STATE OF ARKANSAS DEPARTMENT OF FINANCE & ADMINISTRATION OFFICE OF HEARINGS & APPEALS ADMINISTRATIVE DECISION

Transcription

1 STATE OF ARKANSAS DEPARTMENT OF FINANCE & ADMINISTRATION OFFICE OF HEARINGS & APPEALS ADMINISTRATIVE DECISION IN THE MATTER OF ACCT. NO.: GROSS RECEIPTS ALCOHOLIC BEVERAGE TAX ASSESSMENTS AUDIT NO.: DOCKET NOS.: ( Sales Tax) ( Alc. Bev. Tax) TODD EVANS, ADMINISTRATIVE LAW JUDGE APPEARANCES This case is before the Office of Hearings and Appeals upon a written protest dated September 18, 2015, signed by ( Taxpayer s Representative ) on behalf of, Attorney at Law,, the Taxpayer. The Taxpayer protested the assessments of Gross Receipts Tax ( sales tax ) and Alcoholic Beverage Tax issued by the Department of Finance and Administration ( Department ). A hearing was held in Little Rock, Arkansas, on March 24, 2016, at 1:00 p.m. The Department was represented by David Parker, Attorney at Law, Office of Revenue Legal Counsel ( Department s Representative ). Present for the Department was Jaime Jarrett, Auditor, and Adam Hillis, Audit Supervisor., Attorney at Law, ( Taxpayer s Representative ) appeared via telephone and represented the Taxpayer. No witnesses or other evidence were presented on the Taxpayer s behalf. The record remained open for thirty (30) days after the hearing for the Taxpayer to submit affidavits and other

2 documentation to substantiate the Taxpayer s Representative s arguments during the hearing. No affidavits or other documentation were provided. ISSUE Whether the assessments made by the Department against the Taxpayer should be sustained? Yes. FINDINGS OF FACT/CONTENTIONS OF THE PARTIES The Taxpayer solely owns and operates a convenience store in, Arkansas doing business as. During the audit period, the Taxpayer sold beer, tobacco, household goods, health and beauty aids, groceries, and prepared food. The audit period was from May 1, 2011, to June 30, The Department s Answers to Information Response provided, in pertinent part, as follows on pages 2 and 3: An audit was conducted by state auditor, Jamie Jarrett, with the Department of Finance and Administration ("DFA"), in June, This audit determined that Taxpayer was a filer of gross receipts taxes. The initial audit period was June, 2011 through May, 2014, but it was determined that the taxpayer was underreported by 25%; therefore, the audit was extended back to April, 2011, when took ownership of the business. April of 2011 was not underreported and was removed from the audit period. The final audit period is May, 2011 through May, During the audit, Taxpayer provided bank statements, purchase invoices, some expenses, and deposit books. Taxpayer provided no sales information for the audit. It was determined that the purchases would be marked up. Mark-up percentages were based on statements of an employee who was taking notes for, and were determined to be accurate. The audit was then broken into categories: Beer, Food, Other Gross Receipts, and Reduced Food. Totals are attached as Schedule A. Beer: Distributors,, provided a detailed report of all beer purchased during the audit period. Taxpayer

3 informed auditor that the markup on beer was 20%. This mark-up was applied to all beer purchases and it was determined that beer was underreported by. See Schedules B. Food: Taxpayer sells grocery items as well as prepared food. After reviewing invoices for purchases from vendors that provided both food to be sold as well as food to be prepared, the auditor determined that 10% of food sales were allocated to prepared food, and 90% would be allocated to reduced food. All food purchases were marked-up by 20%. See Schedule C. For other food vendor purchases, checks written to vendors did not indicate what money was allocated to each category of items purchased. Therefore, invoices were used to determine a sample percentage of purchases allocated to each category, and these percentages were applied towards all checks written to the vendors, to determine the total purchases for each category from each vendor. The vendors where percentages had to be calculated were, and all vendors who sold soda (Pepsi, Coke, etc. combined onto one spreadsheet). This resulted in three separate schedules for these vendors. See Schedules E (all soda vendors), F ( ), and G ( ). Once the mark-up was applied and all percentages were allocated, it was determined that reduced food sales were. When compared to reported food sales of and a credit for non-taxable EBT sales of, it was determined that underreported food sales were. Other Gross Receipts: Other items were taxed at the full gross receipts rate, including tobacco, household goods, health and beauty aids, and prepared foods. The prepared food totals were determined to be and are found on Schedule C. Tobacco, health and beauty items, and household goods were purchased from only two vendors:. Purchases were calculated and marked-up by 12%. See Schedule D. (Calculations for which purchases qualify for the "Other Gross Receipts" mark-up can be found on Schedules F and G). Total taxable gross receipts were calculated to be. Total reported gross receipts:. Total underreported gross receipts:. Additionally, in reference to the penalty, the Department s Representative stated as follows: Taxpayer was aware that they should be correctly reporting their

4 gross sales to the state. However, care was not exercised when recording the correct amount of taxable sales. Therefore, a deficiency penalty of 10% was applied to the Gross Receipts audit due to willful neglect. The Taxpayer s Answers to Information Request provided the following statements regarding this assessment in the section regarding relevant facts: (A) APPEARS AUDITOR USED CONSTANT MARK-UP OF 20% ON RETAIL, STORE S MARKUP WAS VARIOUS AMOUNTS, TYPICALLY 15%, 16%, & 19%. NOTE AVERAGE MARKUP WOULD BE 16.66%, OR RATHER 3.34% LESS THAN THE PROFIT MARGIN AUDITOR USED (B) NO OFFSET ON DISCARDED PREPARED FOODS, THEFT, BREAKAGE, SPOILAGE, ETC. AUDITOR DETERMINED 100% OF ALL PURCHASES WERE SOLD WITH A 20% MARKUP (C) EBT SALES SHOULD BE GREATER THAN 64, (D)INTEREST SHOULD BE WAIVED (E) PENALTY SHOULD BE WAIVED (F) REQUESTING INTEREST & PENALTY TO BE WAIVED Additionally, in the section of the Answer s regarding the relevant law, the following statement was written: ACA (4)(A) WAS APPLIED BECAUSE TAXPAYER FAILED TO MAINTAIN ADEQUATE BUSINESS RECORDS AND SIGNIFICANT UNDERREPORTING OF TAX LIABILITY WAS ESTABLISHED, STANDARD IS NEGLIGENCE OR INTENTIONAL DISREGARD OF RULES & REGS. STATE IS USING INCORRECT STANDARD OF PROOF. The Taxpayer s Representative argued the following at the administrative hearing: (1) penalty and interest should be waived; (2) based on the Audit methodology, some of the vendors with missing invoices had account payments double counted as additional purchases; (3) the audit had many errors based on

5 assumptions; (4) an amount for theft spoilage, and breakage should have been removed because common sense says that these events occurred; (5) the audit requires the owner to prepay taxes on any retained inventory by including the entire purchase amounts; (6) the EBT sales total (based on the bank records) is too low; and (7) based on a conversation with his client, the correct markups are fifteen percent (15%), sixteen percent (16%), and nineteen percent (19%). The Auditor testified that: (1) she performed this audit; (2) during the audit, the Taxpayer provided bank statements, purchase invoices, a few expense books, and some deposit books; (3) the Taxpayer could not provide z-tapes or sales receipts to support the reported sales; (4) the audit was an estimated assessment utilizing the purchase invoices obtained from the Taxpayer and vendors and applying average markups; (5) the markup percentages were provided by the Taxpayer and verified by checking the markup percentages of a few items in each category; (6) the Auditor utilized a twenty percent (20%) markup for beer, a twelve percent (12%) markup for other gross receipts (tobacco, household, and health and beauty items), and a twenty percent (20%) markup for food items; (7) the food category was separated between prepared and reduced food by reviewing purchase invoices; (8) the Auditor determined that only ten percent (10%) of the food purchase invoices constituted prepared food and applied that percentage to the food purchase invoices to calculate the total amount of prepared food and reduced tax food purchases; (9) the Taxpayer never discussed or provided evidence of breakage, spoilage, or theft and no adjustments were made to the audit for these items; (10) she determined that the vendor invoices were incomplete based on the Taxpayer s

6 checks to those vendors, so she used a sample of the available invoices to calculate percentages of invoiced products that were present in each audit category; (11) she applied those percentages to the payments that she could not associate with particular invoices; (12) when a check could be associated with an invoice, she made sure that the check was not included in purchases; (13) she worked hard to make sure that she was not double counting purchases; (14) despite her best efforts, some vendor checks could have been payments for earlier invoices (even though the checks did not indicate that they were payments for a particular invoice) and, thus, double counting of some purchases resulted; (15) comparing the estimated sales to the reported sales, the Auditor determined that the Taxpayer underreported beer sales by, underreported reduced food sales by, underreported prepared food sales by, and underreported other gross receipt items by ; (16) EBT sales were removed from taxable food sales totals based on the Taxpayer s bank statements; (17) the Taxpayer had an accompanying income tax assessment that was not protested but it was lower than the sales tax assessment because credit was given for all purchases; (18) over the audit period but total deposits were in sales were reported after the removal of EBT funds and cashed checks; (19) penalty was assessed because taxpayer was more than 25% underreported and lacked adequate documentation; (20) the Taxpayer is located in a dangerous location of ; (21) the Department does not have access to EBT records; (22) the audit does not adjust the marked up purchases for retained inventory because the Taxpayer did not show that retained inventory increased over the audit period; (23) the Taxpayer had

7 inventory at the beginning of the audit; and (24) she is unsure whether more or less inventory was present in the store than was present at the beginning of the audit period. follows: CONCLUSIONS OF LAW Standard of Proof Ark. Code Ann (c) (Supp. 2015) provides, in pertinent part, as The burden of proof applied to matters of fact and evidence, whether placed on the taxpayer or the state in controversies regarding the application of a state tax law shall be by preponderance of the evidence. A preponderance of the evidence means the greater weight of the evidence. Chandler v. Baker, 16 Ark. App. 253, 700 S.W.2d 378 (1985). In Edmisten v. Bull Shoals Landing, 2014 Ark. 89, at 12-13, 432 S.W.3d 25, 33, the Arkansas Supreme Court explained: A preponderance of the evidence is not necessarily established by the greater number of witnesses testifying to a fact but by evidence that has the most convincing force; superior evidentiary weight that, though not sufficient to free the mind wholly from all reasonable doubt, is still sufficient to incline a fair and impartial mind to one side of the issue rather than the other. The Department bears the burden of proving that the tax law applies to an item or service sought to be taxed, and a taxpayer bears the burden of proving entitlement to a tax exemption, deduction, or credit. Ark. Code Ann (d) (Supp. 2015). Statutes imposing a tax or providing a tax exemption, deduction, or credit must be reasonably and strictly construed in limitation of their application, giving the words their plain and ordinary meaning. Ark. Code Ann (a), (b), and (e) (Supp. 2015). If a well-founded doubt exists

8 with respect to the application of a statute imposing a tax or providing a tax exemption, deduction, or credit, the doubt must be resolved against the application of the tax, exemption, deduction, or credit. Ark. Code Ann (f)(2) (Supp. 2015). Tax Assessments Arkansas Gross Receipts (sales) Tax generally applies to the entire gross proceeds of all sales of tangible personal property within the State of Arkansas. Ark. Code Ann (Repl. 2014). Food and food ingredients (not including prepared food) is taxed at a reduced tax rate. Ark. Code Ann (Repl. 2014). Additionally, sales of liquor and wine are subject to an additional three percent (3%) liquor and wine excise tax and sales of beer are subject to an additional one percent (1%) beer excise tax that must be reported and remitted with Arkansas sales tax. Ark. Code Ann (Supp. 2015). Further, it is the duty of every taxpayer to make a return of any tax due under any state tax law and to preserve suitable records to determine the amount due. Ark. Code Ann (a) (Repl. 2012). A taxpayer s records may be examined by the Department at any reasonable time, and, when a taxpayer fails to maintain adequate records, the Department may make an estimated assessment based on the information that is available. Ark. Code Ann (b) and (d) (Repl. 2012). The burden is on a taxpayer to refute an estimated assessment and self-serving testimony, standing alone, is insufficient to refute an estimated assessment. Ark. Code Ann (d); cf. Leathers v. A. & B. Dirt Mover, Inc., 311 Ark. 320, 844 S.W.2d 314 (1992). Specifically, the Arkansas Supreme Court stated as follows when analyzing an estimated assessment:

9 In short, we find Mr. Nabholz s testimony insufficient, standing alone, to meet the taxpayer s statutory burden in refuting the reasonableness of the assessment. To hold otherwise would be to permit a taxpayer to maintain scant records and after an unsatisfactory tax audit, avoid taxation by merely verbalizing his transactions unsupported by appropriate documentation made at the time of the transactions or by testimony from other parties to the transactions. Id. at 330, 844 S.W.2d at 319. Since the Taxpayer failed to preserve and maintain suitable records (back up documentation for the reported sales totals), the Department was justified in making estimated assessments for sales tax and alcoholic beverage tax. In the absence of suitable records, the Taxpayer has the burden of refuting the Department s estimated assessments. The law requires that sufficient credible evidence be offered by the Taxpayer to establish that the audit results are unreasonable. Here, the Taxpayer has failed to present any testimony or other evidence to rebut the reasonableness of the estimated assessments. The Taxpayer s Representative argued that: the Auditor must have double counted certain purchases from vendors with missing invoices; the audit had several errors based on assumptions; retained inventory increased over the audit period resulting in taxation of unsold inventory in the audit; EBT sales totals were too low; and markups should be reduced. No factual evidence, however, was presented to support any of these assertions. Further, the Taxpayer s Representative argued that adjustments for spoilage, breakage, and theft should be made but provided no evidence to support any amount of adjustment. The Taxpayer has not borne its burden of refuting the estimated assessments through third party testimony and/or documentary evidence required by A & B Dirt Movers, supra.

10 Consequently, the tax assessments must be sustained at this point in the administrative process. Penalty and Interest The Taxpayer s Representative stated that penalty and interest should be waived. The Department asserted that a negligence penalty was appropriate due to the Taxpayer s significant underreporting and failure to maintain adequate records. The Department further argued that interest must be assessed on any tax deficiency under Ark. Code Ann (Repl. 2012). Ark. Code Ann (4) (Repl. 2012) provides as follows: (A) If any part of a deficiency in taxes is determined to be due to negligence or intentional disregard of rules and regulations promulgated under the authority of this subchapter or any state tax law, then the director shall add a penalty of ten percent (10%) of the total amount of the deficiency in addition to any interest provided by law. (B) However, if any penalty is assessed under subdivisions (1)-(3) of this section, then no penalty shall be assessed under subdivision (4)(A) of this section; Here, the Department has demonstrated that the Taxpayer had only reported sales of $299,928 during the audit period but had over $1.3 million in bank deposits after removing the amounts for EBT sales and check cashing. This discrepancy was not explained by the Taxpayer. Further, the Taxpayer did not maintain any supporting documentation for its reported sales totals. No factual evidence was presented to dispute the audit findings of a significant underreporting by the Taxpayer. The Department has demonstrated negligence on the Taxpayer s part in failing to properly report the correct tax due. Consequently, the assessment of penalty is sustained.

11 Interest is required to be assessed upon tax deficiencies for the use of the State s tax dollars. Ark. Code Ann (Repl. 2012). DECISION AND ORDER The proposed assessments are sustained. The file is to be returned to the appropriate section of the Department for further proceedings in accordance with this Administrative Decision and applicable law. Pursuant to Ark. Code Ann (Supp. 2015), unless the Taxpayer requests in writing within twenty (20) days of the mailing of this decision that the Commissioner of Revenues revise the decision of the Administrative Law Judge, this decision shall be effective and become the action of the agency. The revision request may be mailed to the Assistant Commissioner of Revenues - Policy & Legal, P.O. Box 1272, Rm. 2440, Little Rock, Arkansas The Commissioner of Revenues, within twenty (20) days of the mailing of this Administrative Decision, may revise the decision regardless of whether the Taxpayer has requested a revision. The Taxpayer may seek relief from the final decision of the Administrative Law Judge or the Commissioner of Revenues on a final assessment of a tax deficiency by following the procedure set forth in Ark. Code Ann (Supp. 2015). DATED: May 5, 2016