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YELLOW SHEET Office of the State Auditor of Missouri |
Report No. 2000-36
May 12, 2000
The following areas of concern were discovered as a result of a review conducted by our office of the Department of Revenue, Division of Taxation and Collection, Sales and Use Tax Refunds.
Missouri state law authorizes the Department of Revenue (DOR), Division of Taxation, to issue sales and use tax refunds due to an overpaid return, or an audited return. During fiscal year ended June 30, 1999, the department disbursed state sales and use tax refunds, including interest, of approximately $47,609,000. In addition to refunds, an undetermined amount of credits were applied to under payments of taxes during the fiscal year. Since fiscal year 1990, refund amounts have increased more than 400% as noted in the following table.
| SALES AND USE TAX REFUNDS | |
| FISCAL YEAR | TOTAL REFUNDS |
| 1990 | $8,960,000 |
| 1991 | 6,897,000 |
| 1992 | 16,463,000 |
| 1993 | 17,333,000 |
| 1994 | 16,388,000 |
| 1995 | 17,455,000 |
| 1996 | 15,424,000 |
| 1997 | 28,520,000 |
| 1998 | 32,774,000 |
| 1999 | 47,609,000 |
We reviewed sales and use tax refunds totaling approximately $20,855,000 (including interest) for which there was no indication in the files that the vendor was going to return the tax or interest to the original consumer. We find this especially troubling since a questionable windfall for businesses has been created, and unveils a disincentive to charge taxpayers the correct tax amount.
Legislation was introduced in the 1997 legislative session that would have prohibited the refund or credit of sales or use tax erroneously collected by a retailer, unless it was demonstrated that all erroneously collected amounts would be refunded to the person that originally paid the tax. However, this provision was not approved by the General Assembly.
We contacted six contiguous states regarding their policies related to returning refunds to the original customer. Each of these states have regulations, state laws, or policies which provide that refunds must be returned to the original customer.
Based on our review, it appears that much of the increase in refunds during fiscal 1999 was related to country club membership dues, athletic club fees, and changes in rates applicable to food sales, which are relatively new issues.
Approximately $13,429,000 (37%) of the $36,550,000 refunds reviewed were related to sales taxes collected and remitted to the Department of Revenue on membership dues paid to country clubs and fees paid to athletic clubs. These refund applications cited various Administrative Hearing Commission (AHC) decisions. The decisions ruled that country clubs were entitled to a refund of sales taxes collected and remitted to the Department of Revenue on dues paid by membership classes which had voting rights in the club, had an ownership interest in the club, and would receive a distribution of the club's assets in the event of dissolution. Other decisions ruled that athletic clubs were entitled to a refund of sales taxes collected and remitted to the department on fees paid by members. These athletic clubs are not considered places of amusement or recreation, but rather fitness centers where the primary purpose is to improve member health and fitness and , therefore, the membership fees are not subject to sales tax.
Several country clubs which collected and remitted sales taxes on membership dues for the tax-exempt members applied for a refund from the Department of Revenue. To determine if the refund request was valid, the department required the clubs to indicate whether the members met the previously noted conditions required by the Administrative Hearing Commission decision. If the clubs indicated all three conditions were met, the refund was processed. However, the department did not require documentation, such as the bylaws, to verify that all three conditions were met. Failure to require adequate documentation reduces assurance that refunds are issued only to clubs which meet the requirements outlined in the Administrative Hearing Commission decision.
Approximately $2,685,000 (7%) of the $36,550,000 refunds reviewed were due to changes in sales tax rates applicable to food sales.
Other common reasons noted for refunds included approximately $5,394,000 for exempt sales, $4,806,000 related to taxpayer clerical errors, $3,924,000 for dual operators, and $2,177,000 pertaining to quarter-monthly filers.
Of the 266 sales and use tax refunds reviewed for fiscal year 1999, at least 76, totaling approximately $14 million, indicated a consultant was involved in filing the refund request.
