Wednesday, June 25, 2014

Revenue Finds Taxpayer's "Fuel Log" Insufficient Substitute for Exemption Certificates

Excerpts of Revenue's Determination follow:

Taxpayer is a combination fuel station and convenience store. Taxpayer sells gasoline, racing fuel, kerosene, and diesel fuel. As a "convenience store," Taxpayer sells food items, soft drinks, and other merchandise.

The Indiana Department of Revenue ("Department") conducted an audit review of Taxpayer's tax returns and business records. The audit resulted in the assessment of additional sales tax. Taxpayer disagreed with the assessment and submitted a protest to that effect.

Taxpayer argues that the Department's audit overstated the amount of tax owed on its sale of diesel fuel and that the information provided is sufficient to reduce the assessment amount.

At the outset of the audit, Taxpayer and the Department agreed that the audit would utilize a "September and October 2013" sample period to determine the amount of tax potentially due for the three-year audit period.

The audit report states that it discovered taxable diesel sales where sales tax was not charged or collected and for which a valid ST-105 ("General Sales Tax Exemption Certificate") exemption certificate was not on file. Additional taxable diesel sales for the sample period reviewed were totaled and divided by the exempt diesel sales for the sample months as reported on the ST-103MP's ("Monthly Trust Tax Return"). This resulted in an error percentage. The error percentage was then applied to the total exempt sales reported to arrive at the additional taxable diesel sales.

During the course of the audit, the Taxpayer provided exempt diesel sales documentation for September and October in the form of "pink sales slips" which purportedly contained the information equivalent to that found on the standard ST-105 exemption certificates.

The audit report noted that IC § 6-2.5-7-3(b) provides as follows:

Unless the exemption certificate is provided, the retail merchant shall collect the state gross retail tax prescribed in this section even if the transaction is exempt from taxation under IC 6-2.5-5.

Nonetheless, the audit accepted the "pink slips" as evidence that the transactions documented were exempt from sales tax. However, Taxpayer was unable to provide additional documentation supporting the exempt status of other diesel fuel sales.

Both during the audit and during the course of the administrative hearing, it was Taxpayer's position that they were maintaining the same type and quality of records that other fuel retail stores were maintaining and that the Department was holding it to an unreasonably strict record-keeping standard.

Although Taxpayer agrees with the two months "sampling," Taxpayer believes that they are being held to a higher standard of behavior than other fuel vendors, that the assessment is substantially overstated, and that the additional information provided could establish the correct amounts of exempt and non-exempt diesel sales.

Taxpayer argues that because the audit previously accepted "pink slips" as proof that the these transactions were exempt, the pink slips should be accepted as "evidence of blanket purchase exemption requests." Taxpayer asks that the Department accept the pink slips as blanket exemption certificates and recompute the amount of sales tax due.

In addition to the "pink slips," Taxpayer maintained a "Rolodex" of cards identifying its exempt customers. Rather than obtaining an exemption certificate from each customer for each transaction or blanket exemption for each customer, the Taxpayer's employee simply consulted the "Rolodex" to identify the customer as either "exempt" or "non-exempt." This Letter of Findings refers to the accumulated information contained in the Rolodex as its "Fuel Log."

During the administrative hearing, Taxpayer's representative provided a copy of the information contained on the Fuel Log as "additional business records in total" which, as Taxpayer asserts, "provide[s] the information for the adjusted sales that is equivalent to that found on the ST-105 exemption certificate."

Taxpayer points to the provision set out in IC § 6-2.5-8-8(e) which allows a seller 120 days to "prove by other means" that the transaction was not subject to gross retail or use tax.

Taxpayer has provided additional "pink slips" which purport to establish that it sold diesel fuel to customers which were exempt from sales tax. Since the audit accepted the originally provided "pink slips" as evidence of exempt transactions, the audit division is requested to review the newly submitted "pink slips" and – assuming that the transactions took place during the two month sample period – make whatever adjustments are warranted.

During the administrative hearing, Taxpayer provided additional information which purports to correct simple clerical errors. For example, Invoice 127337 states that one of Taxpayer's customers bought 21.633 gallons of exempt diesel fuel for which the audit report indicates that the customer paid $87.39 when the actual amount was $87.59. The discrepancies are significant because Taxpayer was given "credit" for certain amounts of exempt sales. Most of the remaining clerical errors involve larger dollar amounts but the premise remains the same as the example cited. As with section "A" above, the audit division is requested to review the relevant documentation and to make whatever adjustments are warranted.

As mentioned previously, Taxpayer accumulated hand-written customer information on Rolodex cards. This information is referred to alternatively as Taxpayer's "fuel log." As explained by Taxpayer:

[Taxpayer] maintained the Rolodex, which included the business associated with tax exempt purchases. The Rolodex included the legal business name, or d/b/a name, and an identification number associated with the business. The identification number for the business was [either] a MC Number, DOT Number, and/or TID number . . . . By maintaining a [R]olodex with the MC Number, DOT Number, and/or TID Number, [Taxpayer] had the DOT Number or TID Number for each business receiving a sales tax exemption on diesel fuel. [Taxpayer] is able to use the MC Number, DOT Number, or name of a business to obtain a Company Snapshot from the government showing the name, address, phone number, DOT Number, and MC Number of the business. The Company Snapshot includes the equivalent information to Form ST-105.

Taxpayer provided a sample of the "Company Snapshot" containing customer information obtained from various public sources.

Taxpayer believes its "Fuel Log" is an entirely satisfactory substitute for the missing exemption certificates. However, Taxpayer's "Fuel Log" is not a record of transactions and does not establish which transactions are exempt and which are not exempt. Taxpayer apparently assumes that any customer which provides an MC Number ("Motor Carrier"), DOT Number (Department of Transportation"), or TID Number ("Tax Identification") is exempt from sales tax. The Department must disagree with Taxpayer's premise. The Department does not agree that every vehicle with a Motor Carrier, DOT, and TID number and which consumes diesel fuel is necessarily exempt. Common experience would seem to indicate that certain diesel-powered vehicles are not engaged in "public transportation," agricultural activities, in another exempt activity, or that otherwise "exempt customers" may occasionally purchase fuel for use in a non-exempt manner. Moreover, IC § 6-2.5-7-3(b) is clear that vendors of diesel and other special fuels are required to collect sales tax on each transaction in the absence of a valid exemption certificate and is then required to hold "the tax as agent for the state." IC § 6-2.5-2-1(b). (The retail merchant "holds . . . taxes in trust for the state and is personally liable for the payment of those taxes . . . ." IC § 6-2.5-9-3).

The Department is unable to agree that, in the absence of a properly completed exemption certificate, the Rolodex information is sufficient to establish that the "purchaser used the [fuel] for exempt purpose." As noted previously, IC § 6-8.1-5-1(c) places on Taxpayer the burden of establishing that the audit assessment was "wrong." Taxpayer has failed to meet this standard.

Nonetheless, Taxpayer maintains that it was denied an opportunity to provide additional information pursuant to IC § 6-2.5-8-8(e).

However, the Department's audit began February 2013 and was not completed until September 2013 during which the issue of undocumented exempt diesel sales was discussed at length. During the eight months the audit was underway, Taxpayer was able to provide additional information which the audit duly considered. Taxpayer filed its protest December 2013 and the administrative hearing conducted March 2014. Taxpayer had ample opportunity to provide what information it thought necessary and – as explained above – the Department did in fact accept the additional information provided during the hearing. The Department is unable to agree that Taxpayer had insufficient time in which to gather the necessary information.