Taxpayer operates a gas station/convenience store in Indiana. Taxpayer sells gasoline and diesel fuel. The Indiana Department of Revenue ("Department") conducted a sales and use tax audit of Taxpayer for the tax years 2009, 2010 and 2011. The Department's audit found that Taxpayer's exempt diesel sales were not supported with exemption certificates, so the Department taxed those transactions. The Department also found that Taxpayer's reported cost of goods sold percentage was unsupported by Taxpayer's available records. As a result, the Department assessed additional sales tax, penalty, and interest.
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Taxpayer protests the imposition of the negligence penalty assessed for underreporting sales. Taxpayer protests that the bulk of the adjustment from the audit was due to not collecting sales tax from its customers on the sale of diesel fuel without having collected valid exemption certificates.
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As provided by IC § 6-2.5-8-8(a), a seller accepting a valid exemption certificate has no duty to collect or remit the state gross retail or use tax on a purchase. However, since Taxpayer, as a retail merchant, did not accept valid exemption certificates from its customers, Taxpayer had a duty to collect and remit sales tax. Because Taxpayer failed to collect and hold the taxes in trust for the state, Taxpayer is personally liable for the sales tax, interest, and penalties due to the state for those sales.
Taxpayer agrees that it owes the uncollected sales tax and interest, but argues that it should not be assessed a negligence penalty on the amount of taxes it should have collected from its customers. Although Taxpayer admits that it did not collect the exemption certificates, Taxpayer stresses that because this was Taxpayer's first sales tax audit, it is reasonable for the penalty to be waived. Penalty waiver is permitted if the taxpayer shows that the failure to pay the full amount of the tax was due to reasonable cause and not due to willful neglect. IC § 6-8.1-10-2.1. The Indiana Administrative Code, 45 IAC 15-11-2 further provides:
(b) "Negligence" on behalf of a taxpayer is defined as the failure to use such reasonable care, caution, or diligence as would be expected of an ordinary reasonable taxpayer. Negligence would result from a taxpayer's carelessness, thoughtlessness, disregard or inattention to duties placed upon the taxpayer by the Indiana Code or department regulations. Ignorance of the listed tax laws, rules and/or regulations is treated as negligence. Further, failure to read and follow instructions provided by the department is treated as negligence. Negligence shall be determined on a case by case basis according to the facts and circumstances of each taxpayer.
(c) The department shall waive the negligence penalty imposed under IC 6-8.1-10-1 if the taxpayer affirmatively establishes that the failure to file a return, pay the full amount of tax due, timely remit tax held in trust, or pay a deficiency was due to reasonable cause and not due to negligence. 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 this section. Factors which may be considered in determining reasonable cause include, but are not limited to:
(1) the nature of the tax involved;
(2) judicial precedents set by Indiana courts;
(3) judicial precedents established in jurisdictions outside Indiana;
(4) published department instructions, information bulletins, letters of findings, rulings, letters of advice, etc.;
(5) previous audits or letters of findings concerning the issue and taxpayer involved in the penalty assessment.
Reasonable cause is a fact sensitive question and thus will be dealt with according to the particular facts and circumstances of each case.
Taxpayer has not shown there was reasonable cause for its failure to collect exemption certificates. Furthermore, there were other issues found by the Department that resulted in additional sales tax liability upon which a penalty was assessed, and for which Taxpayer has also not provided a satisfactory explanation regarding reasonable cause. Therefore, the Department finds that Taxpayer has not made an affirmative showing of reasonable cause for not remitting sales tax for the periods at issue.
