Recently, the Georgia Department of Revenue (DOR) completed an audit of vendor submissions for 2015 – 2019, resulting in some rather large audit adjustments on the September Local Option Sales Tax (LOST) and Special Purpose Local Option Sales Tax (SPLOST) distributions to some local governments.
The amount of the audit adjustment is fairly large and is certainly more than the amount included in normal monthly distributions. Many clients have already reached out to us concerning these large distributions. The most common two issues/questions we have received are (1) should this be accrued at June 30, 2020 (for those entities with a June 30th fiscal year end), and (2) to which SPLOST referendum do we apply the receipts?
We have held discussions with the DOR and researched this matter and want to share the following guidance with you:
(1) Under GASB Statement No. 33, since sales tax is a derived tax revenue, the asset is recorded when the underlying exchange transaction occurs or the resources are received, whichever is first. The DOR has told us the exchange transaction period is 2015 – 2019, therefore, the receivable for the audit adjustment amount should be accrued at year end (assuming a fiscal year end of 6/30, 7/31, or 8/31). As for the revenue, an entity will have to consider the criteria used for availability when recording revenue in the governmental funds under the modified accrual basis. For example, assume an entity has a June 30th year end and a 60 day policy for revenues to be considered available in its governmental funds. In this scenario, the receivable will be offset by unavailable revenue, a deferred inflow of resources, at the fund level under the modified accrual basis of accounting. At the government-wide level, under the full accrual basis of accounting, the receivable would be recognized as revenue. Note that the remainder of the September 2020 sales tax distribution would be recorded in a manner consistent with prior years. For impacted counties, another twist is the need to record an offsetting expenditure and payable for amounts due to municipalities if the SPLOST resolution includes provision for the cities within a county to receive a portion of the monthly SPLOST distributions.
Consider the following example:
Sample County has a year end of June 30, 2020, and is notified that a $1,000,000 amount was distributed in September 2020 representing the audit adjustment. After conferring with legal counsel, Sample County has determined that Sample County should pass along 12% to Sample Town, and another 22% to Sample City.
Governmental Fund Level:
Debit Taxes Receivable $1,000,000
Credit Unavailable Revenue $1,000,000
Debit Intergovernmental Expenditures $340,000
Credit Intergovernmental Payable-ST $120,000
Credit Intergovernmental Payable-SC $220,000
Notice the net effect of this series of journal entries will be a reduction of fund balance.
Entity-Wide Level Conversion Adjustment:
Debit Unavailable Revenue $1,000,000
Credit Taxes Revenue $1,000,000
(2) As for the regulatory guidance on whether these audit receipts are applied to the current sales tax referendum or need to be split or charged to which ever referendum(s) were in place during the span of 2015-2019, the current guidance from DOR is that these would be part of the current referendum in place for the entity. The monthly distributions have always had an “audit” column to the distribution report but it rarely is a substantive number. The DOR is always conducting reviews/audits of the distributions and will generally have adjustments in every month’s distribution (both positive and negative). Previously, these audit adjustments have been included as part of the current referendum in place. For consistency purposes, this additional distribution should also be included as part of the current referendum in place.
Questions or Need More Info?
If you need additional information or have any questions related to these additional sales tax distributions or other governmental accounting matters, please reach out to us. We are happy to help!