Wednesday, June 11, 2014

Revenue Waives Penalty Where Taxpayer's Actions Due to Reasonable Cause

Excerots of Revenue's Determination follow:

Taxpayer, a construction company, is a general contractor, providing construction services in Indiana. In 2013, the Indiana Department of Revenue ("Department") audited Taxpayer's business records for the tax years 2010, 2011, and 2012. Pursuant to the audit, the Department determined that Taxpayer failed to collect and remit the proper amount of sales tax on some sales. The Department's audit also determined that Taxpayer purchased certain tangible personal property to be used in the course of its business without paying sales tax or self-assessing use tax. As a result, the Department assessed additional sales tax, use tax, penalty, and interest.

The Department's audit imposed a ten percent negligence penalty for the tax period in question. Taxpayer requested that the Department abate the negligence penalty.

Pursuant to IC § 6-8.1-10-2.1(a), the Department may assess a ten (10) percent negligence penalty if the taxpayer:

(1) fails to file a return for any of the listed taxes;
(2) fails to pay the full amount of tax shown on the person's return on or before the due date for the return or payment;
(3) incurs, upon examination by the department, a deficiency that is due to negligence;
(4) fails to timely remit any tax held in trust for the state; or
(5) is required to make a payment by electronic funds transfer (as defined inIC 4-8.1-2-7), overnight courier, or personal delivery and the payment is not received by the department by the due date in funds acceptable to the department.

In this instance, Taxpayer requested that the Department abate the negligence penalty for various reasons. Primarily, Taxpayer asserted that its actions were due to reasonable cause and not due to negligence. Taxpayer explained that, for the three audit years at issue, it had large annual sales; among those sales, the Department's audit found that for approximately 0.02 percent of them Taxpayer failed to provide exemption certificates. Also, Taxpayer explained that, to perform the contract jobs, its employees at the job sites often need to replace or repair tools and equipment at job sites. Thus, certain of Taxpayer's employees purchase items which were needed to perform the work by using the company's credit cards ("Procurement Cards") assigned to those individuals. Taxpayer maintained that it has established a policy and a procedure concerning the Procurement Cards to ensure that the sales tax or use tax on the expense purchases was properly paid or remitted; however, it was not able to provide the source documentation for approximately 1.6 percent of the audit sampling transactions, because the documents were several years old and it was not able to locate or find them at its storage. Taxpayer further contacted the retail merchants for assistance but was not able to obtain copies of the documents for the same reason. Moreover, Taxpayer stated that it began implementing an internal audit procedure to address this issue after the audit. To support its protest, Taxpayer further submitted additional documentation, including a copy of its "Procurement Card Instructions."

Upon review, the Department agrees that Taxpayer provided sufficient documentation to demonstrate that the negligence penalty should be abated.