Retail Merchant is a sole proprietor who owns and operates a seasonal fireworks business. Retail Merchant's sales are both wholesale and retail. The Indiana Department of Revenue (Department) conducted a sales and use tax audit of Retail Merchant for the years 2009 and 2010. For the years at issue, Retail Merchant was a seasonal filer for sales and use tax purposes. The Department's audit found that Retail Merchant had made taxable sales and did not have a record of exemption certificates for any of those sales. Therefore, pursuant to the audit, Retail Merchant was assessed additional sales tax, penalty and interest for the periods. Retail Merchant protested the assessment of additional sales tax.
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The Department's audit assessments were made using the best information available to the Department. According to the Department's audit summary, dated June 6, 2012, Retail Merchant did not retain sales receipts or invoices for cash sales, and did not maintain receipts for credit sales outside of the account statement/transaction listing from his financial institution. Retail Merchant did not have register tapes or other documentation to support actual sales numbers. Retail Merchant did maintain invoices from inventory purchases. The Department's auditor used vendor invoices to total the inventory purchases for each year in the audit period. The auditor then reviewed industry statistics to determine the average percentage of total sales that represents inventory purchase costs. After removing Retail Merchant's wholesale, exempt, and at-cost transactions, the auditor determined the amount of inventory sold in retail, marked-up, taxable sales. This amount was multiplied by the industry percentage previously identified to estimate total retail sales (after adding in the at-cost sales as well). The auditor subtracted from that total the taxable sales already reported by Retail Merchant to arrive at the estimated additional taxable sales and made adjustments accordingly.
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The relevant regulation is 45 IAC 2.2-8-12 (b) which states, "Retail merchants are required to collect sales and use tax on each sale which constitutes a retail transaction unless the merchant can establish that the item purchased will be used for an exempt purpose."
Therefore, Retail Merchant has a duty to collect and remit sales tax on its sales of tangible personal property. When Retail Merchant fails to collect and hold the taxes in trust for the state, Retail Merchant is personally liable for the sales tax, interest, and penalties due to the state for those sales.
Accordingly, it is Retail Merchant's responsibility to retain the documentation that supports the amounts it used to determine tax owed.
At the initial hearing and in a telephone follow-up to the hearing, Retail Merchant made two claims in the context of its protest: (1) Retail Merchant stated that it had exempt sales to a local church that purchased fireworks from him every year, and (2) that at least for some of the years at issue, Retail Merchant had high excess inventory at the end of its season and therefore using the inventory numbers as a starting point was unfair. The hearing officer provided Retail Merchant with a special AD-70 form that would allow Retail Merchant to obtain the church's exemption information and signature belatedly. The hearing officer also asked Retail Merchant to substantiate its claim regarding the unused inventory.
After the hearing, Retail Merchant sent in the properly filled out AD-70 forms from the church. However, Retail Merchant failed to provide invoices or anything from the church showing the dollar amounts associated with these exempt transactions. Short of another audit, the Department can ascertain neither that these transactions were in the assessment nor for what amounts.
As for its contentions regarding starting and ending inventory for the years at issue, Retail Merchant did not provide any additional documentation subsequent to the hearing.
Given all of the above, Retail Merchant has not carried its burden to overcome the Department's proposed assessment.
