Taxpayer, an Indiana company, operates a gas station/convenience store in Indiana. Taxpayer sells gasoline at its gas station; it also sells tangible personal property, which includes grocery items, candy, soft drinks, prepaid telephone calling cards (i.e., prepaid phone cards), cigarettes, money orders, and lottery tickets, inside its convenience store ("In-store Sales").
In 2012, the Indiana Department of Revenue ("Department") audited Taxpayer's business records for the 2009, 2010, and 2011 tax years ("Tax Years at Issue"). Pursuant to the audit, the Department found that Taxpayer did not maintain sales records and source documents, such as cash register tapes and closing tapes (Z tapes), as statutorily required. Based on the best information available at the time of the audit, the Department imposed additional sales tax, penalty, and interest. The Department's audit used Taxpayer's purchase records pertaining to the tax periods from January through and including June, 2011, as to the best information available to determine the proper amount of sales tax for the Tax Years at Issue. The Department determined that Taxpayer had underreported its sales and made adjustments for additional taxable sales.
Taxpayer protests the assessment related to its additional taxable In-store Sales. A hearing was held. This Letter of Findings addresses Taxpayer's protest of the sales tax assessment. Taxpayer also protests assessments other than the sales tax assessment, including corporate income tax and withholding tax. Letter of Findings 02-20130400 addresses Taxpayer's protest of the additional composite return withholding tax on its additional sales, determined by the Department's audit. Letter of Findings 03-20130399 addresses Taxpayer's protest of county income tax withholding on wages paid to its employees. Letter of Findings 01-20130403P addresses the issue of penalty assessed against Taxpayer for failure to withhold the additional income tax on behalf of its nonresident shareholders.
...
...
The Department's audit imposed additional sales tax on the ground that Taxpayer failed to remit the proper amount of sales tax it collected on its In-store Sales. Taxpayer, to the contrary, argued that the Department's assessment is overstated for various reasons.
...
...
In this instance, the Department's audit used Taxpayer's purchase records from January through and including June 2011 as the best information available to determine the proper amount of sales tax regarding Taxpayer's In-store Sales because Taxpayer did not maintain adequate business records and source documents, as required by the statute.
At the hearing, Taxpayer argued that the Department's audit assessment is overstated because the audit did not consider the exempt "food stamp sales" and its year-end inventory information. Taxpayer also asserted that the audit assessment is overstated because the audit used an estimated 25.5 percent mark-up to compute the sales tax on its In-Store Sales. This Letter of Findings addresses Taxpayer's arguments as follows:
A. Food Stamp Sales.
Taxpayer first asserted that the audit's assessment is overstated because the audit erroneously assessed additional sales tax on its "food stamp sales," which are sales exempt from the Indiana sales tax. To support its protest, Taxpayer submitted a copy of "Food Stamp Program Permit" issued by the U.S. Department of Agriculture – Food and Nutrition Service, a copy of executed Agreement between Taxpayer and a financial institution contractor, which administers the Food Stamp reimbursement program, and a copy of 1099-K form for the 2011 year.
...
...
Upon review, Taxpayer's documentation demonstrates that it is a participating retail merchant of the U.S. "Food Stamp Program." Taxpayer's documentation also shows that it received monthly reimbursements during the tax periods January through June 2011 from the financial institution contractor. However, Taxpayer's documentation did not demonstrate which retail transactions (or which Items at issue) were considered as exempt "food stamp" transactions. Therefore, Taxpayer's file will be returned to the Department's Audit Division for a review of the information. The Department's Audit Division will review the information and determine an amount of allowable exempt sales, if any, in a supplemental audit review to be conducted consistent with the audit's methodology used in the audit.
In short, Taxpayer's protest of the "food stamp sales" is sustained to the extent that the Audit Division determines that the above mentioned Taxpayer's information submitted is sufficient to support an allowable amount of exempt sales.
B. Inventory.
Taxpayer claimed that the Department's audit assessment is overstated because the audit did not consider its year-end inventory information when the audit used Taxpayer's purchase records to calculate the additional sales tax on the In-store Sales. To support its protest, Taxpayer provided a copy of its 2011 federal form 1125-A "Cost of Goods Sold." Taxpayer, referencing that 2011 "Cost of Goods Sold" information, maintained that not all its purchases in 2011 were sold in 2011.
Upon review, however, Taxpayer's reliance on that 2011 "Cost of Goods Sold" information is misplaced. Taxpayer stated that it had an increase in inventory for the 2011 year. However, Taxpayer's documentation does not contain monthly inventory information; rather, its documentation represents a summary for the 2011 year as information collected December 31, 2011. As mentioned earlier, without adequate source documentation, the Department had to rely on Taxpayer's purchase records pertaining to the tax periods from January through and including June 2011. Taxpayer did not maintain its inventory information for the tax periods from January through and including June 2011. Thus, given the totality of the circumstances, in the absence of other supporting documentation, the Department is not able to agree that Taxpayer met its burden.
C. Gross Profit Percentage ("Mark-ups").
The Department's audit assessed Taxpayer additional sales tax based on the industry averages of a gross profit percentage of 25.5 percent. This information was the best information available during the audit because Taxpayer only provided copies of its purchase invoices to the Department at the time of the audit. The Department's Audit Summary, page 8, in relevant part states:
In order to convert the purchase amount to estimated sales figures, audit has used a gross profit percentage of twenty five and five tenths percent (25.5 [percent]). The gross profit percentage is defined as gross profit (sales less cost of goods sold) divided by sales. Therefore, in algebraically solving for sales, divide the cost of goods sold (purchases) by seventy four and five tenths percent (74.5 [percent]). The estimated sales figures extrapolated from vendors paid by checks are then footed to the unreported sales calculation . . .
Taxpayer claimed that the audit's assessment is overstated because its own mark-ups were less than 25.5 percent. To support its assertion, Taxpayer submitted additional documentation, including a list of its mark-ups by categories concerning the items at issue, a supplier's written statement, and several photos showing retail prices of the items at issue.
Upon review, however, the Department is not able to agree. First, Taxpayer submitted certain documentation pertaining to its purchases and sales of certain items at issue during the 2013 year, but the Department's audit is for 2009, 2010, and 2011 tax years and the audit utilized Taxpayer's January through June, 2011 purchase records. Thus, Taxpayer's supporting documentation is not relevant and is beyond the scope of its protest.
Even if, assuming Taxpayer's documentation is relevant, its documentation does not support its assertion. For example, Taxpayer asserted that it can only have an eight (8) percent mark-up on certain cigarette sales pursuant to the industry requirements imposed by the suppliers or manufacturers. However, Taxpayer's documentation presented demonstrates that the suppliers recommend more than eight (8) percent mark-ups. Additionally, Taxpayer maintained that it only had a five (5) percent mark-up on its sales of prepaid phone cards. However, upon review, its documentation shows that it sells prepaid phone cards, which had various mark-ups ranging from 5 percent to 11.7 percent, depending on the types of prepaid phone cards.
In this instance, Taxpayer did not maintain adequate records for the tax years at issue for the Department to determine the proper amount of sales tax by reviewing Taxpayer's source documentation of the sales. Pursuant to IC § 6-8.1-5-1(b), if the Department reasonably believes that Taxpayer has not reported the proper amount of tax due, the Department is required to make a proposed assessment on the basis of the best information available to the Department. Thus, given the totality of the circumstances, in the absence of other supporting documentation, the Department is not able to agree that Taxpayer met its burden of proof to demonstrate that the proposed assessment is wrong.
D. Certain Check Payments to Suppliers.
The Department's audit found that Taxpayer made certain check payments to its suppliers H and L, but the payments did not match the suppliers' billing invoices. Taxpayer asserted that the check payments did not match the invoices (listed in page 19 of the audit Summary) because the "multiple invoices were paid with one check, or the check and invoice did not match up for the reason of a discount." However, Taxpayer did not provide sufficient factual analysis to support its assertion. Thus, the Department is not able to agree that Taxpayer met its burden of proof.
...
...
Pursuant to IC § 6-8.1-10-1(e), the Department does not have the authority to waive the interest.
...
...
Taxpayer did not provide sufficient documentation establishing that its failure to pay tax or timely remit tax was due to reasonable cause and not due to negligence.
