YELLOW SHEET Office of the State Auditor of Missouri Claire McCaskill

Report No. 2005-13

March 2005

The following areas of concern were discovered as a result of an audit conducted by our office of the Department of Revenue, Division of Taxation and Collection, Sales and Use Tax.

• The Department of Revenue (DOR) does not track information regarding all 117 sales and use tax exemptions currently provided by state law and, as a result, cannot determine the effects on state revenue related to each of the exemptions.  DOR records indicate adjustments to gross sales receipts totaling approximately $120 billion and $110 billion in fiscal years 2004 and 2003, respectively.  Detailed information of what is included in the adjustments total reported on the sales and use tax returns is not required.  In addition, according to DOR personnel, only taxable sales are reported on some sales and use tax returns and gross sales receipt or adjustment amounts are not included.  Because exemption information is not reported and tracked for most exemptions, the cost in terms of reduced state sales and use tax revenue for each exemption cannot be determined, which reduces the general assembly's ability to make informed decisions regarding the propriety of current and possible future exemptions.

This concern was noted in the prior report.  The DOR agreed that tracking exemptions is a laudable goal; however, disagreed with the recommendation stating the cost of implementation would outweigh the benefit derived and would substantially increase the complexity of the forms.

• State law does not require vendors to return sales and use tax refunds and related interest to the original purchaser when applicable, resulting in a windfall for the vendor.  During fiscal years 2004 and 2003, the DOR disbursed sales and use tax refunds, including interest, of approximately $60 million and $61 million, respectively.  In addition to refunds, an undetermined amount of credits were applied to under payments of taxes.  It should be noted that some refunds are the result of errors, quarter-monthly filer estimates or other circumstances in which sales and use taxes were not collected from a purchaser, and as a result, should be retained by the vendor.

We addressed this issue in previous reports and the DOR agreed with the recommendation to support legislation that would require sales and use tax refunds and related interest to be returned to the original purchaser; however, such legislation has not been successful.

• The state's General Revenue Fund – State (GRF-S) does not receive reimbursement from local funds for their proportionate share of interest paid on refunds of sales and use taxes. Based upon the percentage of distributions to state and local funds to total distributions to local  funds, interest payments of  approximately $2.9 and $3 million  should have been allocated to local funds during the years ended June 30, 2004 and 2003, respectively, and is due to the GRF-S from local funds.

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