What is a markup test? So in the context of a sales audit, a markup test is kind of what it sounds like. A markup test is a test to determine the markup in the aggregate of taxable products that are being sold.
So what the auditor does is, let’s take a restaurant, for example, they’ll look at all the menu items and they’ll have somebody break out food cost and say, okay, if you’re selling burritos, tell me all the ingredients that go into the burrito and give me a cost of how much it costs you to make that. And then let’s see what your markup is.
So markup tests are really dangerous because markup tests generally vary across different products. So a restaurant selling beer can have a certain markup. A restaurant that’s serving shots coming out of a bottle is going to have a higher markup on liquor than with beer. So when trying to take an average of those two things, it’s really difficult to get an appropriate average markup.
So we try and avoid markup tests whenever possible. If we have to go through them, we will try and limit the scope of the market test to make it as easy as possible on the client and to make sure that the results that we’re getting are really consistent.
Market tests are very common, particularly in retail settings, with restaurants, in a variety of other businesses, and they really should be avoided at all costs.