting these transactions.
Uniform Sales & Use Tax Exemption/Resale Certificate-Multi-
Jurisdictions
The Multi-State Commission created the Uniform Sales & Use Tax Exemption/Resale
Certificate-Multijurisdictional for entities operating in multiple states. Purchasers may use this
form only when claiming the resale exemption subject to the provision of 61 Pa. Code §32.3.
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Local Sales, Use, and Hotel Occupancy Tax
Imposition and Reporting
Pennsylvania state law authorizes certain counties to impose a tax on each separate sale at
retail of tangible personal property or service that originates within the county. The law also
authorizes the counties to impose a tax on the use within those same counties as well as on the
rental charge for a hotel room. This tax is commonly referred to as the “local” sales or use tax.
The rules for imposition, collection, reporting, and remittance are generally the same as those
for state sales tax under Article II of the Tax Reform Code of 1971. However, unlike state sales
tax, local tax is a point of origin tax, meaning that the local tax is only due when a sale originates
from, or the items are used within the taxable county. Currently, Philadelphia and Allegheny
counties are the only counties imposing the tax. Currently, the tax rate for Allegheny sales, use
and hotel occupancy tax is one percent. The tax rate for Philadelphia sales and use tax is two
percent and the rate for hotel occupancy is one percent. Taxpayers report these taxes under
the local tax columns of the PA-3.
Bracket schedule
The 1% Allegheny County sales and use tax, and the 1% Allegheny and Philadelphia County
hotel occupancy taxes are computed in accordance with (72 P. S. §7203) and on the Sales and
Use Tax Rates (REV-221) (pa.gov).
The tax on purchases in excess of $10.00 is 1% of each dollar plus the above bracket amounts
on any fraction of a dollar.
The 2% Philadelphia County sales and use taxes are computed in accordance with (72 P. S.
§7203) and on the Sales and Use Tax Rates (REV-221) (pa.gov).
The tax on purchases in excess of $10.00 is 2% of each dollar plus the above bracket amounts
on any fraction of a dollar.
Related Taxes
Public Transportation Assistance (PTA) Taxes and Fees
Article XXIII of the Tax Reform Code (TRC) of 1971 imposes taxes and fees on transactions
involving the sale or use of new tires, motor vehicle lease tax, motor vehicle rentals, and car
sharing. The provisions of Article II of the Tax Reform Code of 1971 apply to PTA taxes and
fees (72 P.S. §9301 & 61 Pa. Code § 47.19). This tax is also referred to as the Mass Transit
Tax.
Taxpayers must report the charging and self-assessment of these taxes and fees on a PA-4,
Public Transportation Assistance Fund Taxes and Fees (PTA) Return, electronically either
online through at myPATH or by calling the business TeleFile phone system at 1.800.748.8299.
PA-4 is filed on a quarterly basis.
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Tire Fee
There is a fee of $1.00 on each new tire sold at retail for on highway use. This would include
new tires sold in conjunction with the sales of other property, such as a new car. The
nonbusiness and business exemptions discussed above do not apply to the tire fee, except for
sales of new tires to governmental entities.
Motor Vehicle Lease Tax
There is a 3% motor vehicle lease tax imposed on the total lease price on a contract for the use
of a motor vehicle for 30 or more days (lease). If a lease is exempt from the sales and use tax,
then the lease is exempt from the motor vehicle lease tax.
Motor Vehicle Rental Fee
There is a $2.00 per day motor vehicle rental fee imposed on each day of a contract for the
rental of a motor vehicle for less than 30 days. A rental that extends beyond the initial 29-day
contract is still a rental and subject to the fee until the contract is terminated. If a rental is exempt
from sales and use tax, then the rental is exempt from the motor vehicle rental fee.
Peer-to-Peer Car Sharing Fee
Car sharing is a membership-based service that allows a person to rent a vehicle. Members
can rent a vehicle per minute, per hour, per day or on a per trip basis.
Effective October 30, 2017, an incremental car-sharing fee is computed in accordance with the
following fee schedule:
Time Used Fee
Less than 2 hours 25 cents
2 to 3 hours 50 cents
More than 3 hours but less than 6 hours $1.25
6 or more hours $2.00
Figure 1.1- Peer-To-Peer Car Sharing Fees
Effective January 1, 2023, in accordance with Act 53, peer-to-peer car-sharing programs or car
sharing by a shared vehicle owner is subject to state sales tax, local sales tax and Public
Transportation Assistance Fund Fees.
Vehicle Rental Tax
The Vehicle Rental Tax (VRT) is listed under Article XVI-A under the Tax Reform Code of 1971.
Article II of the TRC and regulations promulgated there under apply to the VRT (72 P.S. §8601-
A ff & 61 Pa. Code §47.20).
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Rental contracts involving motor vehicles designed to transport 15 or fewer passengers, or a
truck, trailer or semitrailer used in the transportation of property other than commercial freight, a
tax of 2% is imposed upon the rental payments. If the vehicle rental company fails to collect the
applicable tax, the purchaser shall pay the tax directly to the Department on a form prescribed
by the Department. A vehicle rental company is defined as a business engaged in the business
of renting five or more rental vehicles in this Commonwealth.
Taxpayers must report the charging and self-assessment of these taxes and fees on a PA-5,
Vehicle Rental Tax (VRT) Return, electronically either online through myPATH or by calling the
business TeleFile phone system at 1.800.748.8299. PA-5 is filed on a quarterly basis.
E911 – Pennsylvania Emergency Management Agency (PEMA)
Retailers that sell wireless telephones or pre-paid telecommunication services (i.e., pre-paid cell
phone minutes or phone cards) are subject to the pre-paid wireless emergency-911 surcharge
at a rate of $1.95 per retail transaction. This surcharge is collected on each retail transaction
regardless of whether the service or pre-paid wireless telephone is purchased in person, by
telephone, internet or by any other method.
The pre-paid E-911 surcharge is to be charged and collected by the retailer and is excluded from
the purchase price when calculating the sales tax.
The E-911 surcharge is to be reported on the sales and use tax return through myPATH with the
same filing frequency and the same due dates as the seller’s sales and use tax returns.
Retailers that timely report and remit the E-911 surcharge, are entitled to a 1.5 percent discount.
This discount is separate from the 1 percent discount received for timely remitting sales and use
tax returns and payments.
Note: The E-911 fee is $1.65 per transaction through February 29, 2024, and $1.95
thereafter.
Tax Collection
Amounts collected from customers from each of the taxes referenced above are considered
trust fund money. Vendors are considered agents of the Commonwealth in the collection of
these taxes as these taxes are paid by someone else and held in trust until they are reported
and paid to the state. Consequently, vendors are required to charge, collect, report and timely
remit this money to the Commonwealth (72 P.S §7237 & 61 Pa. Code § 34.3). Failure by the
vendors to fulfill their fiduciary responsibilities in relation to these taxes successfully may result
in the imposition of additional interest, penalties, fines, and/or imprisonment.
Interest and Penalty
Interest
The interest rate for any given year is established by the U.S. Treasury Secretary and is
st
effective on January 1 of each year. The per diem rate is arrived at by dividing the announced
interest rate by 365 (representing the number of days in a year) and the result becomes the per
diem rate.
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For taxes due after January 1, 1982, the rate of interest will vary from year to year. The date
that the tax is first due and payable will determine the applicable rate of interest. This
information is updated yearly on the REV-161 1 Interest Rate and Calculation Method for Title
72 Taxes Due after Jan. 1, 1982.
Interest on credits will be calculated for each reporting period based on the cumulative balance
of the tax amount. Interest on periods with a net cumulative balance overpayment will be
calculated at 2% less than the interest charged on underpayments.
Penalties
Understatement Penalty
A penalty is applied anytime an understatement of reported tax is determined in the amount of
5% of the amount of the understatement.
Failure to File/Major Understatement Penalty
A taxpayer failing to file any return will be charged 5% of the tax due for each month or fraction
of a month that a proper return for the period remains unfiled, up to a maximum of 25% of the
amount of the tax due for the period. In no case shall such charge be less than $2.00.
If the taxpayer understates more than 50% of the true amount due, they will be charged 5% of
the of the amount that was understated for each month or fraction of a month a proper return for
the period remains unfiled, up to a maximus of 25% of the amount of the understatement. In no
case shall such charge be less than $2.00.
Tax Evasion (Major Penalty)
For attempt to evade or defeat a tax, there is a penalty charge of one-half of the total amount of
the tax evaded. These penalties are posted under “Major Penalty”.
Multiple Additions/Penalties
A taxpayer who files a return but understates the true amount due by more than 50%, is subject
to both the flat 5% understatement penalty and the 5% per month (to a maximum of 25%).
A taxpayer who fails to file a return is subject to both the flat 5% understatement penalty and
the 5% per month (to a maximum of 25%), failure to file penalty for each month or fraction of a
month that a proper return for the period remains unfiled.
A taxpayer who attempted to evade or defeat the tax is subject to both the charge of one-half
the total amount of the tax evaded, and either one of the above referenced additions in this sub
section.
Administration and Enforcement of Tax Laws
The Pennsylvania Department of Revenue is charged by the State Legislature to administer
and enforce the state sales and use tax laws. Accordingly, the Department has authority to
issue regulations, general rulings, and statements of policy (See 72 P.S. §6 & 61 Pa. Code
§3). The Department may also issue confidential letter rulings to individual taxpayers that
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address specific questions. In addition, the Department provides general information in the
form of instruction booklets, Tax Updates, tax bulletins, etc.
If there appears to be a conflict between documents within the Revenue Information System,
the order of precedence shall be as follows:
• Statutes
• Regulations
• Statements of Policy
• Bulletins
• Letter Rulings
• Revenue Information
The PA Code also requires the Department of Revenue to publish a general listing of taxable
and nontaxable goods and services every three years. This list is published as the "Retailers'
Information" Handbook (REV-717) and is also posted in the Pennsylvania Bulletin.
Information Resources
A list of useful information resources and links are listed below:
Information Resource List
Retailer's Information (REV-717)
Sales and Use Tax - Taxability of Medical & Surgical Supplies
Sales and Use Tax - Taxability of Dental Supplies List
Act-45 Contractor's Purchase for Exempt Entities
Pennsylvania Sales and Use Tax Mushroom Farming - Tax Exempt Items
Tax Information for Farmers (REV-1729)
Hotel Tax Matrix
Hotel Booking Fact Sheet
Figure 1.2- Information Resource Links
Employer Withholding of Pennsylvania Personal Income
Tax
The auditor is required to review a taxpayer’s compliance with Pennsylvania employer
withholding of Pennsylvania personal income tax concurrently with the sales tax audit.
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Pennsylvania Personal Income Tax
Individuals
Each individual with gross taxable earnings over $33 of Pennsylvania sourced income or who
incurred a profit or loss from any transaction as a sole proprietor, partner in a partnership, or
shareholder in a Pennsylvania “S” corporation is required to pay personal income tax at the
state’s specified rate and to report their earnings to Pennsylvania (72 P.S. §7302). The
individual’s employer normally withholds tax due on wages received. The individual should
receive a W-2 Wage and Tax Statement, from the employer at the beginning of the subsequent
year in which the wages were earned. Individuals are required to report their earnings via a
Pennsylvania Income Tax Return (PA-40), by April 15 of the following year. The individual must
maintain the W-2 received from the individual’s employer in the event the Department requests
a copy of the W-2 to verify wages. The taxpayer is also responsible for paying any additional
tax due at this time. If the taxpayer is self-employed, schedules filed with the return must outline
all income and expenses.
A sales and use tax audit of a sole proprietor, partnership, or an “S” corporation also involves
the examination of the owner’s and partner’s PA-40s.
Partnerships
PA-20S/PA-65, Commonwealth of Pennsylvania PA S
Corporation/Partnership Information Return
Partnerships and “S” corporations are required to file a PA-20S/PA-65, Corporation/Partnership
Information Return (PA-20S/PA-65) if:
• During its taxable year, the partnership or “S” corporation earned, received, or acquired
any gross taxable income allocable to Pennsylvania or,
• The partnership had at least one partner or the “S” corporation had at least one
shareholder that was a Pennsylvania resident. The PA-20s/PA-65 details the
partnership’s or “S” corporation’s net profit or loss allocable to Pennsylvania.
In addition, beginning in 2006, a Partner/Member/Shareholder Directory is required to be
included. The form must be accompanied by PA-41 Schedule RK-1 - Resident Schedule of
Shareholder/Partner/Beneficiary Pass Through Income, Loss and Credits (PA-41 RK-1) or
2021 PA Schedule NRK-1 - Nonresident Schedule of Shareholder/Partner/Beneficiary Pass
Through Income, Loss and Credits (PA-20S/PA-65 NRK-1) showing the apportionment of
profits or losses allocable to Pennsylvania among each partner/shareholder. The individual
partner/shareholder uses the appropriate schedule to help calculate their Pennsylvania
personal income tax liability. The individual partner/shareholder must file a PA-40 to report the
allocation and appropriate personal income tax.
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Personal Income Tax Rates
Pennsylvania personal income tax is imposed at the rate of 3.07 percent against taxable income
of resident and nonresident individuals, estates, trusts, partnerships, S corporations, business
trusts and limited liability companies not federally taxed as corporations.
Employer Withholding Requirements
Pennsylvania law requires each Pennsylvania employer to withhold personal income tax from
the taxable compensation of its employees. Employers are required to remit their withholding
semi-weekly, semi-monthly, or monthly and to report these withholding quarterly via myPATH
W-3, Employer Quarterly Return of Income Tax Withheld.
At the end of each year, the employer is responsible for issuing a W-2 Wage and Tax
Statement, to their employees reporting annual wages and the related tax withholdings. In
addition, the employer must file Annual Withholding Reconciliation Statement (REV-1667) , W-
2 Transmittal, reconciling all individual withholdings to the taxpayer’s annual wage and
withholding totals either by mail or electronically at myPATH. Records for employer withholding
of Pennsylvania personal income tax are generally audited in conjunction with sales and use
tax records.
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CHAPTER 2- AUDIT FUNCTION
Record Keeping Requirements
The same law that imposes Pennsylvania sales, use and related taxes on certain transactions
also requires vendors to maintain appropriate tax records. Specifically, a taxpayer is required
to maintain records that support the information reported on all tax returns. These records must
distinguish between taxable and nontaxable transactions as well as document the proper
charging, collection and remitting of tax money to the Department. The taxpayer is responsible
for maintaining these records for three years from the end of the calendar year to which they
pertain. This requirement is determined by the time limitation on assessment and collection
imposed by 72 P.S. §7258.
Examination of Records
Title 72 P.S. §7272 states that the Department or any of its authorized agents is authorized to
examine the books, papers, and records of any taxpayer in order to verify the accuracy and
completeness of any return made or, if no return was made, to ascertain and assess the tax
imposed by Pennsylvania state law. This also includes the right to examine taxpayer records
to verify compliance with laws pertaining to employer withholding of Pennsylvania personal
income tax. Taxpayers are required to provide the Department with all necessary tax records
upon request. In addition, taxpayers must provide the opportunity and physical facilities to
enable the Department to examine the records. The Department may use Order to Appear
letters and Secretary’s Writs to obtain the records necessary to conduct an audit in situations
where the taxpayer fails to cooperate.
The Department is required to use audit procedures that are in conformity with the
Commonwealth’s statutes and the Department’s regulations, rulings, and policies. These
procedures involve examination of source documents, journals, ledgers, schedules, tax returns,
and other records used by the taxpayer to record sales and purchase transactions as well as
the withholding of Pennsylvania personal income tax. The auditor may conduct a complete
review or utilize test methods that allow for the examination of a representative portion of the
taxpayer’s business activities. Audit findings must be documented in a report that includes a
narrative, forms, schedules, and exhibits.
Confidentiality
Taxpayer records viewed by an auditor as part of an audit are confidential (see 72 P.S. §7274).
Therefore, specific discussion with those other than the taxpayer and appropriate Department
personnel is forbidden. The auditor should establish that a taxpayer’s representative is
authorized before any information is disclosed.
In addition, auditors are responsible for maintaining strict security of written and computerized
materials. Computer systems are tracked and subject to periodic monitoring and review.
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The auditor must adhere to the restrictions listed below when handling private tax information.
• Confidential tax information may only be accessed and released for work related
purposes in accordance with the statutes, Standards of Conduct, and Department policy.
• Confidential tax information is not to be left unattended or available for access by non-
Department employees.
• The auditor must exercise care in the logging of their credentials into the Department’s
computer system so that no one else can access confidential tax information under the
auditor’s credentials.
• If an auditor is uncertain whether accessing tax information or releasing it has been
authorized, the auditor must consult their supervisor.
• All legal requests, subpoenas, and court orders for tax information should be promptly
sent to the Office of Chief Counsel for disposition.
Data Governance
During the course of an audit, an auditor may have access to or possession of a taxpayer’s
electronic financial data. It is the auditor’s responsibility to ensure that this data is secure at all
times.
The auditor must follow the best practices and restrictions below when handling taxpayer’s
data.
• All data is to be stored within the audit folder created by the Bureau’s audit application
software. Data should not be stored anywhere else on the auditor’s hard drive. This will
ensure that data is removed from the hard drive after the assignment is closed and that
any data needed for the appeal process is available from the Department’s secure
servers.
• Data should be saved to different folders within the folder created by the Bureau’s audit
software that make it clear and easy to understand where the data used for different
audit procedures is located. A suggested hierarchy would include sales, assets,
expenses, EW, PIT, and research.
• Files transferred electronically should be done so using the Department’s secure email
server. If the taxpayer or their representative has requested not to use the Department’s
secure email server, any information containing personally identifiable information (PII)
such as social security numbers (SSNs), driver license numbers, and financial account
information must still be transferred using the Department’s secure email server. At no
time should PII be sent using standard email systems.
Note: FTI is further limited in how it can be exchanged. If a need to exchange
this information electronically, discuss options with Computerized Audit Support
(CAS).
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• The Bureau’s laptops are encrypted for data security. When working outside of a
Regional Office, auditors must be sure to properly shutdown their laptops at the end of
the day. Putting the machine into sleep mode or locking the screen is not sufficient to
ensure the encryption process is completed.
All employees are reminded to read and follow policies and procedures contained in the PA
Department of Revenue, Bureau of Audits, Electronic Device Acknowledgement Form.
Federal Tax Information
During the course of an audit, an auditor may need or may be provided tax information that was
obtained from the Internal Revenue Service (IRS). The Bureau has created a manual Federal
Tax Information and the PA Department of Revenue, Bureau of Audits that discusses in detail
what constitutes federal tax information (FTI) and how to properly handle and dispose of that
information. All employees are required to read and acknowledge the manual. Key highlights
from this document are below.
• FTI is tax return and return information provided by the federal government to the
Pennsylvania Department of Revenue.
• Calculations based on FTI, if the FTI is identifiable, become FTI.
• If information containing FTI needs to be exchanged electronically with the taxpayer,
please consult with Computerized Audit Support (CAS).
• Audit reports containing FTI are to be mailed following the procedures outlined in the
manual.
• Generally, FTI should not be printed. If a need to do so arises, FTI is only to be printed
using the region’s multifunction printer or the auditor’s mobile printer if at the taxpayer’s
location.
• Printed FTI must be stored in a secured cabinet or desk within the regional office. If a
need arises to store the FTI for a short period of time at an auditor’s home, the regional
manager is to be consulted. At no time should FTI be stored overnight in a vehicle.
Measuring Compliance
The measure of compliance with Pennsylvania’s sales and use tax statutes and regulations as
reflected in the taxpayer’s records is expressed in terms of a deficiency or credit. An audit that
finds a taxpayer to be in complete compliance with Pennsylvania sales and use tax laws results
in no deficiency (a “none” audit). In certain circumstances, the audit may result in a credit for
the taxpayer. An audit that finds the taxpayer not in compliance with the statutes and
regulations results in a tax deficiency. The deficiency is expressed in monetary terms and
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results in the issuance of a tax assessment against the taxpayer. The assessment will also
include interest and penalty. The taxpayer may appeal the assessment to the Department’s
Board of Appeals and then to the Board of Finance and Revenue. The appeal process may
continue through the state courts.
Taxpayer’s Rights and Responsibilities
The Taxpayers’ Bill of Rights requires the Department to issue a disclosure statement to all
taxpayers contacted by the Department for purposes of audit (72 P.S. §3310-202). The
disclosure statement is to include:
• The rights of a taxpayer and the obligation of the Department during an audit.
Prepare a written basis of assessment of any additional tax due determined from
the audit.
Act upon requests to resolve concerns that come up during the course of an audit.
Allow taxpayers to make requests by going through the proper chain of command.
Explain the taxpayer’s right to appeal the assessment of any additional tax from
the audit.
• The procedures by which a taxpayer may appeal or seek review of any adverse
decision by the Department, including administrative and judicial appeals.
• The procedure for filing and processing refund claims and taxpayer complaints.
• The procedures that the Department may use in enforcing taxes.
Consistent with this requirement, the Department has prepared REV-554 (PO), "Your Rights
as a Taxpayer".
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CHAPTER 3-PRE-AUDIT PROCEDURES
This chapter of the manual describes the procedures that must be followed or considered prior
to examining a taxpayer’s records.
Assignment Research
Audit Assignment
Every audit assignment is required to be created in the Department’s PATH system. The audit
will be assigned to the auditor responsible for the assignment through the PATH system in a
manner determined by the regional office as required by the Bureau’s policy.
Auditors should make every effort to complete audits on first in, first out basis. However, there
may be instances when the audit notes indicate special instructions that an assignment is given
a priority status.
Auditors will be notified of new assignments in the “My Work” Manager in the PATH system.
The PATH Guidebook and the “Help” link in PATH will assist the auditor with navigation
through the system. Regional offices may also notify auditors of an assignment in a different
manner as they determine.
Any special instructions included in the audit notes must be addressed during the audit. Any
special instructions that indicate to notify headquarters for a direct special instruction must be
thoroughly explained in the audit narrative, Conflict of Interest Statement and Auditors
Comments, or on the Additional Headquarters Processing Request form, whichever is
appropriate given the facts. In addition, notification of action required on information forwarded
to headquarters must be indicated on the Additional Headquarters Processing Request form.
Upon receiving a new audit, an auditor should create an audit folder in the Bureau’s audit
application software if it is not created by the regions’ Clerk-Typist or Management Tech.
Taxpayer Research
The auditor is to conduct preliminary research on a taxpayer such as reviewing their reporting
history, business activities, prior audits, and any interactions with the Department such as
appeals or letter rulings. An Initial Audit Research checklist is available that lists all of the steps
below.
Pennsylvania Tax Hub (PATH)
The Department’s Pennsylvania Tax Hub (PATH) will be utilized by an auditor in conducting pre-
audit research activities.
In addition to assignment tracking, PATH is used to download a taxpayer’s reported information
and research any notes concerning the Department’s interactions with a taxpayer.
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Business Trust Fund Tax Returns Download
The download files for all business trust fund taxes will be generated in PATH. The generated
report for a taxpayer’s reported information will be imported into the Bureau’s audit application
software. The following download guide are available for these taxes:
• SUT Download
• EW Download
• Public Transportation Assistance (PTA) Download
• Vehicle Rental Tax (VRT) Download
When conducting pre-audit research, the auditor should conduct a download of all the business
trust fund taxes that a taxpayer is registered to report. The downloaded information is included
in the audit report as “Accrual Differences” and “Filing Detail” schedules. The auditor will review
these schedules to identify sales and sales tax reported, taxable to gross sales ratios, use tax
reported, credits taken on the return, fluctuation of reported amounts, and returns filed late.
It may be necessary to download the reported information again if the audit period is different
than the period included in the initial download.
Customer and Audit Notes
The Notes tab or the Recent Notes panel in the Customer and Audit Springboards of PATH
should be reviewed to see if there were any interactions between the Department and the
taxpayer. This transaction is useful to see any collection efforts taken by the Department, and
it may also contain information used to identify contact information.
Audit notes may contain special instructions or specific transactions that are to be reviewed as
part of the audit. The treatment of the instructions during the audit must be clearly addressed in
the narrative or the Conflict of Interest and Auditor’s Comments, whichever is more appropriate.
Identifying Non-Filed Returns
The PATH system is used for taxpayer management, returns, processing, tax account
management, revenue accounting and collections. While conducting pre-audit research, the
auditor should use PATH to identify any non-filed returns. The auditor will identify any non-filed
returns in the Account Springboard in the Financial tab and Expectation subtab.
Demographic information
The auditor should review the demographic information, which the taxpayer will verify during the
course of the audit. The auditor will use PATH to verify mailing and physical addresses for the
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taxpayer. The taxpayer will have to correct any information in this section that is incorrect by
using myPATH.
Customer Accounts
The auditor should also be able to determine the accounts that the taxpayer is registered for
through the Customer Springboard, Registration Tab, and Accounts Subtab.
Prior Audits
Any prior audit for a taxpayer must be reviewed. The auditor can review any prior audits that
were closed in PATH through the Customer Springboard under Audit Tab. The auditor should
select “show history” hyperlink to display all prior audits closed in PATH.
Customer Contacts
Links are also available in PATH that will allow the auditor to determine a contact person for the
taxpayer. The auditor can view the Contacts subtab under Registration tab which will provide a
name, phone number for the person associated with, or representative of the customer in some
way.
Customer Returns
The Department uses the PATH system to maintain information on the filing of individual,
partnership, and S Corp income tax returns. The auditor may use these documents to determine
a contact person for taxpayers, affiliates, business activities, compare figures reported on the
sale tax return, etc. The corporate tax returns for the audit should be saved to the audit folder,
as they will be used during the audit.
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When planning the audit for these types of entities, the auditor must access the Account
Springboard, Financial tab, and Returns subtab to review the taxpayer’s filing history as well as
the detail for the individual returns. Non-filed income tax returns must be addressed as part of
the audit report.
The auditor should review the returns for all principals of sole proprietorships, partnerships,
LLCs, and S-Corporations to ensure these principals filed a Pennsylvania personal income tax
return and to verify that the business income claimed on the return is consistent with the financial
records reviewed in the conduct of a sales and use tax audit. Returns can be accessed using
the taxpayer’s social security number or federal employer identification number.
Bankruptcy Information
If a taxpayer has filed for bankruptcy, an “Indicator” banner will appear on the Customer
Springboard and will also be displayed on the “Indicators” subtab under the “CRM” tab. The
auditor can click the indicator name (Bankruptcy) in the “Indicator” banner to view the list and
links.
The auditor can verify any information related to a bankruptcy filing for a taxpayer by reviewing
the Bankruptcies subtab in the Customer Springboard Collections tab.
PA DOR Bridges
Prior to the implementation of PATH, the Department has created a website that puts information
from the Department’s multiple information systems on one convenient website. This website is
called Bridges as it was intended to bridge the gap between all of Revenue’s information
systems. The website can be accessed through this link BRIDGES. The entire website provides
useful information; however, only information pertaining to historical data prior to November 30,
2022, will be available.
A link is available through the Bureau of Audit’s main menu tab that can be used to review
previous audit files and images. This page also provides a link to access previous audits closed
in PATH. Audits completed prior to 2013 will have images available on the Audit Main menu.
Audits completed after this date should have an image of the audit available and copy of the
audit software folder that can be opened.
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The “View Imaged Returns” link is also available in this section that will allow the auditor to
review a copy of the corporate (IMG-CORP) and sales and use (IMG-S+E) tax returns filed on
or before 11/30/2022. The auditor may use these documents to determine a contact person for
the taxpayer, affiliates, business activities, compare figures reported on the sales tax return, etc.
The corporate tax returns for the audit should be saved to the audit folder, as they will be used
during the audit.
Revenue Appeals Processing System
This section provides information relating to any appeals that the taxpayer may have filed and
provides a link to the Revenue Appeals Processing System (RAPS). The auditor must review
RAPS for refund petitions filed for any period included in the current audit period to ensure
duplicate credit is not granted within the audit and for any appeals related to prior audits.
Supervisors may obtain refund decisions and file documents through email request to
headquarters’ personnel. Board decisions after January 1, 2003, may be viewed together with
supporting schedules via the RAPS system. The RAPS system may be accessed via this link
RAPS and the Audits main menu page. After accessing the link and inputting the appropriate
passwords, the auditor may select several search options from the RAPS “Main” page. If the
docket number is known, the auditor may enter it into the docket number field or select the
“Search” tab to query the system by taxpayer/practitioner name, business partner number, PATH
account ID, account number, or employer identification number (EIN). The actual written
decision will be listed under the “decision” link. Supporting documentation is listed under “Docs”.
Letter Rulings
A list of EINs of taxpayers with letter rulings is available for auditors to search. When
conducting pre-audit research, the auditor must search to determine if the taxpayer is on this
list. If the taxpayer is on the list, the auditor should obtain a copy of the letter ruling through an
email request to headquarters’ personnel.
Internet
Taxpayer’s Website
The auditor should search the Internet for the taxpayer’s website or other links that may provide
information on the taxpayer’s location, business activities, products, and annual reports. In
addition, the auditor may also use the Internet to gather information about the taxpayer’s
industry.
Department of State
The auditor should search the Pennsylvania Department of State (DOS) for taxpayer
information. DOS can provide information relating to fictitious names, name changes, mergers,
and incorporation or formation information. For taxpayers incorporated or formed in another
state, that state’s Department of State website should be reviewed also.
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Headquarters Information Requests
Additional information concerning the taxpayer is available from the sales tax division. This
information can be requested through an email request to headquarters’ personnel. The
information available includes:
• Aircraft and Boat Registration
• Audit Research Questions and Account Referrals
• Bankruptcy
• Corporate Clearance
• Bulk Sale Certificate
• KOZ/KOEZ/KOIZ/SDA Exemption
• PennDOT records (vehicle registration information)
Tax Research
All pre-audit planning must include a review by the auditor of sales and use tax laws, regulations
and policies pertaining to the taxpayer’s business activities. The taxpayer’s business activities
are normally determined by the listed NAICS code, previous audit information, case notes,
Department files, the Internet, invoices, advertising materials, or other information. In addition
to determining the taxpayer’s exposure to sales and use tax, the auditor must also determine
the taxpayer’s exposure to:
• Public Transportation Assistance (PTA)
• Vehicle Rental Tax (VRT)
• Employer Withholding (WTH)
• Income Tax (PIT & CNI)
• Gross Receipts (GRE & GRT)
• Malted Beverage Tax
• E911 PEMA (PEM)
• Wine Excise (WET)
• Consumer Fireworks Tax (CFT)
There are several sources of information the auditor is expected to use in determining the
taxpayer’s tax exposure. The sources are listed below.
Checkpoint
Thomson Reuters publishes a federal, state, and international tax reporter called Checkpoint
that the Bureau uses as its main source of information on tax laws and regulations.
Checkpoint is an online resource that is accessed at http://checkpoint.riag.com. Thomson
Reuters has a library of recorded training videos that an auditor may access via a “Product
Training” link found on the right side of the Checkpoint landing page.
The majority of the information relevant to sales, use, and hotel and related taxes will be found
in the Pennsylvania State Tax Reporter.
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Statutes
This section contains the actual statute written by the State legislature. The sections most
needed of the reporter include Articles II and XVIII of The Tax Reform Code of 1971, the
Pennsylvania Intergovernmental Cooperation Authority Act for cities of the first class, the Public
Transportation Assistance Act, and the Philadelphia Code - Sales and Use Tax. These sections
can be found by following these links from the Pennsylvania State Tax Reporter: “Pa. Stat.
Ann.”, then “Title 72 TAXATION AND FISCAL AFFAIRS”, then “Chapter 5 TAX REFORM
CODE OF 1971”. Some of the most commonly cited legal cites referenced in an audit report
or cited to a taxpayer in support of the audit function are:
Title Links
Act-45 Contractor's Purchase for 72 P.S. §7201 Definitions
Exempt Entities
Assessment Period for Audits 72 P.S. §7258 Limitation of assessment and
collection
Collection of Tax & Exemption 72 P.S. §7237 Collection of tax.
Certificates
Confidentiality 72 P.S. §7274 Unauthorized disclosure
Department’s Right to Examine 72 P.S. §7272 Examinations
Records
Fraudulent Returns & Other Crimes 72 P.S. §7268 Crimes
KOZ/KOEX Exemption 73 P.S.§820.511 State Sales and Use Tax &
73 P.S. §820.705 Local Sales and Use Tax
Sales Tax- A Trust Fund Tax 72 P.S. §7225 Tax Held in Trust for the
Commonwealth
Testing Regulations 61 Pa. Code Chapter 8A. Enforcement
Figure 3.1 Commonly Cited Legal Cites
References to statutes in the audit report should be as specific as possible and cited using the
following format:
72 P.S. §7201(o)(4)(B)(ii)
Regulations
The regulations represent the Department’s interpretation of the law as set forth in the Tax
Reform Code of 1971. They are issued by the Department of Revenue and promulgated by
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the Independent Regulatory Review Commission to provide taxpayers with rules of general
application so that taxpayers might clearly understand their rights and duties under the law.
Sales and use tax regulations can be found in Chapters 31 through 39 by following these links:
“Pa. Code”, then “Title 61 REVENUE”, then “Part 1 DEPARTMENT OF REVENUE”, then
“Subpart General Fund Revenues”, then “Article II Sales and Use Tax”. (61 Pa. Code Article II.
Sales And Use Tax).
References to regulations in the audit report should be as specific as possible and cited using
the following format:
61 Pa. Code §32.21(a)(2)(ii)(B)
If the cite is used at the beginning of a sentence, the word “Title” must be inserted in front of
the cite. For example:
Title 61 Pa. Code §32.21(a)(2)(ii)(B)
Rulings
Rulings issued by the Department advise the public of the Department’s application of the tax
laws to a general factual situation. A ruling is issued to ensure uniformity in the application of
the law. Sales and use tax rulings can be found in Chapters 41 through 58 by following these
links: “Pa. Code”, then “Title 61 REVENUE”, then “Part 1 DEPARTMENT OF REVENUE”, then
“Subpart B General Fund Revenues”, then “Article II Sales and Use Tax”.
References to rulings in the audit report should be as specific as possible and cited using the
same format for regulations. For example:
61 Pa. Code §53.1(c)(2)(xiv)
If the cite is used at the beginning of a sentence, the word “Title” must be inserted in front of
the cite. For example:
Title 61 Pa. Code §53.1(c)(2)(xiv)
Revenue Pronouncements-Statement of Policy
The pronouncements are used by the Department to interpret law or policies that the
Department expects to implement in a future regulation or to follow in a future adjudication,
explain an administrative procedure within the discretion of the Department, or implement an
act of assembly if the Department finds it is unnecessary to use regulatory powers to perform
its duties and responsibilities provided by law. The pronouncement is in effect once it is
published in the Pennsylvania Bulletin. Sales and use tax pronouncements can be found in
Chapter 60 by following these links: “Pa. Code”, then “Title 61 REVENUE”, then “Part 1
DEPARTMENT OF REVENUE”, then “Subpart B General Fund Revenues”, then “Article II
Sales and Use Tax”. (61 Pa. Code Chapter 60. Sales And Use Tax Pronouncements—
Statements of Policy).
References to pronouncements in the audit report should be as specific as possible and cited
using the following format:
61 Pa. Code §60.6(f)(2)(iii)(A)
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If the cite is used at the beginning of a sentence, the word “Title” must be inserted in front of
the cite. For example:
Title 61 Pa. Code §60.6(f)(2)(iii)(A)
Cases
This section contains opinions issued by various state courts. The opinions are organized by
court and decision year.
References to court cases cited in the audit report should use the following format:
Graham Packaging Company v. Commonwealth, 652 FR 2002 (2005)
Explanations
Thomson Reuters has prepared a number of explanations for various sales and use tax topics.
These explanations can be reviewed by the auditor as they may offer additional insight, history,
or plain language guidance; however, they are not authoritative and should not be cited by the
auditor.
Department and Division resources
Tax Law: Policies & Bulletins
Many tax bulletins, informational notices, and select letter rulings issued by Office of Chief
Counsel are available on the Department’s webpage. These may be used by the auditor in
researching tax issues. Anything available on the Department’s webpage may be shared with
taxpayers.
Also available on the Department’s webpage are a number of taxability lists that provide
additional guidance on the taxability of medical and surgical supplies, farming items, building
machinery and equipment, and hotel occupancy tax.
Division Letter Ruling Database
This topically organized database provides an index with a brief discussion of issues addressed
via letter rulings that are on file at headquarters. While these letter rulings only apply to the
taxpayer and the facts that they presented; they may be used as guidance in similar situations.
Appeals Decisions
Appeals decisions by the Board of Appeals (BOA) and the Board of Finance & Revenue (BFR)
may be used by an auditor for guidance. Decisions of BOA and BFR for a specific taxpayer
must be adhered to during an audit, unless the facts presented during the appeal differ from
the facts presented during the audit. In those instances, contact the Division before proceeding.
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Board of Appeals Decisions
RAPS may be searched by taxpayer or by topic to find decisions that may be helpful in
researching a tax issue.
Board of Finance & Revenue Decisions
Decisions of the Board of Finance & Revenue, including dissenting opinions, are published
(after deletion of certain confidential information) and available to the public for decisions issued
after April 1, 2014, on the Pennsylvania Office of the State Treasurer’s website. The decisions
are searchable by docket number, taxpayer, or topic. These decisions are accessible through
RAPS.
Contacting the Taxpayer
Audit Engagement Letter
An audit engagement letter is generated through PATH and mailed to the taxpayer (customer)
in batches via overnight processing. Regional staff will add the engagement letter to the Audits
Springboard under CRM tab and Letters subtab. Once the letter is created and saved, it will
create a Letter ID that will be validated and added to the batch to be mailed. The letter will be
printed as a PDF and saved to Bureau’s audit application software. The engagement letter can
be viewed in PATH by the auditor as well as the Taxpayer if they are enrolled in myPATH.
The letter serves as notice to the taxpayer of the Department’s intent to conduct an audit. It
also identifies the audit scope and records required for audit. Audit engagement letters for
mandatory and out-of-state assignments must be sent within two months of headquarters
creating the assignment, unless a shorter time period is required to ensure the audit is on a
timeline that will protect statutory periods.
Audit Engagement Letters must be exhibited in the audit report and referenced in the audit
narrative.
A template has been created in Microsoft Word and in the Bureau’s audit application software
for the ability to create an engagement letter manually.
In addition to the Audit Engagement Letter, the taxpayer must be sent a copy Your Rights as a
Taxpayer (REV-554).
Telephone Contact
The auditor assigned to conduct the audit must contact the taxpayer or a duly authorized
representative by telephone within 30 days of the date on the audit engagement letter to make
preliminary arrangements for the pre-audit conference.
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When making the call, the auditor should:
• Clearly state their name, agency, and purpose of the call.
• Obtain the name (including verification of proper spelling), title, phone and fax number,
and email address of the person responsible for handling the taxpayer’s audits.
• Verify the receipt of the audit engagement letter and Your Rights as a Taxpayer (REV-
544).
• Verify entity name and location.
• Arrange place, date, and time for the pre-audit conference. The taxpayer should be
advised at this time if additional audit staff will be attending the conference. They should
also be informed of the purpose of the conference and advised that any designated
representatives should be present at the conference. Directions to the location of the
pre-audit conference and any other relevant information should also be discussed.
• Discuss records required to conduct the audit and obtain a brief description of the
taxpayer’s record keeping system.
• Discuss the taxpayer’s business activities.
• Ask clarifying questions where appropriate.
A Pre-Audit Conference Questionnaire is available for the auditor to maintain record of the
answers provided during the phone call and the pre-audit conference.
The auditor should keep a written record of each contact made with the taxpayer. This includes
listing the name of each contact along with the date and time of the contact. The auditor must
document in chronological order all attempts to contact the taxpayer and include the
documentation as an exhibit in the audit report if necessary.
Confirmation Letter
The auditor is required to send a Confirmation of Pre-Audit Conference letter to the taxpayer
for all out-of-state and mandatory assignments. This letter should, at a minimum, verify the date,
time, and place of the pre-audit conference. The letter may be customized as required.
While not required, it is recommended that the auditor send the taxpayer a confirmation Letter
for local assignments.
Templates have been created for both local and out-of-state assignments and should be used.
The templates are available in Microsoft Word and in the Bureau’s audit application software.
Order to Appear Letter
In situations where an auditor cannot schedule a pre-audit conference because of a lack of
cooperation with the taxpayer or the taxpayer refuses to grant access to records that may be
necessary to perform an audit, an Order To Appear letter should be issued.
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The letter constitutes a formal legal order for the taxpayer to appear at a specified location for
the purpose of producing the required documents when all other reasonable efforts to obtain
the taxpayer’s cooperation have been exhausted.
An “Order to Appear” letter is initiated by the supervisor and issued by the regional manager.
The letter should be addressed to each owner, partner, officer, or other responsible individual.
The information to be included in the order consists of the individuals name, title, and address;
the specific records requested; and the exact time, date, and location where such records are
to be presented. The order must be sent at least 21 days prior to the appearance date set forth
in the letter via certified return receipt mail.
The Order To Appear template should be used and must be included as an exhibit in the audit
report and referenced in the audit narrative.
Secretary’s Writ
A Secretary's Writ may be used when the Department determines that it is necessary to issue
a formal demand for access to the financial records or information pertaining to the tax matters
of a particular individual or business. The Writ is prepared by the regional office and forward to
headquarters for the signature of the Secretary of Revenue. The Department seal is affixed to
all writs. Legal citations pertaining to the Writ are listed on the front page.
Before Requesting a Secretary’s Writ
Before requesting the Executive Office to sign-off on a writ, the auditor will first send to
taxpayer a letter notifying them of their legal obligation to provide records necessary to conduct
an audit and the department’s legal obligation to keep those records confidential.
If the taxpayer is cooperating with the audit process but feel they need the writ to overcome
confidentiality issues, the auditor will send the Prewrit Cooperative Letter along with a Request
for Financial Records form detailing the records that the taxpayer is to provide. The templates
for these documents are available in the Bureau’s audit application software.
If the taxpayer is not cooperating with the audit process by not providing the records
necessary to conduct the audit, the auditor may send Prewrit Nonresponsive Letter along with
a Request for Financial Records detailing the records that the taxpayer is to provide. The
templates for these documents are available in the Bureau’s audit application software.
Requesting a Secretary’s Writ
Once the time has expired to provide the records, the regional office should prepare the
Secretary's Writ. The writ must contain the following information:
• Name and title of the representative being served the writ.
• Address where the writ is to be served.
• Legal name of the taxpayer.
• Audit period.
• Auditor’s name and title who is to receive the requested records.
• Office address where the records are to be provided.
• Date and time that the records are to be provided.
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o In all cases, the date that records are to be provided should allow for 45 days
from the date it is submitted to headquarters to allow for processing.
• A detailed list of all records that are to be provided.
• If multiple Writs are needed for the same audit, all writs should be completed at the same
time. This usually only occurs when Writs are requested for owners, officers, or partners
and financial institutions.
The completed writ(s) should be submitted to the Program Administrator along with the
following information:
• Assignment number, audit period, EIN, and tax account number.
• A report outlining the facts in the case, such as attempts to contact the taxpayer and the
taxpayer’s failure to provide requested information.
• Copies of correspondence, log of phone call, visits, Order to Appear Letter, and certified
mail receipt, or statement from the auditor attesting to receipt of the Order to Appear
Letter by the taxpayer.
Headquarters’ personnel will obtain the signature of the Secretary’s designee on the writ.
Taxpayer Delay
The taxpayer may find it necessary to delay the audit for various reasons. Where it is apparent
that the reasons stated by the taxpayer are authentic and not intended to interfere with the
orderly conduct of an audit, the auditor may arrange for a date sometime in the future for a pre-
audit conference. In the event of repeated postponements, or a postponement of over 60 days,
the taxpayer must request a postponement in writing on company letterhead or email. The
request must include the reason for the delay and the date when the pre-audit conference can
be held. The taxpayer should be asked to provide the letter within two weeks. The proprietor,
a partner, or a corporate officer must sign the letter or send the email.
This letter must be included as an exhibit in the audit report and referenced in the audit
narrative.
When scheduling is delayed at the taxpayer’s request or the taxpayer is not providing records
that allow for the timely completion of the audit before statutory periods expire, a waiver is to
be obtained.
Pre-Audit Conference
During the pre-audit conference, the auditor should exercise every reasonable effort to secure
the goodwill and cooperation of the taxpayer. Since the conference is only the preliminary or
introductory phase of the audit, the discussion with the taxpayer of business activities,
maintenance and retention of records, and various methods of audit procedures should be
general in nature.
The audit period is normally established during the pre-audit conference. The taxpayer should
be informed that if circumstances prevent the audit fieldwork from concluding within a reasonable
time from the pre-audit conference, the audit period will be extended. If delays prevent the
fieldwork from being completed within twelve months and the originally determined audit period
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end date does not bring the audit period through the end of the calendar year, the auditor is
required, at a minimum, to extend the audit period to include the entire calendar year.
The Department is required, upon advance written request of the taxpayer, to make an audio
recording of the pre-audit conference at the taxpayer's own expense and with the Department's
equipment. The taxpayer may also make an audio recording of the interview with the taxpayer's
own equipment if, prior to commencement of the interview, the taxpayer notifies all parties
present that the interview will be recorded (72 P.S. §3310-203).
A Pre-Audit Conference Questionnaire is available for the auditor to record the information listed
below.
Preliminary Information
The auditor, after presenting their credentials to the taxpayer, secures and records the names,
official titles, or in the case of outside representatives, the professional status and authorization
of all persons attending the conference on behalf of the taxpayer. This information should be
recorded for inclusion in the audit narrative.
The auditor should again verify receipt by the taxpayer of the Audit Engagement Letter and
Your Rights as a Taxpayer (REV-554). If the taxpayer or their authorized representative
indicates that these items have not been received, the auditor must provide copies.
Statement of Purpose and Request for Cooperation
The auditor should inform the taxpayer of the Bureau’s intent to perform a routine sales and
use tax audit. Also, assure the taxpayer that the orderly procedures of the business operations
will not be disrupted or interfered with to an extent greater than is absolutely necessary to
conduct the examination.
The auditor should state the audit period subject to audit. Normally an audit period consists of
all reporting periods within the last three complete calendar years and the reporting periods
required to have been reported in the current year as of the date of the pre-audit conference.
The auditor should state that a limited examination of employer withholding will also be
conducted. The auditor should state that if the taxpayer is found to have exposure to other
taxes and fees administered by the Department, a limited examination will be conducted in
these areas as well. If a deficiency results from the examination, a separate audit assignment
will be issued on the specific tax.
Business Activities
Through discussion with the taxpayer, the auditor should determine the overall nature of the
business activities, operations, nexus with Pennsylvania, number of business locations, type of
entity, changes in entity, changes in divisions, affiliates, and other related parties. The auditor
must then determine the taxpayer’s business entity, affiliates, and business activities in
Pennsylvania. The auditor must identify sales locations, including out-of-state locations making
sales into Pennsylvania, as well as locations in counties that impose a local sales tax. The
auditor must record information regarding the type of business activity and the taxable and
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nontaxable sales and purchases made by the taxpayer. Business activities between affiliates
must also be recorded so that they may be later described in the audit report.
A list of business locations must be included in the audit report when the taxpayer has more
than one Pennsylvania business location. This list must provide a brief description of each
location (e.g., manufacturing facility, warehouse, admin office, etc.) and clearly indicate those
locations in counties that impose a local sales tax. In addition, locations operating with a
KOZ/KOEZ/SDA must be identified. The list must also include the beginning and ending dates
of those locations that did not operate for the entire audit period. This list should be included
as an exhibit in the audit report. A copy of the taxpayer’s current annual report may provide
most of this information. The auditor should request a tour of the taxpayer’s business
operations. These arrangements should be made definite as to time, place, and persons
involved. Inform the taxpayer that it is a necessary prerequisite to the conduct of an audit to
become thoroughly familiar with the nature of the taxpayer’s business activities and operations
prior to the design of any audit procedure. The auditor should document these items in the
audit narrative.
System Survey
The auditor must obtain a description of the taxpayer’s record keeping system throughout the
audit period including:
• Accounting year (fiscal or calendar),
• Changes in record keeping or accounting systems,
• Accounting basis (accrual, cash, etc.) for sales and use and federal and state income
tax returns, and
• Type of accounting system (computerized, manual, combination, etc.)
The auditor should determine what changes, if any, the taxpayer has made to its accounting
and reporting methods. A description of the changes and the reporting periods in which the
changes took place must be explained in the audit narrative.
The description obtained from the taxpayer should be sufficient for the auditor to understand
the audit trail for sales, use and hotel occupancy purposes, as well as EW, PTA, and VRT
taxes, when applicable.
The auditor must identify and discuss with the taxpayer non-filed returns, late filed returns, filing
without remittance, and the taxpayer’s reporting cycle.
A written description of the audit trail and items discussed with the taxpayer are required to be
included in the audit report. All records referred to in the audit procedures section of the
narrative must be explained as part of the audit trail in the system survey section of the audit
narrative. Understanding the record keeping system from the initial transaction through to the
preparation of summary financial records and tax returns is critical for determining the most
efficient and effective audit procedures. Identifying how source records are stored including
sales invoices, exemption certificates, and purchase invoices is key for evaluating how
fieldwork could contribute to the timely completion of an audit.
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Registration
Bureau of Audits-Registration Verification
If the taxpayer under audit is registered with the Department, the auditor is required to present
the taxpayer with the Bureau of Audits-Registration Verification form. The taxpayer or their
authorized representative should be informed that the completed form will be used to verify that
all information on file with the Commonwealth for the subject taxes is current. This form should
be completed by the taxpayer or their authorized representative at the pre-audit conference or
as soon as possible after and returned to the auditor.
The auditor is required to review the form to make sure it is complete and then compare the
information on the form to PATH. In addition, the auditor should take special note of changes
in ownership (entity changes), bulk sale or merger information indicated on the form. These
actions may require the creation of additional audit assignments.
The taxpayer, or their authorized representative, must be notified of any changes or corrections
needed to their account. The taxpayer, or their authorized representative, is required to update
the account information through myPATH.
If the taxpayer refuses to complete the registration update form, the auditor is required to
complete the form using information found in researching the taxpayer.
Non-registered Taxpayers
PATH requires every taxpayer to have an account to create an audit. Audits issued on a non-
registered taxpayer will be issued on account request by division staff. The Bureau of
Registration and Taxpayer Management (BRTM) will create the sales and use tax account and
put it in a “Pending Registration” status until the taxpayer registers online through the
“Pennsylvania Online Business Tax Registration” via myPATH.
Upon completion of the audit, it is the auditor's responsibility to determine if the taxpayer will
have an ongoing obligation to file sales and use tax returns. Work items in PATH will be used
to instruct the Department how to address the account. Additional instructions can be found at
Non-registered Taxpayers .
Pennsylvania Online Business Tax Registration
If the taxpayer will have a recurring sales and use tax obligation in the future or the current audit
assessment includes trust funds of over $500, the taxpayer, or their authorized representative,
must register for a sales and use tax license by completing the Pennsylvania Online Business
Tax Registration through myPATH.
In these cases, the auditor must complete a Registration Change work item in PATH and indicate
that the taxpayer needs to complete registration for their sales and use tax license. If the
effective date is different than the beginning of the audit period, the actual effective date of the
license should be included.
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BRTM will issue a letter to the taxpayer that will contain a Letter ID that the taxpayer will use to
complete their registration online. Failure by the taxpayer to complete the registration process
can result in additional actions by the Department.
Temporary Account
In situations where:
• the resulting liability is all use tax, and the taxpayer will not have an obvious use tax
liability in the future, or
• sales tax liabilities were established on additional taxable sales and the taxpayer will not
have a sales tax liability in the future because the taxpayer under audit Is no longer in
business or the entity is no longer making taxable sales.
Any liabilities will be assessed using the account created to issue the audit. The auditor must
complete a Registration Change work item form and indicate that the account should cancelled
effective the last day of the audit period.
Requirement for the Audit Review of Third-Party
Credits
The auditor is required to present this form to the taxpayer at the pre-audit conference. The
auditor must include a date on the form by which the taxpayer must present documentation to
support third party credits requested by the taxpayer for inclusion in the audit report. The
auditor should review the contents of the Requirements for the Audit Review of Third-Party
Credits with the taxpayer or their representative, answer any of the taxpayer’s questions
regarding the form, and obtain a signature of the taxpayer’s representative acknowledging that
they received a copy of the form. Should the taxpayer’s representative decline to sign the form
the auditor should indicate on the form, the date the form was presented, who it was presented
to, and that the “Taxpayer declined to sign the form.”
Discussion and Preliminary Conclusion
Discuss with the taxpayer the techniques or procedures usually followed by the Bureau in
conducting an audit based on the current available information. However, the taxpayer must
be informed that the auditor may be compelled to change the discussed procedure once the
records are examined.
Arrangements
The auditor should request that necessary records and adequate physical facilities be made
available to conduct the audit. The auditor should also determine office hours and the
taxpayer’s contact person(s) that will be assisting in the conduct of the audit.
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Direct Payment Permit Holders
The auditor is required to verify that all information on the most recent application for direct
payment permit on file with the Bureau is complete and accurate. The auditor must obtain an
updated Application for Direct Payment Permit when any of the following have occurred since
the most recent application was filed:
• Name Change.
• Business locations added or discontinued.
• Sales and tax license number change.
• Business activities change.
• Business activities qualifying for the business exemption have been discontinued.
• Mergers
At the conclusion of the audit, the auditor must make a recommendation regarding the
taxpayer’s continued use of the direct payment permit. A memo must be attached to the
Additional Headquarters Processing Request advising headquarters of the auditor’s
recommendation.
The auditor’s recommendations should be based on the following:
• Has the taxpayer remitted at least $10,000 in use tax to Pennsylvania during the prior
year?
• Is the taxpayer in compliance with all Pennsylvania state tax requirements?
• Does the taxpayer qualify for a business exemption?
• Has the taxpayer maintained auditable records?
When the auditor recommends revocation of the taxpayer’s direct payment permit, the memo
must clearly state the reason for revocation (e.g., lack of records, no longer qualify for a
business exemption).
A copy of the taxpayer’s most recent application may be requested from a sales and use tax
audit program specialist.
KOZ/KOEZ
The Department defers to the Department of Community and Economic Development (DCED)
on the issue of qualification for benefits related to a Keystone Opportunity Zone/Keystone
Opportunity Expansion Zone. If DCED determines that an entity is a “qualified business”, DOR
accepts the determination and grants benefits accordingly.
During an audit, the auditor is required to verify that the KOZ/KOEZ account number currently
being utilized by the taxpayer is current and valid by requesting verification from the appropriate
headquarters personnel.
Note: All KOZ/KOEZ exemption numbers will start with the prefix "72".
The auditor must further verify that all purchases for which the taxpayer is claiming the
exemption are used or consumed exclusively within the KOZ/KOEZ (see 73 P.S. §820.511).
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Plant Tour
When auditing an entity claiming a business exemption, the auditor should make
arrangements for a plant tour at this time. Failure of the taxpayer to comply with this request
constitutes a scope limitation since the auditor cannot visually determine if the taxpayer
qualifies for the business exemption and/or identify the property directly used in the operation.
Refer to Conducting Plant Tours in Chapter 4 for further procedures.
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CHAPTER 4- AUDIT PROCEDURES
This chapter of the manual describes the procedures that must be followed or considered while
examining a taxpayer’s records.
The taxes covered include:
• Sales Tax
• Use Tax
• Hotel Occupancy Tax
• Public Transportation Assistance Fund Taxes and Fees (PTA)
• Vehicle Rental Tax
• E-911 PEMA
In addition, the minimum requirements to be conducted for Employer Withholding of
Pennsylvania Personal Income Tax (EW) and Pennsylvania Personal Income Tax (PIT) are
explained within.
Auditors must prepare schedules or workpapers showing all audit procedures discussed in the
audit narrative, unless the records provided and exhibited clearly show that the records
referenced in the procedures reconcile. At a minimum, these schedules or workpapers are to
be included in the audit folder of the Bureau’s audit application software. Any schedules or work
papers supporting any audit adjustment must also be included in the audit report. Any original
transactional data files received for the audit must also be saved in the audit folder of the
Bureau’s audit application software. This information is useful upon appeal of the audit and in
order to verify that the audit was completed in accordance with the procedures discussed within
this manual.
Sales Tax
Gross Sales
The objective of the gross sales examination is to determine that all categories and sources of
sales are properly included on the Sales and Use Tax return and are made available to the
auditor for examination. The examination of gross sales is conducted to:
• Become familiar with the business activities and locations (determine exposure to local
sales tax),
• Substantiate that all business activities are made available for audit,
• Verify completeness of sales records provided for examination,
• Determine all sources of taxable sales and sales tax charged,
• Establish the credibility of records,
• Identify affiliates and intercompany transactions,
• Ensure accurate basis for the selection of test periods, and
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• Determine the areas of potential other tax exposure.
The auditor will use the information gathered regarding the completeness, availability, and
credibility of records during the examination of gross sales to determine the type of audit that
will be performed on sales.
Prior to the examination of gross sales, the auditor should review the chart of accounts to
become familiar with the sales accounts that would be expected to be included in the gross
sales reported on the Sales and Use Tax Return.
Comparison with Income Tax Returns
Reported gross sales from the Sales and Use Tax Return (Accrual Differences schedule) must
be compared to the sales on a federal income tax return for a minimum of at least one year
during the audit period. Corporations that are subject to tax in multiple states include a RCT-
106, Determination of Apportionment Percentage, with their RCT-101, PA Corporate Tax
Report, that identifies sales made within Pennsylvania. Similarly, S-corporations and
partnerships include a PA Schedule H, Apportioned Business Income (Loss)/Calculation of PA
Net Business Income (Loss) with their PA-20S/PA-65, PA S Corporation/Partnership
Information Return, that identifies sales made within Pennsylvania. The RCT-106 or PA
Schedule H may be used to compare the sales and use tax return to adjust the sales made
inside Pennsylvania. Differences must be reconciled.
If the sales of the income tax return are higher than the sales and use tax return, the auditor
should determine the general ledger accounts to which the differences relate and determine if
the sales of the income tax return should be included in the audited gross sales on the “Accrual
Differences” schedule. If the difference cannot be reconciled and the taxpayer cannot provide
a satisfactory explanation of the difference, the auditor should compare the income tax returns
to the reported amounts for the remainder of the audit period. The taxpayer should be given a
schedule documenting the differences and a Request for Financial Records requesting that the
taxpayer provide an explanation and documentation to explain and support the differences.
If the examination reveals or documentation is provided to determine that the differences are
related to obviously nontaxable categories of sales, such as real estate rents or royalties, no
adjustments should be made to the audited gross sales on the “Accrual Differences” schedule.
If the examination reveals or documentation is provided to determine that the differences are
related to sales with possible sales tax exposure that have not been reported or no
documentation is provided to substantiate the difference, the audited gross sales on the
“Accrual Differences” schedule should be adjusted to agree with the income tax return.
Documentation provided to substantiate the differences that have possible sales tax exposure
should be examined as part of the taxable and nontaxable sales examination. A Gross Sales
Assessment should be made on any unsubstantiated differences in sales.
If the income tax return sales are lower, the taxpayer should be given a schedule documenting
the difference and a Request for Financial Records requesting that the taxpayer provide an
explanation and documentation to explain and support the differences. Any material,
unexplained differences should be considered for their effect on income tax and either referred
to headquarters for a collateral audit assignment or referral to the Bureau of Desk Review and
Analysis (BDRA).
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Figure 4.1: Gross Sales to Income Tax Return Flowchart
Sales of Business Property
Generally, the sale of a business’s assets would qualify as an exempt isolated sale. However,
if the business should sell their assets frequently enough to no longer qualify as an isolated
sale or they sell assets that are used in the ordinary course of their business, such as rental
equipment, there may be exposure to sales tax. Companies are required to report their gain
or loss on the sale of business property on their income tax return. If a gain or loss is identified
on the income tax return, the auditor should examine the Federal Form (FF) 4797, Sales of
Business Property. The gross sales price, or proceeds, from the sales of business property
used in ordinary course of business or that no longer qualify as an isolated sale should be
examined as part of the taxable and nontaxable sales examination. Additional information,
such as an asset disposal listing or journal, may need to be requested to identify the assets,
proceeds, and frequency involved.
Other Income
In addition to the sales reported on the income tax return, an examination should be conducted
of the other income section of the income tax return. Many times, companies will report income
that is not related to their primary trade or business as other income. Taxpayers are required
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to include a statement describing the type of income with their tax return. The taxpayer should
be asked to provide documentation for any types of other income from sources other than
obviously nontaxable categories of sales.
Documentation provided for income types that have possible sales tax exposure should be
examined as part of the taxable and nontaxable sales examination. A Gross Sales Assessment
should be made on any potentially taxable types when no documentation is provided.
Deductions
Occasionally there are deductions on the income tax return that need to be considered as part
of the sales tax examination. These deductions relate to contra expense accounts (expense
accounts that have a normal credit balance instead of a normal debit balance) or other expense
accounts with a credit balance and are typically shown as a negative (-) deduction on the
income tax return. These accounts are typically shown either as an offset to another deduction
on the taxpayer’s own return or as an offset to an affiliate’s expense in a consolidated group.
The taxpayer should be asked to provide documentation for any negative deductions that have
potential for sales tax exposure. Documentation provided for income types that have possible
sales tax exposure should be examined as part of the taxable and nontaxable sales
examination. A Gross Sales Assessment should be made on any potentially taxable types
when no documentation is provided.
Comparison With General Ledger
Reported gross sales should be traced to the general ledger accounts for the audit period. This
comparison may be done on a reporting period or annual basis. The auditor should prepare a
reconciliation schedule to verify that all locations and applicable general ledger accounts are
included in the total book gross sales. Audited gross sales should be adjusted on the “Accrual
Differences” schedule to reflect differences found by the auditor.
During the verification that sales from all locations are included in the gross sales amounts
reported, the auditor must identify locations that are physically located in a county that imposes
a local sales and use tax. The gross sales from these locations should be compared to the
gross sales reported for each taxing jurisdiction. The results should be recorded on the “Accrual
Differences” schedule.
Comparison with Original Books of Entry
The auditor should verify the completeness of the records made available for audit. The original
books of entry (e.g., accounts receivable journal, cash receipts journal, sales journal) should
be traced to the general ledger sales accounts to ensure that all sources of sales were properly
recorded for a minimum of one year within the audit period.
When discrepancies are found, the auditor should examine additional periods to determine if
the unrecorded or erroneously recorded transactions were isolated or recurring. If the
discrepancies are found to be recurring, the auditor should prepare a reconciliation schedule
for the audit period. Audited gross sales on the “Accrual Differences” schedule should be
adjusted to reflect the unrecorded or erroneously recorded sales.
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The auditor must approximate the number of sales transactions per month and identify how the
approximation was determined. A sample of entries should be traced from the books of original
entry to the source document to verify proper recording and existence of source documents.
Source documents include items such as sales invoices, cash register tapes, hotel guest folios,
and general journal posting vouchers. A sample of source documents should be traced to
books of original entry to verify completeness of recorded sales. Exceptions should be noted
in the audit report.
The auditor should vouch a sample of entries in the general ledger to the original books of entry
to assure that all are made available for examination. Unusual entries or adjustments to the
general ledger accounts should be investigated and clearly explained in the audit report when
they affect the audit findings.
General journal entries posted to general ledger sales or income accounts should be
investigated to determine if the entry represents sales to affiliated interests or intercompany
transactions. These entries should be documented in the audit report when the intercompany
transactions are determined to include taxable transactions. These transactions should be
assessed as additional taxable sales if the taxpayer did not properly tax them. Intercompany
transactions including taxable transactions commonly identified during an audit include canned
computer software, equipment rental, and help-supply, secretarial and editing, and employment
agency services. Intercompany transactions may also be identified by examining eliminations
made on the consolidated federal income tax return. Additional information, such as a transfer
pricing study or management or rental agreement, may be required to determine the items or
services transferred and that the transaction occurred at arms-length terms and prices.
The information obtained regarding the availability, credibility, and completeness of the records
presented during the gross sales verification should be used by the auditor to determine the
type of audit that should be conducted on the taxed and nontaxed sales portion of the audit.
If the taxpayer has exposure to hotel occupancy tax, the auditor should identify the records
necessary to separate sales subject to sales tax from those subject to hotel occupancy tax.
The auditor should also determine exposure to public transportation assistance taxes and fees
(PTA) and vehicle rental tax (VRT) and determine if a collateral audit should be requested.
Minimum requirements regarding taxpayers with exposure to PTA or VRT are separately
outlined in respective sections of this chapter.
Sales Tax Accrual
General
A complete reconciliation of accrued state and local sales tax per books to the reported state
and local sales tax is required for every reporting period in the audit period. The procedures in
this section are required for both state and local sales tax. The auditor must be completely
familiar with the taxpayer’s procedures for the reporting of sales tax charged & collected in order
to ensure the proper reporting. For audit purposes, the accrued sales tax per books can be the
general ledger sales tax account, a sales journal or any other type of sales listing that includes
a sales tax entry listed from the source documents that can be totaled to arrive at the total sales
tax charged & collected for the reporting period. The auditor should verify that all sources of
both state and local sales tax were included in the total sales tax accrual amounts reported.
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When the taxpayer has multiple locations and/or multiple sales journals, the auditor should verify
that all sources of sales tax were posted to the sales tax accrual account for each reporting
period. The auditor should verify that local sales tax from all locations identified in counties that
impose a local sales tax are included in the sales tax reported for each applicable jurisdiction.
The taxpayer is required to report the greater of the sales tax actually charged and collected or
sales tax as computed by the applicable sales tax rate multiplied by the taxable sales. In
situations where actual taxable sales are identifiable, the auditor should verify that the larger of
the two amounts were used for reporting purposes.
The auditor should trace sales tax listed on the sampling of source documents to the sales tax
accrual account in order to verify the proper recording and posting of state and local sales tax.
The audit trail should be explained in the audit narrative.
Reported and audited state and local sales tax is included on the “Accrual Differences” schedule
created by the import process in the Bureau’s audit application software. This schedule is
included in every sales and use tax audit report and referenced in the audit narrative. All
unreported trust funds must be recorded in the audit report on this schedule.
If discrepancies are found, the auditor should prepare a schedule and include it in the audit
report to document accrued amounts not included in the reported tax amounts. The “Audited
Tax Accrual” amounts on the “Accrual Differences” schedule should be adjusted to reflect the
auditor’s findings. Additionally, the source of the adjustment should be included as an exhibit in
the audit report.
If the auditor is unable to perform a reconciliation of accrual amounts, a statement should be
included in the narrative indicating as such.
Reporting Basis
A taxpayer must report all sales tax on sales made during the reporting period (61 Pa. Code §
34.3(b)(2)), whether payment was received or not, i.e., the accrual basis.
When a sale is wholly or partially on credit, the buyer must pay the full amount of sales tax due
on the entire purchase price within 30 days after the purchase, (61 Pa. Code § 33.4(a)). The
tax on credit sales must be reported by the taxpayer either on the return covering the period
the sale was made or when the tax was due to be collected from the customer.
When sales are made by layaway, the taxpayer is required to collect and report the tax on the
full purchase price at the time of the first payment after the goods are reserved, or within 30
days after the goods are reserved, whichever occurs first.
Sales Tax Reported on Other Basis
In situations where sales tax is being reported on a basis other than described above (i.e., cash
basis), the auditor is required to perform procedures to identify the tax that has not been reported
but was due.
The auditor should first verify the reported tax amounts agree with the basis the taxpayer used
for filing and all other requirements detailed in this section. The auditor should then prepare a
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schedule that identifies all sales tax that was due to be reported during the audit period that have
not been included on any return, even if that return is outside of the audit period.
First Time Audit
When the sales tax accrual account must be converted to the correct basis, any deficiency will
be assessed in the last period of the audit via the Accrual Differences schedule. The auditor
must request via the Additional Headquarters Processing Request form, a letter to be sent to the
taxpayer from Headquarters. The letter will advise the taxpayer that the sales tax must be
reported on an accrual basis and that similar deficiencies in subsequent audits will be assessed
on a period-by-period basis.
Subsequent Audits
If the sales tax accrual account must be converted to the accrual basis in subsequent audits,
any deficiency will be assessed on a period-by-period basis.
Debits to the Accrual Account
The auditor should review the sales tax accrual account(s) and determine the source of all
material debits (adjustments) that are unrelated to the payment or pre-payment of sales tax on
a corresponding return. The auditor should review the sales tax account(s) to verify that the
taxpayer did not make unallowable deductions for bad debts. Material, invalid, or
unsubstantiated reductions to the sales tax accrual account should be listed. The listing along
with a Request for Financial Records form requesting that the taxpayer provide documentation
supporting the reduction to the accrual account should be given to the taxpayer. If the taxpayer
does not adequately explain or cannot substantiate the reduction, the auditor should include the
amounts in the audited sales tax on the Accrual Differences schedule and assess the difference.
The source of any unsubstantiated reduction should be included as an exhibit in the audit report.
Accelerated Sales Tax Payments
Accelerated sales tax payments should be included in the sales tax accrual like any other
payment. Taxpayers should not reduce their total sales tax reported on the sales and use tax
return for any accelerated payments that were made. They must report the total tax collected
or due for the reporting period. Accelerated sales tax payments made through myPATH, will
automatically populate in the “Previous Payments” box. This box will only display payments that
have been processed.
Credits Taken on The Return
The sales and use tax return (PA-3) provides for a credit to be taken against the overall
remittance on TPPR Credit box of the PA-3 Sales and Use Tax Return via myPATH. Credits
taken on the return will be included on the download from PATH and will appear on the Filing
Detail in the Bureau’s audit application software. The auditor should reference credits taken in
the audit report and verify the source and validity of the credits. Credits for other than
Department approved credit memos or verifiable Taxes Paid on Purchases Resold (TPPR)
should be listed on a separate schedule. If the taxpayer erroneously took a credit on their return
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for taxes that they would otherwise have been entitled to take against their sales or use tax
account (i.e., a credit for sales tax erroneously accrued and remitted in a previous reporting
period), the taxpayer should be notified of the proper method for taking such a credit. The fact
that the taxpayer was notified of the proper method should be included in the audit narrative.
One Percent Discount
The taxpayer may take a one percent discount (up to a maximum of $25.00 for monthly filers,
$75.00 for quarterly filers, and $150.00 for semi-annual filers) of the total sales tax reported on
the tax return for sales tax timely reported and remitted. The one percent discount is not
applicable to use tax. When a taxpayer has reported use tax as sales tax and has taken the one
percent discount, the auditor must assess the taxpayer for the amount of the unallowable one
percent discount taken.
Taxes Collected not Reported
When trust fund deficiencies of $1,000 or more are established, a list of responsible parties must
be attached to the Additional Headquarters Processing Request form and forwarded to
headquarters. The list should include the name, title, social security number, and home address
of the owners, partners, or corporate officers. The list of responsible parties may not be included
in the audit report of the entity due to the nature of the confidential information.
Also, in a situation where the taxpayer is found to have charged or collected sales tax and did
not report such tax, the auditor is required to determine if major penalties are appropriate. For
an attempt to evade or defeat the tax, there is a penalty of one half of the total amount of the tax
evaded.
In addition to major penalties, the auditor must evaluate the necessity to refer the taxpayer to
the Office of Criminal Tax Investigations as well as evaluating the necessity of assessing
reporting periods beyond the statute.
Sales Tax Accrual Overpayments
If during the examination the auditor determines that the taxpayer overpaid sales tax, a credit
may be granted within the audit. Only overreporting of sales tax resulting from verifiable sales
tax accrual errors, such as double posting or paying more than was actually collected or due,
can be granted on a complete basis. Before granting the credit, the auditor should verify that
the taxpayer did not receive a refund for the overreporting or reduce their tax liability in a
subsequent period to offset the overreporting.
Taxed and Nontaxed Sales
Sales Taxed by the Taxpayer
During the examination of sales, the auditor should multiply taxable sales amount by the proper
tax rate on a sampling of sales invoices to verify that the proper tax rate was used. If exceptions
are found, the auditor should compute the proper tax rate for each sales transaction in the sales
population examined. The additional taxable amount resulting from sales being taxed at less
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than the proper rate should be recorded and included in the total deficient sales for the
population examined (whether sales were examined on a complete or test audit basis).
The auditor should examine a sampling of sales transactions to verify that the taxpayer charged
tax based on the incremental basis of tax for state and local sales tax pursuant to the bracket
system outlined in 72 P.S. §7203 and 53 P.S. §12720.503. Exceptions should be scheduled
and included in the audit findings as additional taxable sales. The auditor should increase the
sample to determine if the noted exceptions were isolated or recurring. If the exceptions are
found to be recurring, the auditor should consider determining the additional tax due by use of
an effective rate examination.
Sales Tax on Nontaxable Sales
During the examination of sales, it may come to the auditor’s attention that the taxpayer was
charging sales tax on nontaxable sales. When this occurs, the auditor should inform the
taxpayer of the error. The auditor should document in the sales tax section of the audit narrative
that the taxpayer was informed of the error and instructed on the proper tax disposition of the
sales transactions involved.
First Time Audit
If a use tax liability results from transactions on which sales tax was erroneously charged, the
error and the use tax exposure should be explained to the taxpayer. This is typically observed
in audits of construction contractors where the contractor erroneously charges sales tax on
nontaxable construction activities. The taxpayer should be informed that use tax will be
assessed in subsequent audits on similar transactions. The auditor should document in the
audit narrative that the taxpayer was informed. The auditor should indicate on the Additional
Headquarters Processing Request form that the taxpayer should be sent a “Contractor’s Letter”.
Subsequent Audits
If during subsequent audits the taxpayer is found to still be charging sales tax on nontaxable
sales on which the taxpayer is required to pay use tax, the auditor should verify that the
taxpayer was informed of the proper payment of tax in the previous audit. If the taxpayer was
informed, the auditor should assess use tax on those items. No offsetting credit for sales tax
collected will be allowed.
Refund Of Tax Erroneously Collected
The taxpayer is not entitled to a credit or refund for the collection and payment of sales tax on
a nontaxable sale, the customer is due the credit. The customer must apply to the Board of
Appeals to recover this type of credit. If the taxpayer has refunded or credited the erroneously
collected tax to the customer and the auditor can verify the refund or credit, the auditor may
allow the credit on a first-time audit. The taxpayer should be informed of the proper method to
recover this type of credit.
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Sales Not Taxed by The Taxpayer
In examining nontaxed sales, there are four fundamental methods of audit examinations that
may be employed:
• Complete
• Modified Complete
• Test
• Combination
In each of these methods of audits, the auditor must determine the taxability of each sale in the
population examined. Each transaction occurring within the population is examined to determine
whether the transaction was properly treated as a nontaxable transaction by the taxpayer either
because the item is excluded or exempt from tax. Exemption certificates that support nontaxed
transactions must also be examined for authenticity and validity.
Transaction Analysis
Sufficient analysis should be conducted of the nontaxed transactions to determine whether the
taxpayer correctly treated the sale as a nontaxable sale. The auditor should determine if the
sale is within Pennsylvania, are the products or services sold subject to tax, is there a purchase
price or implied purchase price, is there a valid exemption certificate on file, or is a valid reason
provided on an exemption statement if a certificate was not on file. The answers to these
questions will determine if the taxpayer correctly treated the transaction as a nontaxable sale.
Figure 4.2: Transaction Analysis Flowchart
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Items that were not properly taxed should be listed on a sales schedule in Bureau’s audit
application software. When the audit is submitted to headquarters, the sales should be included
on a schedule that is formatted the same as the template schedule that is available in Bureau’s
audit application software. The detail of the items listed should include at a minimum:
invoice/transaction date, invoice number, customer, item(s) sold, invoice amount, invoice taxable
amount, tax charged, and additional taxable amount. The template schedule includes additional
columns to record a reason code for a basis of assessment.
Exemption Certificates
When examining exemption certificates, the auditor must determine if there is a valid exemption
available to the customer with respect to the item of property or service that is subject of the
transaction and if there is a valid exemption certificate accepted in good faith on file for the
transaction when applicable.
Acceptance In Good Faith
To be accepted in good faith an exemption certificate must:
• Be properly completed,
• Be in the seller’s possession within 60 days from the date of the nontaxed sale.
• Not contain information, which is knowingly false, and
• The item or service sold is consistent with the exemption claimed and the purchaser’s
business activities.
The taxpayer is presumed to be familiar with the laws and regulations governing their business
and their customers.
Invalid or Missing Exemption Certificates
A copy of the sales tax worksheet or schedule identifying all invalid or missing exemption
certificates should be presented to the taxpayer along with a Request for Financial Records
specifically requesting that the taxpayer solicit exemption statements from those customers
whom the taxpayer believes to be exempt.
Exemption Statements
Exemption statements must be on the customer’s letterhead, reference the invoice in question
by date and invoice number, state what was purchased, the reason it is exempt (how it is used)
and include a signature, title, and date. Exemption certificates cannot be considered as
accepted in good faith in lieu of exemption statements unless the date of the certificate is within
60 days of the actual sale.
The taxpayer should be given 30 days to obtain statements. If the taxpayer does not obtain
exemption statements or the statements provided are not complete or do not provide a valid
reason for exemption, the transactions in question should be assessed the tax through the
audit.
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Missing Invoices or Source Documents
If the source document for the sale is not available for examination and an alternative means
of determining if the item was subject to tax and/or tax was charged is not available, the auditor
should list the transaction on the sales tax worksheet or schedule and indicate “invoice missing”
in the description column. These items are presumed to be taxable until the taxpayer provides
documentation to support that the item is not subject to tax or that the item was properly taxed
at the time of the sale.
The taxpayer should be given a copy of the worksheet or schedule along with a Request for
Financial Records, requesting that the taxpayer supply documentation supporting any items
they believe should be removed from the worksheet prior to assessment. The form should
reference the worksheet and include a date by which the documentation is needed (usually 30
days). The taxpayer should be asked to provide an explanation as to why the items are not
available for examination. If additional information is needed to determine the proper treatment
of the transaction if documentation is provided, such as an exemption statement, it should be
requested at this time as well. A copy of the schedule given to the taxpayer should be included
in the audit report as an attachment to the Request for Financial Records form or as a separate
schedule that is referenced on the Request for Financial Records form.
Tax Self-Assessed by Customers
The Department’s position on removing items found to be deficient based on documentation
furnished by the customer to the taxpayer is as follows:
• If the customer responds on the exemption statement that use tax was paid (by the
customers). The customer must attest that the use tax was paid and provide their sales
and use license number. The auditor should verify that the customer is registered for
sales and use tax and did remit an adequate amount of use tax to cover the nontaxed
items. This policy will apply whether a complete or test audit is performed. If the
customer did not report sufficient use tax, an audit referral must be submitted via PATH.
• If the customer responds on the exemption statement that they (the customer) were
audited for a period that contains the transaction(s) in question, it is necessary to
confirm that an audit, was in fact, performed on the customer. The customer must
supply their account number and the period for which they were audited. If the
customer was audited for the period covering the transaction(s), the item(s) shall not be
assessed in the audit of the seller and item(s) shall be deleted from the listing of
assessed items. It is not necessary to verify that the specific item was assessed in the
audit of the customer, only that the customer was audited for the period that contained
the item(s) listed. The auditor is not required to verify that the assessment against the
customer has been paid. This policy will apply whether a complete or test audit is
performed on the seller.
Note: This policy differs from the policy regarding elimination of transactions when a use tax
audit is performed.
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Hotel Occupancy Tax
General
Hotel Occupancy tax is imposed upon every occupancy by an occupant of a hotel room, for
rentals of a period fewer than 30 days. The tax is collected by the operator of the hotel at the
time the rent is due. Unless there is evidence to the contrary, it is presumed that the rent is
due at the expiration of the rental period. Because the tax is to be charged, collected, and
remitted by the operator, there is no use tax provision for hotel occupancy tax.
Booking Agents
Effective January 22, 2019, a booking agent that facilitates an occupancy on behalf of an
operator located in Pennsylvania must charge, collect, and remit hotel occupancy tax on the
discount room charge, which is the amount charged by the hotel operator. In addition to hotel
occupancy tax, the booking agent is required to register for a Booking Agent license. Booking
agents are required to charge, collect, and remit hotel occupancy tax on any accommodation
fee they charge. An accommodation fee is any amount charged by the booking agent in excess
of the discount room charge. The hotel occupancy tax on the accommodation fee is reported
on a Hotel Booking Agent Tax Return though myPATH. The tax on the accommodation fees is
reported separately as the taxes collected are designated for state’s Tourism Promotion Fund
and not the General Fund as other sales, use, and hotel occupancy taxes.
Booking agents are required to pay hotel occupancy tax on their purchases of hotel occupancy
from the operator. As there is no provision for resale for the hotel occupancy tax, the operator
is required to charge, collect, and remit all applicable hotel occupancy taxes on their sales to the
booking agent. The booking agent will then take a Taxes Paid – Purchases Resold (TPPR)
credit on the PA-3, Sales, Use, and Hotel Occupancy Tax Return.
In instances where the booking agent collects the tax from unlicensed operators (e.g., private
homeowners offering occupancy on an online marketplace), the hotel occupancy tax on the
discount room charge is charged, collected, and remitted under the booking agent’s hotel
occupancy tax license. The booking agent is not entitled to the TPPR credit.
Link: Hotel Booking Fact Sheet
Exemptions
Many of the exemptions applicable for sales and use tax do not apply to the hotel occupancy
tax. The exemptions allowed are listed in 61 Pa. Code § 38.2. An exemption is not available
to the following customers:
• Commonwealth of Pennsylvania, its instrumentalities, or political subdivisions
• State chartered credit unions
• Institutions of Purely Public Charity
• Those claiming a limited business exemption.
• Direct-Payment Permit Holders
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Types of Hotel Occupancy Tax Audits
Concepts applied in the auditing of sales tax generally apply to hotel occupancy tax audits. A
thorough working knowledge of the hotel occupancy tax and the rules and regulations
promulgated, coupled with a complete understanding of the sales tax audit principles and
techniques will enable the auditor to effectively perform hotel occupancy tax audits. Any hotel
occupancy tax assessment must be separately identified in the audit report.
General
The following examination methods, which are employed in sales tax auditing, are adaptable to
and generally utilized in hotel occupancy tax auditing:
• Complete
• Modified Complete
• Test
• Combination
The procedures, techniques, and forms employed in sales tax audits are utilized for state and
local hotel occupancy tax audits except that occupancies are examined instead of sales.
The individual occupancy listings, which serve as the basis for the audit findings are recorded
on the template in the Bureau’s audit application software “Hotel Occupancy schedule”. The
details on the schedule include:
• Check-In and Check-Out Date
• Invoice, bill, or folio number
• Name of the occupant
• Total rental value of the occupancy
• Taxable rental value of the occupancy
• Tax incurred on the taxable rental value.
• Tax charged on the occupancy.
• Reason the auditor considers the rental value as taxable where the taxpayer has
considered nontaxable.
Test Audits
When conducting a test audit on room revenues (occupancies), the population for choosing test
periods for hotel occupancy will be different from the population used to determine the sales tax
test period. This is necessary because sales tax and hotel occupancy tax operate under different
exemption rules. Separate error rates and projections should be calculated for each area of tax.
Two separate test forms are required. Sometimes taxpayers have monthly reports of tax-exempt
rooms or separate folders for banquet/catering charges.
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Use Tax
The auditor is to verify that the taxpayer self-assessed use tax on purchases of taxable tangible
personal property and services that were not properly taxed by the vendor. In addition, the
auditor must verify eligibility for the KOZ/KOEZ/SDA exemption where such exemption has been
used to make nontaxed purchases. Contact HQ to verify the status of the taxpayer’s
KOZ/KOEZ/SDA exemption.
The use tax examination involves three distinct parts: Use Tax Accrual Verification, Capital
Purchases Examination, and Expense Purchases Examination. Each of these parts must be
clearly explained and documented in the audit report. The auditor must approximate the number
of expense transactions per month to identify the most effective and efficient audit procedures
to examine expenditures.
Use Tax Accrual
General
The auditor must establish the audit trail as it pertains to the accrual of state and local use tax
and document the trail in the System Survey section of the audit narrative. The auditor must
explain how the taxpayer identifies purchases not properly taxed by the vendor, how the use
tax is calculated, how the use tax is accrued and reported, and how the taxpayer codes the
invoice to indicate use tax was accrued.
A complete reconciliation of the state and local use tax per the books to the reported use tax is
required for the audit period. The results of the reconciliation by jurisdiction must be detailed
on the “Accrual Differences” schedule. When use tax is accrued from more than one source
and errors are found in posting to the accrual account, a supplemental schedule detailing the
amount from the various sources of use tax for each reporting period should be included in the
audit report. The auditor should substantiate their findings by exhibiting the documentation
used in identifying the errors.
A sampling of transactions where the taxpayer accrued use tax should be traced to the books
and records used in the reporting of use tax to verify the accuracy of the reported use tax.
Exceptions should be scheduled and included in the audit findings. If errors are found, the
auditor should increase the sample to determine if the noted exceptions were isolated or
recurring. If the exceptions are recurring, the auditor should not rely on the use tax coding on
the source documents. A different audit approach is required to account for the use tax.
Additionally, the auditor may encounter other situations which will also require a different audit
approach to account for the use tax, such as:
• Material fluctuations in the amount of use tax reported throughout the audit period.
• Records are not made available to perform a reconciliation.
• Accounting system does not allow a way to effectively identify self-assessed
transactions.
• Ability to trace adjustments from the use tax accrual account to the supporting
documentation.
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• Ability to segregate use tax reported on capital purchases from use tax reported on
general expenses.
• Arbitrary or estimated amounts of reported use tax.
When the auditor encounters the above situations, they should identify all taxable transactions
where the vendor did not properly charge sales tax and then offset any use tax due by the
amount of the reported use tax. In these situations, a zero (0) is entered under the “Audited
Tax Accrual” column for each reporting period. This credit of reported use tax will act as an
offset to the actual use tax liability established and should be identified in the narrative as such.
Any use tax deficiency established by the auditor must be recorded on the “Accrual Differences”
schedule by filing period. The auditor should support the summary use tax accrual deficiency
amounts with transaction-specific schedules or exhibits. The nature of the use tax accrual
deficiency should be fully explained in the narrative.
In addition, credits granted in the audit for use tax reported in error (use tax overpayment
credits) should be detailed on a schedule and not shown as a reduction to the “Audited Tax
Accrual” column of the “Accrual Differences” schedule.
Capital Purchases
General
A complete examination of capital purchases is generally required. When computerized
records are available, a modified complete examination may be performed.
A listing of capital purchases acquired during the audit period should be included in the audit
report as an exhibit and referenced in the narrative (i.e., a current depreciation schedule). The
completeness of this list must be verified by reconciling the capitalized amounts to the general
ledger; Schedule L, Balance Sheets per Books, or FF 4562, Depreciation and Amortization, of
the federal income tax returns; and/or the RCT-106 of the PA Corporate Income Tax Returns.
The auditor should trace all capital purchases from the capital purchase listing to the purchase
invoices to verify the completeness of the purchase invoices presented for examination.
Differences must be explained and reconciled.
The taxpayer should be given a schedule documenting the differences and a Request for
Financial Records requesting that the taxpayer provide an explanation and documentation to
support the differences. If documentation is provided that can be used to identify the source
documents related to the differences, such as a journal entry, those documents should be
reviewed as part of the examination. If material differences remain after the taxpayer has
provided all additional information available, the auditor should assess use tax on the
unsubstantiated differences. If the listing of capital purchases is higher than the summary
records and no additional documentation is provided that can be used to determine if the assets
were sold or otherwise disposed of that could be examined during the sales examination, a
sales tax assessment should be issued on the difference.
When necessary, the taxability of a capital item should be determined by a physical inspection
of the item while in use as well as an examination of supporting documentation. Supporting
documentation includes purchase orders and capital expense requisitions.
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Notes:
• When auditing a business claiming a business exemption, visual inspection of
equipment during the plant tour is an integral part of this phase of the audit. Failure by
the taxpayer to provide a plant tour in this scenario represents a scope limitation because
the auditor cannot visually inspect how a piece of equipment is actually used in the
manufacturing process.
• Transactions not properly taxed by the vendor should be traced to the use tax accrual
account. Deficient transactions should be listed on the “Capital Assets” schedule. In
addition to the information listed on the schedule, the basis for assessing use tax should
be included. The taxpayer should be presented with the schedule and given an
opportunity to review the deficient transactions and provide supporting documentation
and explanations for those transactions that the taxpayer believes are not taxable or on
which tax was paid.
Predominant Use
When the taxpayer uses a capital asset in both a taxable and nontaxable manner, the taxpayer
must provide supplemental documentation that can be used to determine the predominant use
of the item. The predominant use (more than 50%) determines the taxability of the item in
question. The narrative should include an explanation of how predominance was determined,
and the supplemental documentation should be included in the audit report when available.
Testing of Capital
When computerized records can be obtained for capital, a review should be made to determine
if an efficient complete or modified complete examination of capital could be performed. If a
complete or modified complete examination cannot be efficiently performed, a test of capital
purchases may be performed in certain circumstances. If the taxpayer can provide a verifiable
computerized listing of all capital purchases that are able to be examined using a stratified
random sample methodology, the regional office may contact to Sales and Use Tax Program
Administrator to discuss a test of capital.
Expense Purchases
General
In examining expenses, there are four fundamental methods of audit examinations that may be
employed:
• Complete
• Modified Complete
• Test
• Combination
In each of these types of audits, the auditor must determine the taxability of each expense
transaction within the defined population. Each transaction occurring within the population is
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examined to determine whether the proper amount of tax (tax incurred) has been charged by
and remitted to the vendor or that use tax was accrued and reported on taxable transactions.
The auditor must approximate the number of expense transactions per month and identify how
the approximation was determined.
When a test audit is performed, the auditor should review the taxpayer’s chart of accounts and
general ledger to identify accounts that have a large dollar amount and include a small number
of transactions. Accounts with large dollar amounts and a relatively small number of
transactions should be removed from the test population prior to the selection of the test
period(s) and examined on a complete basis. Examples of such accounts include utilities,
prepaid accounts, lease payments, and telephone accounts.
The auditor should verify that all source documents were made available for examination by
tracing a sampling of transactions in the original books of entry (i.e., disbursements journal or
accounts payable journal) to the source documents. The auditor should also trace a sample of
source documents to the original books of entry to verify the transactions were properly
recorded. This sample should be traced to the disbursements journal to verify sales tax
charged on the invoice was actually paid by the taxpayer. Exceptions should be addressed in
the audit report and assessed when deficiencies are discovered.
All transactions in the population chosen for examination should be examined to determine if
the vendor charged sales tax on all taxable purchases. Transactions not properly taxed should
be traced to the use tax accrual account to determine if use tax was reported. Deficient
transactions should be listed on the “Expenses” schedule.
In making the determination of the taxability of the items examined, the auditor may, in addition
to examining the purchase invoices, examine other supporting evidence such as purchase
orders, account coding, contracts, and physical inspection of the items in use. When the auditor
relies on supporting documentation to determine the taxability of an item, the documentation
should be referenced in the audit narrative and on the “Expenses” schedule. A copy of the
chart of accounts, purchase orders, contracts, or other supporting documentation should be
included in the audit as exhibits when they are necessary to support the deficient transactions
listed on the “Expenses” schedule.
Construction Materials
In cases where a taxpayer is engaged in the performance of a construction activity, the auditor
is to conduct a complete examination of all job-related material expenses. Job related
expenses must be examined and discussed separately from other expenses in the audit
narrative.
When computerized records can be obtained for materials and supplies used in construction
activities, a review should be made to determine if an efficient complete or modified complete
examination of job-related expenses can be performed. If a complete or modified complete
examination cannot be efficiently performed, a test of job-related expenses may be performed
in very limited circumstances. certain circumstances. If the taxpayer can provide a verifiable
computerized listing of all job-related purchases that are able to be examined using a stratified
random sample methodology, the regional office may contact to Sales and Use Tax Program
Administrator to discuss a test of job costs.
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Use Tax Credits Recognized by Auditors
General
The auditor may grant credits in an audit for:
• Use Tax Overpayments
• Taxes Paid-Purchases Resold
• Third Party Credits
These credits may be granted for all periods covered in an audit.
Verifying Prior Credits
Prior to granting credit within any audit, the auditor must review RAPS to determine if the
taxpayer received a refund during any portion of the audit period. If file documents are not
available on RAPS, then headquarters personnel should be contacted to obtain the file.
Auditor’s Responsibility for Developing Use Tax Credits
The auditor will make a reasonable effort to develop use tax overpayments rightfully due the
taxpayer. However, the auditor will not expend excessive time in verifying or developing
overpayments. In situations where an excessive amount of time is involved in such work, the
auditor will request the taxpayer to develop the necessary documentation supporting the
overpayments and the auditor can include these credits in their report after verifying its accuracy
and completeness.
If the taxpayer is unable to provide this information by the conclusion of the audit or any credits
requested by the taxpayer are denied, the auditor should inform the taxpayer that the statute of
limitations for any transaction within the audit period is six months from the date of the “Notice
of Assessment” or three years from the date the tax was paid, whichever is later, and that it is
necessary to file a petition for refund for any credits not granted in the audit. These petitions
must be supported by sufficient documentation that proves the overpayment of tax.
Supervisory Review
When the auditor is granting credits to the taxpayer during the audit, the supervisor should review
the credits during the audit pre-review.
Use Tax Overpayments
Credit for use tax overpayments will be recognized in the audit. This situation arises when the
taxpayer self-assesses use tax on a purchase that is excluded or exempt from the tax. Before
granting the credit, the auditor should verify that the taxpayer did not receive a refund for the
overpayment or reduced their use tax liability in a subsequent period to offset the overpayment.
When a test period for expenses is selected on a representative basis using key characteristics,
credits for use tax paid directly to the Commonwealth will be included in the numerator of the
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error rate. As outlined in 61 Pa. Code §8a, “Enforcement”, if the results of a representative
sample (block sample or Stratified Random Sample) yield a net credit, a credit will be projected
for the reporting periods represented by that test sample.
Use tax overpayment credits will be projected when:
• The test periods are chosen on a representative basis (i.e., average expenses) as
outlined in §8a, and
• A stratified random sample methodology is utilized, and the number of observations
results in a precision mutually agreed upon by the Department and the taxpayer, or
• Block sample test periods are selected using one reporting period per year or one
complete year within the audit period, and
• Use tax reporting is consistent throughout the audit period.
Credits should not be projected when the test periods were selected based on the unavailability
of records. This requirement may be waived if the records for a substantial portion of the audit
period are available, and the sample(s) selected is chosen as representative from those periods
that are available. When records are not available for the entire audit period, regional manager
approval is required prior to projecting the results of a net credit test period.
A separate schedule must be included within the audit report for any requested use tax
overpayment credits that were denied by the auditor. The reason for denying the credit must be
included on the schedule.
Taxes Paid-Purchases Resold Credit
Credit for Taxes Paid on Purchases Resold (TPPR), as explained in 61 Pa. Code § 58.11, will
be recognized in the audit. This situation arises when the taxpayer pays tax on tangible
personal property included in inventory, which has been resold in the ordinary course of
business. TPPR credits may be reported on the sales and use tax return or requested through
the audit. Any TPPR credits reported on the sales and use tax return must be verified by the
auditor. The taxpayer should develop any TPPR credits they are requesting to be included in
the audit.
To verify the reported or requested TPPR credits, the taxpayer must provide proof that sales
tax was paid on the original purchase, an invoice, or similar source document, showing the sale
of the item in question, and an attestation on company letterhead. The attestation must state
that they have verified that the credit was not previously received through a credit memo,
petition for refund, or any other means and be signed by the taxpayer, a corporate officer, or a
holder of power of attorney.
Credit for taxes paid on purchases resold may only be granted on a complete basis and may
not be included in an audit assessment as a projection. These credits reduce the overall use
tax liability.
Any TPPR credit granted should be listed on the “TPPR Credits” schedule.
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Reported TPPR credits that were disallowed by the auditor must be documented on a separate
schedule and assessed through the audit.
Third Party Credits
If an auditor discovers that during the audit period, the taxpayer overpaid tax to a vendor and
the taxpayer provides sufficient evidence to the auditor that the tax is not rightfully due the
Commonwealth, the auditor will be permitted to grant credit for the sales tax overpaid on that
transaction. This is called a “third party credit”.
Credit for taxes paid erroneously to vendors must be granted in the sales and use tax audit if it
can be established through clear and convincing documentary evidence that the taxpayer has
paid the tax in error and the taxpayer has not received credit for the overpayments through any
other means.
The Requirements for Audit Review of Third-Party Credits form should be presented to the
taxpayer at the pre-audit conference. All documentation as outlined on this form must be
presented by the taxpayer prior to issuing a third-party credit. The required documentation
includes:
• A copy of the source document for the transaction
• Proof of tax payment
• A valid reason for exemption with supporting documentation if needed (i.e., predominant
use study)
• An attestation that no credit memo, tax refund, or any similar reimbursement for tax
overpayment was provided on the taxpayer’s letterhead and signed by the taxpayer, a
corporate officer, or a holder of power of attorney.
If insufficient evidence is submitted to the auditor, the auditor must deny the credit.
Third party credits are only to be projected when using a stratified random sample methodology.
The population used to select the sample must be drawn from the entire audit period.
Exceptions must be approved by the Sales and Use Tax Program Administrator. Third party
credits may not be projected in a block sample.
Any third-party credit granted outside of a stratified random sample should be listed on the
“Third Party Credits ”schedule. A separate schedule must be included within the audit report
for any third-party credits denied by the auditor. The reason for denying the credit must be
included on the schedule.
Whenever a third-party credit is granted for sales tax paid erroneously on a construction activity,
the auditor should refer the schedule of related credits to headquarters through an Additional
Headquarters Processing Request form with examples of transactions in question.
Headquarters will review the vendors for possible audit or ask Office of Chief Counsel to write
the contractor advising them to stop collecting sales tax and pay use tax on materials consumed
in performing the construction activity.
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Other Use Tax Consideration
Missing Invoices
The auditor should present the taxpayer with a list of transactions where an invoice was not
provided for examination. A separate list should be prepared for capital and expense
transactions. These lists should be labeled as “missing invoices” and should be included with
a Request for Financial Records form. This form should specifically request the taxpayer
provide the invoices for these transactions within a reasonable timeframe (typically 30 days).
The list along with a Request for Financial Records form must be included in the audit report
as documentation for any assessment of missing invoices.
Local Use Tax
The auditor should examine purchase invoices to determine if local sales tax was properly
charged on all taxable purchases originating from vendors located in counties that impose a
local sales tax or shipped to a taxpayer’s location within a county that imposes a local sales
and use tax. The auditor should examine the taxpayer’s local use tax accrual records to
determine if local use tax was accrued and reported on all purchases subject to the local tax
where the vendor did not charge the local sales tax. Any deficient transactions should be listed
on the appropriate “Capital Assets”, or “Expenses” schedule and the appropriate local tax box
should be checked. It is possible that a transaction may have the appropriate amount of state
sales tax charged. In these cases, the “State Exempt” box should be checked on the schedule.
In cases where the taxable amount for state and local differ, the transaction will need to be
entered on separate lines on the schedule.
Procurement/Purchase Cards
Procurement/purchase cards (P-Cards) allow authorized employees to purchase goods and
services using a company credit card without using the traditional purchasing process. Usually
there is a limit on the maximum single purchase, the accounts or cost centers for which it may
be used, or the types of items that may be purchased using the card.
Some common audit issues regarding the use of P-cards include:
• A purchase order is not used.
• The monthly lump sum payment made to the credit card company is for multiple
purchases to multiple vendors and does not include transactional level detail necessary
for audit purposes.
• Vendor source documents identifying an item description, purchase price, and sales tax
charged are not often maintained or readily accessible.
• A single payment may be assigned to several accounts and cost centers.
• Organizations are replacing checks with purchasing cards and automating the payment
to the supplier, complicating proof of payment related to the individual purchases.
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The auditor should review the taxpayer’s purchasing methods and determine if separate audit
procedures are necessary to examine these transactions prior to defining the population for
selecting test period(s).
The audit narrative must specifically address the taxpayer’s use of procurement cards and the
audit procedures used in their examination.
Electronic Data Interchange
Electronic Data Interchange (EDI) is where transactions only exist in electronic or computerized
form. In these situations, the taxpayer does not maintain paper copies of invoices to support
the transactions recorded in the taxpayer’s books.
The invoice detail such as invoice number, invoice date, merchandise, invoice amount, sales
tax, etc. typically listed on a hard copy of an invoice is recorded electronically in the taxpayer’s
books resulting in a “paperless” exchange.
If any of the population examined by the auditor includes EDI transactions, a list of taxable EDI
transactions where sales tax was paid to the vendor should be provided to the taxpayer. A
separate list should be prepared for each vendor. A statement must be obtained from the
vendor on their letterhead indicating they are registered (provide account number) with the
Department of Revenue and the sales tax for the listed transactions was reported and remitted
to the Department. The list and the request for a statement from the vendor must be
documented on a Request for Financial Records form.
Tax Added to Nontaxed Purchase Invoices
In situations where a taxpayer indicates that sales tax was manually added to a purchase
invoice and paid to the vendor, the auditor must verify the supporting documentation. The
auditor should verify that the tax was actually added to the invoice and paid to the vendor. In
addition, the vendor must furnish their applicable sales tax accrual record (or excerpt) or sales
tax accrual worksheet showing the items in question, their account number, and the period(s)
when it was reported to be acceptable. The auditor should verify that the vendor is registered
for sales and use tax and did remit sales tax adequate to cover the transactions in question.
Tax Assessed on Vendor
If the taxpayer claims that a deficient transaction was assessed in an audit of the vendor, it is
the taxpayer’s responsibility to obtain the sales tax license number, employer identification
number, and audit period from the vendor. The auditor will then corroborate the information
provided by examining internal records.
If the vendor was audited on a complete basis and the same deficient transaction was assessed
in the audit of the vendor, and the vendor paid the assessment, the deficient transaction should
be deleted from the schedule.
If the vendor was audited on a test basis and the test population included the deficient
transaction, the deficient transaction will be deleted from the schedule if the vendor paid the
assessment.
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Note: This differs from the sales tax audit policy.
Conducting Plant Tours
If the taxpayer is in the business of manufacturing, processing, or mining, it is imperative to tour
their operations before proceeding with the examination of records due to the limited business
exemption. This will allow the auditor to verify the taxpayer’s operations or activities qualify for
the business exemption and to identify the first and last stages of their operation.
Procedures
Before the Tour
• Request a complete capital asset listing from the taxpayer.
• Ask the taxpayer to provide a detailed narrative of the operation including hours of
operations and if any scheduled plant shutdowns occurred during the audit period.
• Obtain a listing of the utility meters for electricity and natural gas to see what areas, if
any are separately metered.
Note: On-road diesel fuel (clear) is subject to fuels tax and not subject to sales tax. Off-road
or dyed low sulfur diesel is subject to sales tax unless supported by an Pennsylvania Exemption
Certificate (REV-1220).
During the Tour
• Identify the first and last stage of the operation as well as the type of property being used
in pre- and post-production areas.
• Using the capital listing, identify where in the operation the property is being used and
determine direct use (nontaxable) or indirect use (taxable).
o For assets purchased outside of the audit period, identify where in the operation
these assets are being used so a determination may be made when reviewing
expenses associated with these assets.
• Identify activities not qualifying as manufacturing processing or mining such as repair and
maintenance shops.
• For property used in a taxable and nontaxable manner such as forklifts, request the
taxpayer provide a usage study to determine predominant use.
• Trace a few assets from the capital asset listing to the physical asset to verify the
completeness of the capital asset listing.
E-911 PEMA
The auditor should be familiar with the business activities of the taxpayer and verify that E-911
surcharged is being charged, collected, and remitted on all wireless telephones or pre-paid
telecommunication services (i.e., pre-paid cell phone minutes or phone cards). The E-911 fee
is $1.65 per transaction through February 29, 2024, and $1.95 thereafter.
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Reported and audited E-911 surcharges are included on the “Accrual Differences” schedule
created by the import process in the Bureau’s audit application software. This schedule is
included in every sales and use tax audit report and referenced in the audit narrative. All
unreported E-911 surcharges must be recorded in the audit report on this schedule.
For audit purposes, the auditor should request the E-911 general ledger accrual account, sales
journal summarizing the E-911 fees charged and collected or any other sales report detailing
the E-911 fees charged and collected during the audit period. The auditor should trace the
amounts from the taxpayer’s books to the E-911 fees listed in the “Accrual Difference”
schedule.
If discrepancies are found, the auditor should prepare a schedule and include it in the audit
report to document accrued amounts not included in the reported surcharge amounts. The
“Audited Tax Accrual” amounts on the “Accrual Differences” schedule should be adjusted to
reflect the auditor’s findings. Additionally, the source of the adjustment should be included as
an exhibit in the audit report.
Note: The Department is prohibited from assessing the surcharge on the sales of wireless
devices or prepaid telecommunication services where the vendor failed to charge/collect the
surcharge. In these situations, the auditor should instruct the taxpayer to begin charging and
collecting the surcharge.
If the auditor is unable to perform a reconciliation of accrual amounts, a statement should be
included in the narrative indicating as such.
Public Transportation Assistance Tax and
Fees
The auditor must be familiar with 61 Pa. Code §47.19, Public Transportation Assistance Taxes
and Fees (PTA). The auditor should be familiar with the exemptions and exclusions available
for PTA taxes and fees and how they differ from the exemptions and exclusions available for
sales and use tax.
Minimum Requirements
For any taxpayers registered for PTA, the following must be conducted during the sales and use
tax audit:
Note: Reference to these requirements should be included in the “Areas of Discussion” section
of the audit narrative.
PTA Audited vs. Reported
The auditor must review PATH to determine if the taxpayer is registered for PTA tax. If the
taxpayer was registered for PTA anytime during the sales and use tax audit period, the auditor
must obtain reported PTA amounts for all quarters within the statute of limitations. The auditor
must verify that all accrued PTA taxes and fees (tire fee, rental fee, and lease taxes) are included
in the quarterly reported amounts. This verification should include accruals due to sales to
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customers and accruals due to taxes and fees not paid to the vendors. The audit report must
include a PTA Accrual Difference schedule to document that these procedures were performed.
If a deficiency results from this verification, a separate PTA audit must be conducted. If an
overpayment is discovered, the taxpayer should be advised of the overpayment and procedures
to obtain a refund.
PTA Sales Examination
When a taxpayer’s business activities include selling tires, leasing vehicles, or renting vehicles,
the population examined for sales tax purposes should also be examined to determine if
applicable PTA taxes and fees are being properly charged to customers consistent with 61 Pa.
Code §47.19. In addition, any sales transactions involving the sale of new vehicles should be
examined to determine the tire fee for each new tire was properly charged and accrued. If the
taxpayer is not charging taxes or fees on taxable transactions, a separate PTA audit must be
conducted.
PTA Expenses Examination
During the use tax portion of the audit, the population examined for expenses should also be
examined to determine if the proper taxes and fees were charged by the vendor on the
purchase of tires, leases of vehicles and rental of vehicles consistent with 61 Pa. Code §47.19.
If the taxpayer is registered for PTA, a sample of transactions where taxes or fees were not
properly charged by the vendor should be traced to the PTA accrual account to determine if
PTA tax was properly self-assessed. If deficiencies are found, a PTA audit is required.
Nonregistered Taxpayers
If deficiencies are found and the taxpayer is not registered for PTA, the auditor must instruct the
taxpayer to register for a PTA license number online at myPATH.
Obtaining Reported PTA Information
PTA taxes and fees are reported on a quarterly basis. Reported amounts for each complete
quarter within the statute of limitations should be obtained and compared to the taxpayer’s
recorded amounts.
Reported PTA information is maintained within PATH under the Accounts tab in the Customer
Springboard. The auditor will generate a PTA Download of the reported amounts to include on
the “PTA Accrual Difference” schedule with the Bureau’s audit application software.
PTA Audit Assignments
The overall audit procedures and documentation requirements regarding the conduct of a PTA
audit are the same as those required for a sales and use tax audit assignment. Exceptions and
procedures specific to PTA audit assignments are explained below.
PTA audits will be designated an assignment number beginning with PTA (Public Transportation
Assistance) prefix. PTA audit assignments should be conducted concurrently with the sales and
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use tax audit assignment. The information necessary for an assessment of PTA taxes and fees
should be captured using the templates specific to PTA assignments in Bureau’s audit
application software. The same population examined for the sales and use tax review is
generally used for the examination of PTA taxes and fees.
Audited vs. Reported Amounts
The audit trail for taxes and fees should be documented in the audit narrative. The auditor
should verify that all PTA taxes and fees accrued were properly reported on the PTA returns for
each reporting period in the audit period. The auditor should prepare a “PTA Accrual
Differences” schedule, as per the PTA Download instructions. This schedule shall segregate
and compare the audited and reported amounts by motor vehicles lease tax, motor vehicle rental
fee, and tire fee.
The lease tax, rental fees, and tire fees are each assigned unique tax codes and schedule
templates in the Bureau’s audit application software. Therefore, assessment of any one or all
of these PTA taxes and fees may be assessed through a single PTA assignment.
When there is more than one source for a particular tax or fee (lease, rental, or tire) the auditor
should prepare a schedule listing the individual sources to verify that all sources were included
in the amounts reported.
A sample of PTA taxes and fees that were charged on sales invoices should be traced to the
books of original entry to verify that taxes and fees were properly recorded in the PTA accrual
accounts. The sample should also be examined to verify that vehicle lease tax, rental fees, and
tire fees were charged at the appropriate rate.
Sales Subject to PTA
Each transaction examined during the sales tax phase of the collateral sales and use tax audit
should be examined to verify that the proper taxes and fees were charged. When the proper tax
or fee was not charged to the customer, exemption certificates should be examined to determine
if a proper exemption certificate is on file. Deficient transactions should be listed on the
appropriate PTA sales schedule template in the Bureau’s audit application software with specific
tax code to indicate the type of taxes and fees applicable. The schedule templates can be found
in the “Schedule Template Files (PTA)” in the Bureau’s audit application software.
Lease Tax
Lease tax examinations are generally conducted on a complete or modified complete basis.
Test audit procedures may be used when the auditor can document that conducting a complete
audit is unduly burdensome due to the number of transactions and that conducting a modified
complete audit is impractical due to the substantial changes in the leasing customers over the
audit period.
Rental Fee
Rental fee examinations should generally be conducted on a complete or modified basis.
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Test audit procedures may be used in limited circumstances. Because the rental fee is based
on daily rentals, the auditor must know the total number of rental days for each vehicle rented
to properly conduct a test audit procedure.
The rental days on which the rental fee was not charged should be divided by the total rental
days within the test period (ratio).
Note: It is possible that “rental days” could differ from calendar days in the test period. The
ratio should then be multiplied by the total rental in each reporting period to determine the
projected deficient rental days. The results should be multiplied by $2.00 to compute the rental
fee deficiency by reporting period.
If the taxpayer does not make the records available to perform a complete, modified complete,
or test audit procedure as explained above, the auditor should specifically request the
necessary records that were not made available on a Request for Financial Records form. The
auditor may then use the available records to compute a ratio of rental tax to sales (or deficient
rental days to sales) and apply the ratio to sales in the remainder of the audit period to compute
the projected deficient rental fee.
Tire Fee
Tire fee examinations should generally be conducted on a complete or modified complete basis.
Test audit procedures may be used in limited circumstances. The tire fee is based on the
number of new tires sold for over the road use. To properly conduct a test audit procedure, the
auditor must know the total number of new tires sold in each reporting period.
The total number of new tires found to be deficient in the test period should be divided by the
total number of new tires sold during the test period (ratio). The ratio should then by multiplied
by the total number of new tires sold in each of the unexamined reporting periods to determine
the total number of new tires subject to the tire fee. The results should be multiplied by $1 to
compute the tire fee deficiency by reporting period.
Another reasonable projectable basis may be used for the computation of the tire fee (e.g., the
number of new cars sold multiplied by 5) when the exact number of tires sold cannot be
determined. Sales dollars should not be used to project the tire fee unless the number of tires
sold cannot be determined.
If the taxpayer does not make the records available to perform a complete, modified complete,
or test audit procedures as explained above, the auditor should specifically request the
necessary records that were not made available on a Request for Financial Records form. The
auditor may then use the available records (usually the same period as the sales tax
examination) to compute a ratio of deficient tire tax to sales (or deficient number of tires to sales).
The computed ratio is then applied to sales for the remainder of the audit period to compute the
projected deficient tire fee.
For the convenience of the taxpayer, this procedure may be used when the taxpayer provides a
signed written request.
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Expenses Subject To PTA
The expense population examined during the sales and use tax audit should also be examined
to verify that that vendor properly charged all applicable PTA taxes and fees. Exceptions should
be traced to the taxpayer’s PTA accrual account to determine if tax or fees were self-assessed.
Transactions found to be deficient should be listed in the Bureau’s audit application software
indicating the proper taxes and fees applicable.
Type of Examination
Examination of purchases for the proper payment of applicable taxes and fees should be
conducted on a complete or a modified complete basis.
When a complete examination was made of expenses during the concurrent sales and use tax
audit, a complete audit should be conducted on the same population for PTA taxes and fees.
When a test audit is performed on expenses during the concurrent sales and use tax audit, a
modified complete audit should be conducted on PTA taxes and fees. Generally, very few
vendors will be found not properly charging PTA taxes and fees. The taxpayer should be given
a Request for Financial Records specifically requesting a vendor history and purchase invoices
for those vendors found to be deficient during the test period.
Vehicle Rental Tax
The auditor should be familiar with 61 Pa. Code §47.20, Vehicle Rental Tax (VRT), the
exemptions and exclusions available for VRT, and how they differ from the exemptions and
exclusions available for sales and use tax.
Minimum Requirements
For any taxpayers registered for VRT, the following must be conducted during the sales and
use tax audit:
Reference to these requirements should be included in the “Areas of Discussion” section of the
audit narrative.
VRT Audited vs. Reported
The auditor must review PATH to determine if the taxpayer is registered for VRT tax. If the
taxpayer was registered for VRT during any period within the sales and use tax audit period,
the auditor must obtain reported VRT figures for all quarters within the statute of limitations.
The auditor must verify that all accrued VRT tax are included in the quarterly reported amounts.
This verification should include accruals due to sales to customers and accruals due to taxes
not paid to vendors. The audit report must include a “VRT Accrual Differences” schedule to
document that these procedures were performed. If a deficiency results from this verification,
a separate vehicle tax (VRT) audit must be conducted. If an overpayment is discovered, the
taxpayer should be advised of the overpayment and procedures to obtain a refund.
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VRT Sales Examination
When a taxpayer’s business activities include renting five (5) or more vehicles, the auditor
should verify that vehicle rental tax has been properly charged at a rate of 2% on all rental
contracts of 29 days or less. The verification that the rental tax was properly charged should
be conducted on source documents concurrently with the sales and use tax examination. When
the taxpayer has been found not to be properly charging VRT on vehicle rentals, a VRT audit
should be requested and conducted.
VRT Expenses Examination
During the use tax portion of the audit, the population examined for expenses should also be
examined to determine if vehicle rental tax was properly charged on the rental of vehicles
consistent with 61 Pa. Code §47.20. If the taxpayer is registered for VRT, a sample of
transactions where taxes or fees were not properly charged by the vendor should be traced to
the VRT accrual account to determine if VRT tax was properly self-assessed. If deficiencies
are found, a VRT audit is required.
Nonregistered Taxpayers
If deficiencies are found and the taxpayer is not registered for VRT, the auditor must instruct the
taxpayer to register for a PTA license number online at myPATH.
Obtaining Reported VRT Amounts
VRT returns are filed on a quarterly basis. Reported amounts for each complete quarter within
the statute of limitations should be obtained and compared to the taxpayer’s book amounts.
Reported VRT information is maintained within PATH under the Accounts tab in the Customer
Springboard. Reported amounts can be downloaded using the instructions for VRT Download.
VRT Assignments
The overall audit procedures and documentation requirements regarding the conduct of a VRT
audit are the same as those required for a sales and use tax audit assignment. Exceptions and
procedures specific to VRT audit assignments are explained below.
VRT audits will be designated an assignment number beginning with a VRT (Vehicle Rental
Tax) prefix. VRT audit assignments should be conducted concurrently with the sales and use
tax audit assignment.
The information necessary for an assessment of VRT should be captured in Bureau’s audit
application software using the schedule templates specific to VRT assignments. The same
population examined for the sales and use tax review is generally used for the examination of
VRT.
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Audited vs. Reported
The audit trail for VRT should be documented in the audit narrative. The auditor should verify
that all VRT taxes accrued were properly reported on the VRT returns for each reporting period
in the audit period. The auditor should prepare a “VRT Accrual Differences” schedule, as per
the VRT Download instructions. This schedule shall compare the audited and reported amounts.
A sample of VRT taxes that were charged on sales invoices should be traced to the books of
original entry to verify that taxes were properly recorded in the VRT accrual account. The sample
should also be examined to verify that the VRT tax was charged at the appropriate rate.
Sales Subject to VRT
The examination of the proper charging of VRT on sales transactions may be conducted on a
complete, modified complete, or a test basis.
Test audit procedures may be used on the sales transactions when the auditor can document
that conducting a complete audit is unduly burdensome or the records necessary to conduct a
complete or modified audit were not made available. The test periods(s) should be selected
based on average total vehicle rental sales. The auditor should specifically document that total
vehicle rental sales for each reporting period in the audit period were requested by presenting
the taxpayer with a Request for Financial Records.
The proper population to examine when verifying that vehicle rental tax was properly charged
is total vehicle rental sales. The auditor should attempt to obtain the total vehicle rental sales
by reporting period for the audit period. Other sales populations that include total vehicle rental
sales may be used for the selection of the test period (and projection of test period findings to
the remainder of the audit period) when the taxpayer does not make the total vehicle rental
sales available.
The source documents within the population should be examined to determine if the VRT was
properly charged on all taxable vehicle rental sales. A properly executed exemption certificate
should be examined for all untaxed vehicle rental sales.
The auditor should give the taxpayer an opportunity to obtain an exemption statement or other
documentation to support the exemption or proper payment of tax on any transaction listed on
the schedule.
Any deficient transactions should be listed on the “Sales – Rental Tax” template schedule which
can be found in the “Schedule Template Files (VRT)” within the Bureau’s audit application
software.
Expenses Subject to VRT
The examination of the proper charging of VRT on expense transactions may be conducted on
a complete or modified complete basis. Generally, a modified complete examination should be
conducted. Vendors identified not properly charging vehicle rental tax during the examination
of expenses in the use tax phase of the concurrent sales and use tax audit should be listed.
The list, along with a Request for Financial Records requesting a vendor history and the
expense invoices for those vendors for the audit period, should be presented to the taxpayer.
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A test audit should not be conducted when examining expense transactions for proper VRT
unless the information regarding vendors found to be deficient during a sample period is not
made available for the remainder of the audit period.
The invoices should be examined, and any transactions identified as deficient should be listed
on the “Expenses – Rental Tax” template schedule which can be found in the “Schedule
Template Files (VRT)” within the Bureau’s audit application software.
Employer Withholding of Pennsylvania
Personal Income Tax
The statute of limitations for employer withholding of Pennsylvania personal income tax (EW) is
three years from the date the return is filed (rolling statute) and will most likely differ from the
sales and use tax audit period. Therefore, the EW examination should be conducted as soon
as practical during the sales and use tax audit since EW has a rolling statue. In situation where
the auditor anticipates that the sales and use tax audit will take several months to complete, the
auditor should attempt to complete the EW portion of the audit within 60 days of the pre-audit
conference to avoid losing periods due to the statute of limitations.
Minimum Requirements
There are three minimum employer withholding requirements that must be conducted and
documented in every sales and use tax audit report: comparison of W2 to the W3, verify taxes
withheld were properly reported, and verify taxes were properly withheld on all taxable
compensation. In addition, when audits are performed on partnerships or S corporations, the
auditor is required to verify that tax was paid on behalf of nonresident principals. Tax issues
relating to resident principals may be addressed through the issuance of a personal income tax
(PT) audit. Names and social security numbers of principals must not be disclosed in a sales
and use tax audit.
Reference to these requirements should be included in the “Areas of Discussion” section of the
audit narrative.
W-2 to W-3 Reported Amounts
A general list of payroll records includes payroll registers or journals, W-2’s and transmittals
(REV-1667) along with PA W-3. The W-2’s, Wage and Tax Statement are filed by employers
to report wages, tips and other compensation paid to employees as well as FICA and withheld
income taxes. The Annual Withholding Reconciliation Statement (REV-1667) along with W-
2/1099 for each employee/distribution recipient must be submitted annually on or before
January 31st following the year in which wages were paid or distributions occurred. The PA
W-3, Employer Quarterly Reconciliation Return of Income Tax Withheld is used to reconcile the
employer withholding payments during the quarter.
The auditor should verify that the sum of the reported W-3 tax reconciles to the tax as reported
on the W-2 transmittal (REV-1667) for each year of the audit period.
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A comparison of the reported W-3 taxes to the reported W-2 tax for each corresponding year
must be documented on the Employer Withholding Reconciliation schedule. This schedule can
be found in the “Schedule Template Files (WTH)” within the Bureau’s audit application software.
The Employer Withholding Reconciliation schedule is required to be included in the sales and
use tax audit report and must be referenced in the audit narrative.
If exceptions are found, the taxpayer should be given a Request for Financial Records form
and a copy of the schedule. The taxpayer should be asked to submit documentation and
explain the exceptions noted on the schedule.
After the auditor reviews the documentation submitted by the taxpayer, the following actions
should occur:
• If the exception was the result of the over reporting of tax withheld as reported on a W-
3 and the auditor verified the correct amount of tax withheld as per the taxpayer’s payroll
records reconciles to the tax as reported on the W-2, the auditor should inform the
taxpayer to file an amended W-3R through myPATH. The amended returns should be
verified by the auditor in PATH and documented in the audit narrative. The auditor should
follow up with the taxpayer if the amended returns were not filed.
• If the exception results from the incorrect amount of tax being reported on the Annual
Withholding Reconciliation Statement (REV-1667) and the correct amount of tax
withheld as per the taxpayer’s payroll records reconciles to the tax as reported on the
W-3s, the auditor should inform the taxpayer to file an amended REV-1667 via
myPATH. The amended “Annual Withholding Reconciliation Statement (REV-1667)”
should be verified by the auditor in PATH and documented in the audit narrative]. The
auditor should follow up with the taxpayer if the amended “Annual Withholding
Reconciliation Statement (REV-1667)”.
• If the exception was the under-reporting of the tax withheld as reported on the W-3 and
the correct amount of tax withheld as per the taxpayer’s payroll records reconciles to the
W-2 transmittal, an employer withholding deficiency has been identified. A separate
employer withholding audit assignment is required.
Note: Taxes withheld from employee’s compensation are considered trust fund monies. The
statute of limitations does not apply to trust fund monies withheld and not reported.
Audited vs. Reported Amounts
The auditor should verify that the tax withheld per the taxpayer’s payroll records reconciles with
the tax reported on the W-3 for each reporting period of the audit.
A comparison of the reported tax as per the W-3 to the tax withheld as per the taxpayer’s payroll
records for the entire audit period must be documented on the EW Accrual Differences schedule.
This schedule can be found in the “Schedule Template Files (WTH)” within the Bureau’s audit
application software. This schedule is required to be included in the sales and use tax audit and
must be referenced in the audit narrative.
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If the taxpayer has over reported tax as verified to the payroll records, the taxpayer should be
informed of the overpayment of tax and instructed to apply for a refund. The exception should
be noted in the narrative.
If the taxpayer has under reported tax, an employer withholding deficiency has been identified.
A separate employer withholding audit assignment is required. Taxes withheld are trust fund
monies, review prior periods for the under-reporting of withholding taxes.
Verify Proper Computation of Tax Withheld
Verify that all taxable compensation was included in the computation of the employer withhold
tax and that the tax was withheld at the proper rate for a minimum of one reporting period.
The W-3 is considered the return for reporting purposes of withholding of PA personal income
tax. Therefore, a reporting period is one quarter. The auditor may examine one quarter or any
period of time greater than one quarter to fulfill this requirement.
The auditor is required to verify that all taxable compensation was included in the computation
of the tax withheld. If additional taxable compensation was not included on the individual W-2’s
submitted to the employees, a separate employer withholding audit must be conducted.
If the compensation used to compute taxes withheld was incorrect, but the proper amount of
Pennsylvania compensation was included in Block 16 (beginning 2001) of the W-2s submitted
to employees, the following should occur:
• First Time Audit – The taxpayer should be informed of the error and the requirement to
withhold tax at the statutory rate on all taxable compensation. The taxpayer should be
informed that upon subsequent audit, the taxpayer will be held liable for additional tax
not properly withheld on Pennsylvania compensation. The auditor should note in the
narrative that the taxpayer was informed of the error. The auditor should request through
an Additional Headquarters Processing Request form that a letter be sent to inform the
taxpayer to begin withholding and reporting tax on the taxable Pennsylvania
compensation.
• Subsequent Audit – The auditor should verify that the taxpayer was previously
informed of the withholding requirement. If the taxpayer did not properly withhold tax, a
separate employer withholding audit must be requested to assess the additional tax due.
The auditor is required to verify that the proper tax rate was used to compute tax withheld. The
verified Pennsylvania taxable wages should be multiplied by the proper rate and the result
should be compared to the tax withheld.
If the tax rate was found to be in error, but the proper Pennsylvania taxable wages were
included on the employee’s individual W-2 for the year:
• First Time Audit – The taxpayer should be informed of the error and the requirement to
withhold tax at the correct statutory rate. The taxpayer should be informed that upon
subsequent audit, the taxpayer will be held liable for additional tax not properly withheld
on Pennsylvania compensation. The auditor should note in the narrative that the
taxpayer was informed of the error. The auditor should request through an Additional
Headquarters Processing Request form that a letter be sent to inform the taxpayer to
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begin withholding and reporting tax on the additional taxable Pennsylvania
compensation.
• Subsequent Audit – The auditor should verify that the taxpayer was previously
informed of the statutory requirement to withhold tax at the proper rate. If the taxpayer
did not properly withhold tax, a separate employer withholding audit must be requested
to assess the additional tax due.
The period(s) examined, and the procedures employed to verify the proper withholding of tax
at the correct rate for all taxable Pennsylvania compensation must be referenced in the “Areas
of Discussion” section of audit narrative.
Obtaining Reported EW Amounts
EW returns are filed on a quarterly basis. Reported amounts for each complete quarter within
the statute of limitations should be obtained and compared to the taxpayer’s book amounts.
Reported EW information is maintained within PATH under the Accounts tab in the Customer
Springboard. Reported amounts can be downloaded using the instructions for EW Download.
EW Audit Assignments
The overall audit procedures and documentation requirements regarding the conduct of an EW
audit are the same as those required for a sales and use tax audit assignment. Exceptions and
procedures specific to EW audit assignment are explained below.
EW audits will be designated an assignment number beginning with a WTH prefix. EW audit
assignments should be conducted concurrently with the sales and use tax audit assignment.
The information necessary for an assessment of EW should be captured in the Bureau’s audit
application software using the schedule templates specific to EW assignments.
Audited vs. Reported Amounts
The audit trail for EW should be documented in the audit report. The auditor should verify that
all accrued EW taxes were properly reported on the W-3s for each reporting period in the audit
period. The auditor should prepare an EW Accrual Differences schedule. This schedule can be
found in the “Schedule Template Files (WTH)” within the Bureau’s audit application software.
This schedule shall compare the audited and reported amounts.
EW taxes withheld form a sampling of employees should be traced to the original books of entry
to verify the taxes withheld were properly recorded in the EW accrual account.
Additional Taxable Wages
If the taxpayer did not include all taxable compensation in the computation of the employer
withholding tax and the additional taxable compensation was not included in the employee’s
W-2, the auditor should examine all source documents within the audit period to identify all
periods where this error occurred.
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The auditor should calculate the proper taxable compensation on one of two EW template
schedules in the Bureau’s audit application software.
Additional Taxable Wages by Employee
The “Additional Taxable Wages by Employee” template schedule is available to calculate
additional taxable wages by employee and pay period. The information that the auditor needs
to complete this schedule includes pay date, employee name and social security number, gross
compensation paid, allowable deductions from gross compensation, and reported taxable
wages. The schedule will calculate the audited and additional taxable wages. Supporting
schedules should be created if necessary to document the deductions allowed by audit.
Additional Taxable Wages by Quarter
The Additional Taxable Wages by Quarter template schedule is available to calculate additional
taxable wages by quarter. The information that the auditor needs to complete this schedule
includes gross compensation paid, allowable deductions from gross wages, and reported
taxable wages. The schedule will calculate the audited PA taxable wages (gross wages less
allowable deductions) and additional taxable wages (audited PA taxable wages less reported
PA taxable wages). Supporting schedules should be created if necessary to document the
deductions allowed by audit.
Incorrect Withholding Rate
If the taxpayer did not use the correct withholding rate in the computation of the employer
withholding tax and the additional taxable compensation was not included in the employee’s
W-2, the auditor should examine all source documents within the audit period to identify all
periods where this error occurred.
The auditor should list all the periods that the error occurred on the Incorrect Withholding Rate
template schedule in the Bureau’s audit application software to calculate the additional tax due.
The information needed to complete this schedule includes taxable wages and any additional
withholding that is withheld at an employee’s request. The schedule will calculate the audited
withholding (taxable wages times the rate), audited tax accrual (audited withholding plus
additional withholding), and tax accrual difference (audited tax accrual less reported tax
accrual).
Pennsylvania Personal Income Tax
General
A limited examination of Pennsylvania personal income tax is required when conducting a sales,
use and hotel occupancy audit of a sole proprietorship, partnership, S corporation or Limited
Liability Company electing pass through status.
Note: Unless the auditor is working with a sole proprietor, member of a single-member LLC, or
100% shareholder of a PA S corporation, information regarding personal income tax returns for
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partners or shareholders such as request for the returns or failure to file returns must not be
discussed with the taxpayer’s representative or noted in the narrative.
Statute of Limitations
The statute of limitations for Pennsylvania Personal Income Tax (PIT) is three years from the
date the return is filed or the return due date, whichever is later. A filing of an extension extends
the statute of limitations to three years from the due date of the extension.
If income on the return is underreported by twenty-five percent or more, the statute of limitations
is six years from the due date or date the return is filed, whichever is later. If a return has not
been filed, there is no limitation imposed by statute.
The PIT examination should be conducted as soon as practical during the sales and use tax
audit due to the rolling statute. In situations where the auditor anticipates that the sales and
use tax audit will take several months to complete, the auditor should attempt to complete the
PIT portion of the audit within sixty days of the pre-audit conference to avoid losing a year due
to the statute of limitations.
Accessing Personal Income Tax Returns
Personal Income tax returns (including partnership returns) filed with the Department can be
accessed through PATH. The auditor must access the individual’s Account Springboard,
Financial tab, and Returns subtab to review the taxpayer’s filing history.
Minimum Requirements
When an audit is conducted on a sole proprietor, partnership, LLC electing pass through
status, or an S corporation, the following must be conducted with all sales and use tax audits:
• For S Corporations or Partnerships, verify the entity filed a PA20S/PA65 including the
corresponding RK-1 for resident partners, members, or shareholders and/or NRK-1 for
non-resident partners, members, or shareholders.
o Examine PA Schedule NW to verify the proper withholding of tax for non-resident
partners, members or shareholders.
• Verify a PA-40, “Personal Income Tax Return” has been filed for partners, members,
shareholders, or sole proprietors. Do not verify limited partners.
o For S corporations and partnerships, verify the business income as reported
on the RK-1 or NRK-1 was properly reported on the PA-40.
o For sole proprietorships, verify a Schedule C was included in the PA-40.
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o Note: If the entity has two or more nonresidents, the nonresidents may elect to file a
nonresident Consolidated Income Tax Return (PA-40 NRC) in lieu of filing an
individual PA-40.
• A general review of the sales and expenses as reflected on the Schedule C or PA-
20S/PA-65 should be made to determine that the reported sales and expenses are
materially consistent with the books and records reviewed during the sales and use tax
audit. For entities filing a PA20S/PA-65, this will require an examination of Federal
Form 1120S/1065 attached to the pass-through return. During this review, the following
areas should be examined:
o Verify the audited gross sales as per the sales tax audit materially reconciles to
the gross sales as reported on Schedule C or Federal FF1120S/1065.
o Verify the expense examination of the sales and use tax audit does not include
any personal related expenses of the partners/members/shareholders such as
mortgage payments, tuition payments, groceries, or any other expenses
unrelated to the operation of the business. If so, verify these expenses were
posted to the partner/member/shareholder’s equity or distribution account.
If any of these minimum requirements identify non-filed PA-40 returns, improper reporting of
RK-1/NRK-1 on the PA-40 or any discrepancies in the reporting of gross sales and/or
expenses on the Schedule C or PA20S/PA65 resulting in a material personal income tax
deficiency, the auditor should request a review by the Bureau of Desk Review and Analysis
(BDRA) by completing the “BDRA - PIT Referral” template available in Bureau’s audit
application software. The referral will be attached to a work item created in PATH; refer to PIT
Referral procedures.
NOTE: Beginning January 1, 2006, all federal S-Corporations are considered to be PA S-
Corporations other than those who opted out under form REV-976, Election Not to be Taxed
as a Pennsylvania “S” Corporation.
Link: Election Not To Be Taxed as a Pennsylvania S Corporation (REV-976)
Required Audit Documentation
The documentation of the procedures performed regarding the limited examination of PIT
returns should be limited to the statement in the “Areas of Discussion” section of the audit
narrative.
“The entity’s state return (PA-20S or PA-65) as filed has been reviewed. The entity has
prepared RK-1s for each principal. The total of the pass-through income by category as
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shown on the RK-1s equals the total income by category on the entity returns in each
year of the audit period”.
No mention should be made regarding the PA-40 comparison to the business records. Also,
the audit report should not contain any schedules, attachments or exhibits relating to the
Pennsylvania personal income tax return of any member/shareholder/partner.
Limited Liability Company-Filing Guidelines
The tax treatment of limited liability companies (LLCs) are discussed below:
• An LLC that elects to file as an S Corporation with the Internal Revenue Service (IRS)
may elect PA Subchapter S status and file using the PA-20S/PA-65.
• An LLC that elects to file as a partnership with the IRS files as a partnership for PA using
the PA-20S/PA-65.
• An LLC that elects to file as a single-member disregarded entity with the IRS files as a
sole proprietor using the PA-40 if the single member is an individual as defined by PA
PIT law. The business activities will be reported on a PA Schedule C, Profit or Loss from
Business or Profession (Sole Proprietorship).
• An LLC that elects to file as a “C” corporation with the IRS files as a “C” corporation for
PA. The LLC files an RCT-101 and is not considered a pass-through entity for purposes
of this examination.
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CHAPTER 5-EXAMINATION METHODS
This chapter of the manual specifically describes the general procedures to be followed by an
auditor in determining the type of audit method and related procedures in the conduct of an audit.
Determination of the Examination Method
Prior to determining the examination method to be employed, the auditor should discuss the
availability of computerized records available for audit with the taxpayer. Computer assisted
audits can be conducted using any audit method.
When the taxpayer does not have complete records or when the review of each transaction
would be unduly burdensome for the Department to conduct a complete audit in a timely and
efficient manner, the Department will determine whether to examine all the records of the
taxpayer for the entire audit period, employ a test audit method, or utilize a combination of audit
methods.
There are four basic examination methods available:
Complete Audit
All records in the population for the entire audit period are examined.
Modified Complete Audit
All records in the population for a defined timeframe of the audit period are examined.
Transactions found to be in error (by customer, vendor, of account) are examined for the
remainder of the audit period.
Test Audit
A representative sample(s) from the population is selected from the audit period and
examined. The results are used to project the assessment (net deficiency or credit) to the
unexamined periods. The primary test audit procedures include stratified random sampling
and block sampling.
In addition, alternative testing procedures may be used to estimate tax liability when the
taxpayer fails to maintain adequate records to properly conduct a previously listed audit
method. These alternative testing procedures include:
Gross Sales Assessment
Development of Taxable Sales/Purchases-Elimination of Obviously Nontaxable
Items
Current Sales Sample Audit-Projectable Average (Tally)
Estimate Taxable Sales using Purchase Records
Effective Rate/Taxable to Gross Auditing Technique
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Combination Audit
Prior to selecting the test period(s), the total population is separated into two or more distinct
populations. Each distinct population is examined independently. A test is performed on
one (or more) distinct population and a complete or modified complete examination is
performed on the non-tested populations(s).
Factors in Determining Method
In making the determination of the method to be used, the Department will consider the following
factors:
• The type of tax under audit.
• The nature of the business activities.
• The number of transactions in the population. The narrative must indicate:
The number of transactions
Source of the transactions such as:
- General Ledger
- Sales Journal
- Purchase Journal, etc.
o The type of transactions such as:
- Sales invoices
- Purchase invoices
- Journal entry, etc.
• The adequacy and availability of the taxpayer’s records. If required records are not made
available, the taxpayer should acknowledge that the required records could not be
provided on a Request for Financial Records form.
• Whether the business is cyclical or seasonal.
• Whether significant changes occurred in the taxpayer’s business activities during the
audit period:
Such as discontinuing a line of business.
• Other relevant factors such as a change in accounting systems, a division going from an
individual accounting system to a company-wide centralized accounting system, major
changes in the personnel responsible for making the determination of the taxability of
items, significant changes in the statutes or regulations governing the taxpayer’s business
activities and any inconsistencies in the reporting of tax.
For example:
- The taxpayer reports use tax for only 10 months of a 36-month audit period.
These items must be considered and fully addressed whenever a test audit procedure is used.
These items must be addressed in the narrative and explanatory documentation should be used
when pertinent.
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Complete Audit
A complete audit is an examination of all transactions within the population for the audit period.
This is the most thorough audit method. However, time, personnel, and resource limitations on
the part of the taxpayer and/or the Bureau may make it impractical or unduly burdensome to
conduct complete audits.
When computerized records are available, Computerized Audit Support (CAS) may be utilized
to perform various sorts, summaries, or merging of taxpayer information to aid the auditor in
conducting a complete audit to reduce time and resources on the part of both the taxpayer and
the Bureau.
Complete audits of a taxpayer’s records are only performed where adequate records are
available and where such audits are practical. Complete audits are employed when the volume
of transactions are small and the unit price of each transaction is large (such as mobile homes,
boats, airplanes, fine jewelry sales, and construction equipment).
In the conduct of a complete audit of sales transactions, each transaction occurring during the
audit period is examined to determine whether the proper amount of tax has been charged,
collected, and reported on all taxable transactions.
In the conduct of a complete audit of capital and expense transactions, each transaction
occurring during the audit period is examined to determine if the vendor charged sales tax or
the taxpayer accrued and reported use tax on all taxable transactions.
All additional taxable transactions are individually listed on the appropriate Bureau’s audit
application software template schedules and summarized by reporting period for assessment.
Modified Complete Audit
This method of auditing may be used when the taxpayer’s record keeping systems, accounting
structure, sales customers/expense vendors are generally consistent throughout the audit
period. This method is generally not used when the taxpayer has had a significant change in
the type of products sold (or purchased), the customers (or vendors) change frequently from
year to year, and the taxpayer’s records are capable of being audited on a complete basis with
minimal additional field time.
A complete audit is conducted on a defined timeframe of the audit period (such as one year or
a reporting period in each year). Like transactions, customers, vendors, or accounts found to
be in error are examined on a complete basis for the remainder of the audit period.
When computerized records are available, Computerized Audit Support (CAS) should be used
to sort data to identify transactions pertinent to the various accounts, customers, cost centers,
or other criteria that is used by the auditor to identify transactions to be examined when
employing a modified complete examination.
Note: The original periods, time frames or areas reviewed to determine the scope of the
modified complete examination of the remainder of the audit period must be specifically
identified in the audit narrative.
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Test Audit
The Department is authorized by statute to use test procedures in an audit (72 P.S. §10003.21).
Title 61 PA Code § 8a also governs the use of test audit procedures. Test audit procedures
are used when complete records are not available or when it would be impractical to perform
an examination of the taxpayer’s records on a complete basis.
Only a sample of the transactions from the entire population for the audit period is examined in
detail for the purpose of verifying the taxpayer’s compliance.
Because the audit findings are supported only by a sample of the total transactions occurring
during the audit period, the audit narrative and supporting documentation should make it very
clear that:
• Reviewing each transaction would be unduly burdensome and
• To review each transaction could not be accomplished in a timely and efficient manner.
Since each additional taxable transaction identified within the test period(s) is extrapolated
across the entire audit period, it is very imperative that the auditor clearly explain the basis for
assessment for each additional taxable transaction within the test period(s). This should be
accomplished through pertinent citations, supporting documentation (such as copies of invoices
or purchase orders), clear descriptions in the audit narrative and on the audit schedules, and
the inclusion of account and/or cost center to which the transaction was posted. When account
coding or cost centers are included on the audit schedules or in the audit narrative, a chart of
accounts and/or a listing of cost centers should be included as an exhibit in the audit report.
Prior to performing a test audit procedure, the auditor will determine through review of the
taxpayer’s general ledger accounts, review of past audits, and discussion with the taxpayer,
what cost centers, customers, vendors, accounts, or other areas (if any) will be eliminated from
the test population and audited on a complete or modified complete basis. This must be
performed prior to the selection of the test period(s).
Link(s): 61 Pa. Code Chapter 8A. Enforcement
Taxpayer’s Concurrence with Test Audit Plan
Prior to performing test audit procedures, the auditor is required to provide the taxpayer with a
written plan of the test audit pursuant to 61 PA Code § 8a.8. The test audit plan is documented
on the Taxpayer's Concurrence with Test Audit Plan form, which is available as a template in
Bureau’s audit application software. The plan must be in writing and include the following:
The time period subject to audit (Audit Period)
The audit period will be extended under limited circumstances.
The objective of the test and the type of test being performed.
The clear objective of the test must be documented such as “Verify sales tax was charged,
collected, and reported on all taxable sales transactions.” In addition, the type of test
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must be documented (i.e., Block Sample- Projectable Average or Stratified Random
Sample).
Population to be tested
Define the test population by identifying the type of transactions and the source of the
transactions. For example, “All sales transactions posted to selected accounts as per the
sales journal for the entire audit period.” The selected accounts must be listed on the test
form or referred through a schedule or exhibit.
The period(s) selected for examination (test periods(s))
The actual periods that are going to be examined and the periods that they will represent
should be listed on the form (i.e., July 2022 for CY 2022).
Basis for selecting test period
The methods for selecting the test periods must be explained including a schedule
detailing how the test periods are selected. If a proper basis was not used for selecting
the test periods due to a lack of records, a Request for Financial Records form must be
included in the audit report to substantiate that the auditor made a reasonable attempt to
obtain the records necessary to properly select the test period(s). The schedule or
request must be referenced on the test audit plan and referenced in the narrative.
The procedures that will be used during the test
A description of the procedures that will be used and how the results will be projected
should be included in this section of the form. The plan must state:
• The way any tax liability will be calculated based on the records reviewed,
• An error rate will be developed by dividing the total additional taxable transactions
by the total amount of the transactions in the test period.
• The error rate will then be multiplied by the total amount of the transactions in the
unexamined periods to arrive at the total projected taxable amount.
• The total projected taxable amount will be multiplied by the applicable tax rate to
compute the total projected deficiency for the population tested for the audit period.
When a stratified random sample is used, the Computerized Audit Support (CAS) division or
regional computer assisted audit representative will prepare the “Taxpayer’s Concurrence with
Test Audit Plan” form.
The plan must be presented to the taxpayer. The taxpayer should be asked to sign, date, and
include their title on the form. The taxpayer should also be asked to indicate on the form if the
business activities were cyclical or seasonal, or if there were significant changes in the
taxpayer’s business activities during the audit period significant enough to affect the selection
of test periods and application of test audit procedures.
The taxpayer should be asked to indicate on the form any reason they may have for disagreeing
with the selection of the test sample and/or test audit procedures to be employed.
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The auditor must evaluate the taxpayer’s concerns and address them in the audit narrative. If
the taxpayer’s concerns are reasonable and can be substantiated, the auditor may adjust the
test population to address the taxpayer’s concerns. If the adjustment results in any deviation
from the originally selected test period(s), a letter or email requesting the change, which states
the reason for the request must be obtained from the taxpayer and included in the audit report.
At this point, a second Taxpayer’s Concurrence with Test Audit Plan form should be completed
and presented to the taxpayer.
If the taxpayer declines to sign the Taxpayer’s Concurrence with Test Audit Plan, the auditor
should indicate on the form:
• Whom the form was presented to.
• The date the form was presented.
• Note: “Taxpayer Declined to sign the form”.
The fact that the taxpayer declined to sign the form does not preclude the auditor from
conducting the test audit.
NOTES:
• When the auditor expects to conduct a test audit of the hotel occupancy tax and sales
tax as part of a hotel audit, the population for choosing test periods for the examination
of the hotel occupancy tax must be different from the population used to examine sales
tax. This is necessary because sales tax and hotel occupancy tax operate under
different exemption rules. Separate error rates and projections should be calculated for
each area of tax.
• Separate test forms are required for each test conducted, i.e., Sales tax and hotel
occupancy.
Inclusion of Credits in the Test Period Audit Findings
When a test period for expenses is selected on a representative basis using key characteristics,
credits for use tax paid directly to the Commonwealth on nontaxable transactions will be
included in the numerator of the error rate. The overpayment should not be netted against the
underpayment in the calculation of the error rate. Separate error rates will be calculated for
overpayments and underpayments.
Refer to Chapter 4, “Use Tax Credits Recognized by Auditors, Use Tax Overpayments” when
projecting credits.
When the test period(s) chosen is less than one reporting period per year, the approval of the
Regional Manager in writing is required before a credit projection can be made.
Only credits for taxes paid directly to the Commonwealth (use tax) may be projected through a
block sample test audit. Third party credits may not be granted on a test basis, except for when
a stratified random sample method is used, and the population used to select the sample covers
the entire audit period. Any projection of third-party credits where the population is less than
the entire audit period requires approval of the Sales and Use Tax Program Administrator.
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Credits should not be projected when the test periods were selected based on a scope limitation
such as the availability of records or use tax reported on expenses was not consistent. This
requirement may be waived if the records for a substantial portion of the audit period are
available, and the sample(s) selected are chosen as representative from those periods that are
available.
Credit Schedule Requirements
Credits are normally recorded on the same schedule as underpayments, but these transactions
must be coded as either a “3” or “U” tax category. For test audits, transactions coded with these
tax categories will result in separate third-party credit and use tax credit error rate calculations
and projection schedules in the Sales and Use Tax Report.
Refer to Chapter 4-“Use Tax Credits Recognized by Auditors” section of this manual for further
detail on credits.
Taxes Paid – Purchases Resold
Credit for Taxes Paid on Purchases Resold (TPPR) may not be included in the audit findings
as a projection, except for Stratified Random Sample. TPPR credits are similar to third party
credits; therefore, a test audit of TPPR credits is only permissible through the use of Stratified
Random Sample if the population used to select the sample covers the entire audit period. Any
projection of TPPR credits where the population is less than the entire audit period requires
approval of the Sales and Use Tax Program Administrator.
Note: TPPR credits associated with inventory related accounts should be addressed through
a separate population.
Test Methods
Stratified Random Sample
Stratified Random Sample test procedures will only be conducted in conjunction with computer
assisted audit (CAA) personnel and will utilize computerized records.
Ideally, Stratified Random Sample tests utilize transactions from the entire audit period.
However, Stratified Random Sample testing may be performed in conjunction with a projectable
average computation when the population of transactions selected for the Stratified Random
Sample does not encompass the entire audit period.
Record Requirements
Computerized records and related source documents should be requested for the entire audit
period on a Request for Financial Records form. In addition, the auditor should have the
taxpayer acknowledge that the source documents are available for the entire audit period. If
the taxpayer cannot or will not make the records available for the audit period, the auditor
should have the taxpayer indicate this fact on the Request for Financial Records form, by
acknowledgement of email, or a letter signed by the taxpayer. In no case should less than one
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complete accounting cycle (usually one year) be used to select the Stratified Random Sample
without approval from the Sales and Use Tax Program Administrator.
Selection of Stratified Random Sample Size
When utilizing a stratified random sample method, the initial sample size will be determined by
past Bureau experience. To achieve the desired precision, the size of the sample will be based
on the stratified data. The sample size may be increased until mutual agreement is reached
between the Department and the taxpayer or until the desired precision is obtained.
Stratified Random Sample Procedures
Computerized transactions are obtained from the taxpayer and presented to CAA personnel.
CAA can accept files in most widely used file formats. CAA will sort and subtotal the records
at the auditor’s direction and present the auditor with the results. The auditor must verify the
taxpayer’s computer data is complete prior to CAA pulling a sample. Some acceptable methods
of verification include:
• If the data was obtained from the accounts payable system and both debit and credit
records were provided, use the change in the balance of the accounts payable liability
account for the same period of time. If the data was obtained from the accounts
payable system and only debit records were provided, compare the value of the credit
records in the accounts payable account for the same period.
• If general ledger detail was obtained for audit purposes, compare several of the most
material expense account totals to income statements or trial balance sheets for the
same period.
• Compare several expense account totals to general ledger balances for the same
period. If accounts payable data was obtained for audit purposes, reconciliation will
need to be performed to identify differences due to entries from other journals (Payroll,
General Journal, Accounts Receivable, etc.).
Test Population
Methods of verification may vary depending on the taxpayer’s accounting system. Once the
test population has been verified as complete, the auditor will identify for CAS any obvious
nontaxable accounts such as insurance, taxes etc... that should be excluded from the test
population. Only those accounts with potential tax liability should be included in the test
population. The auditor should also identify any accounts to be excluded from the test
population and examined on a complete basis.
CAA will eliminate those areas of the population identified by the auditor, perform the
stratification, and identify the items or transactions to be included in the test sample. CAA will
prepare the Taxpayer’s Concurrence with Test Audit Plan form. CAA and/or the auditor will
present and explain this form to the taxpayer.
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The auditor will present the test sample to the taxpayer along with a Request for Financial
Records form requesting that the taxpayer pull the records for examination. It is the auditor’s
responsibility to review all transactions in the statistical sample. The auditor may not replace
transactions from the sample even if the records are missing.
Projection Schedules
CAA or the auditor will compute the error rate, perform the projection, and calculate the
precision utilizing the statistical sampling wizard (SSW) within Bureau’s audit application
software. The SSW will calculate the error rate as well as generate a projection schedule and
precision schedule.
Precisions
The auditor will notify the taxpayer of the results of the projection and discuss the precision of
the projected deficiency. The auditor must complete and present the Taxpayer's
Acknowledgement of Precision Level - Stratified Random Sample form to the taxpayer, which
is available as a template in Bureau’s audit application software.
Taxpayer’s Acknowledgement of Precision Level -Stratified Random Sample
Form
This form must be completed and presented to the taxpayer as soon as possible to allow the
taxpayer time to review the sample errors and results. The completed form must be included in
the audit report.
Taxpayer Accepts Precision Level:
• If the taxpayer signs the form and indicates, “I accept the precision as indicated
and do not request an increase in sample size, no further testing is required.
• The projection resulting from the stratified random sample is included in the audit
report.
Taxpayer Does Not Accept Precision Level
• If the taxpayer signs the form and indicates “I do not accept the precision as
indicated and request an increase in the sample size”, the auditor should complete
the following:
Request that the taxpayer provide the precision level they will accept. At the
minimum, an acceptable precision level is 25%.
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Inform CAA of the requested precision level. CAA will identify the additional
number of transactions needed to achieve the desired precision level and
provide these additional transactions to the auditor.
Provide taxpayer with a Request for Financial Records form along with the
list of additional transactions.
Provide the taxpayer with a revised “Taxpayer’s Concurrences with Test
Audit Plan” reflecting the new sample population. CAS will create the new
test form.
Allow 30 days for taxpayer to present the additional records.
Review the additional transactions.
CAA or Auditor will compute the error rate, perform the projection, and
calculate the precision utilizing the statistical sampling wizard (SSW), within
the Bureau’s audit application software.
Present an updated Taxpayer’s Acknowledgement of Precision Level-
Stratified Random Sample form for the taxpayer to review.
If the taxpayer does not provide the additional requested records, the
original sample will be assessed.
Taxpayer declines to complete the form
• If the taxpayer or their representative declines to complete the Taxpayer’s
Acknowledgement of Precision Level – Stratified Random Sample form, the
auditor should indicate the name of the representative that was presented the
form, the date the form was presented, and note the representative declined to
sign on the form, which will be included in the audit report.
• If precision of the sample is greater than 25% the auditor should follow the above
steps under “Taxpayer Does Not Accept Precision Level”.
• If precision of the sample is 25% or less, no additional procedures are necessary,
and the original sample will be assessed.
Application of Credits
Credits will be included in the numerator of the Stratified Random Sample for use tax paid by
the taxpayer directly to the Commonwealth. This credit will only be included in the Stratified
Random Sample calculation when the auditor can trace the use tax coded on each transaction
to the use tax accrual account, and all use tax accrued was remitted. When less than the entire
audit period was used to select the sample, the auditor must verify that use tax was reported
consistently throughout the audit period prior to projecting credits.
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Third-party credits and TPPR credits may be included in the Stratified Random Sample
computation provided the population encompassed the entire audit period. Any exceptions
must be approved by the Sales and Use Tax Program Administrator.
Sample Period Less Than Audit Period
If the Stratified Random Sample was selected from less than the entire audit period, it is
necessary to compute a projectable average (error rate) to be applied to the periods not
included in the sample selection. An error rate should be computed by dividing the total
projected additional taxable transactions by the total amount of the transactions in the SRS
population. The error rate should be multiplied by the total amount of the transactions from the
same accounts for the periods excluded from the population to arrive at the total taxable
transactions for the unexamined periods.
Separate error rates must be calculated for each tax code and tax category such as use tax
overpayments, third party credits etc. Estimated Error Rates are automatically calculated on
the SRS Projection schedules(s) for each tax code and tax category with findings.
Direct Payment Permit Holders-Formulary Method of Reporting Use
Tax
During the pre-audit conference of direct payment permit holders, the taxpayer shall be
informed that a formulary method of reporting use tax on expenses is available and that the
procedures for computing a use tax factor for expense transactions can be performed during
the current audit. If a taxpayer is interested in formulary reporting of use tax, applications are
available through headquarters.
Statistical sampling procedures must be used to develop the factor for formulary reporting of
use tax on expenses.
The Formulary Factor:
Included in the Numerator
• All expense transactions with a net change (additional taxable purchases less
nontaxable purchases where use tax was erroneously reported).
• All expense transactions in the test sample where the taxpayer properly reported
use tax.
• All expense transactions in the test sample where the taxpayer properly paid
sales tax to the vendor except those for which it was mutually agreed to exclude,
for example:
Hotel Occupancy
Restaurants
Telecommunication Services
Included in the Denominator
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• The total dollar value of all transactions in the test sample.
NOTE: Audit Periods for Direct Payment Permit holders should end on a calendar year,
December 31.
Block Sample-Projectable Average
When a block sample method is chosen, the Department will select blocks of time in which the
average is approximately equal to the computed average of key characteristics for the type of
transaction and the time period to which they apply.
Selection of the Population to Be Tested
Prior to selecting test periods, the population to be tested must be defined. The taxpayer’s
general ledger accounts shall be examined to determine what accounts (if any) should be
eliminated from the population being tested and audited independently of the test procedure.
Accounts with large dollar amounts and relatively few transactions should be excluded from the
tested population prior to the selection of the test period(s) and audited on a complete basis;
refer to Chapter 4-Expense Purchases for further detail.
The error rate computed for a test period shall be applied only to those periods and population
from which the test period was selected with two exceptions:
• When the taxpayer does not make records available for the entire audit period.
• The taxpayer provides express written consent (letter or email) to applying the results of
test period to periods excluded from the population used in the selection of the test period.
(For example, bring an audit current if audit was put on hold for several months before
the beginning of the fieldwork.) This consent must be exhibited in the audit report.
Local Tax Consideration
When it has been determined that the taxpayer had sales locations during the audit period in a
jurisdiction(s) that imposes a local sales tax, separate error rates must be computed for each
jurisdiction.
The auditor should request that the taxpayer provide detailed sales information by location for
each reporting period in the audit period on a “Request for Financial Records” form. It is the
taxpayer’s responsibility to provide the sales breakdown by location. The auditor should verify
the accuracy of the information provided to the taxpayer’s books but should not spend time
extracting the information.
If the taxpayer can provide a breakdown of sales by location, separate test periods should be
selected for each local tax jurisdiction. The numerator of the error rate will be the total additional
taxable sales (by jurisdiction); the denominator will be the total sales of the test period for each
local jurisdiction.
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When the taxpayer cannot provide a detailed breakdown of sales by location for each year in
the reporting period, the test period(s) selected for state sales tax will be used to examine the
local sales. The numerator will be the total additional taxable sales subject to local sales tax (by
jurisdiction). The denominator will be the total sales of the test period.
When the taxpayer cannot provide detailed sales locations by jurisdiction, the auditor should
verify that the locations required to charge and collect local sales tax during the test period(s)
had sales in the periods in which the error rate will be projected. If it can be determined these
locations did not have any sales during a portion of the audit period, the error rate will be applied
to only those reporting periods when these locations had sales.
Selection of Block Sample Size
When utilizing a block sample method, the sample size required is as follows:
• One reporting period in each year of the audit period. Partial years may be combined
with complete years (up to an aggregate of 18 consecutive months) for the purposes of
choosing a single test period. The error rate established for each test period shall be
applied to only those periods from which the test period was selected (or)
• One complete year (calendar or fiscal) within the audit period.
The taxpayer should be presented with a Request for Financial Records form that specifically
requests the records required to properly select the test periods. All block sample audits should
be approached using these criteria.
Deviation from the Test Period Requirements
Deviation at Taxpayer’s Request
If the taxpayer requests that fewer test periods be examined, the auditor must obtain a written
acknowledgement from the taxpayer attesting to their request. The acknowledgement must be:
• Written by the taxpayer on the taxpayer’s letterhead.
• State specifically the number of reporting periods requested to be examined.
• State the specific reason for the request of deviation.
• Include the date of the request.
• Include a statement that the individual signing the request is a duly authorized
representative.
• Include a signature of the authorized representative.
The auditor may also accept this information in an email from the taxpayer or as a response on
the Taxpayer’s Concurrence with Test Audit Plan form signed by the taxpayer.
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This acknowledgment should be included in the audit report as an exhibit and referenced in the
audit narrative and on the Taxpayer’s Concurrence with Test Audit Plan form. The auditor must
document that the taxpayer’s business activities were relatively consistent throughout the
periods for which the test period(s) apply and that there is no reason to believe the test period(s)
chosen are not representative of the entire period to which the results will be applied. The
supervisor must acknowledge the deviation of the test periods by indicating his/her agreement
on the Conflict of Interest Statement and Auditors Comments form.
In all cases where the taxpayer requests that less than the required number of periods be
examined, the auditor shall make a documented effort to obtain computerized records and
pursue a statistical or other form of computerized audit procedure.
Deviation at the Bureau’s Request
The Bureau may not unilaterally deviate from the required number of test periods without written
approval from the Program Administrator. This decision will be based on the total number of
transactions per reporting period, the availability of records, and the results of the findings of
prior audits of the taxpayer. It is the auditor’s responsibility to indicate it would be unduly
burdensome to examine additional records.
When less than the required number of test periods are selected and computer records are not
available, the test period (s) will be selected from the periods for which the error rate will be
applied. For example, if the taxpayer presents a written request that one reporting period be
selected to represent the entire audit period, the period selected will be the reporting period
closest to the average key characteristics computed for the entire audit period. The supervisor
must comment on the Conflict of Interest Statement and Auditors Comments form that they
reviewed and agreed with the size of the sample and method used to conduct the test selection.
Documentation of the Test Periods
The taxpayer should be presented with a Request for Financial Records form that specifically
requests the transactional detail for the selected test period(s), as well as a Taxpayer’s
Concurrence with Test Audit Plan form. All block sample audits should be approached using
these criteria.
The selection of the test periods must be supported by a schedule. A schedule must be included
in the audit report that shows the calculation of the selection of the test periods. The schedule
must clearly indicate the test period(s) chosen, include a footnote referencing the accounts or
other items eliminated from the population prior to selecting the test periods, and contain a
footnote referencing partial or combination years used to select a test period. The schedule
must be included in the audit report. The schedule must be referenced in the narrative and on
the Taxpayer’s Concurrence with Test Audit Plan form. The only exception to this should be
when records are not adequate to determine test periods based on average key characteristics.
Records Not Available to Properly Select Test Periods
In every instance where adequate records are not available to select test periods based on
average sales, expenses, or some other key characteristic, a Request for Financial Records
form must be included in the audit report to support that the necessary records were requested,
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and the taxpayer was given a reasonable amount of time to produce the records. The Request
for Financial Records form should be referenced on the Taxpayer’s Concurrence with Test Audit
Plan form under the “Basis for Selecting Test Period”, included in the audit report, and referenced
in the audit narrative. When records are not available for the entire audit period, the test periods
will be selected based on the characteristics of the periods for which records are available.
Factors That Must Be Considered When Determining Test Periods
The following factors must be considered and discussed in the narrative when determining test
periods:
• Average Gross Sales or Average expenses (use actual if reported amounts are incorrect).
• Ratio of taxable to gross sales (when applicable)
• Whether the taxpayer’s business is cyclical or seasonal.
• Significant changes in the business activities during the audit period.
• Significant changes in the law, regulation, or policy during the audit period.
• Adequacy and availability of taxpayer’s records.
• Other relevant factors that could affect the representation of the selected test periods.
Computation of the Projectable Average (Error Rate)
One error rate will be computed for each test period and be applied only to the population from
which the test period was selected.
Error rates will be computed to six decimal places and rounded to five decimal places.
Numerator
All additional taxable transactions will be recorded and included in the numerator of the error
rate calculation. Credit for use tax paid directly to the Commonwealth will be included in the
numerator when the auditor can verify use tax was erroneously accrued and reported on a
nontaxable transaction. The auditor should also verify that credit had not previously been
granted through a refund petition. Separate error rates will be calculated for additional
taxable transactions and nontaxable transactions where use tax was erroneously reported.
Credits will not be included in the projectable average computation if the test period was
selected based on a lack of records. The auditor may not project any TPPR or third-party
credits using a block sample.
Denominator
The denominator will be the net dollar value of all transactions in the test period.
When it appears that the characteristics of the business for particular periods have changed
and conditions are not constant or comparable, or where changes in the law substantially
affected the taxability of merchandise or services sold by the vendor throughout the audit
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period, a separate error rate should be computed for periods before and after the material
changes.
The dollar amount of the denominator should be the same as the dollar amount listed for the
same period(s) on the schedule used to select the test periods. One error rate for each tax
code and tax category will be computed for each test period and be applied only to the
population from which the test period was selected.
Isolating Transactions in the Test Sample
When conducting a block sample, every transaction determined to be an outlier will be removed
from the numerator prior to the computation of the error rate and treated as an isolated
transaction. The outlier will be identified in the audit narrative and assessed on a separate audit
schedule. The outlier will remain in the denominator of the projectable average calculation. The
remainder of the audit period will not be examined to determine if like transactions occurred in
other reporting periods.
Outliers
Title 61 Pa. Code §8a, “Enforcement,” gives guidance in determining (quantifiably) which
transactions found to be deficient in the test period should be isolated from the test period’s
results prior to computing the error rate.
If an item is greater than 2% of the total tested population, that transaction is a “suspected”
outlier. Any transactions identified as a “suspected” outlier will be considered a “confirmed”
outlier. Both additional taxable transactions and use tax credit transactions may be outliers.
The Bureau’s audit application software is programmed to identify an outlier if a transaction
is greater than 2% of the population being tested. Therefore, any transaction listed on a
schedule for projection that is greater than 2% of the test population will be excluded from
the numerator of the error rate and assessed on a separate schedule as an isolated
transaction. The transactions determined to be outliers will remain in the denominator of the
error rate computation.
Test Periods not Selected Using an Average
When test periods are not selected based on average key characteristics due to the unavailability
of records, the requirement to isolate transactions greater than 2% does not apply. The reason
being that the scope limitation imposed from the lack of records does not allow for an adequate
and complete review of large dollar transactions. In this circumstance, the auditor may:
• Leave the transaction in the numerator.
This may be performed when the selected test period is not considered to be a
representative period because it was selected based on lack of records or;
• Isolate the transaction and treat it as an outlier.
This may be performed when the selected period is considered a representative period
or;
• Examine like transactions on a complete basis and project on the remaining
deficient transactions.
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Under the third bullet, the denominator will be reduced by the total of any transactions reviewed
in this manner. This is allowable because changing the denominator will not affect the selection
of the test period since the selection was not based on any average characteristics.
Discontinuing the Test Audit Procedure
When conducting a block sample test on one reporting period in each year of the audit period
and no exceptions were found in the first test period examined, the auditor may abandon the
examination of the remainder of the test periods if:
1. the business activities were consistent in each year of the audit period and
2. the taxpayer’s reporting history was relatively consistent.
When performing a block sample test on one reporting period in each year of the audit period
and very few transactions are found to be deficient during the first period examined, the auditor
may perform a limited examination on the remaining test periods. Like items, as those found to
be deficient, should be examined on a modified complete basis for the remainder of the audit
period and no projection shall be made for assessment purposes. This may only be performed
when very few customers (vendors) are found to be deficient, the items sold (purchased) during
the audit period remained constant, the taxpayer’s reporting history is relatively consistent, and
the majority of the sales are to repeat customers (or purchases are continuously made from the
same vendors).
Examples of Test Period Selection
All Sales in Audit Period Included
When identifying the periods to sample when the population to test includes all sales for
the audit period, the auditor should:
• Identify the three periods in each year (or partial/combination year) that are closest
to the average sales for the year.
• Of the three periods coming closest to the average in each year, choose the period
that comes closest to the average taxable sales to gross sales ratio for the year.
All Sales in Audit Period not Included-Combination Audit
When identifying the periods to sample when the population to test includes only a subset
of all sales for the audit period, the auditor should select the test periods using only the
key characteristics of the subset of the population that to be tested that are available. The
sales and/or taxable to gross used to compute averages should include only those sales
being tested.
Separate block sample tests may be performed on various populations. When this is
performed, a separate test period must be chosen in each year for each population tested.
When segregating sales into separate test populations, the supporting schedule must
clearly define the populations tested.
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Gross Sales Assessment
Note: The following methods should only be used when the taxpayer does not maintain or
provide auditable source documents such as sales invoices for the audit period.
Prior to utilizing this audit method, the auditor must present the taxpayer with a “Request for
Financial Records” form, requesting the records necessary to conduct the audit utilizing a
complete audit method, a modified complete audit method, or a test audit method using
representative test period(s).
When it is impossible or impractical to effectively employ another type of audit method because
of a taxpayer’s failure to maintain or provide auditable source records such as sales invoices or
receipts, the Department may assess the taxpayer on the gross amount of the verified sales.
The results of the gross sales assessment computation should be presented to the taxpayer.
The taxpayer should also be given an additional Request for Financial Records form, requesting
that the taxpayer provide sufficient competent evidence that would support the computation of
the tax actually due.
The Revenue Regional Manager must approve this procedure before it is used to establish an
audit assessment. This memo must be attached to the Additional Headquarters Processing
Request form.
In the conduct of an audit resulting in a gross sales assessment, every reasonable attempt must
be made to eliminate obvious nontaxable transactions from gross sales. If any of the taxpayer’s
records permit the development of a sample technique that will reliably measure the extent of
nontaxable transactions, such a technique should be implemented.
The difference between the verified gross sales and the reported taxable sales should be
assessed as the additional taxable sales for the audit period as illustrated below.
Note: This audit method may be adapted for use with expenses, capital purchases, PTA and
VRT.
Gross Sales Assessment Example
This example will show the application of an imposed tax rate on verified gross sales.
Reported Additional
Verified Taxable Taxable
Period End Gross Sales Sales Sales
1/31/X1 87,500 16,667 70,833
2/28/X1 120,000 33,333 86,667
3/31/X1 112,000 43,333 68,667
Total 319,500 93,333 226,167
Figure 5.1 Gross Sales Assessment Example
A schedule like this may be created using the blank template available in the Bureau’s audit
application software.
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Development of Additional Taxable Sales (Purchases) by
Eliminating Obvious Nontaxable Items
Prior to utilizing this audit method, the auditor must present the taxpayer with a “Request for
Financial Records” form, requesting the records necessary to conduct the audit utilizing a
complete audit method, a modified complete audit method or a test audit method using
representative test period(s).
This audit method is generally used on sales when the taxpayer has not maintained adequate
auditable source documents such as sales invoices but has maintained documentary evidence
that a portion of sales were obviously nontaxable. This audit method may be adapted for use
on capital purchases or expenses if the taxpayer has not maintained sufficient source
documentation such as payable invoices but does maintain capital purchases or expense totals
and some documentation indicating the purchase(s) were put to a nontaxable use (such as
obvious direct use in public utility, manufacturing, or mining). There must be convincing
evidence that the specific sale or purchase is nontaxable prior to eliminating the item from the
gross amount.
Before using this test procedure, the supervisor must be consulted. The technique employed is
designed to eliminate those clearly nontaxable transactions from a representative test period,
thereby creating a presumption that the remaining items within the test period are taxable. The
test findings are then projected to the entire audit period. The results of the Development of
Taxable Sales (Purchases) assessment computation should be presented to the taxpayer. The
taxpayer should be given an additional “Request for Financial Records” form requesting
sufficient competent evidence that would support the computation of the tax actually due.
In the conduct of this type of audit, the auditor identifies obviously nontaxable transactions in the
sample period (e.g., clothing, prescription drugs, direct use etc.). The total nontaxable
transactions for the sample period are then subtracted from the total gross sales(purchases) of
the sample period. The difference, the taxable transactions are divided by the total gross sales
(purchases) of the sample period. This taxable ratio is then applied to the total gross sales
(purchases) of the unsampled periods to arrive at the audited taxable sales (purchases).
Eliminating Obvious Nontaxable Sales - Example
This example will show the application of eliminating obvious nontaxable sales from a sample
period to develop an error to apply against verified gross sales in other periods.
Sample Period
Sample
Obvious Sample
Sample Nontaxable Taxable Sample T:G
Sample Period Gross Sales Sales Sales Ratio
1/1/X1 - 1/31/X1 100,000 20,000 80,000 0.8
Figure 5.2 Eliminating Obvious Nontaxable Sample Period
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Apply to Other Unsampled Periods
Audited Reported Additional
Verified Sample T/G Taxable Taxable Taxable
Period End Gross Sales Ratio Sales Sales Sales
1/31/X1 87,500 Actual 80,000 16,667 63,333
2/28/X1 120,000 80% 96,000 33,333 62,667
3/31/X1 112,000 80% 89,600 43,333 46,267
Total 319,500 265,600 93,333 172,267
Figure 5.3-Eliminating Obvious Nontaxable Projection
Auditing of Sales Using Prospective Records
Prior to utilizing this audit method, the auditor must present the taxpayer with a Request for
Financial Records form requesting the records necessary to conduct the audit utilizing a
complete audit method, a modified complete audit method, or a test audit method using
representative test period(s).
Auditing of sales using prospective records is used when the taxpayer has failed to maintain
auditable sales tax records for the audit period. In this audit method, the auditor will perform an
examination of prospective sales records for a sample period and use the results as a basis for
any sales tax assessment. The basis consists of detailing a sufficient number of prospective
sales records to establish an average percentage of taxable sales to gross sales and an average
effective rate of tax incurred.
Because a prospective period is being used, it is recommended to extend the audit period to
include the prospective period.
The average taxable to gross sales ratio of the prospective period is applied to the audited gross
sales of the audit period to arrive at the audited taxable sales. The reported taxable sales should
be subtracted from the audited taxable sales to arrive at the additional taxable sales.
Estimating Taxable Sales Using Purchase Records
Before using this procedure, the supervisor must be consulted. When a taxpayer has failed to
maintain adequate sales tax records such as sales invoices but has maintained adequate
purchase and gross sales records, a sales tax liability may be established from a sampling of
purchase records.
Prior to utilizing this audit method, the auditor must present the taxpayer with a Request for
Financial Records form requesting the records necessary to conduct the audit utilizing a
complete audit method, a modified complete audit method, or a test audit method using
representative test period(s).
When this method is used, each purchase for resale occurring in the sample period is examined
and classified as either a taxable type of purchase (i.e., a purchase which upon resale ordinarily
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would be taxable) or a nontaxable type of purchase (i.e., a purchase which upon resale is not
taxable).
When summarizing the sample findings, the total of the taxable type purchases for the sample
period is divided by the total sample period purchases. The ratio derived may then be applied
to gross sales for the entire audit period if there is not a substantial difference in the average
markup on taxable and nontaxable merchandise.
If substantial differences can be established by product or product type, the auditor may use a
combined markup or individually apply the markup by product.
Average Industry Markup
Average industry markup of cost of goods sold to sales may be used when other adequate
documentation is not available. Headquarters has access to various reference materials
regarding industry average markup of cost of goods sold. These industry averages may be used
to determine the reasonableness of the taxable purchases to gross purchases ratio claimed by
the taxpayer when adequate documentation is not maintained to verify the taxability of actual
sales transactions on an individual basis. Typical use of these averages would include
examinations of smaller retail establishments such as restaurants.
Sample Period
Sample Taxable Sample T:G
Sample Period Gross Sales Purchases Ratio
X1 100,000 80,000 0.8
Figure 5.4 Taxable: Gross Ratio from Purchase Example
Projection of Taxable Sales
Audited Reported Additional
Verified Sample T/G Taxable Taxable Taxable
Period End Gross Sales Ratio Sales Sales Sales
1/31/X1 87,500 80% 70,000 16,667 53,333
2/28/X1 120,000 80% 96,000 33,333 62,667
3/31/X1 112,000 80% 89,600 43,333 46,267
Total 319,500 255,600 93,333 162,267
Figure 5.5 Projection Using Estimate from Purchase Example.
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Estimating Gross Sales using Form 1099-K
Form 1099-K is an IRS form used to report transactions made via payment settlement entities.
These entities process credit and debit card transactions. The 1099-K lists the amount of credit
and debit card transactions processed and deposited into the taxpayer’s bank account. The
1099-K is an effective tool for estimating gross sales as the sales information is provided by a
third party; therefore, it is considered complete and accurate.
The 1099-K only reflects credit and debit card transactions. Therefore, the Department applies
a “1099K” ratio to the amounts listed on the 1099-K to estimate gross sales. This procedure
accounts for sales where the payment was not a credit card or debit card such as cash sales.
The “1099K” ratio is calculated using the taxpayer’s prospective records or industry average.
1099K Ratio Using Prospective Records
When the taxpayer does not maintain any auditable sales records as required by 61 Pa. Code
§ 34.2. Keeping of records or the sales records are incomplete, the auditor should request the
taxpayer to maintain auditable sales records for a prospective month. The sales records should
consist of transactional records such as sales invoices, guest checks, POS reports, register
tapes as well as daily summary reports. The transactional records should detail the items sold,
sales tax charged, tender type (cash vs. credit), and tip amounts, if applicable. The daily reports
should summarize the taxable and nontaxable sales, tender type, sales tax charged and the
applicable tips.
The “1099K” ratio is calculated by dividing the total credit card sales transactions inclusive of the
sales tax and tip by the total sales transaction exclusive of sales tax and tip. The amounts listed
on the taxpayer’s 1099-K form are divided by the calculated “1099K” ratio to arrive at the Audited
Sales. If the taxpayer has nontaxable sales, a taxable to gross sales ratio is calculated using
the prospective records. This ratio is multiplied by the Audited Sales to arrive at the Audited
Taxable Sales. The Audited Taxable Sales are multiplied by the effective sales tax rate to arrive
at the Audited Sales Tax. Any reported sales tax is subtracted from the Audited Sales Tax to
arrive at the sales tax deficiency. The deficiency is entered as an accrual deficiency and the
findings should be entered on the “Accrual Differences” schedule.
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Figure 5.6 -1099K Prospective Records Example
In the narrative, the term “1099K ratio” must be used to describe the type of ratio used to
calculate the Audited Gross Sales. If the taxpayer uses a marketplace facilitator to make sales,
the 1099Ks of these marketplace facilitators must be included in the total of the 1099Ks used to
arrive at the Audited Gross Sales. Also, the Audit Sales Tax should be offset by any sales tax
reported by the marketplace facilitator.
Prospective Records-Additional Taxable Sales
If the prospective records identify any additional taxable sales, an error rate is calculated by
the dividing the additional taxable sales by the audited sales for the prospective period. The
error rate is applied to the monthly Audited Gross Sales to arrive at the additional taxable
sales for the audit period.
Figure 5.7-Prospecitive Records-Additional Taxable Sales Example
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1099K Ratio using Industry Average
When the taxpayer does not maintain complete prospective sales records an “Industry Average
1099K Ratio” (industry average) is used. The industry average represents the average ratio of
1099K’s (includes sales tax & tip) to total gross sales (excludes sales tax & tip) of similar
taxpayers. This ratio is applied in the same manner as the 1099K ratio used for prospective
records.
The supervisor should contact headquarters to obtain an “Industry Average 1099K Ratio”. The
request should include the taxpayer’s name, FEIN, assignment number, county, annual 1099K
receipts and the possession of liquor license or not.
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CHAPTER 6- POST-AUDIT
PROCEDURES
This chapter of the manual describes the procedures that must be followed or considered,
following the examination of a taxpayer’s records.
Concluding and Summarizing Audit Work
At the conclusion of the field work, the auditor must prepare schedules that summarize the audit
findings. These schedules must be sufficient to enable tracing of individual items found to be
deficient to the final schedule of assessment by reporting period. These schedules (references)
must be included in the Sales and Use Tax Report and all supporting schedules created outside
of the Bureau’s audit application software.
The auditor should provide the taxpayer all pertinent schedules and worksheets including the
Sales and Use Tax report prior to submitting the audit for pre-review. Collectively, these
workpapers support the basis of assessment. Ideally, these workpapers should be presented
to taxpayer as the audit procedures are progressing. The Sales and Use report should be
stamped as “Draft” using the watermark feature in the Bureau’s audit application software.
Pre-Review Procedures
Upon conclusion of the fieldwork, the auditor will have a meeting with the taxpayer’s
representative (in person if practical) to discuss the audit findings and provide the sales and use
tax report and schedules. The auditor should not provide the Taxpayer’s Acknowledgement of
Post Audit Conference form to the taxpayer at this time. The auditor should provide the taxpayer
with Sales and Use Report along with any worksheets and schedules necessary to support the
basis of the audit findings. The auditor should allow the taxpayer an opportunity to review the
Sales and Use Tax report prior to the post audit conference. The auditor should be prepared to
provide a detailed explanation of the basis for the audit findings. This includes providing the
taxpayer with specific references to the law and regulations pertaining to the audit findings.
The auditor should explain to the taxpayer representative that the audit is being submitted for
supervisory review, is subject to change upon review, and that no further documentation will be
accepted. If the taxpayer provides records after the meeting, those records may need to be
reviewed or a waiver obtained to have the necessary time to review. This will be evaluated by
the supervisor on a case-by-case basis. In addition, the auditor will inform the taxpayer that
once the supervisory review is complete, the auditor will contact the taxpayer to schedule a post
audit conference either in person or by phone.
The auditor should gather all audit documents, the Sales and Use Report, the completed audit
narrative, and verify that all required schedules, forms, and exhibits have been properly prepared
for submission for pre-review. This includes proof reading, checking citations, checking header
information, required signatures, and cross footing audit totals. The complete audit report
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including narrative and exhibits must be submitted to the supervisor at least 45 days before the
Due to HQ date.
The auditor will stage the audit to “Supervisor Review” and change owner to supervisor in PATH.
Management personnel will complete the pre-review process within 30 days as per Audit
Assignment and Inventory Management Policy and inform the auditor to post the audit as
submitted or if adjustments are required.
Upon the pre-review:
Adjustments are required:
• The audit will be staged in PATH as “Rework” and owners changed back to the auditor.
• Any adjustments which result in an increase or decrease in the audit findings, the revised
workpapers including the Sales and Use Report should be provided to the taxpayer’s
representative with an explanation of the adjustment.
• The entire pre-review process will start over, so when the auditor resubmits the audit
package for pre-review, the auditor will stage the audit to “Supervisor Review” and change
owner to the supervisor in PATH.
No adjustments are required:
• The supervisor will change owner to the auditor in PATH.
• The auditor will stage the audit in PATH to “Conference”.
• A post-audit conference should be conducted and the final audit report submitted to
management personal within 10 days of the completion of the pre-review process or as
noted in the Audit Assignment and Inventory Management Policy. Exceptions to extend
timeline may be approved by the Regional Manager.
AUDIT REVIEW TIMEFRAME
Auditor Submits for Pre-Review 45 Days Prior to Due to HQ
Date
Supervisor/Manager Completes Pre- 30 Days or less
Review
Auditor Conducts Post-Audit 10 Days or less
Conference and Submits Final Audit
Report to Supervisor
Final Regional Review to Submit to HQ 5 Days or less
Figure 6.1 Audit Review Timeframe
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Post-Audit Conference Requirements
A post audit conference must be conducted for every audit including the completion of the
Taxpayer’s Acknowledgement of Post Audit Conference form.
A post audit conference should be held in person. In circumstances where a face-to-face
conference cannot be held, the auditor must document their attempts to set up an in-person
conference. A telephone post-audit conference should be conducted for all out of state audits.
The taxpayer may record the post audit conference. At the taxpayer’s request, the Department
will provide a recorder and a copy of the recording.
The auditor must do the following at each post audit conference:
• Record date, name of those participating in the conference, the location of the conference
and the length of the conference. This information must be included in the audit narrative.
• Inform the taxpayer that the audit findings are subject to further review and possible
correction by the Bureau.
• Determine areas of disagreement and reasons for such disagreement.
• Explain in the audit narrative the taxpayer’s reasons for disagreement as they relate to
the various audit findings.
• Present the taxpayer with a Taxpayer’s Acknowledgement of Post Audit Conference form.
A template of this form is located in the Bureau’s audit application software. This form
will identify the audit period, areas of deficiency, and corrective recommendations for the
areas of deficiency.
• Advise the taxpayer that they will receive a Notice of Assessment that will include the
amount of the assessment, interest, penalties, credits, and any payment (made before
the assessment is issued) by U.S. mail. The taxpayer should be informed that interest
and penalties will be separately stated and explained on the assessment notice.
• Inform the taxpayer of their appellate rights and that the appeal rights are explained on
the “Notice of Assessment”. These rights and procedures are described in more detail
below.
• Request the taxpayer to complete the Taxpayer’s Acknowledgement of Post Audit
Conference form and signify agreement, disagreement in part, or disagreement entirely
with the audit findings. The taxpayer may elect to leave the form blank and merely sign.
If the taxpayer declines to sign the form, the auditor should note on the form and in the
narrative the date, time and whom the form was presented to, and that the taxpayer
declined to sign the form. The auditor must inform the taxpayer that completion of the
form does not waive any rights to appeal, no matter what is indicated.
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• Inform the taxpayer that a complete Basis of Assessment (audit report) will be sent with
the Notice of Assessment.
• Prior to the post-audit conference, the auditor should verify if the taxpayer wants the Audit
Basis of Assessment (audit report) uploaded to myPATH; refer to Notice of Assessment
& Audit Basis of Assessment procedures.
• The auditor will review the formal handout Notice of Assessment Audit Basis of
Assessment. The auditor should confirm all information.
A copy of the completed Taxpayer’s Acknowledgement of Post Audit Conference form should
be given to the taxpayer. If a copier is not available, the auditor is to inform the taxpayer that a
copy will be sent to them prior to the audit being submitted for processing.
Payments Received from the Taxpayer During an Audit
If a check is received from the taxpayer anytime during the audit (including the post audit
conference), the auditor will create a payment voucher in PATH and provide it to the taxpayer
along with instruction on where to mail payment; refer to Checks Received in the
Field procedures.
The auditor is not to solicit payment for tax liabilities during the conduct of an audit.
The auditor should inform the taxpayer that any payment received by check that exceeds
$1,000 would result in an EFT penalty. To avoid the penalty, the taxpayer should pay the
assessment when the Notice of Assessment arrives.
Taxpayer Electronic Payment
If the taxpayer wants to make an electronic payment through MyPATH before the audit has
been closed, the auditor should inform the taxpayer to choose the last reporting period of the
audit period and make a return payment. The taxpayer will:
• Select “Make a Payment” hyperlink under their sales and use tax account.
• Select payment type:
o Choose an existing payment channel or Select “NEW”.
• Enter and confirm the amount.
• Submit
Post-Audit Conference by Phone
A post audit conference by phone is allowable when conducting a post audit conference in
person is not practical due to proximity or necessity. In addition to the preceding requirements
for a post audit conference held in person, the following requirements must also be performed:
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• Prior to a post-audit conference by phone, a copy of the Taxpayer’s Acknowledgement
of Post Audit Conference form, along with all schedules necessary to explain the audit
findings should be sent to the taxpayer.
• The taxpayer should be asked if they received and reviewed the form and schedules.
The taxpayer’s response should be included in the narrative.
• After the post-audit conference, the taxpayer must be sent a Post-audit Conference by
Phone letter signed by the regional manager. This letter will state the names of those
who participated in the post-audit conference, the date of the conference and the
assessment amount.
• The Post Audit Conference by Phone Letter is letter must be included in the audit report
as an exhibit and discussed in the narrative.
• The original Taxpayer’s Acknowledgement of Post Conference form should be sent to
the taxpayer along with a self-addressed stamped envelope. The taxpayer should be
instructed to complete and return the form to regional office.
Note: If the taxpayer provides the signed Taxpayer’s Acknowledgment of Post Audit
Conference form electronically immediately following the conference, then the Post-Audit
Conference by Phone letter will not be required.
Inability to Schedule Post-Audit Conference
A post-audit conference by certified mail may only be conducted after a reasonable effort to
conduct the conference in person or by telephone has been made. The auditor must document
all efforts to contact the taxpayer (including phone calls, faxes, in person visits, emails, and
mailed correspondence) to conduct the conference in person or by telephone and must include
the documentation in the audit report. Such documentation will include a chronological listing
of attempts made by the auditor, supervisor, or regional manager to contact the taxpayer to set
up the post audit conference.
Information provided to the taxpayer through voicemail does not constitute a post audit
conference under any circumstances.
In these situations, a post-audit conference will be scheduled in the regional office at a date
and time decided by the auditor and their supervisor. The taxpayer will be informed of the
scheduled post-audit conference in a letter sent through certified mail. The taxpayer should be
given at least two weeks advanced notice of the schedule date.
Inability to Schedule Post-Audit Conference Letter
An Inability to Schedule Post Audit Conference Letter, signed by the regional manager must be
sent via certified mail to the taxpayer along with all pertinent schedules necessary to explain
the audit findings. A Taxpayer’s Acknowledgment of Post Audit Conference form should be
completed and included with the letter. The date used on the form should be the scheduled
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date of the post-audit conference. A copy of the form and letter must be included as an exhibit
and discussed in the narrative. A template of this letter is located in the Bureau’s audit
application software.
The letter must:
• Explain that the subject audit has been completed.
• Formally notify the taxpayer of the time and date that the post-audit conference will be
conducted in the regional office.
• Inform the taxpayer that the deficiency, interest, penalties, and the taxpayer’s right to
appeal will be included on the Notice of Assessment.
• Specifically identify the enclosed worksheets and schedules included with the letter.
• Reference the post-audit conference form.
• Indicate that the letter will be considered the close of the audit in the event the taxpayer
fails to attend the scheduled post-audit conference.
Other Post-audit Considerations
At the conclusion of the audit work, the auditor should discuss with the supervisor the
appropriateness of:
• Requesting or referring additional audits
• Referring the assignment to the Office of Criminal Tax Investigations
• Applying major civil penalties.
Audit Referrals
The auditor may discover, during pre-audit planning and during the course of the fieldwork,
other entities that should be referred for audit. Procedures for identifying potential audits and
making an audit referral are discussed below:
Audits of Affiliated Companies
The auditor must evaluate the necessity to conduct an audit of affiliated companies.
An affiliated interest exists when two corporations, associations, partnerships, proprietorships,
or other businesses, in which one corporation, association, partnership, proprietorship,
individual or other business owns more than 50% of the stock or assets, including inventory,
machinery and equipment of the remaining corporation, association, partnership, proprietorship
or other business. Also, the common ownership of more than 50% of the stock or assets of
each of two or more business entities results in an affiliated interest between the two commonly
owned entities.
The auditor must:
Determine if the affiliate(s) is registered for sales and use tax in Pennsylvania and if so,
review the reporting history for compliance. If the affiliate(s) is not in compliance (i.e.,
delinquent returns), an audit must be conducted.
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When common management (e.g., parent of sister corporation) is responsible for the
reporting of sales and use tax for affiliated companies and the potential exists for similar
errors identified during the current audit, an audit must be conducted.
The auditor should complete an Audit Potential Worksheet to request the issuance of the
appropriate assignment. The template of the form is available in Bureau’s audit application.
The auditor should request the audit assignment as soon as the potential for a referral audit
assignment is identified.
Note: Audit assignments for these referrals will not be made to the originating auditor unless
it is a collateral audit, or the Program Administrator authorizes the assignment.
Audits of Other Companies
Audit referrals may also be generated because of a change in ownership of the entity under
audit. In these circumstances, audit referrals must be made in accordance with the instructions
found under Chapter 8 – Audit Policy, Entity Changes.
Audit referrals may also be generated when the auditor discovers during the expense
examination taxable payable transactions where the vendor is not charging sales tax. When
conducting a sales examination, referrals should be made when exemption certificates are
construed as being accepted in good faith by the vendor under audit, but independent research
of the purchaser’s activities are not consistent with the exemption claimed.
Audit Potential Worksheet
The Audit Potential Worksheet is an auditor’s primary tool used to gather information about a
taxpayer for an audit referral. The completed worksheet allows for a systematic review of the
taxpayer’s business activities as well as a determination of whether or not the entity listed on
the worksheet meets the Bureau’s audit criteria. The worksheet is available as a document
template in the Bureau’s audit application.
Submitting an Audit Referral
The auditor will submit an audit referral work item along with Audit Potential Worksheet by
following the Audit Referrals procedures for PATH. The auditor will either send the referral to
their supervisor or regional manager (owner of work item). The supervisor and/or regional
manager will review referral work item and forward to the Program Administrator (owner) for
further review.
The Program Administrator will assign work item to program specialist with the ST Division who
will review the information and issue an assignment if an audit is warranted.
Collateral Audits
Collateral audits are audits on the same taxpayer for a different tax type, such as Employer
Withholding (WTH), Public Transportation Assistance Tax (PTA), E-911, Vehicle Rental Tax
(VRT), Wine Excise Tax (WET) and Consumer Fireworks Tax (CFT).
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Note: The auditor who requested the collateral audit will also conduct the audit.
Submitting Request for a Collateral Audit
The auditor will submit a collateral audit request work item along with the Audit Potential
Worksheet following the Audit Collaterals procedures in PATH. The auditor will either send the
request to their supervisor or regional manager (owner of the work item). The supervisor
and/or regional manager will review the collateral audit request work item and forward to the
Program Administrator (owner) for further review.
The Program Administrator will assign work item to program specialist with the ST Division
who will review the information and will issue an assignment if an audit is warranted.
Criminal Tax Program
In most instances, tax crimes involve fraud, which is a crime of “commission”. In other words,
the taxpayer must act in a manner that conceals or suppresses the true tax liability. The
taxpayer commits a form of theft if trust fund money is collected and commingled with the
taxpayer’s funds to keep the business operating. The taxpayer is committing theft by failure to
make required disposition of funds.
The taxpayer can also commit crimes of “omission”. In these situations, a taxpayer can commit
a crime by failing to act, such as not filing a return or not paying tax that is due. Crimes of
omission are not discussed in this manual since the method of detection is self-evident, but they
do, constitute basis for criminal tax referral.
What is Fraud?
Fraud is generally defined as an act of deception or misrepresentation of material facts, or
failure to act when good faith requires expression. It can be defined more simply as wrongful
or criminal deception intended to result in financial or personal gain.
Tax fraud usually involves false documents, returns, and/or statements and may include
attempted evasion, conspiracy to defraud, aiding and abetting, or counseling of fraud with the
intention of stealing trust fund monies that have been collected. Elements common to all tax
fraud cases involve the following:
• An understatement of tax liability or a failure to file.
• Willful intent to evade taxes.
• Course of action demonstrating the taxpayer’s intent.
It is emphasized that the mere existence of an understatement of tax liability is not indicative of
a taxpayer’s willful intent to evade taxes. Willful intent is usually shown by a pattern of
understatements, deceit, concealment, misleading acts, misrepresentation, and other acts
evident of willfulness. Acts in either the past or present that are representative of the taxpayer’s
state of mind when the possible fraud(s) occurred are critical to determining whether the
taxpayer acted with willfulness. Since the burden of proof in any fraud case rests on the
Commonwealth (see below), the Department must fully document each of these acts to
establish any alleged fraud.
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Guidelines for Determining Tax Evasion Audits
The Department has the burden of proof in establishing that the taxpayer engaged in a willful
attempt to evade the tax. In civil cases, willfulness may be shown by a preponderance of the
evidence, whereas criminal cases must be proven beyond a reasonable doubt.
Examples of scenarios that could involve tax evasion during an audit:
Report less tax than shown on the accrual
• Failure to report tax collected as shown
account.
on invoices.
Paying employees in cash
• Misappropriation of tax monies.
(No withholding of personal income tax)
Submitting a false document or affidavit.
• Failure to deposit all sales tax and
employer withholding receipts.
No records, poorly kept record, two sets of
• Failing to keep proper books and records.
records, attempts to falsify records, or
altering records.
Knowingly making false, misleading, and
• Destroying books and records without a
inconsistent statements.
plausible explanation or refusal to make
certain records available.
Bribery with money or other items or
• Willful failure or refusal to collect tax.
services of value.
Figure 6.1- Tax Evasion Scenarios
Since it is necessary to determine whether the taxpayer’s actions are willful, it is important to
show a consistent pattern of tax evasion. The mere failure to report tax collected on sales of
an infrequent nature does not necessarily constitute tax evasion. When auditors have identified
discrepancies, auditors must ask the taxpayer such questions as to how, why, when, where,
and who in order to decide whether the audit should be discussed with the appropriate
supervisor concerning fraud.
Imposition of Tax Evasion Penalties
Under Pennsylvania law, the Department may assess a penalty in the amount of 50% of the
amount of tax evaded. Specifically, 72 P. S. § 7267(b) provides: "Any person who willfully
attempts, in any manner, to evade or defeat the tax imposed by this article . . . shall, in addition
to other penalties provided by law, be liable for a penalty equal to one-half of the total amount
of the tax evaded." This provision is separate from and in addition to the penalties imposed for
late filed returns. When interpreting what conduct constitutes a willful attempt to evade tax, the
court in Zimmerman v. Commonwealth, 68 Pa. Commw. 336, 449 A.2d 103 (1982), “looked
for guidance to Section 302(g) of the Crimes Code, 18 Pa. C. S. § 302(g), which defines
willfulness as acting "knowingly." Knowingly is defined under Section 302(b)(2)(i) of the
Crimes Code as being "aware that . . . conduct is of that nature." Accordingly, to support the
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imposition of tax evasion penalties, the Department must show that the taxpayer was aware
that the conduct in question involved an evasion of tax.
Possible Indications of Fraud
Include:
Willful failure to consistently collect tax on Deliberately altering books and records to
taxable transactions. misrepresent tax liability.
The consistent understatement of figures Willful failure to maintain records.
on tax returns.
Destroying or refusing to turn over Consistently collecting tax and not
records when the Department has remitting a part or all of the tax collected.
reasons to believe a tax liability can be
established.
Failure to file returns Aiding and abetting a taxpayer to defraud
the Commonwealth of tax revenues.
Figure 6.2-Possible Indications of Fraud
Criminal Referral Criteria
All audit assignments involving the same taxpayer, including collateral assignments, must be
simultaneously referred for criminal investigation to the BETA Criminal Tax Division even if only
one of those audit assignments meets the criminal referral criteria.
Additional referral guidelines include:
• Where feasible, document and schedule all available invoices that represent taxes
collected and not reported. This will support and strengthen the criminal referral.
• Trust fund deficiencies established through projections should be referred regardless of
the method used to establish the liability.
• If a payment is made prior to assessing the tax deficiency, the regional manager is to
contact the Program Administrator for a referral decision.
• Failure to carry out reasonable tax collecting, accruing, reporting, and/or paying
responsibilities.
- For example: An initial audit discloses that the taxpayer was not collecting sales tax
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in one or more situations; the taxpayer was fully apprised of tax collecting
responsibilities; and upon subsequent audit, it was discovered that the taxpayer
continues to make such sales and not collect the tax due.
• Failure to keep proper books and records; poorly kept records; two sets of records;
attempts to falsify or alter records; refusal to make records available; destroying books
and records.
If any one of the above criteria is met, all audit assignments involving the taxpayer in question
must be recommended for referral to the BETA Criminal Tax Division. A memorandum must be
attached to the Additional Headquarters Processing Request form stating the reason for the
referral.
Assignments should not be referred to BETA Criminal Tax Division based on assessments
resulting from nontaxed sales or use tax.
Post-Audit Conference on Criminal Referrals
A post-audit conference will be held with a Bureau representative at the taxpayer’s place of
business to explain the civil audit findings, make recommendations to correct areas of
noncompliance, and provide the supporting schedules.
Audits referred on out-of-state entities can follow the guidance for holding a post-audit by
phone.
Criminal referral should not be discussed at the post audit conference. The decision to make
the criminal tax referral will be made upon regional review, after the conclusion of the audit.
If, during the course of the audit or at the post audit conference, the taxpayer questions the
possibility of a criminal referral, a statement may be made citing the audit could be referred
pending further review.
Major Penalties
72 P.S.§ 7267(b) states any person who willfully attempts, in any manner, to evade or defeat
the tax imposed by this Article shall, in addition to other penalties provided by law, be liable for
a penalty equal to one-half of the total tax evaded.
Therefore, the determining factor for imposing major penalties is not a dollar threshold but the
willful attempt of the taxpayer to evade the tax. Willful attempt is defined as knowing or being
aware of the conduct. To impose major penalties, the Bureau must demonstrate the taxpayer
knew or was aware of the under-reporting of the sales tax.
Following are examples where the Bureau would consider the taxpayer willfully attempted to
evade the tax and major penalties should be imposed.
• The under-reporting of sales tax was assessed in prior audits.
• Sales tax associated with a non-filed return.
• Consistent pattern of under-reporting sales tax during the audit period.
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• The under-reporting of sales tax was a significant percentage of the total reported
sales tax. (ex. The reported sales tax is $15K for the audit period, but the unreported
sales tax is $25K).
Following are examples of scenarios where the Bureau would not consider the taxpayer willfully
attempted to evade the tax and major penalties should not be imposed.
• The under-reporting of sales tax was a result of a clerical or administrative error.
• The sales tax is consistently over and under reported netting to zero tax due.
• The under-reporting of sales tax was an insignificant percentage of the total reported
sales tax. (ex. The reported sales tax is $5 million for the audit period, but the
unreported sales tax is $50K).
• The under-reporting of sales tax was result of taxpayer’s incorrect application of the
statute or regulation. (ex. cash vs. accrual method).
The auditor should ask themselves the following questions when it comes to determining willful
attempt by the taxpayer to evade tax:
• Was the under-reporting of sales tax a result of an administrative or clerical error
(i.e., transposing of numbers, generating the wrong report etc.…)?
• Was the under-reporting of sales tax identified and assessed in prior audits?
• Is there a consistent pattern of under-reporting of sales tax (e.g., every month)?
• Does the taxpayer have a reasonable explanation for the under-reporting of sales
tax?
• In addition to the under-reporting, is the taxpayer over-reporting resulting in the
netting of zero tax due?
• Was the under-reporting a result of incorrect application of the statute/regulation or
erroneous guidance from the Department?
• Is the under-reporting of sales tax a significant or insignificant percentage of the sales
tax collected?
Major penalties should not be discussed at the post audit conference. The decision to impose
major penalties will be made upon regional review, after the conclusion of the audit.
If, during the course of the audit or at the post audit conference, the taxpayer questions the
possibility of major penalties, a statement may be made citing major penalties may be imposed
pending further review.
Review and Submission of Audit Report to
Headquarters
After the post-audit conference is held, the auditor will prepare the final audit report for submittal
to the supervisor. The final Audit Report includes all audit documents that will be include in the
Bureau’s audit application software.
The audit documents include:
• Sales and Use Report
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• Completed audit narrative
• All required schedules
• All forms
• All exhibits
Final Review
The auditor will stage the audit in PATH to Regional Review and change the owner to the
supervisor. The supervisor conducts the final review of the audit package and generate another
the Sales and Use Report which should be stamped as “Final” using the watermark feature in
the Bureau’s audit application software. The supervisor will change the ownership in PATH to
Clerk/Management Tech. The clerk/Management Tech will verify information from the audit
package to information in PATH using:
• Audit- Attributes Panel
• Audits tab-Attributes subtab
• Customer Springboard
• Account Springboard
Creating the Audit Report and Submitting to Headquarters
The clerk/management tech will create an Audit Report (Single PDF) and save the PDF
document as “Audit Assignment Number”. The clerk/management tech will create a folder with
the assignment number within P:\RcvdHQ\STD. The clerk/management tech will transfer the
following files to this folder:
• Audit file (TMZ)
• Copy of Audit Report-Final
• Audit Experience Evaluation Survey (Region)
• Sales and Use Report -Final (Excel file)
• Additional Headquarter Processing Request form (if applicable)
• PIT Referral (if applicable)
• Sales Schedule (Excel File) (if applicable)
• Purchase Schedule (Excel File) (if applicable)
The clerk/management tech will stage the audit in PATH to “HQ Review” and change the owner
to the Program Administrator.
Appeal Process
Taxpayers may appeal any audit assessments. Instructions for filing an appeal are provided
with the assessment notice. Appeals must be filed within designated time frames (See Time
Limitations on Filing Petitions for Appeal (REV-1799A).
Board of Appeals
All appeals of audit assessments are initially filed with the Department of Revenue’s Board of
Appeals.
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In order to file an appeal, the taxpayer must submit a Petition for Reassessment to the board
postmarked within 60 days of the assessment notice date. The last day to file the appeal will
be clearly indicated on the assessment. A petition may be filed by mail or electronically through
the Board’s web page at https://www.boardofappeals.state.pa.us. The taxpayer may use Board
of Appeals Petition Form (REV-65) , and REV-39, Sales and Use Tax Appeal Schedule. The
petition must state the basis of appeal, accompanied by an affidavit, and signed by the
petitioner.
The Board will review submitted evidence and conduct hearings as necessary to decide the
merits of the taxpayer’s case. After considering all evidence, the board will then issue a written
decision to the taxpayer.
Board findings issued to specific taxpayers must be adhered to in follow up audits unless it is
evident that the facts presented to the Board of Appeals differ from the facts in the current audit.
If the taxpayer disagrees with the findings of the Board, the taxpayer may appeal the case to
the Board of Finance and Revenue.
Board of Finance and Revenue
The Board of Finance and Revenue (BFR) is the next level of appeal for taxpayers after the
Board of Appeals. The Board consists of three members. Two members are appointed by the
Governor and confirmed by the Pennsylvania Senate. The State Treasurer or their designee
is the third member and is Chair.
Upon receiving the written decision from the Board of Appeals, the taxpayer has 60 days to file
an appeal with BFR. BFR will review submitted evidence and conduct hearings as necessary
to decide the merits of the taxpayer’s case. After considering all evidence, the Board then votes
on the merits of the case. The board will then issue a written decision to the taxpayer.
BFR’s decision on a specific case for a specific taxpayer must be adhered to in any follow up
audit unless the facts upon which BFR made their decision differ from the facts in the current
audit or the Department appeals the BFR decision. Prior to setting aside a BFR decision,
contact HQ first. Copies of BFR decisions may be requested through headquarters. BFR files
relating to refund or appeal requests initially filed with BOA after January 2003 may be viewed
on the RAPS system.
If the taxpayer disagrees with BFR’s decision, the taxpayer may appeal to the Commonwealth
Court of Pennsylvania.
Commonwealth Court of Pennsylvania
The Commonwealth Court has appellate jurisdiction over appeals on decisions made by state
administrative boards like the Board of Finance and Revenue. A hearing before this court
represents actual litigation where the Office of Attorney General represents the Department.
The taxpayer has 30 days from the postmark date of the BFR decision to file an appeal at this
level. The court will render a written decision describing the issues and the legal basis for its
decision. The taxpayer may elect to pursue the matter to the Pennsylvania Supreme Court and
beyond if Commonwealth Court rules in favor of the Commonwealth.
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In certain cases, the Department and the taxpayer will settle out of court. These settlements
are nonbinding on future audits and only pertain to the specific case at hand.
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CHAPTER 7-AUDIT REPORT
Purpose
The purpose of the audit report is to document audit findings and to provide a clear basis of
assessment to all parties involved in a potential appeal. These parties include the taxpayer,
practitioners, administrative boards, and state courts. Interested parties also include auditors
and management staff who may be called to testify in hearings or who are involved in a follow
up audit. Therefore, an audit report is intended to be a self-sustaining record. The audit report
must independently account for all events that impact the findings of the audit.
Content
The audit report is made up of a narrative and supporting documentation. The narrative
provides a written explanation of audit procedures, audit findings, and the legal basis for any
assessment. Supporting documentation includes schedules, reports, exhibits, and forms. This
documentation is intended to summarize, itemize, and illustrate the audit findings.
Each piece of documentation within the report, including the narrative, is considered evidence.
The evidence presented in the audit report supports the Department’s issuance of a tax
assessment. Therefore, audit documentation must be prepared in such a way that it can rebut
challenges made during an appeal by accurately depicting the facts on which the assessment
is based. The Bureau has implemented certain requirements that must be followed in the
preparation of each part of the audit report with this objective in mind. These requirements are
listed below.
SLS Narrative Report and Audit Findings
The audit narrative is the auditor’s written explanation of audit procedures and the legal basis
for assessment. The narrative should be written as the audit progresses. For instance, the pre
audit section of the narrative should be prepared as soon as the conference is completed so that
pertinent details about the discussion are retained. This will allow the auditor to record events
timely and accurately. It will also contribute to efficient conduct of the audit.
The narrative cites the provisions of the law and Department regulations that pertain to the audit
findings. It also serves as the document that connects the entire audit report together by
referencing all other supporting documentation. This is the mortar that cements the various
supporting data into a meaningful audit report.
General Rules
There are general rules of “do’s and don’ts” that apply to the body of the narrative.
Narrative Do’s
• Do cite laws and regulations where appropriate. This includes narrative discussions of
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areas contested by the taxpayer, areas of large deficiency, and any area of potential
appeal as well as cites that govern the taxpayer’s business activities. Cites should be
as specific as possible and must be written in the proper format (See Chapter 3.
Checkpoint).
• Do reference and explain all schedules and exhibits. The name of the document as
listed on the Audit Package Checklist should be the same name of the document
referenced in the narrative.
• Do use correct spelling, grammar, and punctuation.
• Do write the narrative in third person (the auditor, the taxpayer, etc.)
• Do consult this manual in the preparation of the narrative.
Narrative Don’ts
• Don’t reference supervisors, management staff, or headquarters personnel in the
narrative. However, supervisor or manager attendance at a pre or post audit conference
must be referenced.
• Don’t reference internal memos, documents, or email. These items are confidential.
Internal documents may be referenced on the Conflict of Interest Statement and Auditor’s
Comments form located in the Bureau’s audit application software.
• Don’t reference letter rulings in the narrative unless the Office of Chief Counsel has
directly addressed the ruling to the taxpayer under audit.
• Don’t use “canned” narratives. “Canned” narratives are prewritten narratives that often
contain data from a different audit report.
• Don’t wait until the conclusion of the audit to begin writing the audit narrative.
Sections of the Narrative
The auditor will use a Microsoft Word template (Narrative Report of Audit Findings) to write the
narrative. This template is available in the Bureau’s audit application software.
Audit Summary
This section of the narrative summarizes the net audit deficiency by tax type and tax category
including a reference of the various reports within the Sales and Use Report.
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Pre-Audit:
General Information
Legal Name and Trade Name
The taxpayer’s legal and trade names must be identified. These can be inserted from the
“Taxpayer Information” screen in the Bureau’s audit application software through the macro
available in the Narrative Report and Audit Findings template.
Business Information
This section of the narrative is intended to provide clear description of the taxpayer. The auditor
will complete the following:
• Entity type (select from drop-down box).
o The type of entity must be specifically stated. The most common types of entities
are sole proprietorships, partnerships, corporations, subchapter “S” corporations,
joint ventures, associations, limited liability partnerships, and limited liability
companies. If the entity is a corporation, the date and state of incorporation
identified on the Bureau of Audit’s Registration Verification form must also be
stated.
• State of Incorporation/Formation (select state from drop-down box).
• Formation Date
• Headquarter Location
o Detail the address of Headquarter location.
• PA Business Start Date
• Pennsylvania Locations
o Specifically indicate the number of the taxpayer’s Pennsylvania business
locations. If the taxpayer has more than one Pennsylvania location, an exhibit
detailing the addresses of these locations and a brief description of their activities
must be included in the audit report and referenced in the narrative.
• Local Tax Jurisdiction (select from the drop-down box)
o None
o Allegheny County
o Philadelphia County
o Both
Engagement Letter (select from the drop-down box for exhibit identity)
The engagement letter must be specifically reference in the narrative by exhibit.
• Engagement Letter Date
o The date the letter was issued needs to be entered in this field.
Initial Contact
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This is the first date when the auditor attempted to contact taxpayer.
Registration (select from the drop-down box)
• Bureau of Audit Registration Verification form.
Audit Review of Third-Party Credits
Enter the due date when the taxpayer must provide the records.
Publication Outlining Bill of Rights (select from the drop-down box)
This section of the narrative must indicate that the taxpayer either received a copy of the REV-
554 Disclosure Statement of the Department’s and Taxpayers’ Rights and Obligations or a copy
was provided at pre-audit conference.
Accounting System
• Type of Accounting System (select from the drop-down box)
o Handwritten
o Computerized
o Handwritten and Computerized
• Basis of Accounting Income Tax (select from the drop-down box)
o Accrual
o Cash
• Basis of Accounting Sales and Use Tax (select from the drop-down box)
o Accrual
o Cash
• Accounting Period (select from the drop-down box)
o Calendar Year
o Fiscal Year Ended
Confirmation Letter (select from the drop-down box for exhibit identity)
The Confirmation Letter must be specifically reference in the narrative by exhibit and indicated
in this section.
• Confirmation Letter Date
o Enter the date the letter was issued to the taxpayer.
Audit Site & Record Location Request (select from the drop-down box)
Identify location of audit and records for the audit.
Record Removal Receipt (Received)
Enter the date of the signed Record Removal Receipt.
Audit Plan (select from the drop-down box)
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Indicate yes or no if audit plan(s) was issued.
Enter the last date audit plan was signed.
Waiver Period
The Waiver Period is a populated field. This field contains a macro which pulls data from the
Bureau’s audit application software “Taxpayer Information” section.
• Waiver Expiration
o The Waiver Expiration is a populated field. This field contains a macro which pulls
data from the Bureau’s audit application software “Taxpayer Information” section.
Areas of Discussion
• The date and place of follow up contact to set an appointment for the conference must
be described. If numerous attempts were necessary to establish contact, then this
section of the narrative should reference an exhibit that documents each attempt.
• Any taxpayer’s requests to postpone the audit for a significant length of time should be
in writing and exhibited in the audit report.
• The audit period identified. If the defined period is not in conformity with the standard
audit period (three years plus the current), then this section of narrative must provide an
appropriate explanation.
• Waivers signed by the taxpayer that extend the audit period must be referenced in this
section with an explanation for executing the waiver.
• Information regarding entity changes, affiliates, collateral audits, and bankruptcy must
be included in this section of the narrative.
• Information on bankruptcy must include the bankruptcy date, cause number, bankruptcy
type, and bar date.
• Issues regarding nexus or information provided by the taxpayer via a Business Activities
Questionnaire must be addressed.
• Also, any documentation related to an entity change such as any bulk sales agreement
or merger agreement should be included as an exhibit.
Other Taxes/Fees/Licenses
• List other tax licenses and fee in this section along with License (Account) Number that
will be examined as part of the audit.
o i.e., PTA and Employer Withholding
Sales & Use Tax License Information
Filing Frequency
Indicate either monthly, quarterly, or semi-annual.
Filing Detail Reference
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Enter Reference # from Sales and Use Report
Accrual Difference Reference
Enter Reference # from Sales and Use Report
Number of Returns Filed
Enter the number of returns filed during the audit period.
Number of Returns Filed Late
Enter the number of returns that were filed late during the audit period.
Number of Non-Filed Returns
Enter the number of non-filed returns during the audit period.
Sales Tax Reported (select from drop-down box for Tax Code for sales tax reported).
Indicate either S00, S02 and/or S51, none.
Use Tax Reported (select from drop-down box for Tax Code for use tax reported).
Indicate either U00, U02 and/or U51, none.
Areas of Discussion
• Describe any detail relating to non-filed returns, revoked sales and use tax license, or
other related information.
Pre-Audit Conference
The purpose of this section of the narrative is to document details of pre-audit conference with
the taxpayer and/or the information discussed with the taxpayer prior to the beginning of the
audit.
Date
List the date of conference.
Time
List the time of the conference.
Length
Indicate how long the conference lasted.
Conference Type (select from the drop-down box)
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• On site
• Virtual
• Letter
• Phone
Taxpayer’s Representative(s):
The names and titles of attendees for the taxpayer must be included in this section. This section
must also indicate if any of the taxpayer’s representative were operating under “Power of
Attorney” authorization.
Department’s Representative(s):
The names and titles of attendees from the Department must be included in this section.
Areas of Discussion
• Detail any other information pertaining to the Pre-Audit Conference such as plant tour
arrangements.
Business Activities
This section of the narrative is intended to provide a clear description of the business operations
such as retailer, construction contractor, manufacturer, etc. and to describe any products or
services provided.
If the taxpayer is a manufacturer or processor, then a general description of the manufacturing
operation must be included in the narrative or exhibited in the audit report. The description must
identify the first and last stage of the manufacturing operation. The description should also
discuss any areas of the operation that require additional clarification. A plant diagram can also
be included as an exhibit to help clarify the manufacturing process.
Local Tax Jurisdiction(s):
• Select from the drop-down box for any local jurisdiction business activities:
o None
o Allegheny County
o Philadelphia County
o Both
Taxable Sales and citation(s)
This section of the narrative will identify the taxpayer’s taxable sales. The statute and/or
regulations governing the taxpayer’s business activities must be cited.
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Nontaxable Sales citation(s)
This section of the narrative will identify the taxpayer’s nontaxable sales. The statue and/or
regulation governing the taxpayer’s business activities must be cited.
Taxable purchases and Citation(s)
This section of the narrative will identify the taxpayer’s taxable purchases. The statute and/or
regulations governing the taxpayer’s business activities must be cited.
Nontaxable Purchases and Citation(s)
This section of the narrative will identify the taxpayer’s nontaxable purchases. The statute and/or
regulations governing the taxpayer’s business activities must be cited.
System Survey
The purpose of this section of the narrative is to provide a description of the taxpayer’s financial
records used to document the audit trail of sales and purchase transactions from the source
documents through the taxpayer’s accounting system to the sales and use tax return. It is also
to provide an overview of all available records. All records referred to in the “Audit Procedures”
section of the narrative must be addressed as part of the system survey. The following items
must be addressed in this section of the narrative:
Sales and Sales Tax Audit Trail
This section must describe a step-by-step explanation that traces the gross sales and taxable
sales information reported on the sales and use tax return from the sales source document
through the accounting system to the return.
Sales Tax Records Provided
Document name and Exhibit
Detail the list of records provided by the taxpayer that were used in preparing the sales portion
of the sales and use tax return. Identify the exhibit if record(s) are included in the audit report.
Purchases and Use Tax Audit Trail
This section must describe a step-by-step explanation of the taxpayer’s purchases. The auditor
should trace the taxpayer’s purchases information from the source document through the
accounting system to the return.
Use Tax Records Provided
Document Name and Exhibit
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Detail the list of records provided by the taxpayer that were used in preparing the use tax portion
of the sales and use tax return. Identify the exhibit if record(s) are included in the audit report.
Areas of Discussion
This section must describe any records not provided or further detail of the records that were
provided.
Audit Procedures & Adjustments
Sales Tax Phase
Gross Sales Examination
The narrative must describe the results of verifying gross sales as reported on the tax returns
to the appropriate federal or state income tax returns and the general ledger for the audit period.
Description (Select from the Drop-Down Box)
Indicate the following:
• No Difference
• No significant difference noted.
• Additional state taxable sales
• Additional Allegheny County local taxable sales
• Additional Philadelphia County local taxable sales
Note: If more than one area of deficiency in gross sales, use separate line for each description.
Gross Sales Difference
Indicate the amount of any significant discrepancies in the reported gross sales.
Reference # and Report Title
Enter the Reference Number and report title as indicated in the “Sales and Use Tax Report”.
The “Accrual Differences” schedule as well as separate schedules to support any significant
discrepancies must be referenced in the narrative.
Details of Review
In the open box section, the auditor must provide a clear explanation of the records used to
verify reported gross sales as well as an explanation of any discrepancies. The records used
in the reconciliation must be the same records referenced in the System Survey.
If federal or state returns are not available for the verification of gross sales, the narrative must
disclose that a Request for Financial Records was provided to the taxpayer and explain the
reasons the records were not provided.
Other sources used to verify gross sales in the absence of federal or state returns must be
specifically identified.
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The audit report must provide an approximation of the number of sales transactions per month
and identify how the approximation was determined.
Sales Tax Accrual
The narrative must clearly state the findings of comparing the taxpayer’s reported sales tax to
amounts recorded in the taxpayer’s sales tax accrual records and general ledger accounts.
Description (Select from the Drop-Down Box)
Indicate the following:
• No differences
• Unreconciled Difference
• No audit findings were established.
• Sales tax discount disallowed.
• State sales tax deficiency
• State sales tax credit
• Local sales tax credit
• Disallowed bad debts.
Note: If more than one area of deficiency in sales tax accrual, use separate line for each
description.
Tax Accrual Difference:
Enter the discrepancies or errors in the reporting of sales tax.
Reference # and Report Title
The narrative must reference the “Accrual Differences” schedule and “Accrual Error” schedule
along with Reference Numbers from the “Sales and Use Tax Report”. The records used in the
reconciliation must be the same records referenced in the “System Survey”.
Details of Review
In the open box section, the auditor must describe the records and procedures used to verify
the reported amounts. Additionally, any assessment resulting from the examination must be
explained and properly cited.
Sales Examination
This section of the narrative will specifically indicate the procedure used and discrepancies
found in the examination of sales.
Description (Select from the Drop-down box)
Indicate the following:
• No sales tax deficiency established.
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• Additional state taxable sales
• Additional Allegheny County local taxable sales
• Additional Philadelphia County local taxable sales
Note: If more than one area of deficiency in the sales examination, use separate line for each
description.
Amount
Enter the amount of deficiency. If there are differences for local tax jurisdictions it can be
entered on additional rows.
Reference # and Report Title
Reference must be made to the related “Sales” schedules in the Bureau’s audit application
software as well as the relevant “Combined Summary” and “Tax Detail” schedules, and related
exhibits.
Details of Review
In the open box section, the auditor must specifically state the type of audit conducted (i.e.,
complete, modified complete, test). The narrative must discuss the tracing of a sampling of
transactions to the books of original entry to the return to verify the proper recording of all
transactions. Also, explain the tracing of transactions from the books of original entry to the
invoice to verify all invoices were made available for examination. In addition, the narrative
must address the completeness of the taxpayer’s computer records. The method used to verify
the status of the computer records must be disclosed.
If a test audit was conducted, the narrative must provide the details of the test plan. This
includes the disclosure of the reason for testing, the test type, the test period selection criteria,
the test periods, and the actual procedures. The test plan disclosed in the narrative must be
consistent with the test information provided on the Taxpayer’s Concurrence with Test Audit
Plan form. The information presented in the narrative and on the form must disclose the
Department’s full compliance with 61 Pa Code § 8(a). This information must be recorded in
the narrative for each separate test population.
If a modified complete audit was conducted, the narrative must specifically describe the original
periods, time frame, or area initially examined on a complete basis.
The narrative must describe the records examined during the audit.
The narrative must specifically state the amount of time provided to the taxpayer to obtain
exemption certificates or statements.
A general description of the assessed transactions and the basis of assessment must be
provided.
The narrative must provide appropriate detail for major areas of assessment and areas
contested by the taxpayer. This includes referencing the laws and regulations that support the
assessment.
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The narrative must describe any sales that the taxpayer was improperly charging tax and
discuss the corrective actions that were recommended. Also discuss the Bureau’s response if
similar issues are identified during any subsequent audit.
Use Tax Phase
Use Tax Accrual
This section of the narrative must clearly state the findings of comparing the taxpayer’s reported
use tax to use tax accrued in the taxpayer’s books.
Description (Select from the Drop-Down Box)
Indicate the following:
• No differences
• Unreconciled Differences
• No audit findings were established.
• State use tax deficiency
• State use tax credit
• Local use tax credit
• Local use tax deficiency
Note: If more than one area of deficiency in the use tax accrual examination, use separate line
for each description.
Tax Accrual Difference
Any discrepancies or errors in the reporting of use tax must be explained, documented, and
referenced in the narrative.
Reference # and Report Title
The narrative must reference the “Accrual Differences” schedule and “Accrual Error” schedule
along with Reference number from the “Sales and Use Tax Report”. The records used in the
reconciliation must be the same records referenced in the System Survey.
Details of Review
In the open box section, the auditor must describe the records and procedures used to verify
the reported use tax including the tracing of a sampling of transactions where the taxpayer
accrued use tax to the use tax accrual account as to verify the accuracy of the reported use
tax. Additionally, any assessment resulting from the examination must be explained and
properly cited.
If reported amounts could not be traced to a use tax accrual account, the narrative should
indicate that the reported use tax was treated as prepayment and used to offset any deficiency
established in the capital and expense purchase exams.
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Capital Assets
This section of the narrative will specifically indicate the procedure used and discrepancies
found in the examination of the purchase of capital assets.
Description
Indicate the following:
• Additional State Taxable Purchases
• Additional Allegheny County Local Taxable Purchases
• Additional Philadelphia County Local Taxable Purchases.
• No audit findings were established.
Note: If more than one area of deficiency in the capital assets examination, use separate line
for each description.
Amount
Enter the amount of deficiency. If there are differences for local tax jurisdictions it can be
entered on additional rows.
Reference # and Report Title
The narrative must indicate the “Reference Number” of the “Capital Assets” schedules from the
“Sales and Use Tax Report” as well as the relevant “Combined Summary” and “Tax Detail”
schedules from “Audit Report”.
Details of Review
In the open box section, the auditor must describe the methods and records used to conduct
an audit on capital purchases. This includes referencing the taxpayer’s fixed asset/depreciation
schedule exhibited as part of the audit report. The completeness of the taxpayer’s fixed
asset/depreciation schedule must be verified by tracing entries from the general ledger to the
fixed asset/depreciation schedule. This schedule should also be reconciled to other
independent sources such as the FF4562 of the federal income tax return.
The auditor must also examine fixed asset accounts such as the construction in progress (CIP)
in the general ledger for any capital transactions not posted to the fixed asset/depreciation
schedule. The type of records examined to verify payment of sales tax charged on the invoice
must be included in the narrative. If asset purchases were found to be deficient, a general
description of the expenditure and basis of assessment must be addressed in the narrative.
The narrative must state the approximate number of capital purchases made during the audit
period and indicate the source.
The narrative must provide appropriate detail for major areas of assessment or areas contested
by the taxpayer. This includes referencing appropriate laws and regulations and related
exhibits.
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For entities with a business exemption, assessed capital assets should include specific
reasoning as to why the assets did not qualify for the exemption. Such reasonings include:
• Pre- and post-production
• Maintenance
• Real estate
• Safety and fire prevention
• Waste disposal
• Employee use
• Management and administration
• Space heating, cooling, and illumination
The narrative should include a few sentences that describe how the items are used.
For example:
Items used in maintenance activities included welding supplies, electronic diagnostic tools,
hydraulic lifts, cleaning compounds, and truck washes. These purchases of tangible personal
property were taxable according to 61 Pa. Code §§ 31.1(2), 31.7(a)(1), 32.25(b)(2),
32.32(a)(3)(ii), and 32.35(a)(3)(ii).
Certain equipment, such as forklifts, can be used directly and not directly in production. If the
forklifts are not solely used in one destinated area, the auditor should request an equipment
study to support the direct and indirect usage within the manufacturing process in order to
determine predominance.
Expenses
This section of the narrative will specifically indicate the procedure used and discrepancies
found in the examination of expenses.
Description
Indicate the following:
• Additional State Taxable Purchases
• Additional Allegheny County Local Taxable Purchases
• Additional Philadelphia County Local Taxable Purchases.
• No audit findings were established
Note: If more than one area of deficiency in the expense examination, use separate line for
each description.
Amount
Enter the amount of deficiency. If there are differences for local tax jurisdictions it can be
entered on additional rows.
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Reference # and Report Title
The narrative must indicate the “Reference Number” to the “Expense” schedules from “Sales
and Use Tax Report” as well as the relevant “Combined Summary” and “Tax Detail” schedules
from “Audit Report”.
Details of Review
The narrative must document the procedures used in verifying the completeness of the records
presented for examination such as tracing a sampling of transactions from the books of original
entry to the expense purchase invoices. The type of records examined to verify payment of
sales tax charged on the invoice must be included in the narrative.
The narrative must state the approximate number of expense transactions per month or year
and identify how the approximation was determined.
There must be a description of the type of audit performed (i.e., test, modified complete,
complete).
If test procedures were used, then this section of the narrative must include a statement that
provides the reason for conducting a test (i.e., volume of records, record availability, etc.). The
criteria for selecting test periods must also be provided. The selected test periods and test
method must be described. Reference must be made to the Taxpayer’s Concurrence with Test
Audit Plan form as well as a ‘Test Period Selection” schedule, “Error Rate” schedule, and a
“Projection” schedule. The information provided in the narrative must be consistent with
information detailed on the test form and must reflect compliance with 61 Pa. Code § 8(a).
If a modified complete audit was conducted, the narrative must specifically describe the original
periods, time frame, or area initially examined on a complete basis.
There must be a general description of untaxed taxable transactions assessed by the auditor
and the basis for assessment.
An audit of a construction contractor must also separately address job costs from general
operating expenses. Job costs differ from general operating expenses; therefore, separate
examination of these expenditures is required.
The narrative must provide appropriate detail for major areas of assessment or areas contested
by the taxpayer. This includes appropriate cites to laws and regulations and related exhibits.
Credits
This section of the narrative will discuss any credits granted during the audit examination.
Description
Indicate the following:
• State taxes paid purchases resold (TPPR) credit.
• State third party credit
• No credit was granted
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• State use tax overpayment
• Allegheny County local taxes paid purchases resold (TPPR) credit
• Philadelphia County local taxes paid purchases resold (TPPR) credit
• Allegheny County local use tax overpayment
• Allegheny County local third-party credit
• Philadelphia County third-party credit
Note: If more than one area of credits is being granted within the audit, use separate line for
each description.
Amount
Enter the amount of credit being granted.
Reference # and Report Title
The narrative must indicate the “Reference Number” to the different credit schedules from the
“Sales and Use Tax Report”. Below outlines specific report titles for credit schedules to
reference in this section.
Details of Review
Use Tax Overpayment Credits
The narrative must specifically explain use tax overpayment credits granted in the audit and
reference the related “Use Tax Overpayment Credits” schedule from Bureau’s audit application
software. The narrative should also explain the reason for denying any credits. All denied
credits should be listed on a separate schedule. All corresponding schedules and exhibits
supporting the granting or denial of the credits must be referenced in the narrative.
Third Party Credits
The narrative must specifically explain third party credits granted in the audit and reference the
related “Third Party Credits” schedule from the Bureau’s audit application software. The
narrative should also explain the reason for denying any credits. All denied credits should be
listed on a separate schedule. All corresponding schedules and exhibits supporting the
granting or denial of the credits must be referenced in the narrative including the taxpayer’s
attestation letter.
Taxes Paid Purchases Resold Credits
The narrative must specifically explain taxes paid purchases resold credits granted in the audit
and reference the related “TPPR Credits” schedule from the Bureau’s audit application
software. The narrative should also explain the reason for denying any credits. All denied
credits should be listed on a separate schedule. All corresponding schedules and exhibits
supporting the granting or denial of the credits must be referenced in the narrative including the
taxpayer’s attestation letter.
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Pennsylvania Personal Income Tax Withheld and Paid
Employer Withholding of Pennsylvania Personal Income Tax
This section of the narrative must describe the results of comparing taxable wages and personal
income tax withheld as reported to the Department via W-2 transmittal and W-3 returns to the
taxpayer’s records.
Account Number
List the taxpayer’s Employer Withholding license number.
W-2 Transmittal Filed
Indicate the month and year when W-2 Transmittals were filed. If there were periods that were
not filed, indicated in the “Areas of Discussion” section of the narrative.
PA-W3s Filed
Indicate the month and the year when the W-3 Transmittals were filed. This should be
comparable to the W-2 Transmittals filed. If there were periods that were not filed, you will need
to explain in the additional comments section. If there wasn’t any W-3’s filed than indicate none
and explain in the “Areas of Discussion” section of the narrative.
Comparison of W-2s to W-3s (select from the Drop-Down Box)
Indicate the following:
• PA-W3s lower
• PA-W3s higher
• No differences noted
• Other-See areas of discussion
See Reference
The narrative must indicate the Reference Numbers and Report Title for the “EW Accrual
Differences” schedule and the “Employer Withholding Reconciliation” schedule from the “Sales
and Use Tax Report”.
Records Examined
Indicate the payroll records that were used as part of the examination for Employer Withholding.
Examples:
• Payroll Summary
• Salary and Wage reports
• Payroll Register
• Quarterly PA-W3, etc.
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Periods Examined
Indicate the periods that were examined. The auditor is required to review one quarter to
determine if the proper tax was withheld. The auditor must examine the taxpayer’s payroll
records to ensure that all taxes withheld in each quarter were properly reported.
All Tax Withheld Reported, All Taxable Compensation Included, and Tax Withheld at
Proper Rate (Select from the Drop-Down Box)
Indicate the following:
• Yes
• No, See Areas of discussion.
Areas of Discussion
The auditor must discuss any areas of discrepancies regarding the Employee Withholding
review.
When the taxpayer has remitted all taxes due but has non-filed returns, the narrative must
indicate that the taxpayer was instructed to file the missing returns through myPATH.
If the initial exam of these records results in a collateral audit, then the resulting audit
assignment must be referenced.
Personal Income Tax
For sole proprietors, partnerships, and subchapter “S” corporations, the narrative must describe
the taxpayer’s compliance with Pennsylvania Personal Income Tax requirements. The narrative
must state that the business income was reviewed, and that the entity properly reported the
income to the principles on a RK-1 or NRK-1 form. If an entity’s income tax return was not filed
with the Department, state the year or years not filed.
Post-Audit Conference
The purpose of this section of the narrative is to document the information presented to the
taxpayer by the auditor at the conclusion of the audit. This section of the narrative must
specifically address the following areas:
Conference Information
The date, place, and length of the post audit conference must be documented. If the
conference is conducted by telephone, the time of day must also be specifically indicated in the
narrative. The follow up Post Audit Conference by Phone Letter must also be referenced in
this section.
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Note: A signed “Post Audit Conference letter is not required if the auditor receives a signed
electronic image of the Taxpayer’s Acknowledgement of Post Audit Conference form prior to
post audit conference or immediately after.
Taxpayer’s and Department’s Representative(s)
The names and titles of attendees must be listed in this section of the narrative.
Taxpayer’s Acknowledgement of Post-Audit Conference
The total deficiency must be stated in this section of the narrative. The auditor will also indicate
the appropriate response from the drop-down box for the following:
Representative(s) notified of appeal rights and procedures. (Yes or No)
• The taxpayer must be informed that the statute of limitations for all credits related to the
audit period is six months from the date on the notice of assessment or three years from
the payment of tax, which is later.
Representative Agreement with audit findings:
• Agrees
• Disagrees
• Disagrees in part
• No indication
Taxpayer intends to appeal findings:
• Yes
• No
• Unsure
Representative signed form:
• Yes
• No
• Declined
• Form not returned
Record Removal Receipt (records returned):
If hardcopy (paper) records were removed from the taxpayer’s site, the auditor must provide a
Record Removal Receipt form located in the Bureau’s audit application software of a list of
records removed where both the auditor and the taxpayer will sign and date. Once the records
are returned, the taxpayer and the auditor will sign and date the form. The audit assessment will
not be issued until all source records are returned to the taxpayer.
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Post-Audit Conference letter
If a Post Audit Conference by Phone Letter was issued, the auditor will indicate the exhibit.
Audit Recommendations
The auditor can use this area of the narrative to discuss recommendations that were made to
the taxpayer and/or representative(s) during the post-audit conference.
Explain Areas of Disagreement
Areas of disagreement must be addressed in this section of the narrative. Taxpayer arguments
against the audit findings should be discussed. In addition, the basis for assessment on any
disputed items should be restated.
Areas of Discussion
This section can be used to discuss other issues that were noted during the post-audit
conference:
Penalty Abatement
This section of the narrative must address any abatement of penalty granted through the audit.
The following language is recommended:
“The Taxpayer was advised the auditor was recommending penalty abatement and provided a
"Penalty Abatement Petition Form", the Taxpayer was further advised that completion of a
petition for penalty abatement did not preclude the Taxpayer from petition the Board of Appeals
for reassessment based on disagreements with the tax liability as established through audit.”
Interest and Penalty
The narrative must disclose that the Department’s policy on interest and penalty as it relates to
the assessment was explained to the taxpayer.
Sales and Use Report
The audit findings are documented through the “Sales and Use Report” generated by Bureau’s
audit application software. The “Sales and Use Report” includes all the reports necessary to
support the basis for assessment.
Tax Codes and Rate Categories
The Bureau’s audit application software uses several tax codes and rate categories to classify
audit adjustments by tax type and category.
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Tax Codes
Tax codes are used to identify the rate that the Bureau audit application software imposes on
a transaction. Audit findings must be listed under the proper tax code to segregate the findings
properly. These tax codes are included in the audit report generated by the Bureau’s audit
application software in alphabetical order. The tax codes used in the Bureau’s audit application
software include the following:
Title Tax Code
State Sales Tax S00
Allegheny Sales Tax S02
Philadelphia Sales Tax S51
State Use Tax U00
Allegheny Use Tax U02
Philadelphia Use Tax U51
Consumer Fireworks Tax CFT
E-911 E911
State Hotel Occupancy Tax H00
H02
Allegheny Hotel Occupancy Tax
Philadelphia Hotel Occupancy H51
Tax
Public Transportation Lease Tax PLEAS
Public Transportation Rental PRENT
Public Transportation Tire PTIRE
Vehicle Rental Tax VRENT
Employer Withholding EW
Figure 7.1 Bureau’s Audit Application Tax Code
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Rate Categories
Rate categories are primarily used to identify and segregate credits granted in the audit.
Deficiencies found in the audit are always assigned a “General Deficiency” rate category.
Credits granted in the audit use a rate category determined by the type of credit granted. The
Bureau’s audit application software uses the following rate categories:
Title Rate Category
Third-Party Credit [3]
Accrual Error [A]
General Deficiency [G]
Taxes Paid, Purchases Resold [T]
Credit
Use Tax Over-payment Credit [U]
Figure 7.2 Bureau’s Audit Application Software Rate Category
Reports
The Bureau’s audit application software has a number of reports available to include in the
“report stack”. The report stack is created using the “Report Generator” that is available in the
“Tools” menu or by the F9 hotkey. The report titles contained in the “Table of Contents” are
arranged in outline format using indentations to show how the various reports relate to each
other as to their dependencies one to another. Individual report totals are traceable from report
to report, up and down the table of contents' outline format. The left-most indented report titles
contain the highest level of summary information while the right-most indented report titles
contain the highest level of transactional detail. Annotations within the transactional reports
documents the basis for assessment. The reports that must be included in the “Sales and Use
Report ”are dependent on whether there are audit findings or not.
Reports always Included
When running the Report Generator, the following reports must be selected under Reports to
Print for all audits (including “none” audits):
• Table of Contents
• Billing Summary
• Filing Detail
• Raw Schedules
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Reports to Include for Findings
For audits with findings (net deficiency or net credit audits), the following reports must also be
selected under Reports to Print:
• Billing Sheet
• Tax Detail
• Combined Summary
• Formatted Schedule
• Distribution
Report Descriptions
Distribution Report
Although this is not the highest-level summary report, it will appear as the first report in the
“Sales and Use Report”. This report will provide a summary of the assessment by Tax Code
and Tax Category showing the total tax for the entire audit period. This report is informational
only within Bureau’s audit application software and is not related to any revenue accounting.
Billing Summary
The Billing Summary recaps the net assessment by Tax Code, showing the total tax due for
the audit period. This report calculates down to the locality level.
Billing Sheet
This schedule provides a summary of the net assessment by filing period. This report will
repeat for each Tax Code listed on the Billing Summary report.
This schedule will be formatted one of two ways. If the assessment does not include accrual
errors or stratified random samples, the Billing Sheet will list the net tax due by filing period. If
the assessment includes accrual errors or stratified random samples, the Billing Sheet will
separate the net tax due from the accrual errors or stratified random samples under the “Tax
Adj” column of the Billing Sheet. The Billing Sheet contains the following:
Period
Ending dates for monthly, quarterly, or semiannual reporting period.
Tax
The total net tax due of all Rate Categories.
Tax Adj
Net tax adjustments from accrual errors or stratified random samples.
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Tax Detail
This schedule provides a summary of the assessment by filing period for each Tax Category.
This report will repeat for each Tax Code listed on the Billing Summary report. This schedule
lists the tax measure, tax rate and calculated tax or credit for each Tax Category.
Period
Ending dates for monthly, quarterly, or semiannual reporting period.
Measure
The total tax basis of all “Rate Categories”.
Rate
Applicable tax rate.
Tax
Measure multiplied by rate.
Tax Adj Detail
This schedule provides a summary of the assessment by filing period for each Tax Category
with a tax adjustment. This report will repeat for each Tax Code with an adjustment to tax.
Combined Summary
This schedule provides a summary of the tax measure by filing period for each Tax Category.
This report will repeat for each Tax Code & Tax Category listed on the Distribution Report.
Period
Ending dates for monthly, quarterly, or semiannual reporting period
Measure
The total tax basis of all Rate Categories.
Tax Adj by Source
This schedule provides a summary of the tax adjustment by filing period for each Tax Category.
This report will repeat for each Tax Code and Tax Category with an adjustment to tax.
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Schedules
Schedules are created by auditors to detail the transactions assessed during the audit. Separate
schedules are generated for each Tax Code and Tax Category.
The Report Generator in Bureau’s audit application software has a section listing all the
schedules that have been created in the audit folder. There are three options for printing
schedules in the report stack. The options are “Calculate and Print”,“Print Only”, and do not
print (unchecked). Schedules that are selected to “Calculate and Print” will be used in the
calculation of the audit assessment. These schedules are included in the report stack as a
formatted schedule, where the schedule is subtotaled by reporting period. When printed as a
formatted schedule, any schedule that contains multiple tax codes or rate categories will also
by segregated by those tax codes and rate categories. Formatted schedules are included in
the report stack in the hierarchy of reports discussed above. Schedules that are selected to
“Print Only” are not used in calculation of the audit assessment. These schedules are included
in thereport stack as araw schedule. Raw schedules are included in thereport stack with the
same formatting and order as they appear on the working schedule in the Bureau’s audit
application software. Raw schedules are included in the report stack in a “Supporting Exhibits”
section at the end of the report stack.
The order of the schedules that are presented in the report will depend on whether they are
formatted or raw schedules. Formatted schedules will be presented in alphabetical order under
the corresponding Combined Summary or Tax Adjustment by Source report by default. Raw
schedules will be presented in alphabetical order under the Other Exhibits section. The order
the schedules are presented under their corresponding report can be adjusted by selecting a
schedule and moving them in lists of schedules using the up and down blue arrows found at
the bottom of the Schedule section.
Schedule Descriptions
Template Schedules
Standardized templates schedules are maintained in the Bureau’s audit application software
for common transactions encountered during an audit. When audits are submitted for
processing, transactions must be entered in a template schedule or in a schedule that contains
the same columns in the same order. The amounts from these schedules “roll-up” to the
summary reports listed above.
The template schedules include the following columns:
Invoice Date
The date listed on the sales or payable invoice.
Reason Code
Numerical value linked to the Reason Description table.
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Reason Description
A table of standardized reason descriptions used to provide a basis for assessment (i.e.,
Missing Exemption Certificate, Indirect Use).
Invoice Number
The number listed on the sales or payable invoice.
Customer/Vendor
The name of the customer on the sales invoice or the name of the vendor on the payable
invoice.
Description
A brief description of the property purchased or sold that was subject to tax.
Invoice Amount
The total amount of the invoice including any taxable or nontaxable amounts.
Invoice Taxable Amount
The taxable portion of the Invoice Amount.
Tax Charged
The amount of any sales tax charged on the invoice or the amount of use tax accrued and
reported.
Tax Rate
The rate of the sales tax charged on the invoice or use tax accrued.
Additional Taxable Amount
This is a calculated field and represents the measure amount listed on the Combined Summary
Schedule. Any sales tax charged or use tax accrued is divided by the Tax Rate and then
subtracted from Invoice Taxable Amount to arrive at the Additional Taxable Amount.
State Exempt
This check box is used if the transaction is exempt from sales tax (i.e., state sales tax was
charged on the invoice), but subject to a local sales/use tax.
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Alleg/Phila Co
These check boxes are used if the transaction is subject to Allegheny County or Philadelphia
County local sales/use tax.
Filing Detail
The Filing Detail report summarizes the filing frequency of the taxpayer. This report displays
the ending dates of the filing periods, due dates, filing date, any discounts by taxing jurisdiction,
and any credits by taxing jurisdiction.
Period Ending
Ending dates for monthly, quarterly, or semiannual filing period.
Due Date
The date the return was due.
Date Field
The date the return was filed.
Payment Date
This field is not normally populated.
Under-statement
Check box indicates understatement penalties imposed.
Major Under statement
Check box indicates major penalties imposed.
Not Filed
0 = return filed, 1 = non-filed return.
Working Paper
Identification number for location of the document data.
Period Key
Identifies the period the return was filed. The period key consists of a four-digit number where
the first two digits identify the year and the last two identify filing period (01-12 = monthly; 41-
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44 = quarterly; & 21-22 = semiannual).
AST Penalty
Indicates any accelerated sales tax penalty for failure to file or underpay accelerated sales tax.
TPPR Credit
Check box indicates Taxes Paid Purchases Resold credit taken on return. Auditor must verify
these credits.
Late Penalty
Indicates if any late penalties were charged.
PA Discount
Amount of discount taken on the return for state sales tax.
AL Discount
Amount of discount taken on the return for Allegheny County sales tax.
PH Discount
Amount of discount taken on the return for Philadelphia County sales tax.
E911 discount
Amount of discount taken on the return related to E911 fees.
PA Credit
Amount of state tax credit taken on the return. Auditor must verify credit.
AL Credit
Amount of Allegheny County credit taken on the return. Auditor must verify credit.
PH Credit
Amount of Philadelphia County credit taken on the return. Auditor must verify credit.
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Accrual Differences
The “Accrual Differences” schedule must be included in the Sales and Use Report. The
purpose of the schedule is to document the comparison of sales information recorded in the
taxpayer’s books to the information reported to the Department on the Sales and Use Tax
Return. The auditor manually enters the numbers from the taxpayer’s books when the numbers
are different from those reported on the tax return. Differences are calculated by the audit
application.
Period
Ending dates for monthly, quarterly, or semiannual filing period.
Jurisdiction
This field designates the taxing jurisdiction based on the Tax Codes.
Reported Gross Sales
Gross sales as reported by the taxpayer on the sales and use tax return for the filing period
and Tax Code.
Audited Gross Sales
Gross sales as verified and/or determined by the auditor.
Gross Sales Difference
This represents the difference between gross sales in the taxpayer’s records and the gross
sales reported on the sales and use tax return for the same filing period and Tax Code.
Reported Taxable Sales
Taxable sales reported by the taxpayer on the Sales and Use Tax return for the same filing
period and Tax Code.
Audited Taxable Sales
Taxable sales as verified and/or determined by the auditor.
Taxable Sales Difference
This represents the difference between taxable sales in the taxpayer’s records and taxable
sales reported on the Sales and Use Tax Return for the same filing period and Tax Code.
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Reported Tax Accrual
Tax as reported by the taxpayer on the Sales and Use Tax Return for the filing period and Tax
Code.
Audited Tax Accrual
Tax as verified and/or determined by the auditor.
Tax Accrual Difference
This represents the difference between tax accrued in the taxpayer’s books and records, and
the tax as reported on the sales and use tax return for the same filing period and Tax Code.
This difference becomes a tax deficiency or a credit.
Reported Taxable to Gross %
Reported Taxable Sales divided by Reported Gross Sales. This column is not printed on the
schedule in the Sales and Use Report.
Reported Effective Rate
Reported Tax Accrual divided by Reported Taxable Sales. This column is not printed on the
schedule in the Sales and Use Report.
Major Penalty
The box is checked to apply major penalties. This column is not printed on the schedule in the
Sales and Use Report.
Major Penalty Amount
This field lists the amount of the major penalty. The audit application is programmed to
calculate the amount of the major penalty.
Test Schedules
The Block Sample and Stratified Random Sample (SRS) Wizards generate a number of
schedules that are used to calculate error rates and projections, the SRS Wizard also creates
a number of schedules to apportion the deficiency to the proper period, tax codes, and rate
categories. Audit reports that include testing procedures must also include the following
schedules:
Schedules - Block Sample
Block Projection Error Rates
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This schedule details the calculation of the error rate by Tax Code and Tax Category (Print
Only).
Block Sample Population Summary
This schedule lists the population amounts by filing period and the test periods within the
population (Print Only).
Block Sample Projection
This schedule calculates the additional taxable measure by filing period for each Tax Code and
Tax Category (Calculate and Print).
Outliers
Any transactions that were suspected outliers and removed from the test projection (Calculate
and Print ).
Schedules - SRS
SRS Sample Errors
This schedule details only those transactions from the sample with tax errors (deficient and/or
credits).
SRS Estimates
This schedule projects the total net tax due from the sampled transactions. Except for the
complete stratum, the total net tax due tax from each stratum is projected against the frame
total resulting in the total net tax due for the population.
SRS Allocation (Jurisdiction/Strata)
These schedules allocate the total net tax due by Tax Code and Tax Category. Both are
informational schedules with the same data but sorted by jurisdiction and stratum.
SRS Precision
This schedule calculates the precision at a 90% confidence level.
SRS Projection
This schedule allocates the total net tax due by Tax Code and Tax Category for each filing
period in the population.
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SLSWKS Template
Excel worksheets templates are available under attachments in the Bureau’s audit application
software. These templates include:
Audit Status Report Worksheet and Audit Plan
Refer to chapter 8-Audit Plan and Audit Status Worksheet for further information on when to
use this template.
Gross Sales Analysis
To be used to analyze the taxpayer’s gross sales by comparing the sales and use tax returns,
taxpayer’s sales summary and detail records and audited gross sales to the taxpayers’ gross
sales reported on tax returns and/or financial statements. This spreadsheet is used to verify the
completeness of sales used in the sales examination.
Sales Tax Accrual Analysis
To be used to analyze the taxpayer’s reported sales tax on the sales and use tax return and in
general ledger account to the audited sales tax. This spreadsheet is used to verify all sales tax
collected and self-assessed use tax was properly reported to the Department.
Test for Sales (Full, Partial and One Year)
The methods for selecting the test periods must be explained including a schedule detailing how
the test periods are selected. This template will be used in provide detail of the selected test
periods based on the taxpayer’s gross sales and sales tax reported to calculate a taxable to
gross sales ratio. The periods are selected then based on the most representative period(s) in
the audit.
Asset Reconciliation
This schedule is used to reconcile the taxpayer’s capital purchases for completeness and
identify any undocumented Pennsylvania asset acquisitions and/or dispositions during the
audit period.
Test for Expenses
The methods for selecting the test periods must be explained including a schedule detailing how
the test periods are selected. This template will be used in provide detail of the selected test
periods based on the taxpayer’s expenses on selected general ledger accounts to select the
most representative period(s) in the audit.
These templates are not required to be used, but schedules supporting the procedures
performed during the audit must be completed and included in the audit report.
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Audit Workpapers
Audit workpapers are generally created through standardized templates in the Bureau’s audit
application software. Auditors are permitted, and in some cases required, to create workpapers
(i.e., Excel) outside of the standard templates. These customized workpapers may calculate a
tax deficiency or credit or provide supplemental information to support the schedules in the
Bureau’s audit application software. Any other schedules calculating a tax deficiency or credit
must be imported into the Bureau’s audit application software. In addition, the Excel file should
be saved in the audit folder under “Attachments”.
Schedules must be prepared in accordance with the Bureau’s standard format described
below:
• Each page of each schedule must be properly headed.
o Headings must include:
Audit ID
Taxpayer’s legal Name
Federal Employer Identification Number (FEIN) or Social Security Number
(SSN)
Account ID
Beginning Audit Period
Ending Audit Period
Auditor’s Name
Audit Supervisors Name
Schedule name
Schedule number
• Workpapers must be paginated using the Page X of Y format (e.g., Page 1 of 2).
• Workpapers must reference any supporting documentation.
• Footnotes should be included to provide necessary explanations.
• Workpapers must be footed and cross-footed to prove mathematical accuracy.
• Workpapers must be professional in appearance.
Exhibits
Generally, exhibits are documents supplied by the taxpayer and are included in the audit report
to substantiate the audit findings. Exhibits may also consist of written correspondence between
the Department and the taxpayer. All exhibits must be referenced in the narrative. There must
be continuity among the exhibits. The use of exhibits is encouraged so the auditor may provide
a well-documented and comprehensive basis for the assessment.
Required Exhibits
The following documents/reports are required to be included in every audit report:
Audit Engagement Letter
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Written correspondence
• Cover letters for waivers
• Confirmation letters
• Post audit conference letters, etc.
Taxpayer’s fixed asset/depreciations schedule
If voluminous, the first and last page should be exhibited. A complete copy of the report must
be saved to the TaxMaster audit folder.
A copy of any document or report referenced in the System Survey
If voluminous, the first and last page or any page supporting an audit finding should be exhibited.
A complete copy of the report must be saved to the TaxMaster audit folder.
A listing of PA locations
Describe the activities performed at those locations. Must be include in the audit report when
the taxpayer has more than one location.
Any “Order to Appear” Letter
Must be included in the report when used during the course of an audit.
Suggested Exhibits
Other documents suggested to be included in the audit report are:
• Brochures provided by the taxpayer
• Photographs
• Copy of PUC rights
• Merger Agreements
• Organizations Charts
• Name Change Documentation
• Sales agreements
• Disallowed Exemption Certificates
• Management Agreements
• Contracts
Forms
The conduct of a sales, use, and hotel occupancy tax compliance audit involves several types
of forms. These include forms that are specifically designed for use in conducting an audit as
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well as forms used by the taxpayer that must be examined as part of an audit. The auditor
must be familiar with each of these forms. Most forms presented during the audit are created
using form templates in Bureau’s audit application software. The templates use tokens which
pull information from the “Taxpayer Information” section of Bureau’s audit application
software.
Taxpayer Information
Taxpayer Information is accessed in Bureau’s audit application software directly after creating
an assignment folder or by clicking on the assignment folder. Taxpayer Information for sales
and use tax audit will contain two tabs named “General” and “Sales and Use”. The data to be
entered and information concerning where it can be located is listed below:
General Tab
PATH ID
10-digit PATH number.
FEIN/SSN
9-digit Federal employer identification number or social security number for sole proprietorship
or single member LLC with no FEIN.
ACCOUNT ID
PATH provides each converted or native account with an 11-digit account ID number.
Audit ID
The audit is assigned in PATH an identification number which includes “A” and 4 digits.
Legal Name
This is the taxpayer’s legal name and is the same as the legal name listed in PATH in the
Customer Springboard under the “Registration:” tab and “Names” subtab and/or the Bureau of
Audits-Registration Verification form line 1. It should also be verified to the Department of
State’s website.
Notes:
• If there is a discrepancy in the legal name listed on the Bureau of Audits Registration
Verification form, PATH and Department of State’s website, the auditor should address
with the taxpayer for verification and use the information provided on the Bureau of
Audits Registration Verification form. Any discrepancies should be discussed in the
narrative.
• Sole proprietorships should be listed as last name, first name, middle initial.
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Trade/DBA Name
This is the taxpayer’s trade name and is in PATH in the Customer Springboard under the
“Registration” tab and “Names” subtab and/or line 3 of the Bureau of Audits-Registration
Verification form. The legal name and trade name may be the same.
Business Address
This is generally considered to be the taxpayer’s “headquarters” address. It is the same
address listed as the physical street address shown in PATH in the Customer Springboard
under the “Registration:” tab and “Addresses” subtab, or line 5 of the Bureau of Audits-
Registration Verification form.
Note: Business address cannot be a P.O. Box.
Assessment Mailing Address
This is the address to where the assessment is mailed. It is generally the same as the mailing
address listed in PATH in the Customer Springboard under the “Registration:” tab and
“Addresses” subtab. It is also generally the same mailing address as listed on line 6 of the
Bureau of Audits-Registration Verification form.
NOTE: When a taxpayer requests the assessment be sent to an address that is different from
the taxpayer’s business or mailing address (e.g., accountant’s address), the Additional
Headquarters Processing (1105) form must be prepared notifying HQ to mail a copy of
assessment to the second address listed on the 1105.
Date to Supervisor
Date the audit was submitted to supervisor for review.
Pa Locations
The number of Pennsylvania locations. If taxpayer has more than one PA location, an exhibit of
the Pennsylvania locations with the addresses must be included in the audit report.
Main Contact Person, Title, and Telephone Number/Additional T/P Representative’s,
Title, and Telephone Number
This section is used to list the taxpayer and/or their representatives that assisted in the conduct
of the audit by attending the audit conferences, providing the records during the course of the
audit, or conducting tours.
Bankruptcy Type, Date Filed, Cause Number, Bar Date, and Court Filed
This information is typically found on the website of the bankruptcy court and in PATH under the
“Registration” tab and “Bankruptcies” subtab.
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Case Totals
The information is populated whenever the Report Generator is run and shows the current audit
totals.
Sales And Use Tab
Tax Type
Sales and Use.
Control Number
Audit Assignment Number SLSAXXXX
License ID
Sales tax account number.
Waiver Tax Type
Sales and Use.
Waiver From Date & Waiver to Date
Beginning & ending date of the waived periods.
Waiver Expiration Date
The waiver expiration data should match the date in PATH.
Trade/DBA Name
Automatically populates with Trade/DBA Name entered on the General tab.
Beginning Period & Ending Period
The beginning and ending dates of the audit period.
Reporting Interval
SUT Account filer frequency (Monthly, Quarterly, or Semi-Annually).
Location Address
Address where the records are located.
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Type of Ownership
Select type of organization from the drop-down box.
NAICS Code
This is a numeric code identifying the taxpayer’s line of business. It must be consistent with
information presented in PATH under the “Registration” tab and “Activity Codes” subtab or line
8 of the Bureau of Audits-Registration Verification form.
Type of Business
Based on the NAICS Code entered, the field may automatically populate.
Pre-Audit & Post Audit Dates
The dates in this section must match the dates in PATH under the "Audit” springboard,
“Attributes” tab.
Auditor’s Name
The name of the auditor(s) that conducted the audit should be included in this section along
with the number of hours charged to the assignment and production percentage. The hours
charged to an assignment must reconcile to the hours listed in PATH.
Supervisor Name
The name of supervisor responsible for reviewing the audit.
Additional Headquarter Processing Request
Check the box if an Additional Headquarters Processing Request form is included with the
audit.
IRS Disclosure Limitations
This form is required in every audit that contains Federal Tax Information (FTI). It must be the
first document of the audit package. In addition, the Audit folder name and assignment number
should be renamed to include the “_FTI” suffix.
Audit Package Checklist (Index)
Each audit report must contain an index. The index provides a list of all forms, schedules,
Sales and Use Tax reports and exhibits included in the audit report. Each document included
in the audit report must be referenced on the Index along with the corresponding number of
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pages. The Index also indicates which documents are included in the copy of the audit report
mailed to the taxpayer.
The first section of the index lists audit forms. The second section of the index lists SUT report.
The next section lists the supplemental schedules, and the last section lists the exhibits.
Audit Report and Basis of Assessment
This form is the cover sheet for every audit report. It provides summary information on the
report.
“Taxpayer Information”
The following fields are populated from the data entered on the “Taxpayer Information” screen
form the Bureau’s audit application software:
• Header Information-Located at top right corner.
• Legal Name
• Trading/As Name (T/A Name)
• Assessment Mailing Address
• Business Address
• Address Where Records Located
• Number of PA Business Locations
o If there is more than one PA Business Location, an exhibit of all PA locations must
be included in the audit.
• Type of Ownership
• NAICS Code
• Bankruptcy Information
• Waiver Information
• Taxpayer Representative
Principals (Owners/Officers)
The individuals listed in this section are the same as the individuals listed on line 15 on the
Bureau of Audits-Registration Verification form or in PATH under the “Registration” tab and
“Responsible Party” subtab. This field is manually entered. If the owner is a corporation, limited
liability company, or partnership, list their EIN. For individual owners/officers DO NOT list social
security numbers in the EIN field.
Total Tax Amount to be Assessed
This field is automatically populated based on the most recent Sales and Use Report. If the
Sales and Use Report is run after the form is created, the tokens must be refreshed (click on
Reveal Tokens & Save to refresh the data) to update the “Total Tax Amount to be Assessed”.
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Conflict of Interest and Auditor’s Comments
This form is confidential and is intended for Department use only. It is to be included in the
Dept. Documents. The form must be signed by everyone charging time on the audit. It is not
to be included in the copy of the audit report mailed to the taxpayer.
The auditor may use this form to disclose information relating to the audit that is not disclosed
elsewhere in the audit report. This information may include auditor observations that provide
additional insight into the audit findings. The auditor may also reference on this form Board of
Appeal decisions, letter rulings, Department policy, etc., that support the audit findings. This
form may also be used to explain large differences between current and prior audit findings.
This form must also be used by supervisors to document that credits greater than $5,000
granted by the auditor have been reviewed and approved by the supervisor. Test period
exceptions must also be acknowledged by the supervisor on this form.
Taxpayer’s Acknowledgement of Post Audit Conference
This form is required to be in every audit report. It is used to secure the taxpayer’s written
acknowledgement that the audit findings were discussed with the taxpayer at the conclusion of
the audit and prior to the issuance of any assessment. It acknowledges that the auditor
explained the procedures for assessment, additions of interest and penalty, and appeal
procedures. This form is also used to record the auditor’s corrective recommendations. This
form is used for every type of post audit conference including face-to-face meetings and
conferences conducted by phone. This form should also be sent to the taxpayer when a post
audit conference is not held due to a lack of cooperation from the taxpayer (post by mail). The
form is then presented to the taxpayer for signature. When a post-audit conference is
conducted by phone or one cannot be held, the auditor should follow the procedures discussed
in Chapter 6 relating to post-audit conference by phone and inability to schedule post-audit
conference.
Completion of the Form
Completion of the form is discussed below.
Audit Period
This period must be the same as the period referenced throughout the audit report. This field
is automatically populated from the data entered in the “Taxpayer Information” screen.
Audit Deficiency
This is the total tax deficiency established by audit. It does not include penalty and interest that
will be posted as part of the official assessment. This field is automatically populated from the
data entered in the “Taxpayer Information” screen. It must equal the total amount listed on the
“Distribution Report” included in the Sales and Use Report as well as the amount documented
in the post audit conference section of the narrative.
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Name of Auditor
The name of the auditor conducting the conference must be listed in this block. This field is
automatically populated from the data entered in the “Taxpayer Information” screen.
Areas of Deficiency
This section of the form must itemize the amount due by area of deficiency and reference the
supporting schedules within the Sales and Use Report.
Recommendations To Taxpayer for Correcting Areas of Deficiency
This section of the form must always be completed. It must provide recommendations to the
taxpayer for correcting the areas of deficiencies identified in the audit.
Name and Signature of Taxpayer or Authorized Representative
The taxpayer or the taxpayer’s representative must be asked to sign the form. The term
“taxpayer’s representative” includes employees of the taxpayer who represented the taxpayer
during the audit. As part of providing the signature, the taxpayer may also indicate agreement
or disagreement with the findings. The taxpayer may also provide additional comments. If the
taxpayer declines to sign the form, the auditor must note the time, date, reasons, and the person
involved on the form.
Request for Financial Records
This form must be used and included in the audit report for every instance when the records
requested are not furnished. This document provides a record of the auditor’s specific request
for, and the taxpayer’s written explanation for failure to provide, records needed to conduct the
audit. Proper use of this form will eliminate any misunderstanding concerning record requests.
It also provides documentation supporting the use of alternative audit procedures due to the
lack of records. More than one form may be required during the course of an audit.
Attachments or schedules referenced on this form must be included in the audit report as
attachments to the records request. Items attached to the form should be an exact copy of the
schedule or attachment referenced.
This form is also used to document that a reasonable amount of time was afforded to the
taxpayer to provide the requested records prior to creating an assessment due to missing or
inadequate records. The auditor must sign the Request for Financial Records form and include
a date on the form by which the records must be presented by the taxpayer.
A signature should be obtained from the taxpayer acknowledging receipt of the request. This
form maybe provided to the taxpayer via email. It is recommended the auditor request the
taxpayer return an electronically signed copy of the form acknowledging receipt of the request
or secure a read receipt.
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If the taxpayer is unable to make certain records available, the taxpayer should document the
reason(s) for the records being unavailable and sign the form. If the taxpayer declines to
complete the form, the auditor should indicate that the requested documentation was not
provided, and the taxpayer declined to complete the form. The auditor should include the name
of the representative the form was provided to and the date it was provided.
The auditor should follow the procedures for Requesting Records from Taxpayer in Chapter 8
of this manual.
Taxpayer’s Concurrence with Test Audit Plan
This form is required to be included in every report where test procedures were used to develop
a tax deficiency. It is designed to secure written acknowledgement that the auditor discussed
the activities of the business with the taxpayer in order to arrive at a representative period(s)
for testing. The taxpayer also acknowledges that the procedures to be used in performing the
test audit(s) and the projection of any deficiency resulting from the test period(s) was thoroughly
explained. Finally, the taxpayer has the option to comment on the selection of the test period(s)
and results of the test projection and state any reasons for nonconcurrence.
The information on this form must accurately describe the testing process and must be
consistent with information presented in the narrative. It must also accurately reflect the
explanation provided by the auditor to the taxpayer.
NOTE: This form must be presented to the taxpayer for acknowledgement and signature prior
to performing the test examination.
Completion of the Form
Completion of the form is performed through Bureau’s audit application software. A separate
form is required for each test population.
Auditor’s Name
The name of the auditor who discussed the testing process with the taxpayer must be listed
under the CONCURRENCE section of the form. The name of the lead auditor entered in the
“Taxpayer Information” screen is automatically populated under the CONCURRENCE section
of the form.
Audit Period
The audit period must be accurately stated. The audit period entered in the “Taxpayer
Information” screen automatically populates this field.
Type of Test
This field must identify the type of test being performed. Types of tests normally utilized by the
Bureau include block sample projectable average and stratified random sampling (SRS).
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Test Objective
The test objective must indicate that the taxpayer’s records are being audited to determine the
taxpayer’s compliance with the tax laws. For example, “Verify sales tax was charged, collected,
and reported on all taxable transactions and a valid exemption certificate was on file for any
untaxed transactions”.
Population to Be Tested
This is the population used to select the test period(s). Examples of possible test populations
include gross sales and general expenses. The test population must be specifically defined.
For instance, if a test is limited to a specific group of accounts, these accounts must be identified
on the form or through an attachment to the form.
Test Periods
Each test period must be specifically identified. This section of the form must also indicate
what time frames of the test population the specific test periods represent.
Basis for Selecting Test Period(s)
This part of the form must identify the criteria used to select the test periods. Examples of
testing criteria include average gross sales, average taxable to gross sales ratio, average
expenses, etc. All schedules used in the selection of the test period(s) must be referenced on
this form. In addition, this part of the form must reference related Requests for Financial
Records when the selection of the test periods is based on the lack of available records.
Test Procedure
This portion of the form must identify the transactions to be examined for the test periods,
calculation of the error rate, and test projection methods. This section of the form must also
indicate that the additional taxable sales or expenses identified and projected as a result of the
test shall be multiplied by the applicable tax rate to calculate the tax deficiency.
Taxpayer Comments
This field is to be completed by the taxpayer. In this area of the form, the taxpayer may state
any areas of concern regarding the procedures to be employed or the representation of the test
periods selected from the populations.
Signatures
The taxpayer and the auditor who explained the procedures to the taxpayer must sign this form.
If the taxpayer declines to sign the form, the auditor must note on the form whom the form was
presented to, the date, time, and the fact that the taxpayer declined to sign the form.
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The form must be included with the audit report. This information along with any other pertinent
facts must also be noted in the narrative.
Taxpayer’s Acknowledgement of Precision Level-
Stratified Random Sample
This form is required for all audits when a stratified random sample test is conducted regardless
of the precision level. Auditors should refer to Chapter 5. Taxpayer’s Acknowledgement of
Precision Level – Stratified Random Sample, to determine how to proceed based on the
taxpayer’s response on the form.
Completions of the Form
Reviewing Taxpayer’s Representative
Name of representative that reviewed the SRS.
Precision Level %:
The precision calculated by SRS wizard.
Stratified Random Sample
Define the sample (e.g., sales, expenses, etc.). If more than one SRS is being performed be
specific in defining the sample.
Check boxes
☐ I accept the precision as indicated and do not request an increase in sample size.
☐ I do not accept the precision as indicated and request an increase in the sample size.
Consent to Extend Time Limit for
Assessment/Determination of Tax and to Extend Period
of Time for Record Retention (Waiver)
Issuance of Waivers
This form is used to extend the time limit for record retention and assessment of tax. It becomes
a binding legal document when properly completed. When collateral audits are performed on
different types of taxes, a separate waiver is required for each type of tax.
The Revenue Regional Manager is ultimately responsible for obtaining the waiver and ensuring
that periods are not lost due to the expiration of the statute.
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Refer to Chapter 8 for further information on Issuance of Waivers.
Completion of Form
The form automatically populates Part 1 - Taxpayer Identification, Part II - Tax and Identification
Numbers, Part 3 - Tax Period, and Part IV - Extended Assessment/Determination and Record
Retention Dates based on data entered on the Taxpayer Information screen in Bureau’s audit
application software. Part V – The Consent is automatically populated with the date the form
is created.
Part I: Taxpayer Identification
This section of the form must list the taxpayer’s correct legal name and mailing address. This
information should be verified with the legal name listed on PATH in Account Springboard
“Registration” tab and/or Bureau of Audits-Registration Verification form as well as the
Department of State’s website.
Part II: Tax and Identification Numbers
This part of the form must indicate the type of tax, the related account number, and the entity’s
FEIN.
Part III: Tax Period
This part of the form must indicate the entire period being extended. For instance, if the period
to be extended is 2019 then the beginning date must be listed as 1-1-2019 and the end date
should be listed as 12-31-2019. If the extended period includes more than one year, the entire
extended period must be reflected in the beginning and ending dates.
For instance, if a waiver has already been executed for 2018 and an additional waiver is needed
for 2019, the beginning dates on the new form should be 1-1-2018 and the ending date should
be 12-31-2019. An extension of an existing waiver must be executed on or before the date set
forth in PART IV of the existing waiver. When more than one waiver covers the same period
of time, all such forms should be retained by the regional manager.
Part IV: Extended Assessment/Determination and Record Retention Date
This part of the form represents the date by which an assessment for the waivered periods
must be issued. The postmark date on the assessment must be on or before this date. An
assessment postmarked after this date prohibits the Department from assessing taxes for the
waived period.
Part V: The Consent
This part explains the consent being executed by the taxpayer. The date listed in this part
represents when the waiver was presented to the taxpayer for a signature. This date is the
same date that the taxpayer signs the form. This part must be completed in order for the form
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to be valid. If the taxpayer returns the form without completing this block, then the Regional
Manager may insert the date of the taxpayer’s signature as listed on the taxpayer’s signature
line.
For The Taxpayer
The taxpayer must sign the form. If the taxpayer is a corporation, a duly authorized officer must
sign the form. An attorney or an agent acting under “power of attorney” authorization may also
sign the form. However, a copy of the REV 677 documenting this authorization must be
attached to this form. The taxpayer must sign this form prior to the expiration of the statute.
For instance, if the period intended to be covered by the waiver is 2019, the taxpayer must sign
this form by December 31, 2022.
The department will accept an electronic version of a hardcopy signed waiver (i.e., PDF),
however the signer must provide an email or similar document acknowledging the authenticity
of his/her signature on the electronic version of the signed waiver. The waiver and email must
be saved in the audit file.
The department will accept an electronically signed waiver using a document signing software
such as DocuSign. When using a document signing software, an email or similar document
acknowledging the authenticity of the signer is not necessary.
Note: A cursive type signature such as available in Adobe is not acceptable as an
electronically signed waiver.
Power of Attorney and Declaration of Representative
(REV 667)
This form is used to document power of attorney authority vested by the taxpayer in another
party or a declared representative of the taxpayer. This form may be included in the audit report
when it is presented to the auditor by a representative possessing a Power of Attorney.
Notes:
• This form is not a Bureau’s audit application document. The form is accessed from
“Attachments” in the Bureau’s audit application software. The PDF is a fillable document
and must be completed manually.
• If directed to work with someone by the taxpayer, the power of attorney is not required.
However, this form must be included in the audit report when the taxpayer’s
representative is signing documents that bind the taxpayer to certain actions or
agreements, such as when the representative will be signing the waiver.
Link: REV-677 Power of Attorney.pdf
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Completion of the Form
Part 1
This section deals specifically with issuing “Power of Attorney” authorization. The taxpayer’s
legal name, entity identification number, and correct mailing address must be provided. The
correct name, address, and phone number of the individual(s) designated as the taxpayer’s
attorney-in-fact must also be listed.
The authority is limited to representation for the “TYPE(s) OF TAX” listed on the form. TAX“
YEARS OR PERIOD(s) ” indicated on the form must cover the timeframe of the audit period.
The representative is also limited to signing only those Department forms indicated under the
“TAX RETURN/FORM” block. Auditors should instruct the taxpayer to indicate “ALL” in this
block so that the representative can sign all audit forms as required. The taxpayer’s initials or
signature for different statements on the form indicate additional restrictions on the exercise of
the authority. The taxpayer should indicate “audit” under the “Purpose for Authorization” block.
The form specifically requires that if the named representative is not a certified public
accountant, attorney, or enrolled agent, the taxpayer’s signature must be witnessed. Either
obtaining the signatures of two witnesses or the proper authentication of the signature by a
notary public satisfies this requirement.
Part II
This section of the form represents the “Declaration of the Representative”. The
representative must indicate the number listed in this part of the form that best describes the
representative’s capacity. The “JURISDICTION” must be listed as Pennsylvania. The
representative’s “SIGNATURE” and “DATE” are both required.
Similar to a waiver, the department will accept an electronic version of a hardcopy signed POA
(i.e., PDF), however the signer must provide an email or similar document acknowledging the
authenticity of his/her signature on the electronic version of the signed waiver. The waiver and
email must be saved in the audit file.
The department will accept an electronically signed waiver using a document signing software
such as DocuSign. When using a document signing software, an email or similar document
acknowledging the authenticity of the signer is not necessary.
Note: A cursive type signature such as available in Adobe is not acceptable.
Bureau of Audits-Registration Verification
Every audit report must contain a Bureau of Audits – Registration Verification form – This form
is used to verify the accounts of registered taxpayers
NOTE: The form is accessed from “Attachments” in the Bureau’s audit application software.
The PDF is a fillable document and must be completed manually.
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Instructions
The Bureau of Audits – Registration Verification form should be presented to the taxpayer
during the pre-audit conference for completion. When the form is completed and returned to
the auditor, the auditor should verify all sections of the form have been properly completed.
This information should be cross-referenced to the Customer and Account springboard in PATH
and the Dept. of State’s website (i.e., legal name). The auditor must follow-up with the taxpayer
on any discrepancies. Any incorrect information listed on the form should be amended by the
taxpayer by initialing the change on the update form or a new form should be completed by the
taxpayer with the correct information. Any changes to the information listed in PATH such as
the business address should be confirmed with the taxpayer. Once confirmed, advise the
taxpayer to make changes via myPATH.
It should be noted the information residing in PATH will provide detail registration information
for each account for the taxpayer. To verify information for a sales and use tax account, the
Account springboard should be selected along with the Registration tab. The Bureau of Audits-
Registration Verification form is the controlling document for assessing sales & use tax;
therefore, it is imperative that the information on this form is correct and properly corresponds
to the information listed on the Audit Report & Basis of Assessment form in the Bureau’s audit
application software.
In addition, the auditor should take special note of changes in ownership (entity changes), bulk
sale, or merger information if indicated on the form. If the taxpayer answers yes to any of the
questions, the auditor must follow-up with the taxpayer. These actions may require the creation
of additional audit assignments.
A copy of the form must be included in the audit report.
If the taxpayer refuses to complete the Bureau of Audits-Registration Verification form, the
auditor is required to complete the form using all available information.
At the conclusion of the audit, the same procedures noted above for verifying information on
the Bureau of Audits-Registration Verification form should be performed. If differences still
exist, they must be corrected prior to submitting the report for assessment. Special attention
should be made to the following items as they have a direct impact on the Department’s ability
to collect the liability. These items include:
Box 1- Enterprise Legal Name
This is the legal name of the entity being assessed. The legal name listed in this box must be
compared to the legal name listed in PATH and the Dept. of State’s website. For a sole
proprietor, the legal name is the same as the owner’s name. For a partnership, the legal name
is the name listed in the partnership agreement. In the absence of a written agreement, the legal
name is the trade name. For a corporation, the legal name is the name listed in the Articles of
Incorporation, State Charter, or another governing document.
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Box 2- EIN
If a taxpayer has an Employer Identification Number (EIN), this is the entity identification
number under which assessments are issued. EIN information can be compared to the EIN
listed under the Account springboard, Registration tab of PATH.
Box 6-Enterprise Mailing Address
This address is where the taxpayer prefers to receive mail, may be the same as #5 and # 7.
Box 7- Current Assessment Only Mailing Address
This is the address where the taxpayer prefers to receive the Notice of Assessment for the
current audit. Maybe the same as #5 and #6.
Box 8- Form and Type of Organization
While this piece of information is not recorded on the assessment, the auditor must ensure that
the Department’s records reflect the correct entity type. It is part of identifying the correct entity.
The taxpayer may indicate in this section that the enterprise is a Limited Liability Company
(LLC). An LLC is an entity formed under state law by filing articles of organization as an LLC.
For Pennsylvania purposes, the LLC is classified as neither a corporation nor a partnership but
rather is a specific type of entity termed “Limited Liability Company”; however, an LLC elects
how it is treated for federal income tax purposes. For example, an LLC may elect to be treated
as corporation and file FF1120 or elect to be treated as partnership and file FF1065. The
election does not change the entity status of the LLC.
For purposes of Pennsylvania sales and use tax, an LLC in all instances will be considered a
legal entity and will require a sales and use tax license.
During the course of an audit, the auditor may use the LLC filed federal income tax return (1120,
1120S or 1065) to verify gross sales, assets acquired (depreciation schedules), or taxable
expense purchases. A single member LLC where the member is an individual will report his/her
income on PA and Federal Schedule C.
Box 14-Bulk Sale or Merger
If the taxpayer indicates a bulk sale occurred during the audit period, the auditor should request
a copy of bulk sale clearance certificate. If a bulk sale clearance certificate was not obtained,
the auditor should request a copy of the asset purchase agreement and document the purchase
of assets in the narrative. The supervisor must notify headquarters personnel through the
Additional Headquarters Processing Request form to request that a bulk sale assessment be
issued against the purchaser of the assets indicating, purchasing entity’s name, EIN, account
number, and the date of the bulk sale. The assessment will consist of liabilities incurred by the
seller on or before the date of transfer.
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If the auditor is auditing a corporation that merged into another non-registered corporation
designated as the survivor (review Dept. of State’s website) then a new assignment and Sales
and Use tax account must be issued to the surviving corporation. Any assessment will be
issued in the name of the surviving corporation.
If the auditor is auditing a corporation that is the survivor of a merger and the corporation is
registered with no changes in EIN, then no additional action is required.
Box 16- Owners, Partners, Shareholders, Officers, Responsible Party Information
Except for sole proprietors, ownership information is not reflected on the assessment.
However, this information must be correct on Bureau of Audits Registration Verification form so
that the Department may issue Responsible Party Assessment (RPA), if applicable. Partners
in a partnership are jointly and separately liable for the assessment. In addition, certain types
of assessments may be issued against the listed corporate officers if the corporation fails to
pay the assessment. In addition, the social security number listed for a sole proprietor serves
as the entity identification number under which the assessment is issued in the absence of an
EIN.
NOTE: If the information indicates that the taxpayer must register for sales and use, PTA, or
VRT tax, the auditor must instruct the taxpayer to complete application online via "Pennsylvania
Online Business Tax Registration" in myPATH.
Box 17-Multiple Establishment INFO
All Pennsylvania business locations must be listed. A list of Pennsylvania locations must be
attached to the Bureau of Audits Registration Verification form if space on the form will not
accommodate listing all locations.
Entity Changes
If the Bureau of Audits – Registration Verification form discloses a FEIN change or an ownership
change occurring, a new assignment number is required. A name change, change in corporate
stockholders and/or officers, or changes in the number of partners with no changes in FEIN
requires no additional actions other than processing the appropriate updates.
Refer to Chapter 8, Entity Changes for further detail.
Requirements for the Audit Review of Third Party
Credits
This form outlines the Department’s position regarding the documentation required to
substantiate the granting of third-party credits in the audit findings.
The auditor must identify a date by which documentation supporting the taxpayer’s request for
third party credit must be submitted to the auditor for credit to be considered in the audit
findings.
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This form must be presented to the taxpayer during the pre-audit conference. The auditor must
explain the information contained on the form and answer the taxpayer’s question related to
the form.
The auditor should secure a signature from the taxpayer’s representative.
The form is required documentation in the audit report.
Tally Sheet (REV-153)
The REV-153 Tally Sheet form is designed to accurately record taxable and nontaxable sales
in progress during a sample audit period for the purpose of establishing the percentage of
taxable to gross sales ratio and the effective rate of tax.
Additional Headquarters Processing Request
This form is used to notify headquarters of processing requests and the results of special
instructions. In addition to the items specifically listed on the form, these instructions may
include processing tax returns, account cancellation requests, penalty abatements, imposing
major penalties and documents to appropriate personnel such as a Business Activities
Questionnaire, etc.
When the Additional Headquarters Processing Request form is included with an audit report,
the “Y” should be populated in the Sales and Use tab of the “Taxpayer’s Information" folder in
the Bureau’s audit application software by checking the “HDQ 1105”.
Checking the HDQ 1105 box in the Bureau’s audit application software is independent from the
completion of the Additional Headquarters Processing Request form.
Completion of Form
This form is completed and signed by the auditor or supervisor. Supporting documentation
needed to take the actions indicated on the form must be attached to the form. The completed
form and attachments are scanned and saved in the audit folder uploaded to HQ.
The auditor must notify the supervisor of any additional processing requirements.
Business/Account Cancellation Form (REV-1706)
A cancellation of a license should be performed online by the taxpayer via myPATH. If the
taxpayer is unable to cancel the license on-line, a paper copy of the Business/Account
Cancellation Form (REV-1706) form should be prepared and submitted to HQ via the Additional
Headquarters Processing Request form.
Instructions for completion are provided below.
Completion of Form
The auditor must be certain of the following:
• License number is correctly recorded.
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• Owner(s) name and trade name(s) is included.
• Correct date and reason the business was discontinued is given.
If there is a change in entity, the cancellation must be prepared for the entity that has
discontinued business and the new entity must register online through the “Pennsylvania Online
Business Tax Registration” via myPATH to obtain a new license number. This procedure must
take place pursuant to the conduct of the audit and processed prior to the completion of the
audit.
If necessary, the auditor may complete and sign the form directly so that the appropriate
accounts can be canceled.
This form must be typed or completed in ink.
Notice of Assessment
This is the audit assessment notice mailed to the taxpayer. The information is based on the
audit information uploaded by the region into the Department’s computer files. The legal
name, mailing address, FEIN and Sale License ID are all based on updated information
provided by the taxpayer via the Bureau of Audits – Registration Verification form. The tax
period beginning and ending dates reflects the audit period to which the assessment pertains.
The information in these fields should match the information provided on the Bureau of Audits
Registration Verification form. These fields must be correct. The Letter ID is computer
generated and represents the assessment number. A copy of the Notice of Assessment is
generally not included in the audit report.
Explanation
Audited Liability
This amount represents the gross deficiency from the audit.
Interest Forecast
Total interest due on outstanding deficiency. Interest is calculated on a daily basis using an
annual interest rate that varies by calendar year.
Penalty Forecast
The penalty is calculated by 5 percent of the unpaid tax for each month or fraction of a month
from the original filing date of the sales and use tax return.
Payments/Credits
This amount represents any payment or credits made through the audit.
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Total Due
This total represents net amount due after any payments or credits are applied to the liability.
This total is broken down by tax, interest, and penalty.
Issuance
The assessment notice must be mailed to the taxpayer’s mailing address listed on the Audit
Report and Notice of Assessment form. If the taxpayer requests the assessment be mailed to
another location, the taxpayer must submit the request in writing on company letterhead or
email. The auditor must forward the request to headquarters attached to the Additional
Headquarters Processing Request form with a note to send of a copy of the assessment to the
address listed in the letter or email. The Notice of Assessment may also be viewable in
myPATH. It will be viewable in myPATH for any Web Logon that has access to the Sales and
Use Tax Account. Refer to Notice of Assessment & Audit Basis of Assessment procedures.
Secretary’s Writ
A Secretary’s Writ may be used when the Department determines that it is necessary to issue
a formal demand for access to the financial records or for information pertaining to the tax
matters of a particular individual or business. Refer to the previous discussion of this form in
Chapter 3 Secretary’s Writ.
Penalty Abatement Forms
These forms are used to recommend and approve administrative abatement of penalty at the
audit level if the criteria are met based on Penalty Abatement Policy in Chapter 8.
If penalty abatement is being recommend, a statement must be included in the Post Audit
Conference section of the narrative that indicates penalty abatement was recommended and
the taxpayer was advised that completion of the penalty abatement form did not preclude the
taxpayer from petitioning the Board of Appeals on any areas of disagreement.
Penalty Abatement Approval Form
The Penalty Abatement Approval Form is to be completed prior to providing a Penalty
Abatement Petition Form to the taxpayer or their representative. This approval form needs to
be reviewed and approved by the audit supervisor. This form is available as a template in the
Bureau’s audit application software.
Penalty Abatement Petition Form
The form must be signed by the petitioner, officer, or authorized representative and approved
by the audit supervisor. The taxpayer should be advised that completion of this form is no way
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limits or reduces their rights to appeal any notice of assessment they may receive. This form is
available as a template in the Bureau’s audit application software.
NOTE: Both the Penalty Abatement Approval Form and the Penalty Abatement Petition Form
must be included with the Additional Headquarter Processing Request form. The form must
not be included in the audit report as an exhibit or form.
Audit Staging and Attributes
The Pennsylvania Tax Hub (PATH) tracks assigned, in-progress and completed assignments.
Prior to submitting the audit report for assessment, the auditor and supervisor must make sure
that PATH is staged appropriately, and information is updated in the “Attributes” panel and tab
in the Audit springboard to reflect the information recorded on the Audit Report and Basis of
Assessment. This includes audit period, pre and post audit conference dates, waiver dates,
assessed amount, non-assessed amount, credits, and hours charged to the assignment. The
information must also be consistent with the information listed on the Bureau of Audits –
Registration Verification form.
Multi-Region Audit Assignment
When more than one region is conducting an audit on the same assignment number, the lead
auditor is responsible for coordinating the presentation of the final audit report. This must be
planned prior to the start of the fieldwork so that all the work performed by the other region may
be merged into one audit package. The Bureau’s audit application software allows for the
merging of forms and schedules created by a second region.
Submission and Distribution of the Report
The “Final” audit report must be submitted to HQ within 15 calendar days of the post audit
conference. The assessment date is five days after the audit report is submitted to HQ.
Currently, a copy of each audit report is stored on the HQ’s server and is available through the
Audits Main Menu in PA DOR BRIDGES and in PATH. Original documents that are scanned
to the audit report must be maintained in the regional office.
The “Audit Basis of Assessment” can only be made available in myPATH to one Web Logon.
If the” Audit Basis of Assessment” is unable to be made available in myPATH, then an electronic
version of the audit report via a CD-ROM is mailed with the Notice of Assessment. All forms,
reports, schedules, and exhibits are included with the audit report, except for the Conflict of
Interest Statement & Auditors Comments form.
Individuals requesting copies of an audit report must be referred to headquarters. The request
must be submitted in writing on the taxpayer’s letterhead and must be signed by the employee
of the taxpayer who is on record as representing the taxpayer throughout the audit, corporate
officer, or POA. Upon formal written request approved by the sales and use tax program
administrator, the taxpayer will be provided a copy of the audit report.
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Corrections to the Findings
When errors are found in the audit findings during regional review prior to submitting the audit
report to HQ, the auditor must perform the following:
• Correct the schedules in the Bureau’s audit application software.
• If changes are made to supplemental schedules, then the excel spreadsheet must be
updated and the supplemental schedules must be re-imported into the Bureau’s audit
application software. The supplemental schedule should have the same title as the excel
spreadsheet.
• The Sales and Use Report must be re-run.
• Refresh the tokens on the Audit Report and Basis of Assessment and the Taxpayer’s
Acknowledgement of Post Audit Conference form so the correct tax is populated in these
forms.
• The applicable sections of the narrative must be updated to reflect the correction.
All of these steps are required in order to correct the assessment amount.
Note: If the corrections that were made increased the audit deficiency than the auditor must
conduct another Post Audit Conference with the taxpayer.
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CHAPTER- 8 AUDIT POLICY
This section of the manual describes the policies to be used by auditors in addressing certain
audit issues.
Audit Period-Statute of Limitations
The statute of limitations discussed below applies to:
• State and Local Sales, Use and Hotel Occupancy TAX (SLS)
• Public Transportation Assistance Fund Taxes and Fees (PTA)
• Vehicle Rental TAX (VRT)
General
The audit period is normally established during the pre-audit conference. The standard audit
period for a taxpayer is the previous three calendar years and all of the current year’s returns
due as of the preaudit conference date (see 72 P.S. §7258).
Exceptions
The auditor shall not assess beyond the standard audit period except for audits involving the
following:
Non-Filed Returns (72 P.S. § 7259)
For non-filed returns, or false or fraudulent returns, the Bureau will only assess sales tax
collected not reported for the three years prior to the standard audit period. Any assessment
beyond the three prior calendar years requires approval of the Program Administrator.
The under-reporting of collected sales tax as a result of filing a false or fraudulent
return. (72 P.S. § 7260)
Any assessment of the under-reporting of sales tax as a result of filing a false or fraudulent
return requires the approval of the Office of Chief Counsel. The request for the approval should
be forwarded to HQ using the “Assessing Beyond Original Audit Period Approval” form in the
audit application.
Properly executed Consent to Extend Time Limit for Assessment/Determination of Tax
and to Extend Period of Time for Record Retention (Consent/Waiver)
Sales tax on additional taxable sales and/or use tax on additional taxable purchases shall not
be assessed beyond the standard audit period without a properly executed waiver.
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Extension of the Audit Period for Assignments
Taxpayer’s Request
Requests by the taxpayer to bring the audit period current should be honored if the following
criteria are met:
• The taxpayer provides a written request on their letterhead or email for the audit period
to be extended and that they agree to allow the auditor to project test results from
previously selected test periods against the extended periods.
Note: Projection of third-party credits from an SRS may be projected against the
extended periods upon approval of the Program Administrator.
• Business activities in the extended period are consistent with business activities included
in the original audit period. For example, if average expenses were used to choose a test
period for expenses, expenses incurred during the extended period must be reasonably
consistent with that average.
• Prior to projecting to the extended periods, the auditor should verify that the reporting of
sales and use tax in the extended periods were consistent with the original audit period.
• The taxpayer makes the necessary sales and expense information available to properly
extend a projectable average based on either test periods in the original audit period, or
a projectable average based on the original audit period when a complete examination
was conducted.
• The taxpayer makes the necessary capital purchase documentation available for the
extended period.
Length of Time Necessary to Complete the Fieldwork
Once waiver extensions exceed 18 months from the original statutory deadline, regions are
required to bring audit periods forward before authorizing additional waivers or request the
follow-up collateral audit. Any waiver extending the original statutory deadline beyond 18
months is only to be granted with a taxpayer commitment to an audit timeline in writing or with
a taxpayer signed Audit Plan. Any exceptions to the above require Program Administrator
approval.
Example:
During the pre-audit conference, the original audit period is determined to be 1/1/2019 –
6/30/2022. The original statutory period for tax year 2019 expires 12/31/2022 so for any
waiver extending the statute pass 6/30/2024 the audit should be extended to 12/31/2023 or a
collateral audit must be requested for the period beyond 6/30/2022.
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The auditor must verify the following prior to extending the audit period:
• Business activities for the extended periods are consistent with the original
audit period.
• Reporting of sales and use tax for the extended periods are consistent with
the original reporting period.
• A reasonable projectable average can be determined for both sales and
expenses.
The taxpayer should be presented with a Request for Financial Records form which
specifically requests information for capital purchases and the sales and expense totals
necessary to apply the projectable averages from the original audit period over the extended
period.
Note: Projection of third-party credits from SRS may be projected to the extended periods
upon approval of the Program Administrator.
The taxpayer should also be presented with a Taxpayer’s Concurrence with Test Audit Plan
containing an explanation of the procedures to be used to determine the liability or credit for
the extended period. The taxpayer must be given an opportunity to state, in writing, reasons
for objections to the extension of the audit period. The auditor must address any taxpayer
objections and their relevance to the reasonableness of the procedures used to determine the
liability or credit for the extended period.
If the necessary sales or expense totals are not provided for which to apply the projectable
averages from the original reporting period, assessment for the extended audit periods should
be based on an average net deficiency (or credit) identified in the original audit period.
If the necessary capital information is not made available, the average net deficiency (or
credit) identified in the original reporting period should be applied to each reporting period in
the extended period (subject to materiality).
Bankruptcy Audits
Procedures
When an auditor receives a field audit request on a bankrupt taxpayer, it must be given
priority status.
Bar Date
• The auditor is to contact the bankruptcy court and obtain the bar dates, both general
and governmental (a/k/a administrative).
• The bar date is the last date to file a claim.
• The audit must be submitted at least thirty days prior to the first bar date.
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• The auditor should note that this is different than the normal nine-month period given to
other priority audits.
Research
• In most cases, the bankruptcy filing will be noted in PATH and in Bridges; however, if
the petition was not filed in PA or the taxpayer under audit is not the primary petitioner,
it will not appear in Bridges.
• As part of the pre-audit conference, the auditor should inquire as to any open
bankruptcy proceedings.
• If the auditor identifies an open bankruptcy, notify HQ as soon as possible.
Pre and Post-Bankruptcy Periods
• The tax liabilities established must be separated into pre- and post- bankruptcy periods.
• The auditor must separate the findings in accordance with the date the taxpayer filed for
bankruptcy.
• If the audit identifies any liability, the auditor must prepare separate audit reports for the
pre- and post-bankruptcy periods. Each report will be issued under its own assignment
number and separate assessments will be issued.
• Bankruptcy information should not be included on the Audit Report and Basis of
Assessment form of the post-bankruptcy assignment.
• Instead, the Additional Headquarters Processing Request form should indicate that it is
a post-bankruptcy assignment and provide the bar date.
Bankruptcy information is to be reflected in the appropriate section of the Audit Report and
Basis of Assessment as well as the preaudit section of the narrative.
Multi-Court Voice Case Information System (McVCIS)
McVCIS (pronounced “nac-vee-sis”) allows the auditor to contact any U.S. Bankruptcy Court’s
computer from any touch tone telephone at the toll-free number 866-222-8029.
Obtain the following case information:
• Case number
• Names of debtors or principal adversaries
• Case filing date
• Case chapter
• Name of debtor’s attorney
• Name of trustee
• Discharge and closed dates
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• Status of Case
• Whether or not the case has assets
• Telephone number of debtor’s attorney
• Deadlines for filing proofs of claim
• First meeting of creditors date
The service is available 7-days a week, 24 hours per day. Because the information is retrieved
from court’s database, the reported information is the most up to date information available.
When using McVCIS, the computer will direct the user through a series of questions. The
following information should be obtained from the taxpayer prior to the call.
Information to obtain prior to the call:
• The state where the bankruptcy was filed. Typically, this is state where the taxpayer is
incorporated.
• Court District:
o Western
o Middle
o Eastern
• Taxpayer’s FEIN or SSN
• Bankruptcy Cause Number
Prepare to take notes through the call and document the administrative and governmental claim
(bar) dates. If the dates are not available, it is more than likely these dates have not been
established by the courts. Make a note to check every couple of weeks until the dates are
posted.
Note: Some bankruptcy courts have a web page that will provide you with information about
bankruptcy filings in their state.
Field Bankruptcy Notification Form
Should an auditor discover that the taxpayer on any assignment currently in inventory has
declared bankruptcy, they will use the Field Bankruptcy Notification to advise headquarters of
the bankruptcy status so that the Bureau of Compliance and Office of Attorney General may be
informed. The information obtain from the MCVCIS will be used to complete the form.
Billing for Out-of-State Audit Expenses
When audit time is wasted and return trips had to be made on out-of-state sales and use tax
audit assignments because the taxpayer did not have the records available for audit or when
unreasonable delays were encountered waiting for records to complete the audit, the
Department may bill the taxpayer for the cost of the return trips. This is addressed in the out-
of-state engagement letter.
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An out-of-state audit engagement form letter is initially sent to announce the audit and to advise
all out-of-state taxpayers that if return trips are required because of unreasonable delays in
providing records, the statutory provision for billing out-of-state audit expenses may be invoked.
Bulk Sales Assessments
When an audit assessment is being issued against a taxpayer who has transferred 51 % or
more of a class of Pennsylvania assets (bulk sale), a bulk sale assessment shall be issued as
an operation of law against the purchaser (72 P.S. Section 1403). An asset is defined as any
stock of goods, wares, or merchandise of any kind, fixtures, machinery, equipment, buildings,
or real estate, located in Pennsylvania. The bulk sale assessment is issued against the
purchaser to protect the Commonwealth’s interest in any Pennsylvania taxes due related to the
assets sold.
The PA Department of Revenue must be notified 10 days prior to the sale or transfer in bulk of
51% or more of any stock of goods, wares, or merchandise of any kind, fixtures, machinery,
equipment, buildings, or real estate, located in Pennsylvania. The transfer of assets does not
have to be 51% or more of total assets located in Pennsylvania but 51% or more of a class of
assets located in Pennsylvania. Failure of the seller to obtain a Bulk Sale Clearance from the
Department makes the purchasers or assignees, as well as the seller/assignor, jointly liable for
all taxes incurred up to, and including, the date of the sale or transfer.
If a “Bulk Sale Clearance” certificate has been issued, the taxpayer should provide the
clearance certificate to the auditor. If it is questionable whether a bulk sales clearance has been
issued, contact HQ personnel. HQ will contact the Bureau of Registration and Taxpayer
Management to determine if a clearance certificate was issued. When the seller has failed to
obtain a Bulk Sale Clearance, the company under audit will be assessed and the auditor will
request a bulk sale assessment, via the Headquarters Additional Headquarters Processing
Request form, against the purchaser or assignees of the assets. Attach a copy of the sales
agreement to the processing form, if available.
The auditor should review question 14 of the Bureau of Audits – Registration Verification form,
registration springboard of taxpayer’s PaTH account or inquire at the pre-audit conference to
determine if the taxpayer was involved in a bulk sale transaction.
Business Activities Questionnaire
The Business Activities Questionnaire Business Activities Questionnaire (REV-203D) located
on the Department’s website is used by the Bureau of Registration and Taxpayer Management
to determine if out-of-state vendors selling property within the Commonwealth have physical or
economic nexus.
The Bureau of Audits may use the form in those instances where an entity under audit has non-
registered affiliated entities making sales in Pennsylvania with a potential sales or corporation
tax liability. The auditor should request the affiliate to complete the questionnaire to determine
if the entity has physical or economic nexus in Pennsylvania. If the auditor determines the non-
registered entity has nexus, the auditor should request the entity register with the Department
and an audit should be conducted for tax compliance, if warranted.
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The completed “Business Activities Questionnaire” should be attached to the Department’s
Additional Headquarters Processing Request form as part of the completed audit report.
The date and place of follow up contact to set an appointment for the conference must be
described. If numerous attempts were necessary to establish contact, then this section of the
narrative should reference an exhibit that documents each attempt. The narrative must
reference any additional correspondence with the taxpayer with appropriate references to
exhibits (i.e., confirmation letter). Any taxpayer’s requests to postpone the audit for a significant
length of time should be in writing and exhibited in the audit report.
Consolidation of Entities for Sales and Use
Tax Audits
If an entity under audit requests, in writing, that the parent, subsidiaries or any other separate
legal entities such as an LLC, partnership etc...be assessed under one sales and use tax
license number, the Bureau can accept the letter and assess two or more different entities with
separate Employer Identification Numbers (EIN) under the one sales and use tax license
number. The letter should list the legal name, EIN and sales/use tax license of the entities
being assessed under the one license number. The letter must be signed by a corporate
officer or POA and included as an exhibit in the audit package and fully explained in the audit
narrative.
The Registration Verification form must include all Pennsylvania locations for all the entities
being assessed under the single sales and use tax license. Also note on the “Additional
Headquarters’ Processing Request” form that two or more separate legal entities are being
assessed under one license number.
Coupon Sales
Amounts representing a stores or manufacturer’s coupons shall establish a new purchase price
if both the item and the coupon are described on the invoice or cash register receipt.
If “the receipt shows only that the coupons were redeemed, but does not describe them,” the
taxable purchase price is not reduced. Myers V. Commonwealth, 260 A.3d 349 (Pa.
Commwlth.2021), 67 & 68 MAP 2021.
For example:
A customer purchases two hamburgers (taxable) with a “buy one burger get one free”
coupon and a bottle of unflavored water (nontaxable). The price of one hamburger is $2
and the unflavored water is $1. The establishment should ring up $5 on the cash
register and enter a $2 credit for an adjusted purchase price of $3. If the coupon and
the burger are described on the cash register receipt, sales tax is due on the adjusted
taxable purchase price of $2. If the coupon and the burger are not described on the
cash register receipt, sales tax is due on the original taxable purchase price of $4.
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Credit Memos Issued by the Department
The procedure of applying previously approved tax credits in one general fund tax prior to the
computation of penalty and interest is authorized under Section 1108(b) of the Fiscal Code
(see 72 P.S. §1108(b). This section also authorizes the application of assigned credits from
one taxpayer to the taxpayer that is assessed.
Auditors may not allow as an offset any liabilities identified through an audit with any credit
amounts that originate from an official “Credit Summary Notice” issued by the Bureau of
Business Taxpayer Accounting.
Normally, a “Credit Summary Notice” will be issued as a result of a refund order issued by the
Board of Appeals or Board of Finance and Revenue. Such credit notices can be used by the
taxpayer in lieu of a cash or check payment and can be applied to any subsequent sales and
use tax return filed with the Department.
It is important that all audit liabilities are officially assessed. Subsequently, the liability may be
satisfied by a taxpayer presenting a “Credit Summary Notice” in payment of part of that audit
liability, in lieu of tendering a check or cash. The “Credit Summary Notice” must be physically
surrendered to the Department so that the taxpayer does not erroneously receive duplicate
credit.
Determination of Fair Rental Amounts
Between Affiliated Interest
It is necessary to have uniform application in establishing a constructive fair rental charge
between affiliated interests consistent with 61 Pa. Code § 47.16. "Rental of Equipment between
Affiliated Interests".
An affiliated interest exists when two corporations, associations, partnerships, proprietorships,
or other businesses, in which one corporation, association, partnership, proprietorship,
individual or other business owns more than 50% of the stock or assets, including inventory,
machinery and equipment of the remaining corporation, association, partnership, proprietorship
or other business. Also, the common ownership of more than 50% of the stock or assets of
each of two or more business entities results in an affiliated interest between the two commonly
owned entities.
The following procedures are to be using for affiliated Interest:
• In instances where property is owned by one entity and is being used by an affiliated
entity, the audit must determine:
o If there is consideration between the two parties.
o Whether the consideration is at arm’s length.
• If the auditor questions the amount of consideration between the two parties as being a
fair rental charge, an explanation must be provided in the audit report. The consideration
transferred must be documented to support a “sale at retail.” To be considered an arm’s
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length transaction, the fair market rental value will be considered to be the prevailing
market rate (by hour, day, or month).
• The auditor should document the determination of the fair market value established by
use of supporting documentation such as rate schedules or price lists.
• In situations where a fair rental amount is not at arm’s length and the prevailing market
price cannot be determined, the auditor should apply a “percentage of costs” (4% of the
purchase price per month on most items, 3% on cars, and 2% on airplanes). One
method to determine if the rental charge is reasonable is to examine the net profit (loss)
of the lessor. If a reasonable profit has been made, it is assumed to be a fair value
charged.
• If there was no consideration involved in the transaction, the affiliate originally acquiring
the property would be liable for tax on the purchase price. The resale exemption does
not apply since the affiliate acquiring the property did not purchase it for resale but
placed the property to a taxable use by providing to the other affiliate.
Drop Shipments
Drop shipment is a term adopted for a situation in which a customer purchases tangible
personal property from a vendor. The vendor then directs a third-party vendor to ship or deliver
the tangible personal property to a Pennsylvania location. In this situation, we are typically
auditing the third-party vendor who is the taxpayer.
Example:
• A retail customer purchases taxable property from a nonregistered out-of-state vendor
who does not have physical or economic nexus with Pennsylvania.
• The out-of-state vendor purchases the property from the taxpayer and claims the resale
exemption on the purchase of the property.
• The taxpayer then ships or delivers the property to the retail customer in Pennsylvania.
• The nonregistered out-of-state vendor invoices the Pennsylvania based customer for the
taxable property.
The Bureau will accept a resale exemption certificate obtained by the taxpayer without a sales
tax license number from the nonregistered out-of-state vendor provided the certificate includes
a statement indicating the out-of-state vendor does not have physical or economic nexus with
Pennsylvania.
Note: Any drop shipments from an out-of-state vendor totaling over $100,000 during a
calendar year establishes economic nexus pursuant SUT Bulletin 2019-01. If the sales or
payable examination identifies a nonregistered out-of-state vendor with transactions totaling
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$100,000 or more during the calendar year, forward copies of the invoices on the Additional
Headquarter Processing Request form notifying HQ of the vendor’s economic nexus.
Erroneously Charged Sales Tax On
Sales/Installation of Real Property
The offsetting of erroneously charged sales tax against the sale/installation of real property
(incurred use tax) in conjunction with a first-time audit is an administrative policy.
Sales taxes which have been erroneously collected and remitted to the Department will offset
any use tax liability found to be due and owing by the contractor in a first-time audit. This is to
be applied on an individual transaction or contract basis. That is, sales tax erroneously
collected on one contract can only offset the use tax due from that specific contract.
Additionally, if the contractor erroneously takes a T.P.P.R credit on the sales/use tax return for
the purchase of property installed as part of the construction contract, the Department will allow
the T.P.P.R. credit in a first-time audit.
Note: The Department will not issue a third-party credit on sales tax properly charged on the
payable invoice for property installed as part of the construction contract.
No credit or refund will be granted to the contractor for erroneously collected sales tax after
applying such collections against use tax due upon purchases used in the performance of realty
construction activities.
The contractor will be notified in writing at the conclusion of the audit if a customer later files a
petition and receives a refund of erroneously paid sales tax. The contractor will be assessed
for the amount of tax refunded to its customer on the basis that the property was used in the
performance of realty construction activity. See, 61 Pa. Code § 31.12(a)(1).
The policy will be extended on the condition that the contractor agrees to correctly apply the
provisions of the sales tax law with respect to future transactions. The contractor will also be
advised in writing that the Department will employ procedures to ensure compliance with the
law on a prospective basis.
The contractor’s written notice will state that the Department will not extend the policy
subsequent to the date of formal advisement that their procedures were in error. In subsequent
audits, use tax will be assessed on all purchases not properly taxed by the vendor. No offset
for sales tax collected will be granted.
The auditor must notify the audit supervisor of the erroneous sales tax collected and remitted.
The audit supervisor must then record this situation on the Additional Headquarters Processing
Request form. It shall be the responsibility of Audit headquarters to prepare a letter formally
notifying contractors of the conditions outlined above. A copy of this letter will be kept in the
audit file and in Headquarters’ files.
The taxpayer should be apprised of these conditions, and they should be addressed in the audit
narrative.
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Note: With the approval of the Program Administrator, this policy may be applied to other
circumstances where the sales tax was erroneously charged, and a use tax liability resulted
from the same transaction.
Computation of Tax When Sales Tax Is Not
Separately Stated
Sales tax is required to be separately stated on the sales invoice pursuant to 61 Pa Code §
31.2 and charged on the total purchase price as defined by 61 Pa Code § 33.2.
If an auditor encounters a situation where the taxpayer did not separately state the sales tax
but computed the reported sales tax by dividing the “gross receipts by 1.06” and then
subtracting this amount from the gross receipts, the auditor should re-compute the sales tax
due as “gross receipts * 6%”. The difference would be assessed as additional sales tax due.
In these situations, the Program Administrator must be contacted prior to the conclusion of the
audit.
In a first-time audit, taxpayers that do not separately state the sales tax on the sales invoice but
reported sales tax in the manner noted above will not be assessed if the taxpayer acted in good
faith, calculated the tax consistently throughout the audit period and was not previously notified
by the Department regarding the computation of the tax. The taxpayer will be required to sign
a prospective compliance agreement approved by the Program Administrator prior to the
conclusion of the audit.
Note: This does not apply to operators of vending machines or amusement venues that have
been granted permission to post the tax on the menu boards.
Interim/Temporary Storage
Interim/temporary storage involving possession of tangible personal property in Pennsylvania
for any purpose including exercising any right or power over such property. Pennsylvania
imposes use tax on such storage of tangible personal property within its boundaries.
When an item (purchase) is initially delivered to another state but subsequently brought into
Pennsylvania, the Bureau of Audits will recognize a credit for sales/use tax paid to another state
if that state taxes interim storage and has reciprocity with Pennsylvania. However, credit should
not be allowed for tax paid if that state does not tax interim/temporary storage.
The following states tax temporary or interim storage; however, the rules governing the taxation
vary from state to state. Any questions regarding a state’s taxation of interim/temporary should
be directed to a Program Specialist in HQ.
States with Temporary or interim Storage
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Arkansas Iowa Missouri Ohio Vermont
California Kansas Nebraska Oklahoma Washington
Colorado Louisiana Nevada South Carolina West Virginia
Florida Massachusetts New Jersey South Dakota Wisconsin
Georgia Michigan New York Tennessee Wyoming
Idaho Minnesota North Carolina Texas
Illinois Mississippi North Dakota Utah
Figure 8.1 States with temporary or interim storage
Institutions of Purely Public Charity (IPPCs)
IPPC Audits
When auditing Institutions of Purely Public Charity (IPPC) please note the following:
Exemption status
Exemption status of IPPCs will be granted beginning with the date of its initial application to the
Department. The exemption status is not applicable to any activities prior to the initial application
date.
Expired exemption status
In situations where the IPPC’s exemption status expired during the audit period and there was
an interim period prior to the renewal, and there wasn’t any substantial change in the
taxpayer’s activities, the Department will honor the exemption status for the interim period
upon renewal of the exemption.
Expedited Processing of Sales Tax Exemption Application
Supervisors must contact Bureau headquarters personnel to request expedited processing of
pending Sales Tax Exemption Applications in instances where the outcome of an audit
depends on the determination of the taxpayer’s IPPC status.
Purchases by IPPCs
Purchases by IPPCs shall be billed to, and paid for by, the IPPCs.
Exemptions do not extend to the following purchases:
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• Purchases made by individuals on behalf of the IPPC and subsequently reimbursed by
the IPPC.
• Purchases for any unrelated trade or business; building material identified as non-
BM&E, except for materials used in routine maintenance and repair; equipment used to
repair, maintain, construct, and renovate real property; and hotel occupancy tax.
A construction contractor may purchase tax exempt building material identified as BM&E which
is transferred pursuant to a construction contract with an IPPC.
An IPPC may use a Tax Exempt Organization Declaration of Sales Tax Exemption (REV-1715
form on purchases of $200 or more. The obtaining of this form relieves the vendor of the “good
faith” requirement in accepting an exemption certificate. This form does not relieve the IPPC
of its liability if the purchase is later determined to be taxable.
Sales of food and beverages by a volunteer firemen’s organization to raise funds for the
purposes of the volunteer firemen’s organization is not subject to sales tax. See 72 P.S.
7204(71).
Agency Agreements with Exempt Entities
The exemption afforded to exempt entities such as IPPCs and governmental agencies are not
transferable; however, if an agency relationship exists between a non-exempt entity (agent)
and the exempt entity, the non-exempt entity may use the exempt entity’s exemption to
purchase property tax exempt. The following criteria must be satisfied in order for an agency
relationship to exist.
Written agreement
The agency agreement must be in writing at the time of the transaction.
Disclosure
The agency or relationship must be disclosed on the payable invoice and the exemption
certificate.
Agency Agreement statement
The agency agreement states that the principal will be bound by the action of the agent.
Valid Business Purpose
The agency itself must have a valid business purpose.
When auditing a vendor, the payable invoice and exemption certificate must disclose the
purchaser is an agent for the exempt entity to claim the exemption. Any transactions involving
agency relationships, refer the name of the agent to HQ for a collateral assignment; refer to
Chapter 6 Submitting Request for a Collateral Audit.
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Locating Taxpayers
There will be occasions when regional audit office employees have difficulty locating a taxpayer
who has been assigned for audit. In such situations, it is important to minimize the amount of
unproductive audit hours expended by an auditor in attempting to locate the taxpayer. Regional
managers are encouraged to use their supervisors to perform the necessary tasks required to
locate the taxpayer. As a matter of policy, auditors should not expend more than 7.5 hours
attempting to locate a taxpayer. After 7.5 hours, contact HQ for assistance.
When an audit assignment is received, the “Audit Engagement Letter” is to be forwarded to the
taxpayer using the address provided with the audit assignment. If this letter is returned by the
postal service as undeliverable or the auditor is unable to make telephone contact with the
taxpayer, the audit assignment should be returned to the appropriate supervisor who will
attempt to locate the taxpayer by using the following techniques:
• The registration tab in PaTH has three subtabs which includes phone numbers, email
addresses, mailing addresses and physical addresses of authorized taxpayer
representatives.
• Examine RK-1s or NRK-1s of the principal owners or shareholders to identify an
alternative mailing address.
• Search the Internet for other possible locations or mailing addresses.
• If feasible, visit the physical business location of the taxpayer to determine if the business
is still active. If active, ask for the principal owner of the business. If principal owner is
not available, ask for the manager and request the principal owner to contact the Bureau
by phone or email.
• If the above procedures cannot locate the taxpayer, contact headquarters for assistance.
Mergers
Assessments
When a corporation is merged into another, the surviving corporation is always responsible for
all liabilities, including future tax liabilities, resulting from audits regardless of what statements
to the contrary are in the plan or articles of merger. Therefore, where a corporation under audit
has gone out of existence (O/E) or is pending out of existence (POE) as a result of a merger,
the audit assignment on the non-surviving corporation should be cancelled and a new
assignment should be created on the surviving corporation. A note should be included in the
audit springboard of both assignments explaining the reason for the creation and cancellation
of the assignments.
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The Bureau will audit the business activities of the non-surviving corporation up to the effective
date of the merger using standard auditing procedures.
Example:
An audit is issued on ABC Corporation for the audit period of 2019 – 2021. During the pre-
audit conference it is discovered that ABC Corporation merged into XYZ Corporation as of
June 30, 2020. The business activities of ABC Corporation should be audited for the period
of January 1, 2019 – June 30, 2020, the effective date of the merger. Any assessment related
to the business activities of ABC Corporation will be assess against XYZ Corporation, the
surviving entity.
Also, the business activities of XYZ Corporation should be audited for the periods under
statute prior to the merger assuming XYZ Corporation had material nexus with Pennsylvania.
Lastly the activities post-merger should be audited for the period of July 1, 2020 – December
31, 2021.
Any findings resulting from the business activities of ABC Corporation and XYZ Corporation
will be assessed against XYZ Corporation under one assignment number; however, the audit
report and schedules should separately address any assessment resulting from the business
activities of each entity before and after the merger.
An assessment involving trust fund taxes (collected or withheld and not reported) for the period
prior to the merger but discovered after the merger will be assessed against the survivor of the
merger in accordance with 15 Pa. C.S. Section 1929 I.
The auditor should review Question #15 of the Bureau of Audits-Registration Verification form
and inquire with the taxpayer at the pre-audit conference as to any mergers during the audit
period. Additionally, the auditor should review the Department of State’s website (Pa
Department of State) for any Articles of Merger filed with the state. If a merger occurred during
the audit, the auditor must request a copy of the Articles of Merger. If the auditor is unable to
get a copy of the Articles of Merger from the taxpayer, a copy may be requested from the
Department of State by contacting headquarters.
Consent/Waivers
When a merger occurs and the surviving company executes a waiver, the waiver will apply only
to the business activities of the surviving company prior to the merger unless the waiver
specifically identifies the company that was merged out of existence. If the company that was
merged out of existence was not specifically identified on the waiver, the out of existence
company’s business activities should be audited only for the statutorily available period as of
the time the audit is conducted (three years plus the current year).
Example:
Using the example above, XYZ Corporation executes a waiver on December 1, 2022, holding
open the 2019 tax year. Unless the waiver specifically identifies ABC Corporation, the
Department may not assess the business activities of ABC Corporation as ABC was a
separate legal entity during the 2019 tax year. In order to cover the pre-merger business
activity for ABC Corporation and XYZ Corporation, the waiver should be completed as
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follows:
Figure 8.2 Waiver Form Completion-Example 1
If ABC Corporation executed a waiver prior to the merger, any subsequent waivers must
disclose the waived periods only apply to ABC Corporation.
Example:
ABC Corporation executes a waiver on December 1, 2022, holding open the 2019 tax year
until June 30, 2023. On March 31, 2023, ABC Corporation merges into XYZ Corporation,
the surviving entity. On June 1, 2023, the waiver is extended to December 31, 2023. The first
waiver is still valid as it was executed prior to the merger; however, the second waiver must list
the legal name of the XYZ Corporation, the surviving entity. The second waiver should be
completed as follows:
Figure 8.3 Waiver Form Completion-Example 2
This waiver discloses the periods being waived only apply to ABC Corporation. Although the
waiver lists the legal name of XYZ Corporation, the Department cannot assess the business
activities of XYZ Corporation as the statutory period for the 2019 tax year expired (December
31, 2022) prior to effective date of the merger (March 31, 2023).
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Currently, the waiver generated by the Bureau’s audit application software pulls in the taxpayer
information from the “Taxpayer Information” tab. Therefore, it will be necessary to enter the
additional information pertaining to the out-of-existence company on the face of the waiver.
This can be done in the open space of “Part I: Taxpayer Identification.” Enter as “XYZ
Corporation, as successor to ABC Corp Corporation., (EIN), (SUT account number)”.
If the information will not fit on the face of the waiver due to more than one merged company,
reference an attachment on the face of the waiver and include the information in an attachment.
Motor Vehicles
Demonstrator Vehicles
Recordkeeping
The maintenance of records regarding the usage of demonstrator vehicles is required as the
primary method of demonstrating to the Department the taxable and nontaxable use of vehicles.
Examples of records essential to the audit process include paperwork listing:
• A vehicle’s date of acquisition and date of sale.
• Odometer readings at the time of acquisition and date of sale.
• Logs reflecting the taxable or nontaxable mileage accrued by individual vehicles.
Incomplete Records
In audits where adequate documentation is unavailable, the auditor will equate the vehicle’s
mileage (from date of acquisition) to months of taxable usage. For the purpose of this proposal,
each 750 miles (or fraction thereof) of unrecorded mileage will be assessed one month of tax
on the fair rental value.
Example:
If a vehicle subjected to audit has accrued 1200 miles since its acquisition and no records have
been maintained to differentiate which of those miles were for nontaxable purposes, two months
of use tax would be assessed on the vehicle. In no case will the total number of months
assessed exceed the number of months the vehicle was in inventory.
Note: Templates are available in the schedules folder of the audit application to calculate use
tax due for demonstrator vehicles.
Documentation of Actual Number of Months of Service
Should the dealer be able to document the actual number of months a vehicle is in service, the
use tax assessment should not exceed the amount imposed for that number of months.
Example:
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If the dealer can demonstrate with records that a demonstrator vehicle was only in the dealer’s
possession for three months, no more than three months of use tax could be imposed,
regardless of the number of miles accrued.
Early Termination of Leases
Outlined below is the Department’s position regarding the early termination of motor vehicle
leases by a Lessee, a motor vehicle dealer, or upon receipt of an insurance company’s
payment. This reflects a change in policy as a result of recent Board decisions. If you have any
questions, contact the HQ.
General Factual Scenarios
THE LESSOR’S BUSINESS:
The Lessor is in the vehicle lease finance business. As part of that business, the Lessor
purchases vehicle lease contracts (and the related vehicles) from motor vehicle dealers
(“Dealers”) that entered into those leases with retail vehicle customers (“Lessees”). Those
contracts provide the Lessees with possession of the vehicles in exchange for monthly lease
payments.
Scenario 1: Lessee purchase transactions.
The first type of transaction is a “Lessee purchase transaction.” In a “Lessee purchase
transaction”, before the scheduled end of the lease term, a Lessee contacts the Lessor because
the Lessee wants to purchase the vehicle from the Lessor instead of continuing to lease the
vehicle.
If the Lessee and Lessor agree to a purchase price, the Lessee and Lessor terminate the lease
contract, the Lessee pays the Lessor the agreed to purchase price and ownership of the vehicle
is transferred by the Lessor to the Lessee. The purchaser (former Lessee) purchasing the
vehicle should pay sales tax at the time of registration on that entire purchase price because
paying that sales tax is required for a certificate of title to be issued to the purchaser. See 72
P.S. §7238.
DEPARTMENT’S POSITION:
It is the Department’s position that in scenario 1, the former Lessee would be responsible for
the sales tax when the motor vehicle is registered in Pennsylvania. No Public Transportation
tax (PTA) would be due because the lease has been cancelled.
Scenario 2: Dealer purchase transactions.
The second type of transaction is a “Dealer purchase transaction.” A “Dealer purchase
transaction” is similar to a “Lessee purchase transaction”, but in a “Dealer purchase
transaction”, the Lessee who desires to end the lease and purchase the leased vehicle or
another vehicle brings the leased vehicle to the Dealer. It is the Dealer, not the Lessee, who
offers to purchase the vehicle from the Lessor.
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Similar to the “Lessee purchase transaction”, if the Lessor and Dealer agree to a purchase
price, the Lessor and Lessee terminate the lease contract. The Dealer pays the Lessor the
purchase price and ownership of the vehicle is transferred by the Lessor to the Dealer for resale
to the Dealer’s customer (either the former Lessee or another customer). Neither the Dealer
nor the Lessor are obligated to purchase or sell the vehicle to accommodate the Lessee. When
the Dealer resells the vehicle to the former Lessee or another customer, sales tax is paid on
the entire sale price of the vehicle because paying that sales tax is required for a certificate of
title to be issued to the subsequent purchaser. See 72 P.S. §7238.
DEPARTMENT’S POSITION:
It is the Departments position that in scenario 2, no sales tax or PTA tax is due on the sale from
the Lessor to the Dealer because the lease contract is cancelled and the sale of the motor
vehicle to the Dealer would constitute a sale for resale. The Dealer’s subsequent sale of the
vehicle would be subject to sales tax.
Scenario 3: Insurance proceeds
The third type of transaction is the “receipt of insurance proceeds.” A Lessee purchases
insurance from an insurer (“Insurer”) to cover damage to the vehicle or to cover theft of the
vehicle. The Lessor is named as the loss payee in that insurance agreement. In the event that
the vehicle is destroyed beyond repair or stolen, the Lessor receives insurance proceeds from
the Insurer. The payment made by the Insurer is based solely on the fair market value of the
vehicle, not lease payments outstanding at the time the vehicle was destroyed or stolen. The
Lessee has no continuing obligations under the lease if the vehicle is damaged beyond repair
or stolen.
When the Lessor receives the proceeds from the Insurer, the Lessor transfers ownership of the
vehicle to the Insurer. If the vehicle is damaged beyond repair, the Insurer sells what remains
of the vehicle to a salvage yard, and if a stolen vehicle is recovered, the Insurer sells the vehicle
at auction.
DEPARTMENT’S POSITION:
It is the Department’s position that in scenario 3, no sales tax or PTA tax is due from the receipt
of insurance proceeds because transfer of insurance proceeds by the insurance company is
not in exchange for the tangible personal property, but to indemnify the Lessor for its property
loss. In addition, provided the lease is then cancelled between the Lessor and Lessee, and the
Lessee is not obligated to pay any part of the remaining lease payment, then no sales tax or
PTA tax is due from Lessee to Lessor.
Reciprocity
Pennsylvania will grant credit for state sales and use taxes legally paid to another state,
provided the state grants similar tax credit for taxes paid to Pennsylvania. Pennsylvania will
also grant credit for local sales and use taxes, provided such taxes are:
1. Collected by the state and,
2. Paid pursuant to the provisions of the state law which has been adopted by the local
government.
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Maximum credit granted includes state and local sales and use tax, when indicated. Evidence
showing tax has been paid must substantiate claims for tax credit. Pennsylvania Sales and
Use Tax Credit Chart (REV-227) on the Department’s website lists the reciprocity status of the
other states as well as the sales tax rate of each state.
Reciprocal credit is only to be recognized when possession of tangible personal property is
taken in a reciprocal state and subsequently brought into the Commonwealth.
Example:
If a Pennsylvania based company purchases $1,000 worth of office supplies in Georgia, takes
possession of the goods in Georgia, and pays the Georgia 4% sales tax ($40.00), the
transaction would be subject to an additional Pennsylvania tax of $20.00 (6% of $1,000 =
$60.00 less $40.00 reciprocity credit) when the goods are brought into Pennsylvania.
However, if a taxpayer purchases tangible personal property from an out-of-state vendor who
collected that state’s tax and the taxpayer takes possession of the goods within the
Commonwealth, the transaction is not subject to the reciprocal credit. The transaction would
be fully subject to Pennsylvania tax and an erroneous overpayment of tax to the other state
would exist.
Example:
If a Pennsylvania based company purchases $1,000 worth of office supplies from a Georgia
vendor, takes possession of the goods in Pennsylvania, and pays the Georgia 4% sales tax
($40.00), the transaction would be subject to Pennsylvania tax of $60.00 ($1,000 x 6%). The
Georgia tax ($40.00) erroneously paid to Georgia cannot be offset as a reciprocal credit against
the Pennsylvania tax of $60.00 and the taxpayer would be entitled to a $40.00 refund from
Georgia.
When granting an interstate reciprocity credit for local tax, the credit will apply to state tax first
and the remainder will apply to the local tax.
Example:
An Allegheny County taxpayer purchases $1,000 worth of office supplies from an Ohio vendor,
takes possession of the office supplies in Ohio and properly pays the Ohio sales tax of 6.5%
($65). The transaction is not subject to Pennsylvania use tax as $60 of the Ohio sales tax of
$65 would offset the state use tax liability of $60. However, the transaction is subject to
additional Allegheny local use tax of $5. (7% of $1,000 = $70 less $65 reciprocity credit). 61
Pa Code § 60.16(l)(1).
When granting an intrastate reciprocity credit for local tax, a credit will be granted for the local
sales tax that was legally due to the other taxable county upon purchase of the property.
Example:
A Philadelphia County taxpayer purchases $1,000 worth of office supplies from an Allegheny
County vendor and properly pays $70 ($1,000 x 7%) of state and Allegheny County local sales
tax. The office supplies are used in Philadelphia County. The transaction is subject to additional
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Philadelphia County local use tax of $10. (8% of $1000 = $80 less reciprocity credit of $70). 61
Pa Code § 60.16(l)(2).
There are two provisions in the New York state sales tax law that could possibly affect the
incidence of tax for Pennsylvania:
Receiving Bulk Property
The first exemption available to New York taxpayers involves the receiving of property in bulk.
If the property is later distributed to various states, then the original acquisition of the property
is exempt from tax. Therefore, if the records indicate that New York tax was paid on such
acquisitions, it may be possible that the tax was not legally due to New York and the auditors
should not apply any reciprocal credit. Instead, the full amount of the Pennsylvania sales tax
is due on the property used within the Commonwealth and should be assessed.
New York Contractors
The second instance, which also involves the New York state sales tax statutes, regards New
York contractors who acquire property within the state of New York and install such property
outside their state. In such instances, the contractor is required to pay the tax at the time of
purchase and apply for a refund from the New York State Tax Commission upon the installation
of the property into real estate outside of New York.
The Department of Revenue does not allow credit for New York sales taxes paid when the New
York state contractor acquires property within the state of New York, pays New York sales tax,
transports the property to Pennsylvania, and upon installation in Pennsylvania, the property
becomes real property.
The reason for disallowing this credit is the fact that the New York contractor has the legal right
to obtain a refund or credit of the New York state sales tax originally paid on the property since
that property is properly subject to tax in Pennsylvania.
(See New York law at CONSOLIDATED LAWS, CHAPTER 60 TAX LAW, Article 28 Sales
and Compensating Use Taxes, Part III Exemptions. Sec.1119. Refunds or credits based on
proof of certain uses--)
Audit Site & Records Location
All sales and use tax audits are to be performed at the taxpayer’s place of business unless the
taxpayer specifically requests that the auditor examine the records at the regional office or if
there are other unusual circumstances in which it would not be prudent for the auditor to perform
the audit at the taxpayer’s business location. Regional managers may authorize exceptions to
this requirement.
Unless there is an approved exception, the taxpayer will be provided at the pre-audit conference
the Audit Site & Records Location Request form in the Bureau’s audit application software and
will be included in the Audit Report.
The following are exceptions where the form in not required:
• When the taxpayer requests the auditor to work onsite
• Audits conducted in regional office or telework.
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Note: Audits where records are located at personal residence, or the taxpayer is identified in
PATH as previously creating a potential safety concern should not be conducted onsite.
Removing Records from Audit Site
Prior to removing physical records, the auditor should inform the audit supervisor. The auditor
is to give the taxpayer the Record Removal Receipt form located in the Bureau’s audit
application software that details receipt of all records removed. The form is to be signed and
dated by both the auditor and the taxpayer. When records are returned, the same Record
Removal Receipt form will be signed and dated by both the auditor and the taxpayer recording
the fact that the taxpayer received all records originally removed. This form is to be included
in the audit report and reference must be made in the narrative report explaining the reason for
the removal of records.
Remote Auditing
When conducting an audit remotely the following parameters should be followed:
• Original taxpayer records should be reviewed from the regional office.
• Large volumes of taxpayer record copies that cannot be secured in filing cabinet
provided for home telework should be reviewed from regional office.
Requesting Records
Requesting Records from Taxpayer
Any formal request for records should be documented on the Bureau’s Request for Financial
Records form located in the document folder of the Bureau’s audit application software.
If the taxpayer does not provide the requested records, the auditor will calculate an assessment
based on available information. Any missing source documents such as sales invoices,
payable invoices or exemption certificates will be assessed.
The following procedures should be used when requesting financial records from the taxpayer:
• Prepare informal requests (email/letter) and formal request for financial records
(RFR) for necessary, specific, and complete information.
• Ensure that all relevant information is requested at the same time (e.g., sales
invoices and corresponding exemption certificates).
• Provide clarifying explanation of why certain records are being requested when
necessary.
Request for Financial Records (RFR) Steps:
1. Prepare an informal request for records following initial taxpayer contact.
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a. Records requested for audits scheduled within 120 days of the expiration of the
statue, out-of-state audits, or audits where the taxpayer postpones the start of
fieldwork beyond 30 days of the initial contact must be requested on a formal
RFR; refer to step 2.
2. Records necessary to complete the audit that are not made available during fieldwork or
records requested under Step 1a must be requested on the RFR.
a. Ask the representative to sign the RFR acknowledging receipt of the request.
b. If the representative declines to sign indicate: “The taxpayer declined to sign” and
the date when the RFR was provided at the bottom of the form.
i. Use email tracking to document receipt of RFRs not delivered in person.
3. Grant 30 days for RFRs.
a. Exceptions, only at the taxpayer’s request, are given.
i. Discuss the request with supervisor.
ii. Taxpayer must provide written request for periods greater than 30 days.
iii. The request must identify the date records will be provided.
iv. If the taxpayer request less than 30 days, use this date on the RFR.
4. Schedule an appointment to review the records with the representative for the due date
of the RFR.
a. For out-of-state audits, the auditor must contact the taxpayer prior to the booking
of the trip to confirm the availability of the requested records.
5. Create a calendar appointment for the due date of the RFR and send a copy to
supervisor with a copy of the RFR.
6. The due date of the RFR must be entered in the “Audit” tab, “Attributes” subtab in
PATH.
7. Contact the representative a week prior to the due date of the RFR to check on the
status of the requested information.
a. Record date and result of call.
8. Ensure that the taxpayer completed the RFR and indicates why certain records were
not made available or request an extension of time.
9. If the taxpayer doesn’t provide requested records or request an extension, issue a
second RFR and a cover letter which can be found in the Bureau’s audit application
software.
a. Consult with supervisor prior to issuing second RFR.
b. Follow steps 2-8 above.
c. Inform the taxpayer of the potential deficiency.
d. Send a copy to the representative’s immediate supervisor.
10. If the taxpayer doesn’t provide requested records or requests another extension, issue a
third and “Final Request” and a cover letter which can be found in the Bureau’s audit
application software.
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a. Auditor must consult supervisor prior to issuing third and final RFR.
b. Follow step 2-8 above.
c. The audit report and schedules showing the audit deficiency will be prepared and
included with the “Final Request”.
d. A copy must be sent to the representative’s immediate supervisor and a
corporate officer.
Note: A second or third RFR is not required for requesting specific source documents such as
exemption certificates, purchase orders, specific sales invoices, and specific purchase invoices.
However, it is recommended to request the source documents when requesting records
necessary to identify detail transactions. For example, when requesting the fixed asset
schedule, the corresponding purchase invoices should also be requested. Any second or third
RFR for specific source documents must be approved by the supervisor.
Requesting Records from Third Party
The confidentiality provisions of the Sales and Use Tax Act require approval in those instances
where an auditor contacts the supplier or customer of a taxpayer under audit for information.
The auditor should request that the taxpayer secure all necessary documentation to conduct
the audit. A Request for Financial Records form should be presented to the taxpayer for all
necessary records not made available.
When the taxpayer does not have records in their possession, they may obtain documentation
from third parties.
The auditor may not contact a third party for documentation unless express written consent has
been obtained from the taxpayer. See sample letter: Requesting Records from Third Party
Sample Letter .
The only exception to the requirement to obtain written permission from the taxpayer is when
third party contact is necessary in establishing fraud. Should the reason for contacting a
supplier be to establish fraud, the auditor must obtain approval from the Director of the Bureau
of Audits. All facts surrounding the audit must be explained in the request. Approval will then
be sought from the Office of Chief Counsel in order to protect the auditor from the charge of
violating confidentiality.
Penalty Abatement
The auditor may offer penalty abatement only if the following criteria is met:
1. All collected tax is remitted (i.e., there is not state or local sales tax deficiency). Cash
to accrual conversion on a first-time audit are accepted only if:
a. All of the tax collected on the cash basis was properly reported or
b. The adjustments to the accrual account are to correct jurisdiction issues (i.e., the
result is not net accrual deficiency and a deficiency in one jurisdiction is exactly
offset by a credit in another).
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2. The total audit assessment is less than $15,000 or less than 25% of the total combined
reported tax.
If both criteria are met, the taxpayer qualifies for discretionary penalty abatement at the audit
level.
Penalty abatement is approved by the audit supervisor who will sign the Penalty Abatement
Approval Form prior to providing the Penalty Abatement Petition Form to the taxpayer. Both
forms are to be included on the Additional Headquarters Processing Request form indicating
penalty abatement is being offered.
Supervisors may contact the Program Administrator to receive approval to either deny or offer
penalty abatement if the taxpayer does or does not qualify for penalty abatement on the above
criteria. The reason for exception approval should be listed in the “Additional Comments” section
of the approval form and approval from the Program Administrator must be obtained prior to
providing any petition forms to the taxpayer.
Note: The auditor should instruct any taxpayer that are not offered penalty abatement at the
audit level that they can still petition for reassessment to have their penalties abated.
Research & Development-Testing
Laboratories
The auditor must use the following methods to determine whether a testing laboratory qualifies
for the manufacturing/research exemption:
• Determine areas that are not directly used in manufacturing:
• Managerial activities
• Sales activities
• Other nonoperational activities of a research establishment or project, motor vehicles, &
etc.
• The test laboratory may concede certain labs/division as not qualifying for an exemption
under the Lancaster Labs court decision.
• Labs that only test water samples or perform nutritional label testing may be excluded.
• The taxpayer under audit must survey customers to determine whether the testing being
done for clients qualifies for the manufacturing/research exemption or provide other
documentation to establish the activities performed for their customers qualify for the
exemption.
Sample Questions:
Describe your company's general business operations and the specific business activities that
were relevant to your transactions with (taxpayer’s name).
For the listed invoices, please describe the services that were provided by (taxpayer’s name)
and the specific segment(s) of your business to which the services relate. If samples were
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submitted for analysis, please describe the nature of the submitted samples and from where in
your business process the samples were generated.
Describe the primary objectives of the services that were provided by (taxpayer’s name).
The taxpayer must be able to provide total revenue per customer and based on determination
for each customer, calculate revenue generated from activities that meet the threshold of
manufacturing in Lancaster Laboratories and or qualify as contract research. “Exempt
Customer Revenue”/Total Revenue = %. If the survey for the department/division indicates the
equipment is used more than 50% of the time in an exempt manner, then 100% of the purchase
price of the equipment is exempt from tax. Supplies will be assessed based on the taxable
percentage of the department/division.
Example:
If the surveys determine the property is used 70% of the time in an exempt manner, then 30%
of the supplies used in the department/division will be subject to tax.
If the taxpayer refuses to do the survey, this will be documented in the audit narrative and should
be formally documented by a Request for Financial Records form or other evidence that the
request was made, and the taxpayer refused. All assets and expenses will be assessed. This
procedure has been sustained through BOA and BF&R.
Services-Employee Cost
The Bureau will allow the purchaser to obtain amended invoices or statements from the vendors
establishing the amount of nontaxable employee costs when such costs were not listed on the
original invoice. This policy will apply to only the purchaser of Help Supply, Employment Agency
and/or Interior Office Cleaning services. The amended invoices or statements may be used for
assessment purposes, issuing a third-party credit or overpayment of use tax.
The statements from the vendors must be on the vendor letterhead and signed by the vendor or
authorized representative. The statements are to include the period of time of the transactions
and the percentage of employee costs on each individual invoice or the aggregate percentage
of employee costs.
Note: Templates are available in the “Forms and Packages” folder in the Bureau’s audit
application software to calculate employee costs.
Taxable Use of Equipment Purchased for
Resale, Rental or Charter
When a taxpayer purchases equipment (such as a crane) or other items exempt from tax by
claiming resale, rental or charter, the taxpayer is responsible for self-assessing use tax on the
fair rental value of the item that is put to taxable use. Fair rental value will be considered to be
the prevailing market rate (by hour, day, or month). If the rental usually includes an operator,
the cost of the operator may be subtracted from the prevailing market rate to arrive at the fair
rental value. Operators supplied by anyone other than the owner of the equipment should be
treated as help supply.
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The auditor should document the determination of the fair rental amount established by use of
supporting documentation such as rate schedules or price lists.
Note: The tax applicable to the fair rental value of items purchased for resale, rental, or charter
should not be confused with items that are determined to be exempt from tax due to
predominance of use.
Consent/Waivers
The Consent to Extend Time Limit for Assessment/Determination of Tax and to Extend Period
of Time for Record Retention form is used to extend the time limit for record retention and
assessment of the specific tax under audit. When collateral audits are performed on different
types of taxes, a separate waiver is needed for each type of tax.
In order to protect the Commonwealth’s interest where reporting periods are in jeopardy due
to the expiration of the statute of limitations, waivers will be required under the following
circumstances:
Mandatory and Priority Assignment
Audits identified by the Program Administrator as mandatory or as a high priority in the case
management system must be completed without the loss of any statutory periods.
Sales Tax Assignment in Inventory
All sales tax assignments in the regions inventory by September 1 must be completed
without the loss of any statutory periods. Audits received after that date but before
November 1 are to be reviewed by the Regional Manager for potential non-compliance to
ascertain if an attempt to schedule fieldwork and pursue a waiver is warranted.
Issuing a Waiver and Waiver Extensions
Taxpayers Delays
When scheduling is delayed at the taxpayer’s request or the taxpayer is not providing records
that allow for the timely completion of the audit before statutory periods expire, a waiver must
be obtained.
Note: Once waiver extensions exceed eighteen months from the original statutory deadline,
regions are required to bring audit periods forward before authorizing additional waivers or
request the follow-up collateral audit.
Audit Plans
Waivers and extensions of waivers are required to be accompanied by an Audit Plan that is
reviewed internally with the Regional Manager and established with the taxpayer’s
representative.
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Exception can be made by the Regional Manager for situations where the taxpayer is
requesting a delay start of the audit and the waivers is for a period of time less than 18
months from the original statutory deadline.
Periods to Expire within Three Months
A waiver is not to be requested from a taxpayer for any period that will expire within three
months of the engagement letter date unless it is a collateral assignment or there is Program
Administrator approval.
Waiver Extensions
Any waiver extending the original statutory deadline beyond eighteen months is only to be
granted with:
a taxpayer commitment to an audit timeline in writing, or
a taxpayer signed Audit plan.
Any exceptions must be approved by the Program Administrator.
Monitoring Waivers
The audit supervisors are to monitor each audit in progress on which a waiver has been obtained
to make sure that the auditor begins and completes the audit timely and allows sufficient time
for the audit assessment to be mailed before the period expires. As part of this monitoring
process, the beginning and ending dates of the waived period as well as the waiver expiration
date must be entered into PATH as soon as possible.
The revenue regional manager is ultimately responsible for obtaining the waiver and the timely
completion of the assignment.
When properly completed, the waiver becomes a binding legal document.
The waiver must be signed by a corporate officer, an authorized POA or a principal member of
the legal entity.
An auditor may accept an electronically signed waiver or an electronic image of wet signature
waiver if the signer provides corroboration that the use of their electronic signature was
authorized. To corroborate the signature, the Regional Manager should send an email to the
signer’s email address requesting the signer to verify they did authorize the use of their
signature.
Note: The above waiver policy does not pertain to trust fund money taxes collected and not
reported. Taxes collected and not reported may be assessed for any period beyond the statute.
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Suggested email content:
Subject: Digital Signature Verification – Consent to Extend Time Limit to Assess – SLSAXXXXX
Mr./Mrs. XXXXX,
A “Consent to Extend Time Limit for Assessment/Determination of Tax and to Extend Period of
Time for Record Retention” was recently received by the Bureau of Audits extending the period for
assessment for “Name Legal Entity”.
This form included your signature in an electronic format that is not directly verifiable by the Bureau
of Audits.
Please respond to this email confirming you authorized the use of your electronic signature on this
form.
Figure 8.4 Suggest email content for waiver.
If the recipient of the email indicates they did not authorize the use of their signature or fails to
respond to the email, the waiver cannot be accepted. If the recipient authorized the use of their
signature, a copy of the response should be included as an attachment to the waiver.
For any electronic image of wet signature, an attempt should be made to obtain a hardcopy of
the wet signature.
Note: A waiver is not required for non-filed returns or filed returns when there is evidence of the
failure to report collected sales tax.
Board of Appeals (BOA) and Board of
Finance & Revenue (BFR) Decisions
For the most part, Section 210 of the Taxpayer’s Bill of Rights prevents the Department from
assessing a taxpayer that raises an identical or substantially identical issue(s) when the BFR
issues a decision in favor of the taxpayer and the Department has not appealed the decision.
This includes refund and reassessment petitions.
The Department is not bound to follow a prior BOA or BFR decision under the following
circumstances:
• The Department appeals the BFR decision to the Commonwealth Court.
• Decisions from the BOA.
• The Department publishes a bulletin addressing the Department’s position on the specific
issue. However, any change will be applied prospectively from the date the bulletin was
issued.
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• Any change in statute or court decision affecting the specific issue. However, any change
resulting from a change of statute will be applied prospectively from the effective date of
the statute.
• If the facts or circumstance surrounding a favorable decision change or are not the same
as presented to the Boards.
The regional staff must consult with HQ before deciding not to follow any prior BOA or BFR
decisions.
Link: 1996 Act 195 - Section 210 of Taxpayer's Bill of Rights
Audit Plan and Audit Status Worksheet
An Audit Plan is required if a waiver or waiver extension has been requested. As a best
practice, the Audit Status Report Worksheet should be completed at the start of every audit to
assist the auditor to properly organize and manage the audit, so it is performed in an effective
manner.
Difference of Audit Status Report Worksheet and Audit plan
Both reports can be found in the SLSWKS.xlsm within the attachment folder of the Bureau’s
audit application software. The Audit Status Report Worksheet is to be completed by the auditor
to track the progress of an audit and assist in devoting the appropriate attention to important
areas of the audit. The worksheet lists the audit area to be reviewed, the method being used
to complete the review, the procedures being used, what records are required, expectation to
complete, along with several other descriptive columns. The information inputted in the
worksheet, which is a macro-enabled Excel file, will carry over to the Audit Plan. Once the
worksheet is completed and the Audit Plan needs to be generated, the auditor will click the
"Refresh Audit Plan" which will create the Audit Plan to submit for review and approval.
The Audit Plan outlines the audit area that still needs to be reviewed, what procedures will be
used, the records required to complete the review. The Audit Plan also includes date the
taxpayer is to provide records and a target date to complete the review.
Procedures
The Audit Plan is required with all waivers and waiver extensions. The Audit Plan will be printed,
reviewed, and approved with Supervisor. The Audit Plan will be attached to the Consent to
Extend Time Limit for Assessment/Determination of Tax and to Extend Period of Time for Record
Retention form and approved by the Regional Manager. Each Audit Plan prepared and
approved will be saved to the Bureau’s audit application software under attachments.
Entity Changes
If the Bureau of Audits Registration Verification form discloses a FEIN change or an ownership
change occurring as result of the following scenarios listed below, then the entity may require
a new account number.
Note: Any change in entity requires a new assignment number.
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As a result of a: Then:
Sole proprietorship to another sole The successor sole proprietor is considered a
proprietorship regardless of if husband new entity. The new entity must obtain a
and wife. new account by completing an application
online via "Pennsylvania Online Business
Tax Registration” in myPATH.
Sole proprietorship to a corporation The corporation is considered a new entity.
The new entity must obtain a new account
number by completing an application online
via "Pennsylvania Online Business Tax
Registration" in myPATH.
Sole proprietorship to a partnership The partnership is considered a new entity.
The new entity must obtain a new account
(Whether or not the sole proprietor is one
number by completing an application online
of the partners.)
via "Pennsylvania Online Business Tax
Registration” in myPATH.
Partnership to a sole proprietorship The sole proprietor is considered a new
regardless of if a partnership still exists. entity. The new entity must obtain a new
account number by completing an application
online via "Pennsylvania Online Business
Tax Registration" in myPATH.
Partnership adds or subtracts a partner The partnership is considered a new entity
and receives a new EIN. since it received a new employer
identification number. The new entity must
obtain a new account number by completing
an application online via "Pennsylvania
Online Business Tax Registration" in
myPATH.
Partnership to a corporation The new corporation is considered a new
entity. The new entity must obtain a new
account number by completing an application
online via "Pennsylvania Online Business
Tax Registration" in myPATH.
Corporation to a corporation The new corporation is considered a new
entity. The new entity must obtain a new
account number by completing an application
online via "Pennsylvania Online Business
Tax Registration” in myPATH.
Corporation to a limited liability company A new audit assignment number is necessary
(through merger or stock sale) for the new LLC even if the LLC has retained
the same EIN as the corporation. LLC must
obtain a new account number by completing
an application online via "Pennsylvania
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Online Business Tax Registration" in
myPATH.
Corporation to a sole proprietorship The sole proprietorship is considered a new
entity. The new entity must obtain a new
account number by completing an application
online via "Pennsylvania Online Business
Tax Registration" in myPATH.
Corporation to a partnership The partnership is considered a new entity.
The new entity must obtain a new account
number by completing an application online
via "Pennsylvania Online Business Tax
Registration" in myPATH.
Sole Proprietorship to Single Member LLC A new audit assignment number is necessary
for the new LLC even if the LLC retain the
same EIN as the sole proprietorship. LLC
must obtain a new account number by
completing an application online via
"Pennsylvania Online Business Tax
Registration" in myPATH.
Figure 8.3 Entity Changes Examples
Refund of Sales Tax Paid – (REV-1890)
The rental of equipment is subject to tax. In situations where the taxpayer is requesting a third
party credit claiming the rental was a nontaxable service, the vendor and the taxpayer must
complete the Vendor Acknowledgement of Sales Tax Incorrectly Charged and Agreement to
Pay Sales and Use Tax, (REV-1890). This form acknowledges the vendor incorrectly charged
sales tax on a nontaxable service. As part of the acknowledgement, the vendor agrees to
remit appropriate tax on the taxable personal property used in providing the nontaxable service,
including any tax on the fair rental value of the equipment. Additionally, the vendor agrees to
extend the time limit for assessment of any tax. If the vendor fails to remit the appropriate tax,
the Department will assess such tax against the vendor, plus appropriate interest, and
penalties. This form must be included as part of the audit report.
Also notify HQ on the Additional Headquarters Processing Request form of the REV-1890.
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