STATE OF ARKANSAS DEPARTMENT OF FINANCE & ADMINISTRATION OFFICE OF HEARINGS & APPEALS ADMINISTRATIVE DECISION IN THE MATTER OF GROSS RECEIPTS (SALES) & COMPENSATING USE TAX (ACCT. NO.: ASSESSMENT AUDIT NO.: AUDIT PERIOD: FEB. 2014 THROUGH DECEMBER 2016 DOCKET NOS.: 18-009 (SALES TAX) 1 18-010 (USE TAX) 2 TODD EVANS, ADMINISTRATIVE LAW JUDGE APPEARANCES This case is before the Office of Hearings and Appeals upon written protest received May 2, 2017, signed by ( President ) on behalf of the, the Taxpayer. The Taxpayer protested the assessments issued by the Department of Finance and Administration ( Department ). A hearing was held in this matter on September 8, 2017, at 1:00 p.m. in Little Rock, Arkansas. The Department was represented by Gina Dougherty, Attorney at Law, Office of Revenue Legal Counsel. Also present for the Department was Tanzetta Lasker, Tax Auditor, ( Auditor ) and Guy Meneley, Audit Supervisor ( Audit Supervisor ). The President and ( Manager ) appeared at the administrative hearing and represented the Taxpayer. At the request of the Taxpayer, the record was left open for post-hearing submissions. After the administrative hearing, Ms. Dougherty left her position with the Department, and John Theis, Attorney at Law, Office of Revenue Legal 1 This amount represents (Tax) and (Interest). 2 This amount represents (Tax) and (Interest). 1
Counsel, ( Department s Representative ) represented the Department regarding post-hearing issues. The Taxpayer filed its initial post-hearing filing on October 6, 2017. After receipt of this information, the Department conceded the sales tax assessment but argued that the use tax assessment should be sustained in its filing on October 23, 2017. 3 In his final post-hearing filing on October 27, 2017, the President conceded the use tax portion of the assessment; however, he asserted that, based on his calculations, he should be entitled to a refund of excess sales tax payments during the audit period. The Department s Representative provided his arguments regarding the Taxpayer s claim for a refund on October 31, 2017. On November 6, 2017, the parties informed this Office that all relevant information had been submitted and the record should be closed. After the concession of the sale tax and use tax assessments, the only issue left to be decided is whether the Taxpayer is entitled to a refund based on the record in this proceeding. ISSUE Whether the Taxpayer is entitled to a refund of excess sales tax payments during the audit period based on the information submitted. No. FACTS AND CONTENTIONS OF THE PARTIES The Department provided a summary of several relevant facts in its Answers to Information Request, stating as follows: 3 Though the Department s Representative asserted the he was withdrawing the sales tax assessment based on deposits, he noted that, if the assessment had been based on the sales data provided by the Taxpayer during the administrative hearing, the Taxpayer would have owed plus applicable local sales taxes and interest. He stated that the Department will not rework the audit to assess this amount. 2
The taxpayer, is an Arkansas corporation whose stockholders are. The corporation owned and operated two auto repair businesses during the audit period:. The taxpayer obtained a sales tax permit for but operated both businesses under one sales tax account number. provides routine services such as oil changes, brake repairs, tire services, and alignments. It also repairs and rebuilds engines and transmissions, air conditioning systems, as well as providing welding and diagnostics services. provided these types of services and sold automobiles. The audit period is February 1, 2014 - December 31, 2016. The tax auditor, Tanzetta Lasker, asked the taxpayer to provide all sales invoices for both businesses. stated that it would be impossible to provide data for each of those months because it only had records for. 4 The taxpayer stated that had closed and its records were not available unless it paid a fee, which it was unwilling to do, to the record storage company located in. Therefore, Ms. Lasker could not conduct an audit based on sales invoices. Because the taxpayer did not provide sales invoices for both businesses, Ms. Lasker asked the taxpayer to provide three months of sales invoices from each year as a sample. The taxpayer instructed Ms. Lasker to contact its accountant. The accounting firm was not the taxpayer's accountant in tax year 2014, so it could only provide records for and only for tax years 2015 and 2016. Use of a sample method does not provide an accurate result when data is missing so Ms. Lasker did not perform a sample. As a last resort, Ms. Lasker asked the taxpayer for its bank statements. During the audit period, the taxpayer had three bank accounts it used to manage both businesses. The taxpayer provided records for each account. Ms. Lasker calculated all deposits and before deriving the amount of additional taxable sales she removed the following items: 1. deposits the taxpayer demonstrated were not sales, such as receivables payments; 2. deposits from sales of automobiles that qualified as sales for resale; 3. transfers from one bank account to another bank account; 4. merchant fee deposits; 4 As shown in the excerpt from the Taxpayer s October 27th filing below, the President strongly disagreed with the statement that the Taxpayer could not or refused to provide any sales records for either entity during this proceeding. The accuracy of the Department s assertion, however, is no longer at issue as the sales tax assessment has been withdrawn. 3
5. refunds to the taxpayer's customers. When these items were removed, what could only be presumed were deposits from taxable sales remained. Ms. Lasker backed out the applicable state and local tax rates from the deposits so that tax was not assessed on the sales price plus the tax. She then used a standard formula to calculate additional taxable sales:.... In his Answers to Information Request, the President supplemented the Department s Schedule A from the Audit 5 (which calculated additional sales for sales tax) by including additional nontaxable deposits for the months of March through July 2014. 6 Those amounts were based on sales invoices issued to certain customers for the months of March through July 2014. He asserted that sales to those customers were deemed exempt by the Department for the later months. During the administrative hearing, the Auditor testified that this information could not be accepted because the President had not traced those invoices back to the assessed deposits, which was the basis of the assessment. The President also provided sales records to the Department during the administrative hearing. Though the Department offered to redo the audit based on the actual sales records provided during the administrative hearing, the President stated that he was only prepared to discuss deposits (the basis of the assessment) and he would object to the Department altering the basis of the assessment at that point. In his October 27th filing, the President explained the basis for the Taxpayer s refund claim, stating as follows in relevant part: 5 See Department s Exhibit 5. 6 During the administrative hearing, the President stated that these records were not provided during the Audit because the Auditor told them that they ran out of time and the assessment would be issued. 4
I respectfully ask for a decision in this matter as the Department has not fully conceded. The question being: If the Audit process has enough integrity to assess with confidence unpaid Tax, Penalties, and Interest due from a taxpayer then why does not that same Audit provide a refund if that same process finds the opposite to be true? Simply put, I provided documentation which shows the months in question were roughly the same $$ as I had stated in the hearing (about ), that once these months were fully considered the information would produce a refund. The Audit was obviously flawed, Non-Taxable deposits were missing in the first 5 months submitted (in defense) as Schedule A, Exhibit 5 of Ms. Ginas documents to the Court on Sept. 8 th 2017. Unfortunately for Mr. Theis who was not there, some of the presumptions (submitted as FACTS by Ms. Gina) were found to be FALSE in that Hearing. Most of which was the whole notion that we ( ) declined (could not, or would not) produce sales records. The FACT is we were never asked to submit sales records other than the Sample Data in the letter dated February 22, 2017. This letter requested nine random months, three from each year, and those records were provided.... Now that said, We have already PAID the proposed Tax Assessment so we should at least get that back as a refund 7 and if an Audit is as pure as they say it is then the State will owe us additional money back because I provided an additional in Bank Deposits (actual copies of the checks) that were conveniently left off the original assessment because they needed to keep it just ONE-WAY with no risk to them (Keep in mind how HARD this is and I suspect every other business who gets audited this way cannot provide this level of proof so they will get an un-fair assessment.) The Department needs to be warned about this type of AGGRESSIVE and NON-ACCURATE method and perhaps needs to be exposed for what it is doing and I have a chance to do that here. In his October 31st filing, the Department s Representative addressed the Taxpayer s refund claim by asserting as follows: This issue is not presently before the Office of Hearings and Appeals and should not be considered as part of the Administrative Law Judge s decision in the current matter. State law provides a method for a taxpayer to seek a tax refund if it believes one is due and the Taxpayer is free to pursue that avenue. 7 In his October 31st filing, the Department s Representative conceded that the Taxpayer is entitled to a refund of, representing the Taxpayer s payment of the assessed amount minus the use tax portion of the assessment conceded by the Taxpayer. Consequently, the refund of the amounts paid toward the assessment are conceded between the parties and shall not be addressed by this decision. 5
After a general discussion of the burdens of proof in tax proceedings and a discussion of the applicable law, the parties argument shall be addressed with a legal analysis and associated conclusions. follows: CONCLUSIONS OF LAW Burdens of Proof Ark. Code Ann. 26-18-313(c) (Supp. 2017) 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. 26-18- 313(d) (Supp. 2017). 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 6
Ann. 26-18-313(a), (b), and (e) (Supp. 2017). If a well-founded doubt exists 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. 26-18- 313(f)(2) (Supp. 2017). Ark. Code Ann. 26-18-507 (Repl. 2012) provides for a refund of any state tax erroneously paid in excess of the taxes lawfully due. The Taxpayer bears the burden of proving by a preponderance of the evidence that the claimed refund was erroneously paid and in excess of the taxes lawfully due. Refund Claim Initially, Arkansas Gross Receipts (sales) Tax generally applies to all sales of tangible personal property and certain specifically enumerated services, unless an exemption or credit is shown to apply. Ark. Code Ann. 26-52-301 (Supp. 2017). Additionally, the services of initial installation, alteration, addition, cleaning, refinishing, replacement, and repair of motor vehicles are generally taxable. Ark. Code Ann. 26-52-301(3)(B)(i) (Supp. 2017). Consequently, the sales of the Taxpayer s services and any tangible personal property are generally taxable unless an exemption is shown to apply. Additionally, 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. 26-18-506(a) (Repl. 2012). The taxpayer s records may be examined by the Department at any reasonable time, and, when the Taxpayer fails to maintain or provide adequate records, the Department may make an estimated assessment based on the information that is available. Ark. Code Ann. 26-18-506(b) and (d) (Repl. 2012). The burden is on a taxpayer to 7
refute an estimated assessment and self-serving testimony, standing alone, is insufficient to refute an estimated assessment. Ark. Code Ann. 26-18-506(d); cf. Leathers v. A. & B. Dirt Mover, Inc., 311 Ark. 320, 844 S.W.2d 314 (1992). The requirements for a refund claim are stated within Arkansas Gross Receipts Tax Rule GR-81.1(C)(2), which provides as follows: Requirements for Claim. Form 2004-6 is incorporated into and adopted as a part of this regulation and is required to be used by every claimant filing a claim for refund other than an amended return. The form provides a method and format to comply with the requirements for a claim for refund. The form is available on the Internet at http://www.arkansas.gov/dfa/excise_tax_v2/et_su_forms.html. The information listed below in items (a) through (f) of this section shall be required in order to process any claim for refund other than an amended return. a. The Taxpayer's name and identifying tax information, including sales tax permit number, social security number or FEIN; b. The date the tax was paid to the state and the tax period for which the tax was paid; c. The nature and kind of tax paid, such as sales tax, withholding tax, use tax, withholding tax, individual income tax, corporate income tax; d. The amount of tax that is claimed erroneously paid; e. The specific grounds upon which a refund is claimed. For example, if the claimant requests a refund based on a claim that the item purchased is exempt from tax, the information supplied should explain the specific exemption claimed, and the reasons that the item qualifies for the exemption; and f. Any other information relative to the payment required by the director. The Department s Representative is correct that the Taxpayer has not filed a qualifying refund claim under Arkansas Gross Receipts Tax Rule GR-81.1(C)(2). It must be noted, however, that even if the Taxpayer had filed a qualifying refund claim, the refund proposed by the Taxpayer is improperly based on his deposits and not actual sales data. 8
While the Department is authorized by statute to utilize other potential evidence of sales (such as bank deposits) to create an estimation when a taxpayer s records are deficient, a taxpayer is not authorized to estimate its refund based on bank deposits but must use its actual reported sales and sales records. A taxpayer must demonstrate that tax was paid on particular transactions, state the amount of tax that was erroneously paid on the transactions, and prove that the claimed portion of the tax was exempt or otherwise not due to the Department. Here, the Taxpayer has presented evidence that several of its assessed deposits could be traced to exempt transactions to the satisfaction of the Department s Representative. After accepting this evidence, the Department s Representative notified this Office that the provided evidence caused the assessment to reach a zero balance and that the sales tax assessment would be withdrawn. The Taxpayer, however, has not shown that its actual reported sales were associated with exempt sales to the extent that an excess tax payment was made. It should also be noted that the Department s Representative asserted that, if the assessment was based on the provided sales data, an additional assessment of sales tax would be warranted. Based on the evidence submitted, the Taxpayer has not proven entitlement to a refund by a preponderance of the evidence at this point in the administrative process. Consequently, the remainder of the assessed taxes (after adjustments agreed to by the Department) is sustained. 9
DECISION AND ORDER After adjustments necessitated by concessions agreed to by the Department, the remainder of the assessment is 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. 26-18-405 (Supp. 2017), 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, P.O. Box 1272, Rm. 2440, Little Rock, Arkansas 72203. A revision request may also be faxed to the Assistant Commissioner of Revenues at (501) 683-1161 or emailed to revision@dfa.arkansas.gov. 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 by following the procedure set forth in Ark. Code Ann. 26-18-406 (Supp. 2017). DATED: November 13, 2017 10