Summary
Coming behind other consultants and attorneys who failed to produce results, Altus Group was retained by a lodging REIT to assist with a seemingly intractable sales & use tax audit that had been lingering for five years. The auditor believed our client owed $1.3 million in sales and use tax. The main sticking point in this audit centered on the taxability of lease payments the REIT received from its Taxable REIT Subsidiary for the lease of a hotel property and all of its tangible personal property. When Altus became involved it was quickly apparent that there was a vast difference of opinion in what the proper tax base should be. Due to the REIT’s method of accounting for fixed assets reconciling these differing opinions was a daunting task. It was extremely difficult to determine what tangible personal property actually existed and its cost. Over the course of the audit, positions had become hardened and the relationship between the State auditor and the taxpayer’s previous consultants were quite frosty.
Challenge
Upon being engaged we needed to rebuild trust with the State’s audit team through a series of collaborative meetings. While a good working relationship was soon established, getting the State to move from its position was proving to be difficult. The State had come to believe that the taxable percentage of the lease payment should be in the range of 15%. Our experience with these types of issues indicated that the proper tax base should be more in the range of 4%.
It was apparent that continuing to work through the audit documentation in the fashion that had been established by prior consultants would result in our client receiving a large, unwarranted assessment and cause Altus to fall short of our client’s expectations. Creative thinking was called for.
Solution
Drawing on our experience with other hospitality clients, and consulting with our property tax group, led Altus’s transaction tax group to an alternative approach. Altus suggested to the State’s Chief Auditor that the existing audit methodology be abandoned in favor of using an independent third party to perform an appraisal of all of the hotel’s personal property. The appraisal would use a “replacement cost new” approach with the application of a depreciation factor to determine the property’s original cost. As appraisals shown to the state by prior consultants were incomplete, we offered to have the auditors tour the hotel with us so we could agree on the personal property to include in the appraisal. Due to the collaborative nature of our proposal, the Chief Auditor was persuaded by our approach.
Results
At the end of the process we had an appraisal whose completeness was unquestionable and mutually agreed upon. The appraised value of the tangible personal property supported the values that we expected. Upon reviewing the appraisal the State agreed to abandon its potential $1.3 million assessment and instead processed a $54,000 refund. Needless to say, our client was extremely pleased with the result and was very appreciative of our ability to successfully conclude the audit. We are continuing to work for the REIT by formalizing an agreement with the State to ensure that future audits are conducted in a more effective and efficient manner.
Services provided
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