Table of Contents
Chapter 4 - Specific Issues within the Food and Beverages Industries (Grocery Stores)
Initial
Interview
Questions
Questions
to ask
concerning
sources
or
adjustments
to
income
include:
-
Which redemption companies do you use to redeem coupons and rebates?
-
How often do you process the coupons/rebates?
-
Approximate amount of coupons redeemed?
-
How many are directly attributable to gross receipts?
-
How many are in-store coupons?
-
How many are through manufacturers/suppliers?
-
How many handling fees were charged by the coupon redemption companies?
-
Were ledgers kept on coupon redemption?
-
Who and where are the coupon checks (procedures) cashed?
-
Who endorses the checks?
-
-
Who gets the manufacturers/brokers premium gifts?
-
Is the store an authorized retailer in the Food Stamp Program?
-
Is the store an authorized retailer in the Women, Infants and Children (WIC) Program?
-
Does the store accept credit cards?
Back To Top
Income
Lack of
compliance
centers
on the
non-reporting
of
several
types of
income
prevalent
within
the
industry.
Grocery
gross
receipts
are
attributable
to:
-
Coupons
-
Coupon Processing Fees
-
Rebates
-
Value of Vacation Trips; and Other Types of Gifts
-
Cash Discounts
-
Receipt of High Dollar Promotional Items
-
Pay Telephones
-
Bottle/can Redeeming
-
Money Orders
-
Video/DVD Rentals
-
Video/DVD Game Rentals
-
Credit Card Sales
-
Food Stamp Sales
-
WIC Program Sales
-
Prepaid Telephone Cards
Typically a retailer has a sales summary report that reflects the sales on a departmental basis, the amount of sales tax collected, total sales, other income received, rebates that are received and other credit transactions that originate in the stores on a daily basis. The report also shows all of the daily debit transactions, such as voids, refunds, cash payouts, and manufacturer coupons tendered, and store coupons tendered. The debit side will also reflect the amount of daily bank deposit. This report is very helpful in reconciling the amount of coupons debited with the amount credited to the taxpayer's books.
Back To Top
Coupon
Income
The
taxpayer
receives
a fee
for
processing
coupons.
Keep in
mind
that the
amount
credited
for
coupons
could
include
the
coupon
handling
fees.
If the
amount
credited
for
coupons
exceeds
the
amount
debited
throughout
the
year,
the
taxpayer
is
redeeming
more
coupons
than his
customers
brought
in to be
tendered.
This may
result
from the
taxpayer
cutting
coupons
to be
redeemed
and may
reflect
a
potential
source
of
unreported
income.
Retailers
should
report
the
income
from a
coupon's
face
value
and its
related
handling
fee at
the time
the
coupon
is
received
from the
customer.
Rebate
Grocery
stores
receive
many
product
rebates
based on
volume
and
increased
purchases
over
prior
years.
Grocers
receive
rebates
for
almost
all
areas,
but are
more
prevalent
in dairy
products,
snack
items,
cigarettes,
film
processing,
meat
products,
candy,
bread,
and
related
items.
A
technique
to use
to
identify
these
transactions
is the
submission
of a
listing
of
suppliers
to the
taxpayer
requesting
the
taxpayer
to
indicate
the
supplier(s)
they
received
rebates
from and
the
frequency
of
receipt.
From
this
listing
the
taxpayer's
books
and
records
and/or
deposit
slips
can be
checked
to
partially
verify
the
taxpayer's
statements.
Shelving
or
slotting
allowances
are
nothing
new to
the
industry.
Grocery
stores
charge
manufacturers
substantial
amounts
each
year for
prime
shelf
space to
display
their
products.
Please
note
that
vendor
allowances
are an
issue
being
considered
by the
Retail
Technical
Advisor.
Promotional
Items
It
is a
normal
practice
for some
suppliers'
sales
representatives
to give
gifts or
cash to
the
individuals/shareholders
for
buying
their
products
instead
of
another
supplier's
products.
Some of
the
items
individuals
have
received
include
televisions,
computers,
telephones,
microwave
ovens,
lawn
furniture,
coolers,
jackets,
video/DVD
games
and
movies,
value of
vacation
trips;
food,
beverages,
and
paper
products
delivered
to their
homes,
and
professional
and
collegiate
sport
team
tickets.
If the
grocery
store is
incorporated
and the
suppliers
give
promotional
items
directly
to the
shareholders,
adjustments
may be
necessary
to
increase
corporate
receipts
and to
report a
constructive
dividend.
Courtesy
Account
Many
grocery
storeowners
maintain
a
customer
courtesy
account,
a petty
cash
account,
or a
similar
bank
account
that is
completely
separate
from the
business'
regular
bank
account.
The
purpose
of this
account
includes
but is
not
limited
to: 1)
customer
courtesy
transactions
(i.e.
postage,
the sale
of
fishing,
hunting,
and
similar
licenses,
the
handling
of money
orders,
and film
development,
and
recording
of
rebates),
2) to
allow
employees
to
voucher
small
purchases
of
supplies
for the
store,
and 3)
cashing
of
customer
payroll
checks.
It is
suggested
the
examiner
inquire
about
the
handling
of a
customer
courtesy
account
and the
type of
transactions
handled
by the
account.
Accounts
examined
contained
unreported
income
items
such as
coupon
redemption
checks,
the
handling
fees for
coupons,
income
from the
sale of
money
orders,
and
service
fees for
licenses.
Demonstrators
The
taxpayer
may have
a
business
where
individuals
demonstrate
products
and
distribute
the
coupons
of the
taxpayer's
suppliers
in the
grocery
store.
When the
suppliers
request
demonstrations
at a
particular
time and
store,
the
taxpayer
contacts
individuals,
referred
to as
demonstrators,
from a
list the
taxpayer
has
compiled.
Some taxpayers will enter into a written contract with the demonstrator, indicating the demonstrator is being hired on a contractual basis. The taxpayer may instruct the demonstrator on specifications by which the demonstrator would have to adhere, including not being permitted to hire assistants or replacements. Otherwise, the demonstrator is free to employ his/her own methods in performing the demonstrations.
Demonstrators are not guaranteed a minimum amount of work, they are not required to accept jobs when the taxpayer contacts them, and the failure to accept a job does not affect their name on the demonstrator's listing. The demonstrators are not prohibited from performing demonstration jobs offered to them by competitors. Demonstrators typically work a maximum of sixteen hours per week and are paid a set hourly wage for each demonstration. Demonstrators accepting jobs are sometimes asked to bring some supplies with them for which they are reimbursed. The product being demonstrated is always provided by the taxpayer.
The taxpayers may be treating the demonstrators as independent contractors; however, they are employees. This conclusion is supported by the distinction made in Rev. Rul. 65-188, 1965-2 C.B. 390 and Rev. Rul. 75-243, 1975-1 C.B. 322. The degree of control exercised by taxpayers over the demonstrators in this issue and that exercised over the interviewers in the two revenue rulings is similar. Refer to the revenue rulings for a more thorough explanation.
In some cases the demonstrators' wages were netted under promotional income, therefore, avoiding employment taxes.
Back To Top
Cost of
Goods/Inventory
When
examining
a
grocery
store
operation,
consider
performing
the
following
checks
on
purchases
and
inventory:
-
Request specific invoices to analyze (i.e., larger material amounts, unusual payees and invoices of main suppliers). Note any errors found. Become familiar with suppliers billing invoices; what items are included in them; and where they are included (i.e., capital item purchases, trips, etc.)
-
Request a supplier list from the taxpayer. Analyze the list of major suppliers provided by the taxpayer, noting which supplier pays rebates and how often. Analyze the general ledger per sales (credits) and cost of goods (credits) for rebates reported.
-
Note any patterns of reporting the rebates (i.e., credits to sales, credits to cost of goods); considering when they are being reported (i.e., weekly, monthly, semiannually, yearly, etc.)
-
Compare the rebate list to patterns found. Question the taxpayer as to what type of programs or agreements they have with the suppliers that rebate (such as contracts; deal sheets; shelf space, slotting, or volume agreements, etc.)
-
Note if IRC § 263A applies. Verify, through probing, whether the taxpayer included rent, utilities, insurance, taxes on storage facilities, purchasing and management salaries, supplies, telephone, travel, or other IRC § 263A expenses in the amount capitalized. Be aware of the $10,000,000 exception rule for small businesses.
These are the usual 11 categories accounted for IRC § 263A:
Food and Beverages
Housing Maintenance and Repair Commodities
Fuels (other than gasoline)
House Furnishings and Housekeeping Supplies
Apparel
Toilet Goods and Personal Care
Medical Care
Entertainment
Tobacco
Private Transportation (including gasoline)
School Books and Supplies
