5.3. ERMUSR 08-22-2006MINNESOTA REVENUE
August 2°d, 2006
Theresa Slominski
Elk River Municipal Utilities
13069 Orono Pkwy
Elk River, MN 55330
RE: Minnesota Sales and Use Tax Audit, MN ID# 8777905
Dear Ms. Slominski,
Included with this letter are the preliminary schedules, exhibit A, explanation of reason codes,
rule 8130.1100, and computation of tax, penalty, and interest. They are as follows:
1. Schedule A -General MN Sales. The periods from 1-1-OS through 12-31-OS were
reviewed for any taxable sales generated in your miscellaneous revenue accounts. The
items listed were subject to Minnesota sales tax, but were not charged sales tax. Sales
of electric and water connection/access fees are taxable. Taxability of these fees can
be seen in rule 8130.1100 and on fact sheet 157 -residential utilities. This schedule
has been projected on a straight average basis.
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2. Schedule B -Use Tax On ~Stter Donated. The periods from 1-1-04 through 12-31-
05 were reviewed. These amounts represent the donated water at cost donated to the
City of Elk River. Gifts are taxable to the entity purchasing them at their cost. This
schedule has been projected on a straight average basis.
3. Schedule C -Purchases Subject to MN Use Taz. The periods from 1-1-OS through
12-31-OS were reviewed. The items listed are subject to Minnesota sales tax but were
not charged sales tax. It is your responsibility to accrue use tax if the vendor does not
charge sales tax. Documentation showing sales tax was paid or the item is not taxable
will be needed to delete any of these items. This schedule has been projected on a
straight average basis.
4. Schedule D -Capital Equipment Purchases. These purchases found during the
audit period qualify as capital equipment. Tax is due on capital equipment when
purchased, but you are entitled a refund of the tax when you file a capital equipment
refund claim. These items were not taxed so I have listed them as taxable purchases.
The refund for these items is on schedule E. This schedule will not be projected.
5. Schedule E -Capital Equipment from Schedule D. This is the capital equipment
refund of tax listed on schedule D. This schedule will not be projected.
6. Schedule F -Asset Purchases. All assets for the audit period were reviewed. These
assets were bought without evidence of sales tax being paid. These items aze subject
to sales tax. Review items that have a name of "Depreciation Expense." These items
were listed on you depreciation expense report, but I could not find an invoice to
verify sales tax being paid for these items. Documentation showing sales tax was paid
3300 County Road 10, Suite 406 Minnesota Relay (77'Y) 711
MINNESOTA• REVENUE
or the item is not taxable will be needed to delete any of these items. This schedule
will not be projected.
7. Schedule G -Tax Collected vs Remitted. After reviewing your revenue reports and
general ledger detail for the audit period I found discrepancies in collected sales tax
versus remitted sales tax. Refer to exhibit A for more detail. Documentation will be
needed to delete any of these items. This schedule will not be projected.
8. Exhibit A. This exhibit lists the periods that I feel show a material difference in sales
tax collected versus what was remitted. The amounts under "Sales Information from
Revenue Reports" aze the amounts listed on schedule G. Some months show
underreporting and some show over reporting. However, the net comes out to show
underreporting. The dollar amounts under the "Collected" column came from your
revenue reports and represent sales tax collected. I simply compared those amounts
with what you actually paid to discover the underreporting. The next columns are
your general ledger detail for the sales tax account. I could reference almost every
payment and the amount collected from the revenue reports. Review the "Details"
column for some questions I have pertaining to Misc invoices, Correcting Accounts,
double payments, Service Chazges, billings, ADJUST Accounts, tax on materials, and
Adj Accruals.
9. Explanation of Reason Codes. Each item listed on the schedules has a
corresponding reason code as to why the item is taxable. Use this sheet as a reference
as to why the items are taxable.
10. Rule 8130.1100 -Utilities and residential heating fuels. This sheet explains the
rules pertaining to utilities. It specifically references the taxability of connection and
access fees in regards to electric and water usage. Use this sheet as a reference in the
future.
11. Computation of Tag, Penalty, and Interest. This is the current iiability due based
on the current documentation.
If you feel anything should not be taxed and projected please provide me with supporting
documentation. Gather the supporting documentation and we can meet again for me to
review the documentation. Please review the enclosed documents and call me with any
questions.
Sincerely,
Lee Meinerz
Sales Tax Specialist
Minnesota Department of Revenue
3300 County Road 10, Suite 406
Brooklyn Center, MN 55429-3072
Telephone: (763) 569-1815
Fax: (763) 569-1851
3300 County Road ]0, Suite 406 Minnesota Relav (7T1') 711