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 This document is effective on its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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.

Restaurant, was unable to meet its burden of establishing that the Department's proposed assessments of additional tax were wrong; Restaurant failed to maintain complete, contemporaneous, accurate records of fuel and convenience store items sales.

I. Sales Tax - Records.

Authority: IC § 6-3-1-3.5; IC § 6-3-2-1; IC § 6-8.1-5-1(c); IC § 6-8.1-5-4; Dep't of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289, (Ind. Tax Ct. 2007); 45 IAC 15-5-1; 45 IAC 3.1-1-66; 45 IAC 3.1-1-2(14); 45 IAC 3.1-1-7(6); IRC § 1366; Black's Law Dictionary 394 (9th ed. 2009).

Taxpayer argues that the Department of Revenue overstated the amount of income tax due.

II. Tax Administration–Penalty.

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

Taxpayer protests the imposition of the negligence penalty.

Taxpayer operates restaurants in Indiana. The Indiana Department of Revenue ("Department") conducted a sales and use tax audit of the business location. That audit resulted in an assessment of additional sales tax.

As a result, the Department issued Taxpayer an assessment of additional sales tax. Taxpayer disagreed with the assessment of sales tax and submitted a protest to that effect. An administrative hearing was conducted during which Taxpayer's representatives explained the basis for the protest. This Letter of Findings addresses the assessments of sales tax.

I. Sales Tax - Records.

The issue is whether Taxpayer established that the assessments of Indiana sales tax are incorrect on the ground that the Department's audit overstated the amount of convenience store and fuel sales.

As a threshold issue, it is the Taxpayers' 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 Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dep't 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.'" Dep't of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Thus, interpretations of Indiana tax law contained within this decision, as well as the preceding audit, are entitled to deference.

Indiana imposes an adjusted gross income tax on all residents. IC § 6-3-2-1. A taxpayer's Indiana income is determined by starting with the federal income and making certain adjustments. IC § 6-3-1-3.5. Income from an S corporation flows through to the individual shareholder's personal income and is reported by the shareholders on their personal income tax returns. See I.R.C. § 1366. See also 45 IAC 3.1-1-66; 45 IAC 3.1-1-2(14); 45 IAC 3.1-1-7(6).

Simply stated, an S Corporation - such as Taxpayer's restaurant - is "[a] corporation whose income is taxed through its shareholders rather than through the corporation itself." Black's Law Dictionary 394 (9th ed. 2009). Pursuant to IC § 6-3-1-3.5, the Indiana income tax rules piggyback on the federal income tax statutes and regulations. Therefore, the federal rules and case law are generally applicable to determine an individual shareholder's tax liability. Furthermore, any additional income received by the S-Corp as a profit passes through to the individual shareholders as income.

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. IC § 6-8.1-5-1(a). Every person subject to a listed tax must keep books and records so that the Department can determine the amount, if any, of the person's liability for that tax by reviewing those books and records. IC § 6-8.1-5-4 (a). A person must allow inspection of the books and records and returns by the Department or its authorized agents at all reasonable times. IC § 6-8.1-5-4 (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 incorrect rests with the person against whom the proposed assessment is made. IC § 6-8.1-5-1(c).

The Department's audit requested copies of complete business records in order to determine if sales tax had been properly collected and remitted. The audit requested "z-tapes, sales invoices, sales journals, and bank statements." Taxpayer only provided copies of bank statements. Taxpayer did not maintain any cash register tapes or other sales records.

The Department's audit reviewed the available records. The Department noted that Taxpayer was previously audited for 2007 and 2008, in which the Department told Taxpayer to keep source documentation, such as sales tickets and register tape 'z reports' are to be kept." The current audit reviewed the records available and noted that:

The audit report did state that it took into account a discrepancy that occurred when Taxpayer transferred money from one bank account to another.

Taxpayer stated that the reason its ST-103, sales and use tax form, and gross receipts are different are because the ST-103 line one improperly included sales tax, but Taxpayer adjusted the income tax return to properly reflect the amount of income. Taxpayer provided forms ST-103 for December 2012-2014, cash reconciliation worksheets for 2012-2014, bank statements for December 2012-2014, and trial balances for December 2012-2014. The Department wants to note that, Taxpayer's documentation is in support of its own calculation of sales and income tax. As stated in the audit report the cash amounts cannot be verified, since there is no source documentation such as sales tickets and z tapes. These are the same source documents that the Department directed Taxpayer to keep in the prior audit.

In the absence of accurate or complete records, Indiana law requires that the Department issue a proposed assessment based on the best information the Department can obtain. "If the [D]epartment reasonably believes that a person has not reported the proper amount of tax due, the [D]epartment shall make a proposed assessment of the amount of the unpaid tax on the basis of the best information available to the [D]epartment." IC § 6-8.1-5-1(b). See also 45 IAC 15-5-1.

The Department is unable to agree that Taxpayer has made any quantifiably specific objection to the results of the audit. The Department's audit clearly explained that source documentation was required to verify the amount of sales, as did the prior audit. While Taxpayer's calculations do arrive at a lower amount of sales by the S-Corp, and therefore lower income tax to the shareholders, those calculations are not based on source documentation. Therefore, Taxpayer has done nothing to meet their burden establishing that the assessments are "wrong" as required by IC § 6-8.1-5-1(c).

Taxpayer's protests are denied.

II. Tax Administration–Penalty.

Taxpayer requested that the Department abate the negligence penalty.

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

The Department may waive a negligence penalty when "the taxpayer affirmatively establishes that the failure . . . was due to reasonable cause and not due to negligence." 45 IAC 15-11-2(c). 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." Id. The Department is mindful that "[r]easonable cause is a fact sensitive question and thus will be dealt with according to the particular facts and circumstances of each case." Id.

In this instance, Taxpayer has not demonstrated that its actions were reasonable as described in 45 IAC 15-11-2(c). Furthermore, Taxpayer has had compliance issues in past. Thus, Taxpayer's request for penalty abatement is denied.

Taxpayer's protest of the negligence penalty is denied.

Taxpayer's protest regarding the income tax is denied. Taxpayer's protest of the negligence penalty is denied.