Tricky Taxes: Have you been overcharged?

(WISH Photo)
(WISH Photo)

INDIANAPOLIS (WISH) – How closely do you look at your receipts? I-Team 8 found serious questions about how retailers across Indiana are calculating the state’s cut. That cash register confusion may be boosting state revenue at the expense of taxpayers.

Indiana sales tax is set at 7 percent. It’s supposed to be added on to each product when you pay.

But, I-Team 8 found lots of exceptions to those rules that seem to have retailers confused and consumers paying the price, potentially by millions of dollars every year.

TAX TRICKS

Indiana law makes some products taxable and some exempt. Most non-prepared foods — like groceries — are deemed tax free.

But, Indiana law allows for a myriad of exemptions to that rule, and no category has more exceptions to the rules than food.

“Prepared foods are taxable,” said Indiana Department of Revenue Director of Public Relations Robert Dittmer. “So, if you go into a restaurant and the chef prepares that food, that’s a taxable item. Candy as a general rule is taxable. Soft drinks as a general rule are taxable. Anything you buy in a vending machine, by definition, is taxable.”

But, those very same foods could be tax free if they’re intended for a different use.

“In general, grocery items or food items intended to be sold for the use in creating food [are] exempt from Indiana sales tax,” Dittmer said.

Those exemptions are intended to help you save money. But, that dollar stretching only works if stores follow the law.

“It is the retailers’ responsibility to get this right,” Dittmer said. “We expect them to follow that set of rules.”

I-Team 8 discovered a recent change in those rules that is intended to benefit consumers may actually be costing them instead.

‘THERE IS NO LOGIC TO IT’

Those rules revolve around a recent publication known as “Information Bulletin #29.” It was released by the Indiana Department of Revenue in February 2012, and was intended to make sales taxes on food easier to understand.

But, Anderson University Marketing Professor Dr. Emmett Dulaney says the bulletin instead made the issue more complicated.

“There doesn’t seem to be a great deal of logic behind it,” he told I-Team 8. “This is an easy opportunity for consumers to be taken advantage of. In many cases, consumers are paying more than they should on their purchases.”

For example, Indiana law clearly states that candy is taxable. And, a quick glance at “Information Bulletin #29” seems to show that.

Products like Heath Bar bits, chocolate chips, and even Fruit Roll-Ups and flaked sweetened coconut are all listed as “taxable grocery items and candy.”

But, that same bulletin also lists products like Nestle Crunch bars, Kit Kats and Twix bars as “non-taxable food items.”

And, the list gets even more complicated.

According to the bulletin, marshmallow crème or fluff is tax free. But packaged marshmallows are taxable. Popped kettle corn is taxable, but un-popped kettle corn is not. Corn chips, barbeque flavored potato chips or barbeque flavored sunflower seeds are tax free too. But, honey roasted peanuts, beer nut party mix and cereal bars like Quaker granola bars are supposed to have 7 percent tax added on.

Confused?

So is Dulaney.

“I’m not sure what the logic is behind it,” he said. “I would be of the belief that there is no logic to it whatsoever.”

The Department of Revenue believes otherwise.

“It’s a fair question,” Dittmer responded to the criticism. “And, the answer really comes in how the sales tax system works.”

STREAMLINED SALES TAX

Indiana is one of 24 states that belong to the non-partisan “streamlined sales tax governing board.” Its members, not the Indiana legislature, now determine which products are taxed.

Each member state appoints delegates to vote on sales tax rules. Indiana’s current delegates are Sen. Luke Kenley (R-Noblesville), Rep. Milo Smith (R-Columbus) and Indiana Department of Revenue Commissioner Mike Alley.

Indiana joined the streamlined system in 2005, and has seen economic benefits since, Dittmer said.

“There is a factor in making the marketplace easy for businesses to come in and do business here,” he said. “And, so we have to establish a set of rules that 24 states can agree upon.”

But, Dulaney says some of the decisions in the streamlined system are downright confusing.

For example, it considers chocolate sold near a cash register to be a taxable candy bar. But, if that same item is sold in a grocery store near baking goods, it could be considered a food item and be sold tax free.

“It is complicated,” acknowledged Dittmer. “It depends on the circumstances. Depending upon what purpose it’s sold for, it could be [both taxable and non-taxable.]”

Decisions on other types of candy may boil down to ingredient lists.

“With candy, for example, the streamlined sales tax board decided that anything that uses flour in its ingredients is a food item, and therefore, not taxable,” Dittmer said.

But, the Streamlined Sales Tax Governing Board’s decisions at times seem to contradict themselves.

Sweetened flaked coconut could be considered a baking good, too. It sits on the shelf in many grocery stores right next to baking chocolate. But, it’s taxed, while the chocolate bar on the shelf next to it isn’t.

“It’s complicated,” Dittmer repeated. “But, the retailers get this. The retailers understand this.”

I-Team 8’s research seems to cast doubt on whether that’s really true.

CASH REGISTER CONFUSION

I-Team 8 set up a test to see if retailers understand, and are following the guidelines set by the streamlined sales tax system. We bought taxable and non-taxable candy at 20 stores in the Indianapolis area, asking for a receipt with each purchase.

Nine of those stores charged us sales tax when they shouldn’t have. Two more stores did not charge us sales tax when they should have.

That means more than half of our purchases resulted in incorrectly calculated and incorrectly charged sales tax.

When we went back to the stores to ask why, some owners and managers pleaded ignorance.

“It’s confusing,” said Sam Badri, manager at Brown Hen Citgo on College Avenue. “It is confusing. All candy is supposed to be taxed. That’s what we were told.”

When showed a copy of the information bulletin, Badri shook his head.

“I never received this letter,” he said. “I am frustrated, because it looks like we’re cheating, and we aren’t trying to. And, that’s not fair.”

Managers at other stores also seemed puzzled by the bulletin.

“It’s hard to tell what is what,” said Raj Dewan, manager at Hoosier Mart Shell at 82nd Street and Allisonville Road. “They should have it all taxable, or not taxable at all. It is very confusing.”

But, Dewan said he couldn’t do anything to fix the incorrect sales tax calculations in his point of sale computer systems.

“I’m not in charge of that. We have five other stores, and that decision has to come from the owner,” he said.

Multiple messages left for Hoosier Mart’s owner were not returned.

I-Team 8 was able to speak with Ahmed Farooqui, manager at Jack’s Place Phillips 66 station on West 16th Street.

“We just tax everything at our stores,” he told I-Team 8 by phone. “Because, we can’t take the chance.”

Farooqui agreed to meet with I-Team 8 on two separate occasions to explain his stores’ sales tax collection system, but he never showed up. Multiple follow up calls were not returned.

BIG STORES TOO

Indiana Retail Council Executive Director Grant Monahan says the problem may boil down to resources.

“Small business and small retailers always have [a] tough time in complying with government requirements. It’s not because of lack of will. I think in this instance, maybe it’s the lack of technology,” he said.

But, I-Team 8 found problems at big chain stores too.

Thornton’s and Big Lots both charged tax on non-taxable candy, but didn’t return multiple calls and emails from I-Team 8 seeking an explanation.

Kroger didn’t charge sales tax on a Kit Kat bar, but did charge sales tax on a Nestle Crunch bar. Spokesman John Elliott said it’s possible the store’s point of sale database contained an error.

“All of this programming is done by people,” Elliott said. “Every once in a while, there is a key stroke slip up or something missed.”

Kroger operates stores in 31 different states, Elliott said, and updates its electronic point of sale systems twice a week.

“Kroger is not deliberately taxing or failing to tax someone. We make our best efforts to follow the law. Occasionally we run into situations where we need to get additional clarification,” he said.

But, in this situation, Kroger claimed the consumer came out ahead.

“Our store operations show both products as taxable,” Elliott said. “Candy is taxable.”

Dittmer disputed that premise.

“You are able to figure that out by reading the very detailed ‘Information Bulletin #29,’ he said. “That’s what we expect from retailers [as well].”

MISSING MONEY

What happens to the sales tax money stores have collected in error is anything but clear. Retailers are entitled by law to keep a very small percentage of all sales taxes they collect. Dittmer says some retailers could be keeping all of it, either by honest mistake or intentionally.

“Either way, they’re keeping that in violation of the law if they’re charging the 7 cents when they shouldn’t be,” he said.

Far more likely, Dittmer said, is that most of the erroneously charged money has ended up in state coffers.

“It’s not only possible, it’s likely [that the state has some revenue collection it's not entitled to,]” he said. “I would suspect that is true. We wouldn’t have any way of knowing that until we conduct audits. In those audits, we sometimes do discover that sales tax has been collected on something sold for which it should not have. We report that to the retailer as an advisory in our audit reports back to the retailer.”

Without those audits, Dittmer says the state says it has no idea how much extra revenue it’s gotten. But, he believes the figures are low.

“Our batting average suggests the state is doing pretty well. Is there non-compliance out there? Absolutely. There is non-compliance. We would be foolish to tell you otherwise. Are we catching it? Absolutely,” he said.

But, how much is being caught remains unclear.

Last fiscal year, state auditors identified more than $18.3 million in sales taxes that weren’t properly collected from the 925 gas stations and convenience stores they audited. The previous year, the state found $9.1 million in improperly collected sales taxes from 623 stores.

Those are likely just a drop in the bucket.

Indiana currently has 131 tax auditors, charged with keeping tabs on more than 200,000 businesses. Last year, records show auditors opened the financial books on about 3,500 stores — just more than 1 percent.

And, Dulaney, the marketing professor, says even those audits don’t always drill down to specific products.

“The state does not audit the retailers at that level,” he said. “They do not look for items they’re collecting sales tax on that they should not. Imagine how much money is out there [that the state never sees]. Income tax seems outrageous at 3 percent. This is 7 percent that we’re paying on purchases that we don’t need to. It is a great opportunity for a consumer to be taken advantage of.”

MAKING IT RIGHT

In the wake of I-Team 8’s investigation, some stores vowed to “make it right,” and fix sales tax errors that exist in their databases.

“I’m going to change them right now,” said Badri, the manager at the Brown Hen Citgo on College Avenue, pointing to his cash register. “I’m going to go through the list and fix them all.”

But, it’s likely thousands of other retailers are still making mistakes at the register — intentional or not — and consumers are the ones left picking up the tab.

So what can you do to protect yourself?

“There is a very easy solution,” Dittmer said. “Look at your receipts. And, if you think you’ve been charged tax in error, you can file with the Department of Revenue for a refund. All you have to do is fill out a form, tell us on the form where you think you’ve been inappropriately charged sales tax, attach the receipt and send it to us. We have a section that does nothing but process refund requests.”

But, Dittmer admits few consumers ever bother taking that step.

“I would say in a given year we get a few hundred requests,” he said. “But, we do not track them by type, so I can’t tell you specifically how many people requested refunds or for how much.”

Dulaney argues it’s worth your time to check.

“Most people probably think it’s not worth it for 7 cents on the dollar,” he said. “But, add up a few hundred of those transactions every year, and you might change your mind.”

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