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Auditing a General Liability Sales Policy

We’re doing more and more general liability (GL) audits each month. General liability audits can be based on various premium bases; payroll, sales, gallons, admission, area, etc. On this post we’re going to focus on sales records for GL audits that are based on sales as the sole premium basis or companies with another premium basis.

When auditing sales records for a sales-based GL audit, you MUST detail the sales breakdown on your audit. DO NOT just list out the total gross sales for each month, if you’ve been provided a detailed sales report for each month’s sales (see example below). On the example below, the dept totals have been highlighted. On this audit, the auditor should list out each of the departments on their audit worksheet, and not just list out the total sales at the bottom of the sales report (highlighted in Red). Also, you MUST list out ALL sales categories, even if a sales category is being excluded, like Shipping income on the example below.

In this example, there are multiple class codes. Using the sales records, you can easily separate the sales out on the worksheet, so the sales can be properly classified. If you didn’t have the breakdown the sales could not be properly classified.

We always need to show the carrier what is being included as well as what is being excluded. If you only show the total gross sales by month, neither the reviewer nor the carrier will get the full picture, and won't know what you've included and what you've excluded in the sales premium. On this example, we used the total for each dept. which worked for this particular audit. You’ll notice we did not separate out every single line from the sales report on our audit worksheet, it wasn’t needed. But you may have audits where you will need to breakdown the payroll in more detail in order to classify properly or deduct items that are deductible on sales audit.

What is excludable on a GL sales audit?

1. Sales or Excise Taxes Which Are Collected and Submitted to a Governmental Division

Taxes which are imposed on the purchaser and collected and remitted directly to a governmental agency by the seller may be excluded. In allowing this adjustment, the liability exposure associated with the sold product is not diminished. The seller merely acts as the revenue collection unit for the governmental agency. The records of the seller must show separately the taxes collected and a governmental payable account.

Dealers of liquor, tobacco and similar products which incorporate state or federal taxes within their prices should not automatically have these taxes deducted from their audited gross sales. Only sales and excise taxes that are directly remitted to a governmental agency by the insured will be deducted from gross sales.

2. Credits for Repossessed Merchandise and Products Returned. Allowances for Damaged and Spoiled Goods

When a purchaser returns a product as being unwanted, defective or damaged, the seller will generally allow a sales credit. The sales credit may be excluded from the auditable gross sales if the records are maintained to show separately this adjustment. When an allowance is granted for spoiled or damaged products that are not returned, this allowance may also be excluded from gross sales with proper documentation. In either situation, not only is the sales revenue reduced but also the potential liability as the product is off the market. The return of the product or the agreement that it is damaged in effect cancels the seller's warranty. A reduction in liability also takes place when the seller repossesses a product. Therefore, a sales credit to remove the unpaid balance from a seller's books for a product that has been repossessed may be excluded. However, if any of these products are resold, that sale is included in gross sales.

3. Finance Charges for Items Sold on Installments

Finance charges reflect the value of money and its use over time in purchasing items on installment. Since a sale is transacted when the buyer and seller agree to terms, the finance charges are not a part of the product sale and may be excluded from gross sales when properly shown in the insured's records. If the finance charge is built into the price of the product and not shown separately, no deduction is allowed.

4. Freight Charges on Sales if Freight is Charged as a Separate Item on Customer's Invoice

A freight charge is a separate charge made to a customer for the delivery of a product. Please note that no distinction is made between a freight charge via common carrier or the insured seller's own means of delivery. If the freight charges are shown as a separate item on the customers' invoices, they may be excluded from the auditable gross sales. The insured's liability exposure is the same whether the product is picked up by the customer or it is delivered.

NOTE- Shipping and handling charges are also separate charges incurred by the purchaser. Whether a percentage charge on the total purchase or a flat dollar amount, shipping and handling generally refers to the expenses incurred by the seller for locating, sorting, packing and shipping a customer's order. As these charges are applied to offset normal expenses incurred in business, and do not reflect only the actual freight charges incurred, they should not be deducted from gross sales.

5. Royalty Income From Patent Rights or Copyrights Which Are Not Product Sales

Money received as royalties from patents or copyrights does not represent the sale of a physical product that could cause a loss and, therefore, may be excluded from gross sales. However, if a risk receives royalties related to a product that they are selling, this income is included.

**Foreign Sales need to be shown separately on the worksheet and summary**

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