STATE OF ARKANSAS DEPARTMENT OF FINANCE & ADMINISTRATION OFFICE OF HEARINGS & APPEALS ADMINISTRATIVE DECISION IN THE MATTER OF GROSS RECEIPTS TAX & ALCOHOLIC BEVERAGE ACCT. NO.: TAX ASSESSMENTS AUDIT NO.: DOCKET NOS.: 18-141 ( Sales Tax) 1 18-142 ( Alc. Bev. Tax) 2 TODD EVANS, ADMINISTRATIVE LAW JUDGE APPEARANCES This case is before the Office of Hearings and Appeals upon a written protest received June 27, 2017, signed by, 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 ). The Audit Period is April 1, 2011 through December 31, 2015. A hearing was held in Little Rock, Arkansas, on February 22, 2018, at 10:00 a.m. The Department was represented by Chris McNeal, Attorney at Law, Office of Revenue Legal Counsel ( Department s Representative ). Present for the Department was Millicent Hines, Auditor, and Yaminah Holt, Audit Supervisor. Though the Taxpayer was called multiple times (both the day before and during the administrative hearing) at telephone number provided within his protest and utilized during the prehearing teleconference, the Taxpayer was not reached. After the prehearing teleconference, the Taxpayer sent an email to this Office on December 4, 2017, requesting that the original hearing (scheduled on December 15, 1 This amount represents (tax), (negligence penalty), and (interest). 2 This amount represents (tax), (negligence penalty), and (interest).
2017) be continued. That request was granted on December 4, 2017, and notice of the rescheduled hearing date and time was sent by reply to the Taxpayer s email on January 4, 2018. Additionally, the Taxpayer was sent notice of the new hearing date and time by letter dated January 5, 2018, which was sent to his mailing address. The notice of the hearing is sufficient. Ark. Code Ann. 26-18-307 (Repl. 2012). ISSUE Whether the assessments made by the Department against the Taxpayer should be sustained? Yes. FINDINGS OF FACT/CONTENTIONS OF THE PARTIES Prehearing Filings The Auditor provided a summary of the relevant facts within her Audit Comments 3, stating as follows in part: Audit Procedures - Liquor Excise The records available for review were purchase invoices, purchase reports from beer distributors, the purchase data from cash register tapes, excise tax reports, bank statement, income tax returns, and. The taxpayer could not provide all of the purchase invoices and cash register tapes for the audit period, so purchase reports from beer distributors, bank statements, and the purchase data from were used to compute the markup averages. The liquor purchase data from included yearly totals of liquor and wine. Schedule A is a complete list of liquor, wine, beer and sundry items. The taxpayer was given a credit for inventory calculated as the difference between ending inventory and beginning inventory from the income tax returns. The amount of inventory for liquor and wine was arrived by dividing the amount of purchase of each type by total purchases to arrive at the percentage of total purchases. Those percentages were then applied to the inventory on hand for each category type (Sch. A-1). These amounts were either added or subtracted from the total purchases for each year to arrive at the total (Sch. A). 3 The Audit Comments were attached as Exhibit A to the Department s Answers to Information Request.
A percentage mark-up was applied based upon the comparison of shelf prices and actual costs from the purchase invoices. The taxpayer includes taxes into his shelf price, so therefore, an average markup percentage of 42% for liquor and 56% for wine was computed (Sch. B). The markup percentages less taxes equal the actual markup percentages for liquor as 30 % & 29 % and wine as 44% & 43%; the split markups for both liquor and wine were due to tax rate changes effective July 1, 2013. The actual markup percentages for liquor and wine were applied to the liquor and wine purchases and then averaged each type to arrive at monthly sales amounts. The average monthly amount of both liquor and wine were then totaled to arrive at a combined liquor and wine average sales per month (Sch. B1). Those averages were computed due to the taxpayer had inadequate records. The combined average monthly liquor and wine sales were then compared to the amounts reported in to arrive at additional taxable liquor sales (Sch. C). The taxpayer was underreported by 90%; therefore, the audit period was extended back three additional years. Explanation of Audit Adjustments - Liquor Excise The audit adjustment consisted of additional taxable sales of: Liquor and Wine - the sale of wine, liquor, and other intoxicating beverages is taxable Amount and Nature of Tax GR-4, Persons Required to Collect and Remit Tax - Specific Businesses - Sellers of Beer, Wine, liquor and Other Intoxicating Beverages GR-26 Penalty Explanation - Liquor Excise A 10% deficiency penalty was applied due to the intentional disregard of the tax rules and regulations. The taxpayer's purchases far exceeded his sales and he was underreported by 90%. GR-85 Penalties- (A) Negligence Penalty Audit Procedures - Gross Receipts The records available for review were purchase invoices, purchase reports from beer distributors, the purchase data from, cash register tapes, excise tax reports, bank statement, income tax returns, and The taxpayer could not provide all of the purchase invoices and cash register tapes for the audit period, so the purchase reports from beer distributors, bank statements, and the purchase data from were used to complete the audit. The beer distributor purchase reports included yearly totals of beer. The liquor purchase data from included yearly totals of liquor and wine. Since the taxpayer could not provide all the purchase invoices for the audit period, the check stubs were review and all the sundry distributors were totaled for each year. Schedule A is a complete list of liquor, wine, beer and sundry items. The taxpayer was given a credit for inventory calculated as the
difference between ending inventory and beginning inventory from the income tax returns. The amount of inventory for each item was arrived by dividing the amount of purchase of each type by total purchases to arrive at the percentage of total purchases. Those percentages were then applied to the inventory on hand for each category type (Sch. A-1). These amounts were either added or subtracted from the total purchases for each year to arrive at the total (Sch. A). A percentage mark-up was applied based upon the comparison of shelf prices and actual costs from the purchase invoices. The taxpayer includes taxes into his shelf price, so therefore, an average markup percentage of 42% for liquor, 56% for wine, 38% for beer, and 69% for sundry was computed (Sch. B). The average markup percentages less taxes equal the actual markup percentages for liquor as 30 % & 29 %, wine as 44% & 43%, beer as 28% & 27%, sundry as 60% & 59%; the split markups for each item were due to tax rate changes effective July 1, 2013. The actual markup percentages for liquor, wine, beer, and sundries were applied to those total purchases amount and then averaged to arrive at an average sale per month (Sch. B1). Those averages were computed due to the taxpayer had inadequate records. The average monthly beer sales from Schedule B-1 were compared to the amounts reported in to arrive at additional taxable beer sales (Sch. D). There were some months that weren't underreported by 25% so those months were deleted. The taxpayer was underreported by 65%. The average monthly liquor and wine, beer, and sundries sales were compared to the amounts reported in to arrive at additional taxable sales (Sch.E). The taxpayer was underreported by 86%; therefore, the audit period was extended back three additional years. The computation underreported percentages for the additional periods are shown on Schedule F. Explanation of Audit Adjustments - Gross Receipts The audit adjustment consisted of additional taxable sales of Liquor, Wine, Beer, - the sale of beer, wine, liquor, and other intoxicating beverages is taxable Amount and Nature of Tax GR-4, Persons Required to Collect and Remit Tax - Specific Businesses - Sellers of Beer, Wine, Liquor and Other Intoxicating Beverages GR-26 Sundry- selling tangible personal property GR-4 Amount and Nature of Tax; GR-5 Tax Imposed Upon Sale and Not Property - Interstate and Intrastate Sales Penalty Explanation Gross Receipts
A 10% deficiency penalty was applied due to the intentional disregard of the tax rules and regulations. The taxpayer's purchases far exceeded their sales and they were underreported by 86%. GR-85 Penalties- (A) Negligence Penalty In his Protest, the Taxpayer stated his objections to the Department s Assessment, stating as follows: I disagree with the proposed assessment because I don t think I owe all of this amount. The audit was done with all the inventory that was bought. You pay the taxes when you sell the items not when you buy them. The Taxpayer did not file Answers to Information Request. Hearing Testimony The Auditor testified that she performed the relevant audit against the Taxpayer. The Audit Period is April 1, 2011 through December 31, 2015. She stated that the Taxpayer sells beer, liquor, sundries (candy, chips, soda, cigarette lighters, etc.), and wine. She asserted that the Taxpayer s sales were all subject to tax. She assessed gross receipts (sales) tax, beer excise tax, liquor excise tax, city sales tax (1.25%), and county sales tax (2%). Though she requested all bank, purchase, and sales records from the Taxpayer, the Taxpayer was unable to provide its purchase invoices and sales receipts. Consequently, the Auditor estimated the Taxpayer s sales. She utilized the records from the Taxpayer s vendors to determine the Taxpayer s purchases. Schedule B1 provides the total purchases of beer, liquor, wine, and sundries for the Audit Period. She then applied a markup percentage to each category of purchases. The markup percentages were determined by dividing the actual shelf prices by the actual purchase cost of the items within a category and backing out the associated taxes included in those purchase prices. She then divided the total calculated annual sales by twelve (12) to arrive at a monthly sales totals.
The Auditor further testified that credit was given for retained inventory based on the inventory amounts reported on the Taxpayer s income tax returns. The retained inventory for each category was calculated by comparing each category s purchases to the total purchases for all categories to construct a proportion for each category that was then applied to the entire retained inventory. That adjustment was represented in Audit Schedule A1. At this point, the Auditor stated that she noticed a significant discrepancy between her calculated sales and the Taxpayer s reported sales for each month. She utilized the calculated sales for purposes of this assessment due to the lack of actual records. A negligence penalty was assessed due to the large difference between the Auditor s calculated sales and the Taxpayer s reported sales. Specifically, she stated that the Taxpayer s sales were as follows: beer (65% underreported), wine and liquor (90% underreported), and total sales (86% underreported). The Auditor concluded her testimony by noting that the Taxpayer has not presented any evidence of damaged or stolen merchandise. follows: CONCLUSIONS OF LAW Standard 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 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). 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. 26-52-301 (Supp. 2017). Food and food ingredients (not including prepared food) is taxed at a reduced tax rate. Ark. Code Ann. 26-52-317 (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. 3-7-201 (Repl. 2017). 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. 26-18-506(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. 26-18-506(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. 26-18-506(d) (Repl. 2012); 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: 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 purposes. 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. Though the Taxpayer asserted within his protest that credit was not given for retained inventory within the assessments, the Department established that statement was incorrect. The Department s methodology is
reasonable based on the presented evidence and arguments. Consequently, the tax assessments are sustained at this point in the administrative process. Penalty and Interest 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. 26-18-508 (Repl. 2012). Ark. Code Ann. 26-18-208(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 Taxpayer appears to have significantly underreported his sales. This discrepancy was not explained by the Taxpayer. Further, the Taxpayer did not maintain sufficient supporting documentation for his reported sales totals. No factual evidence was presented to dispute the audit finding of a significant underreporting by the Taxpayer. The Department has demonstrated negligence on the Taxpayer s part in failing to maintain adequate records and properly report the correct tax due. Consequently, the assessment of penalty is sustained. Interest is required to be assessed upon tax deficiencies for the use of the State s tax dollars. Ark. Code Ann. 26-18-508 (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. 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. Ark. Code Ann. 26-18-406 (Supp. 2017) provides for the judicial appeal of a final decision of an Administrative Law Judge or the Commissioner of Revenues on a final assessment or refund claim denial; however, the constitutionality of that code section is uncertain. 4 DATED: February 27, 2018 4 See Board of Trustees of Univ. of Arkansas v. Andrews, 2018 Ark. 12.