NOTICE: IC § 6-8.1-3-3.5 and IC § 4-22-7-7 require the publication of this document in the Indiana Register. This document provides the general public with information about the Department's official position concerning a specific set of facts and issues. This document is effective as of its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register. The "Holding" section of this document is provided for the convenience of the reader and is not part of the analysis contained in this Letter of Findings.

Retail businesses did not prove that the Department's calculations of sales tax which should have been collected were incorrect. Therefore, the Department's proposed assessments for sales tax were proper.

I. Sales Tax–Additional Sales.

Authority: IC § 6-8.1-5-1; IC § 6-8.1-5-4; IC § 6-2.5-2-1; Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007).

Taxpayer protests proposed assessments for additional sales tax.

II. Tax Administration–Penalties and Interest.

Authority: IC § 6-8.1-5-4; IC § 6-8.1-10-1; IC § 6-8.1-10-2.1; 45 IAC 15-11-2.

Taxpayer protests the imposition of penalties and interest.

Taxpayer is an Indiana retail business which operated two convenience stores which each had attached gasoline sales. As the result of audits on each convenience store, the Indiana Department of Revenue ("Department") determined that Taxpayer had underreported taxable sales for the tax years 2011, 2012, and 2013 at both locations. Also, the Department determined that Taxpayer had not paid sales tax on purchases of items it used in operating its two businesses. The Department therefore issued separate proposed assessments for sales tax, use tax, penalties, and interest for those years for each location. Taxpayer protested a portion of the sales tax assessments for both locations. Each protest was addressed simultaneously in a single administrative hearing due to common ownership of both locations and substantially similar protests for both locations. This document addresses both protests and will address both locations as "Taxpayer" and as "Store 1" and "Store 2." Further facts will be supplied as needed.

I. Sales Tax–Additional Sales.

Taxpayer protests a portion of the Department's proposed assessments of sales tax for the tax years 2011 through 2013. Specifically, Taxpayer states that the cost of goods sold ("COGS") percentage used by the Department was too low and resulted in overstated calculation taxable sales upon which sales tax should have been collected and remitted. Taxpayer believes that a different COGS percentage is more accurate and its use in the Department's calculations would result in a more accurate calculation of taxable sales.

As a threshold issue, it is the Taxpayer's responsibility to establish that the existing tax assessment is incorrect. As stated in IC § 6-8.1-5-1(c), "The notice of proposed assessment is prima facie evidence that the department's claim for the unpaid tax is valid. The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made." Indiana Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007). Consequently, a taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department's position is wrong. Further, "[W]hen [courts] examine a statute that an agency is 'charged with enforcing. . .[courts] defer to the agency's reasonable interpretation of [the] statute even over an equally reasonable interpretation by another party.'" Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Thus, all interpretations of Indiana tax law contained within this decision, as well as the preceding audit, shall be entitled to deference.

Sales tax is imposed by IC § 6-2.5-2-1, which states:

Therefore, retail merchants are required to collect sales tax on retail transactions, unless the transaction is exempt from sales tax.

Next, the Department refers to IC § 6-8.1-5-1(b), which states:

Also, the Department refers to IC § 6-8.1-5-4(a), which states:

(Emphasis added).

Therefore, all taxpayers subject to a listed tax must keep books and records such as, but not limited to, invoices, register tapes, receipts, and cancelled checks, as provided by IC § 6-8.1-5-4-(a). If the Department reasonably believes that a person has not reported the proper amount of tax due, the department shall make a proposed assessment of the amount of the unpaid tax on the basis of the best information available to the department, as provided by IC § 6-8.1-5-1(b).

In the instant case, Taxpayer provided cash register tapes for 2013, but none for 2011 and 2012. No daily sales recaps which would have documented the total, taxable, and exempt transactions were provided. COGS invoices and expense invoices were provided to the Department with bank statements, however those documents were not sufficiently detailed to determine taxable sales. Also, the Department observed that the 2013 monthly Z tapes "Grocery" category combined both taxable and exempt items with no way to differentiate the two types of sales. The Department therefore decided to use the best information available to determine taxable sales. Those calculations resulted in the determination that Taxpayer had additional taxable sales for the tax years at issue, which in turn resulted in additional sales tax which Taxpayer should have collected and remitted, as provided by IC § 6-2.5-2-1(b).

Taxpayer protests that the Department did not take into account cigarette sales which carry a very low profit margin and a high COGS. Taxpayer then provided its own "margin analysis" with percentages of COGS on items it sold in its stores. Taxpayer did not, however, provide documents such as invoices to support its reported COGS percentages. More importantly, Taxpayer did not provide the type of sales documentation as described in IC § 6-8.1-5-4(a), which would be necessary to refute the Department's calculations and thus prove the proposed assessments wrong, as required by IC § 6-8.1-5-1(c).

As a secondary argument, Taxpayer notes that the Department came up with two different COGS for Store 1 and Store 2. Taxpayer states that this is impossible since both stores carry the same categories of items and both operate on the same margins. The Department notes that Taxpayer has not provided any documentation to support this position. Also, the Department notes that different COGS for different stores could logically be achieved by different amounts of different items with different COGS per item being sold at each store. In other words, even if both stores carried the same items, each store would not sell exactly the same amount of each item. Some categories have higher COGS than other categories and selling more or less of any particular category would directly affect the COGS for each store. Taxpayer has not met the burden imposed by IC § 6-8.1-5-1(c) with this argument.

In conclusion, the Department was correct to use the best information available to determine Taxpayer's total and taxable sales for the tax years 2011, 2012, and 2013, as provided by IC § 6-8.1-5-1(b), since Taxpayer failed to keep all of the documents it was required to keep under IC § 6-8.1-5-4(a). Taxpayer's position that the Department should have used a different COGS percentage in its calculations of Taxpayer's taxable sales is incorrect. Taxpayer has not met the burden of proving the proposed assessments wrong, as required by IC § 6-8.1-5-1(c).

Taxpayer's protest is denied.

II. Tax Administration–Penalties and Interest.

Taxpayer protests the imposition of penalties pursuant to IC § 6-8.1-10-2.1 and the imposition of interest pursuant to IC § 6-8.1-10-1. The Department notes that waiver of interest is not permitted under IC § 6-8.1-10-1(e). Penalty waiver is permitted if the taxpayers show that the failure to pay the full amount of the tax was due to reasonable cause and not due to willful neglect. 45 IAC 15-11-2(b) clarifies the standard for the imposition of the negligence penalty as follows:

The standard for waiving the negligence penalty is given at 45 IAC 15-11-2(c) as follows:

Taxpayer protests the Department's assessment of penalties and interest. After review of the documentation and analysis provided in the protest process, the Department may not waive interest, as provided by IC §6-8.1-10-1(e). Taxpayer failed in its duty to keep sales records as required under IC § 6-8.1-5-4(a). Taxpayer has not affirmatively established that it exercised ordinary business care in this case. Therefore, waiver of penalties is not warranted under 45 IAC 15-11-2(c).

Taxpayer's protest to the imposition of penalties and interest is denied.

Taxpayer's Issue I protest regarding the imposition of sales tax is denied. Taxpayer's Issue II protest regarding the imposition of penalties and interest is denied.