Friday, June 27, 2014

Revenue Finds Taxpayer Failed to Prove Exempt Transactions were Incorrectly Categorized as Non-Exempt by Faulty Computer System

Excerpts of Revenue's Determination follow:

Taxpayer is an Indiana combination gas station and convenience store. Taxpayer sells gasoline and diesel fuel. As a convenience store, Taxpayer sells cigarettes, candy, snack foods, dairy products, automobile parts, and the like.

The Department reviewed Taxpayer's 2010, 2011, and 2012 business records including ST-103MP ("Monthly Trust Tax Return") forms, fuel invoices, cash register "z tapes" and vendor invoices.

For the years 2011 and 2012, the audit determined that the amount of exempt sales reported on the ST-103MP forms conflicted with the amount of exempt sales reported on Taxpayer's "z tapes." The audit report explained the method by which the Department determined an amount of additional tax due.

To determine the amount of the overstated exempt sales, the following approach was taken:

Exempt Categories from cash register z tapes were totaled by month.
Z tape exempt sales were subtracted from the reported exempt sales.
The difference between the cash register z tape totals and the exempt sales reported on the ST-103 MP sales tax returns will be the proposed additional taxable sales adjustment.

Taxpayer believes that its own computer/record keeping system was faulty and resulted in exempt transactions being incorrectly categorized as non-exempt. When Taxpayer installed its new computer software, Taxpayer believes that the underlying software miss-categorized certain specific transaction classifications. Taxpayer speculates that one category of purchases, which would ordinarily be exempt, was mistakenly included in a category of purchases which are subject to sales tax. In particular, Taxpayer points to what it perceives as a sharp increase in cigarette sales between 2010 and following years. Since the audit reviewed 2010, 2011, and 2012 records and the assessment is entirely attributable to 2011 and 2012, Taxpayer believes its explanation has merit because the new computer software was installed at the start of 2011.

Without entirely discounting Taxpayer's explanation, it is relevant to point out that, "Every person subject to a listed tax must keep books and records so that the department can determine the amount, if any, of the person's liability for tax by reviewing those books and records." IC § 6-8.1-5-4(a). In addition, IC § 6-8.1-5-4(c) provides that, "A person must allow inspection of the books and records and returns by the department or its authorized agents at all reasonable times." IC § 6-8.1-5-4(c). In other words, it is Taxpayer's responsibility to assure that its books and records correctly reflect the nature of its business transactions.

Taxpayer has provided what it believes is a rational explanation for the apparent discrepancies, but the Department is unable to agree that Taxpayer has met its statutory responsibility of proving that the assessment is wrong. The Department agrees with the audit's conclusion that "the [T]axpayer was unable to produce any documentation to substantiate [its] claim."

Taxpayer believes that it is entitled to abatement of the ten-percent negligence penalty because "there was no change in 2010 only an issue with 2011 & 2012 [at] which time a new register system was put in use that did not group sales categories correctly. The situation has since been corrected."

The Department believes that Taxpayer has not proven the sales and use tax assessment was wrong. However, there is insufficient information to establish that Taxpayer's actions were so egregious as to constitute negligence. Based on a "case-by-case" analysis and after reviewing "the facts and circumstances of each taxpayer" the Department agrees that the ten-percent negligence penalty should be abated.