California’s Board of Equalization (BOE) often uses this method during certain types of audit. “Use of mark-up methods as an audit procedure is widespread in sales tax auditing,” concurs the BOE’s most recent audit technique Manuel. See Section 405.30 (https://www.cdtfa.ca.gov/taxes-and-fees/manuals/am-04.pdf).
However, there are several weaknesses with this audit method. For this reason alone, it often is crucial for a business owner to retain a tax attorney to defend himself or herself against the State from over-reaching for tax liabilities.
For example, the mark up method assumes that the current mark up figure was the same throughout the entire audit period. It blithely ignores a prior existing pricing structure, to the detriment of the business owner. Also, the shelf test may have incorrect selling prices, or it might have been incorrectly weighted, relative to other goods sold. (The shelf test is part of the mark-up audit, where the auditor chooses selected items from a shelf and compares the cost price with the shelf sale price).
The BOE’s Audit Manuel even cautions that its agent should “not to rely too heavily on mark-up percentages . . . for all types of businesses” because “it may be time consuming to obtain and have little meaning.” Unfortunately, this advice is not always adhered to by the auditor. Accordingly, retaining a tax attorney to question the auditor’s methods, assumptions, and conclusions is advisable for a successful audit. Legal counsel can help reduce the mark-up audit by dismantling the asserted details by the auditor.