Opinion
No. 70-356
Decided July 21, 1971.
Taxation — Sales tax — R.C. 5739.10 — Tax on vendor — Test check — Validity — Must be conducted, how — Vendor's records — Evidence.
In order for a test check conducted pursuant to R.C. 5739.10 to be valid, it must be conducted under conditions which approximate, as nearly as possible, the conditions under which the business being checked was operated during the audit period.
APPEAL from the Court of Appeals for Lucas County.
The six appellees herein, Cherry Street Corporation, Byrne Road Corporation, Oregon McDonald's Inc., MarBee, Inc., Toledo-McDonald's Inc., and Auburn Corporation, operate McDonald's hamburger restaurants in the vicinity of Toledo. Food is sold by them for consumption on and off the premises and some sales are under 31 cents.
The Tax Commissioner, upon determining that none of the appellees kept "complete and accurate records of sales, together with a record of the tax collected thereon," as required by R.C. 5739.11, conducted, pursuant to R.C. 5739.10, test checks of the vendors' "business for a representative period" to "determine the proportion that taxable retail sales bear to all his retail sales."
When the Tax Commissioner conducted the test checks, appellees' employees were instructed not to ask the customer if the order was carry-out and to charge sales tax unless the customer specified that the order was for carry-out consumption. Exceptions to this were situations where a customer's habit of carrying out orders was known, and sales under 31 cents. A notation was made on guest checks specified as carry-out orders and such sales were considered non-taxable.
Subsequent to the Tax Commissioner's test checks, appellees employed an accounting firm to conduct their own tests. In those tests each customer was asked by the employee whether the purchase was for consumption off the premises.
Upon the basis of his test checks, the Tax Commissioner made additional assessments upon each of the appellees in various amounts and for varying tax periods between 1963 and 1966.
The Board of Tax Appeals consolidated the six appeals for hearing, and affirmed the final orders of the Tax Commissioner.
Upon appeal to the Court of Appeals, that court, in six separate appeals, reversed the decision of the board as to all six appellees. In reversing, the Court of Appeals held that the "* * * test check conducted by the Tax Commissioner was not representative and fair in that no attempt was made therein to determine the true and accurate percentage of sales of food to be consumed off the premises of appellant, that it was the duty of the Tax Commissioner and the Board of Tax Appeals to consider the result of the test check of appellant as evidence to determine the accuracy and fairness of the test check conducted by the Tax Commissioner, and that the accuracy and fairness of the test check of appellant was not disputed and created a presumption which the Tax Commissioner failed to overcome."
The causes are now before this court pursuant to the allowance of a motion to certify the record, the six separate causes being consolidated for hearing.
Messrs. Topper Alloway and Mr. R. Brooke Alloway, for appellees.
Mr. William J. Brown, attorney general, and Mr. Thomas V. Martin, for appellants.
The controversy in this appeal centers around the validity of the test checks conducted by the Tax Commissioner.
Appellees argue that the Tax Commissioner's test check was "designed * * * to indicate the maximum tax collectible without vocal protest from the customers," while their test checks were "designed to establish the proportion that taxable retail sales bear to all the retail sales of the taxpayer."
Under R.C. 5739.10, "the proportion that taxable retail sales bear to all * * * retail sales" is to be determined "upon the basis of test checks of the vendor's business for a representative period * * *."
The Tax Commissioner based the method used by him in conducting the test checks on information "that no inquiry was ever made by the firm's employees as to whether or not the order was for `consumption off premises' or `carry-out' and that sales tax was collected in almost all instances."
Thus, the Tax Commissioner's test checks were based on appellees' actual mode of operation during the audit period. Appellees' test checks, on the other hand, were not so based.
In respect to the differences between the test-check methods employed by the Tax Commissioner and appellees, the Board of Tax Appeals stated:
"It appears clear to this board that the Tax Commissioner has fully complied with the requirements of Revised Code Section 5739.10 with respect to the test check authorized therein and that the test check was for a representative period and was also representative of the business as it was actually conducted during the audit period. On the other hand, during the audit period, no question was asked of a customer as to whether the purchased item was a `to go' or `carry out,' and therefore the appellant's test check could not be said to be representative of appellant's business during the audit period."
It is likewise clear to us that the words "representative period," as used in R.C. 5739.10, refer to a period of time within the confines of the audit period and that to be valid a test check must be conducted under conditions which approximate, as nearly as possible, the conditions under which the business was operated by the taxpayer during the audit period.
Thus, the Tax Commissioner's test checks were valid and those of appellees were not.
R.C. 5739.02(B)(20) provides:
"For the purpose of the proper administration of Sections 5739.01 to 5739.01, inclusive, of the Revised Code, and to prevent the evasion of the tax, it is presumed that all sales made in this state are subject to the tax until the contrary is established."
As pointed out in Russo v. Donahue (1967), 10 Ohio St.2d 201, 210, taxpayers are obliged to keep records in order to carry out their burden of proving which of their sales are exempt and are "required to meet the presumption of taxability provided by" R.C. 5739.02.
In view of our conclusion that appellees' test checks were invalid because not conducted in conformity with actual business practice during the audit period, appellees have failed to carry out their burden of proving which of their sales are exempt.
Therefore, the judgments of the Court of Appeals are reversed and the decision of the Board of Tax Appeals is affirmed.
Judgments reversed.
SCHNEIDER, HERBERT, DUNCAN, CORRIGAN, STERN and LEACH, JJ., concur.