Taxpayer is an Indiana business which operates a gas station and convenience store. The Department of Revenue ("Department") conducted a sales and use tax audit of Taxpayer's business records. The audit resulted in the assessment of additional tax along with a "negligence" penalty. Taxpayer disagreed with the penalty and submitted a protest to that effect.
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Taxpayer presented the audit with a "sales recap" for each month. The recap was attached to monthly sales tax returns. Some sales were marked as "taxable" and some were marked as "exempt." However, "no documentation was provided to show which items [were] sold as taxable or exempt." Because sales employees manually operated the cash registers, "Taxpayer could not determine how employees applied exempt status to items, and did not present a breakdown of taxable goods for employees' reference." The audit also found discrepancies in "inventory cost-of-goods sold as compared to purchase invoices." In reviewing Taxpayer's records of fuel sales, the audit found discrepancies between the amount of fuel purchased from suppliers and the amount of gallons sold. The audit noted that the discrepancies in fuel sales were "greater than the total storage capacity of [T]axpayer's tanks." In addition, the audit found that Taxpayer purchased items such as air conditioning equipment and office supplies without paying sales tax and without self-assessing use tax.
Taxpayer challenges the penalty because he "always complied with the rules [and] regulations [and] filed [and] paid all taxes on time." In addition, Taxpayer explains that he relied on his accountant and manager to properly report the amount of tax due.
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IC § 6-8.1-10-2.1(d) allows the Department to waive the penalty upon a showing that the failure to pay the deficiency was based on "reasonable cause and not due to willful neglect." Departmental regulation 45 IAC 15-11-2 (c) requires that in order to establish "reasonable cause," the taxpayer must demonstrate that it "exercised ordinary business care and prudence in carrying out or failing to carry out a duty giving rise to the penalty imposed...."
Under IC § 6-8.1-5-1(c), "The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made." An assessment – including the negligence penalty – is presumptively valid.
Taxpayer is in the business of selling gasoline and convenience store items and has been doing so since 2005; however, Taxpayer's business records were not properly maintained, Taxpayer substantially underreported the amount of tax due and understated the amount of fuel it sold. There is insufficient information to establish that Taxpayer exercised the "ordinary business care and prudence" expected of an "ordinary reasonable taxpayer." 45 IAC 15-11-2 (b), (c). Based on a "case-by-case" analysis and after reviewing "the facts and circumstances of each taxpayer" the Department is unable to agree that Taxpayer has met its burden under IC § 6-8.1-5-1(c) of establishing that the ten-percent negligence penalty should be abated.
