STATE OF ARKANSAS OFFICE OF THE DIRECTOR 1509 West Seventh Street, Suite 401 Department of Finance Post Office Box 3278 and Administration Little Rock, Arkansas 72203-3278 Phone: (501) 682-2242 Fax: (501) 682-1029 http://www.state.ar.us/dfa RE: In the Matter of Gross Receipts and Alcoholic Beverage Tax Assessment Revision Request: Docket Nos. 16-256 and 16-257 Dear : This letter is prepared in response to your request for a revision of the Administrative Decision entered in the above-referenced matter on May 5, 2016. Your letter dated May 19, 2016 is considered a timely filed request for revision and this letter will constitute the final decision of the Arkansas Department of Finance and Administration ( DFA ) under the provisions of Ark. Code Ann. 26-18-405 (Supp. 2015). In your letter you do not reference any specific issue and you have not included any substantiating evidence to support your request; therefore, I will assume that you are seeking a revision as to the ruling in its entirety. Background ( Taxpayer ) operates a convenience store known as as a sole-proprietorship. Taxpayer is engaged in the business of selling beer, tobacco, household goods, health and beauty aids, groceries, and prepared food. An audit was conducted by DFA in June 2015, for the audit period of June 1, 2011 through June 30, 2014. Because the auditor determined that the taxpayer underreported sales by more than twenty-five percent (25%), the audit period was extended back to April 1, 2011, the date that took ownership of the business. Because April 2011 was not underreported, the final audit period was May 1, 2011 through June 30, 2014. The audit resulted in an assessment of gross receipts tax in the amount of $127,620.44 and an assessment of alcoholic beverage tax in the amount of $2,288.60. A hearing was scheduled in the Office of Hearings and Appeals for March 3, 2016. Counsel and witnesses were present on behalf of DFA, but the Taxpayer did not appear and no representatives appeared on his behalf. The following week, you contacted the hearing officer and requested a telephone hearing, which was granted and scheduled for March 24, 2016. At that telephone hearing, DFA was represented by counsel, and witnesses appeared via telephone to testify on
Page 2 of 5 DFA s behalf. You represented the Taxpayer at the hearing, but offered no evidence or witness testimony in support of the Taxpayer s protest. The Auditor testified that, although some records were provided by the Taxpayer in the form of bank statements, purchase invoices, some expense books, and some deposit books, the Taxpayer could not provide z-tapes or sales receipts to support his reported sales. Total reported sales for the audit period were $299,928, but total bank deposits, excluding EBT funds and cashed checks, were $1,324,108.79. The audit was an estimated assessment utilizing the purchase invoices obtained from the Taxpayer and his vendors and applying average markups for each category of products: Beer, Food (which was divided into prepared food and reduced food), and Other Gross Receipts (included tobacco, household, and health and beauty items). Markup percentages were provided by the Taxpayer and verified by the auditor by comparing items in the store for each category. The markup percentages provided and verified were as follows: Beer (20%), Other Gross Receipts (12%), and Food (20%). It was also determined that ten percent (10%) of the food purchases constituted prepared food. The auditor testified that the Taxpayer never discussed, nor provided evidence of, breakage, spoilage, or theft, and no adjustments were made to the audit for these types of losses. Also, the auditor testified that payments made by the Taxpayer to its wholesale vendors,, did not match the available invoices. For this reason, the auditor used a sample of the available invoices to determine the average percentage of each invoice that was associated with each category of product, and these percentages were applied to the remaining payments to where payments could not be categorized based on a corresponding invoice. The auditor testified that extra effort was made to ensure that any payment that could be associated with an invoice was not estimated, but that some payments could have been for earlier invoices because the payments were not labeled and there was insufficient record keeping. Also, EBT sales were removed from taxable food sales totals based on the Taxpayer s bank statements. Upon completion of the audit, the auditor determined that the Taxpayer underreported beer sales by $169,051.72, underreported food sales by $148,019.05, underreported prepared food sales by $12,725.62, and underreported other gross receipt items by $777,083.85. Again, the total reported sales for the audit period were $299,928, but total deposits, excluding EBT funds and cashed checks, were $1,324,108.79. A ten percent (10%) penalty was assessed because the Taxpayer was more than twenty-five (25%) underreported and lacked adequate documentation. Interest was also assessed according Ark. Code Ann. 26-18-508 (Repl. 2012) for use of the State s tax dollars.
Page 3 of 5 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 (Repl. 2014). Estimated Assessments Arkansas Code Annotated 26-18-313(d) states that 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. However, 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). Here, the Taxpayer did not preserve suitable records to determine the proper amount of tax due. Based on the lack of records, DFA had no alternative but to make an estimated assessment based on the information that was available. The best information available was in the form of bank deposits, invoices from vendors, some expense and deposit books, and statements made by the Taxpayer at the time of the audit. Because the Taxpayer failed to preserve and maintain suitable records, DFA was justified in making estimated assessments for sales tax and alcoholic beverage tax. Refuting Estimated Assessments 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); cf. Leathers v. A. & B. Dirt Movers, 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. In the absence of suitable records, the Taxpayer has the burden of refuting DFA s estimated assessments by providing sufficient credible evidence to establish that the audit results are unreasonable. The Taxpayer has provided no evidence at all. No records were presented; no
Page 4 of 5 witness testimony was offered. Disagreeing with the auditor s findings, alone, does not meet the burden of proof to refute the assessment. The Taxpayer presented many seemingly appropriate claims that, if supported by credible evidence, could have given weight to the argument that the audit results were incorrect (e.g. markup percentages were too high, EBT sales totals were too low, unsold prepared food was discarded, spoilage, breakage, and theft). However, no factual evidence was provided to support these claims, and they must be denied. Penalty and Interest The Arkansas Code provides: 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. Ark. Code Ann. 26-18-208(4)(A). Here, the Taxpayer understood the requirement to report sales to DFA as evidenced by his reporting total sales for the audit period of $299,928. However, no documentation was kept to support these figures and verify the accuracy of his returns. This, combined with the discrepancy between reported sales and total bank deposits, supports a finding of negligence on the part of the Taxpayer for failing to properly report the correct tax due and to preserve and maintain records as required by law. Therefore, the assessment of the 10% penalty is appropriate. With regards to interest, 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). A tax levied under any state tax law which is not paid when due is delinquent. Interest at the rate of ten percent (10%) per annum shall be collected on the total tax deficiency from the date the return for the tax was due to be filed until the date of payment. Id. There is no legal basis for the removal of interest from the assessment. Conclusion The Department met its burden of proving that the tax law applies to the sales from Taxpayer s business. Because Taxpayer did not maintain suitable records, DFA was justified in making estimated assessments for sales tax and alcoholic beverage tax. By offering no physical evidence or witness testimony, the Taxpayer has not proven entitlement to any tax exemption, deduction, or credit by a preponderance of the evidence. The assessment of penalty and interest is appropriate.
Page 5 of 5 The administrative decision is sustained. This concludes your administrative remedies under the Tax Procedure Act. Relief from this decision may be sought according to the procedure set forth in Ark. Code Ann. 26-18-406. Sincerely, Tim Leathers Deputy Director and Commissioner of Revenue