Opinion
Docket No. 014062-2013 Docket No. 014061-2013
01-26-2017
Re: Saulwil, Inc. v. Director, Div. of Taxation Samuel and Louise Hammer v. Director, Div. of Taxation
NOT FOR PUBLICATION WITHOUT APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS Robert A. Fee, Esq.
East Gate Center
309 Fellowship Road, Suite 200
Mount Laurel, New Jersey 08054 Heather Lynn Anderson
Deputy Attorney General
R.J. Hughes Justice Complex
25 Market Street, P.O. Box 106
Trenton, New Jersey 08625-0106 Dear Counsel:
This letter opinion constitutes the court's decision as to defendant's motion for summary judgment, and plaintiffs' opposition to the same. Defendant (Taxation) claims its audit of the corporate plaintiff's restaurant business warrants summary judgment in its favor because the audit (which was upheld by a final determination) was a result of lack of adequate books and records, and because Taxation's determinations are entitled to a presumption of correctness. Taxation maintains that the corporate plaintiff provided only summaries or totals of daily or monthly receipts, as opposed to the individual items that made up such totals, thus, in the absence of the actual cash register tapes to corroborate the same, the summaries are unverifiable, thus, irrelevant.
Plaintiffs presented three certifications in opposition to the motion, and contend that there were sufficient contemporaneous books and records that were provided to Taxation, and that the corporate plaintiff's electronically maintained records through the use of a Point Of Sale ("POS") software program were never reviewed by Taxation, therefore, the audited assessment is arbitrary and unreasonable. The certifications also challenged the auditor's refusal to consider plaintiffs' explanation for the difference in reported versus audited receipts, which resulted in the audit's focus shifting to and centering on solely a markup analysis. Plaintiffs maintain that their records and explanations evidence a dispute as to a material fact in genuine issue, viz., existence and adequacy of books and records, therefore, summary judgment is inappropriate.
For the reasons stated below, the court denies the summary judgment in part, specifically as to affirming the sales tax assessment. Plaintiffs have provided a meritorious opposition to show that there are material facts in genuine dispute. One is Taxation's refusal to consider evidence that certain bank deposits in the sample year of 2008 were not taxable gross sales. Another is a rejection of the daily receipts summaries for the sample year 2008 since by Taxation's own regulations, backup for the summaries need not be maintained past ninety days of the filing of the latest tax quarter for 2008. Yet another is Taxation's failure to review the POS entries for the sample period of the first quarter of 2011, because that period was used as a sample only for markup analysis purposes, and further because the Taxpayer repeatedly contends that the POS software can reproduce the breakdown of the cash register summaries. These contentions show that material facts are in genuine dispute as to the central issue, viz., the correctness of Taxation's determination that the Taxpayer had inadequate books and records. Consequently, a decision by summary judgment of the personal gross income tax assessments on the individual plaintiffs is inappropriate since those assessments are purely a consequence of the corporate audit.
The court however finds that summary judgment is appropriate as to the use tax assessment. Plaintiffs' opposition in this regard was simply that use tax should only be on out-of-state sales, therefore, the methodology and tax amount was arbitrary. This is insufficient not only because the imposition of use tax is not limited to out-of-state purchases, but also because the rebuttal does not prove that sales tax was paid by the Taxpayer on the sampled expenses, or that the methodology was aberrant. However, since the error rate was computed as the ratio of sample expenses to the 2008 audited gross receipts, and the quantum of those receipts is yet to be tried, the court cannot affirm the exact amount of the use tax assessment at this stage. PROCEDURAL HISTORY
On December 9, 2011, Taxation issued a Notice of Assessment Related to Final Audit Determination to the corporate plaintiff ("Taxpayer"), an S corporation, imposing the Sales and Use ("S&U") tax of $655,638.15, which with penalty and interest totaled $801,983.97, for tax periods October 2007 to September 2011.
On the same day, Taxation issued a "Notice of Tax Due" to the individual plaintiffs assessing Gross Income Tax ("TGI") for tax years 2007 to 2009. The TGI was imposed on grounds that as a consequence of the corporate audit, the individual plaintiffs, who were 50% owners of Taxpayer, had imputed income by way of a "constructive distribution" of S corporation income. The total TGI liability (plus penalty and interest) was $712,033.11.
In response to plaintiffs' timely protest, Taxation's Conference & Appeals Branch made certain adjustments to the markup percentage for food, increased allowance for waste, which reduced the audited overall markup percentage, which in turn reduced the sales tax assessment. With no changes to the audited use tax assessment, the total S&U tax was reduced to $246,851, which with penalty and interest totaled $330,649 for the tax period October 2007 to September 2011. Corresponding reductions were effectuated to the individual plaintiffs' TGI liability, which was reduced to $493,356, and with penalty and interest totaled $693,631 for tax years 2007 to 2009.
Taxation then issued a final determination reflecting the reductions due to the conference. Plaintiffs timely filed a complaint in this court challenging the same. ASSERTED FACTS
The asserted facts are taken from the certifications in support of Taxation's motion and attachments thereto such as audit work papers, audit and conference reports, plaintiffs' administrative protest, and certifications in support of their opposition. Taxation essentially converted the entire auditor's certification as its Statement of Undisputed Material Facts. Plaintiffs admitted to some of the asserted undisputed facts (many as to the procedural posture), but denied several assertions such as the reasons for, and methodology of, the auditor's markup analysis. They also properly noted that many of the "undisputed material" facts were irrelevant and/or they had no personal knowledge of them (such as the auditor's certifications on the reasons for change of auditor, his alleged several communications with Taxpayer's counsel, his attempts to schedule meetings, and his internal record of the audit events).
The following are the undisputed facts: Taxpayer is a bar and seafood restaurant and does business as Crabs Claw Inn. It is within walking distance to the beach, and open seven days a week, except on Thanksgiving and Christmas. It offers dine-in, bar, and take-out services.
Taxation initiated an audit in 2008. However, it only commenced in December 2010 due to re-assignment of the audit to another auditor. In February 2011 (revised July 2011), Taxpayer filled out a pre-printed pre-audit questionnaire provided by Taxation. In response to the itemized documents available, Taxpayer checked off general ledger; cash disbursements journal; purchase journal; sales journal; register tapes total (but not "detail"); vendor bills; bank statements; cancelled checks; check register; and payroll records/journals. It did not include a POS in the "other" category. Taxpayer also responded that it had three computerized cash registers (but in opposition to the motion claimed to have eight cash registers), but did not save daily register tapes.
In January 2011, Taxation sent a letter that it would be auditing the payroll, S&U (October 2006-September 2010), Corporation Business Tax or CBT (for 2006-2009), and Litter taxes. For this purpose, Taxation listed eight (8) business records it needed, including, among others, cash register tapes and daily summaries for the third quarter of 2010; purchase invoices, purchase and sales journal for "sample year" 2008, bank statements for 2006-2009, and asset purchase invoices for October 2006-September 2010.
The next month it sent a letter stating that the audit was for S&U, CBT, and payroll, and this time listed six (6) needed business records. Cash register tapes and daily summaries were not on the list. Bank statements requested did not include 2008. Asset purchase invoices were requested for 2007-2009.
In April 2011, Taxation sent another letter listing six (6) records. This time purchase invoices were sought for January 2011 to March 2011 and asset purchase invoices were asked for April 2007-March 2011. Once again bank statements requested did not include 2008. The list also asked for current menu reflecting prices charged for food and drinks, including alcohol.
Two weeks later, Taxation sent another letter asking for the same records which was done at the conclusion of the appointment with Taxpayer's counsel on the same day.
On July 25, 2011, Taxation's auditor asked for a breakdown of the purchases reported on the 2008 CBT return, and purchase invoices for January 1, 2011 to March 30, 2011 as to three specific vendors on a sheet called "Information Document Request."
Four days later, the auditor asked for purchase invoices for four (4) other vendors, and prices for soda, coffee, and tea with their serving sizes. The request was given to Taxpayer's above counsel. Another such request was sent to Taxpayer's manager asking for purchase invoices for March 2011, serving sizes of food, information on mixed drinks, alcohol prices (regular, happy hours, discounted), coupons and advertisements showing specials/discounts, and a menu for January 2011 to March 31, 2011.
The auditor made another request in August 2011 for ingredients, portion sizes of certain listed food items, and the cash disbursement journal for the first quarter of 2011.
The following narration is contained in the Audit Report of November 28, 2011, which concluded an S&U assessment of $655,638.15. Plaintiffs have denied or disputed several of the assertions in this regard (audit methodology and basis).
The Report stated that the auditor selected 2008 as the sample period since it was the "most recent year for which there was a filed CBT return," and was "representative of the entire audit period." Taxpayer's representative agreed to this selection.
The Report listed ten (10) business records provided by the Taxpayer (which included 2008 bank statements), as well as menus, advertisements, and a computerized listing of drinks sold. Three items allegedly not provided were, (1) bank statements for 2006, 2007, and 2009; (2) general ledger/sales journal for 2006, 2007, and 2009; and (3) cash register receipts/guest checks for third quarter 2010 (to support the daily summaries provided). The report noted (as "unusual circumstances") that there were no cash register tapes for the first quarter of 2011 but only daily summaries.
These were 2008 bank statements; general/sales ledger for 2008; cash disbursement journal for 2008 and first quarter 2011; purchase invoices for 2008 and for first quarter 2011; payroll records for 2008-2010; daily cash register summaries for third quarter 2011; and depreciation schedule/original asset invoices for July 2006-June 2011.
The auditor concluded that the "records were INADEQUATE" because cash register tapes or guest checks were not available to tie-in to the daily summaries provided, the Taxpayer could only provide daily summaries, and "complete purchase invoices" for the sample year 2008 were unavailable. Therefore, he stated, a markon analysis "was necessary." He noted that the bank deposits for the sample year 2008 were greater than the reported receipts on the S&U and CBT returns (which Taxpayer's attorney could not explain). The auditor further noted that the reported markups (percentage of reported gross receipts to reposted cost of goods) of 2.43%, 2.18%, and 2.86% for 2007-2009, were "unrealistic" because of the nature of Taxpayer's business "(seafood/restaurant/bar) and proximity to the shore (i.e., heavily traveled . . . during summer/vacation months)." He then noted that since he had "determine[d] that a markon analysis was necessary," he did not "attempt to reconcile gross receipts any further."
The S&U return for 2008 showed "gross" receipts of $4.75 million, the CBT return showed $4.83 million but the bank deposits (less sales tax collected of about $332,000) totaled $6.99 million for 2008. The largest deposit was in April 2008 of about $2.09 million, which was significantly higher than any monthly deposit.
Per the Audit Report, the auditor decided to use the first quarter 2011 as the sample period for the markup analysis because it was the most recent return filed when he commenced his audit in February 2011. He further narrowed down the sample period to purchases for the two-week period of 3/13/2011 to 3/28/2011 (500 line items) due to the sheer volume of purchases made by the Taxpayer. He selected 65 food items as appropriate for a markup, which he deemed "representative" of food sold, and arrived at a markup of 3.8% (rounded). After examining the sale prices of alcoholic and non-alcoholic drinks, he determined a markup of 5.14% (beer), 5.91% (wine & liquor), and 17.78% (sodas, juices). After a percentage for loss, theft etc., he applied an overall markup of 3.92% to purchases (using the reported purchases, or cost of goods sold, in the 2008 CBT return), but applied an "error rate" (i.e., percentage of under-reporting) of 1.45% for 2008 and 2009 as applicable for 2010 and 2011. The resulting figure was the sales tax assessment (food and beverages) (corrected to factor in the filed third quarter 2011 S&U return).
Although the markup resulted in increased gross receipts for CBT purposes, the auditor did not impose further CBT assessment since the "additional gross receipts flowed through to the corporate officer's personal returns."
Per the Audit Report, the auditor conducted a sample of expenses for 2008, the sample year. He determined that invoices for certain purchases, and the general ledgers showing janitorial and cleaning expenses, did not reflect sales tax being charged by or collected by the vendor from Taxpayer. These expenses totaled $91,187. He divided this by the audited gross receipts for 2008 (which he had concluded was $7,836,176) to compute 1.164 as the percentage of expenses that were never subject to sales tax, and applied this rate to all years under audit. The use tax assessment was $22,777.
Since Taxpayer was an S corporation, and since the S corporation's net income flows through to, and is subject to personal income tax at the individual shareholder level, the auditor imputed the excess audited corporate receipts (net) to the individual plaintiffs. He also noted that tax year 2007 was beyond the statute of limitations for imposing additional tax, but because the computed TGI deficiency exceeded 25%, he could make the assessment under the extended six-year limitations period pursuant to N.J.S.A. 54A:9-4.
At the administrative protest, plaintiffs contended that the auditor incorrectly determined the 2008 total bank deposits were all attributable to taxable sales for 2008. They claimed that there were several interbank transfers, reversed checks, and advances on line of credit which should not have been included. They specifically explained each of these instances and attached the April 2008 bank statement to show that the $2.09 million deposit included a reverse credit for an incorrect debit for insurance premiums of about $1.75 million, and a February 2008 correction transaction statement for $10,085. Because of this foundational error, contended plaintiffs, the auditor's computation of audited purchases for all audit years were automatically erroneous. Plaintiffs also argued that the audit methodology was aberrant (for example, if their 2008 sales was $7.8 million or 162% over the reported sales of about $4.8 million, it would mean that purchases of food and beverages should be higher, yet, the auditor accepted Taxpayer's reported purchases). They maintained that the auditor did not review all of the available business records, such as the POS.
As to the use tax portion of the assessment, they contended an error on two grounds. One was that the error percentage was wrong because it used the artificially inflated gross receipts for 2008. The second was that the extrapolation of this error rate to other years under audit was wrong because the Taxpayer had purchase invoices for all years under audit, which the auditor did not request or ask to review.
Finally, they pointed out that a federal audit of Taxpayer's gross receipts for 2007 and 2008 resulted in minimal tax owed for 2007, and no assessment for 2008.
The conferee reviewed the Audit Report and concluded that the Taxpayer failed to "provide any books, records or other information to corroborate their contentions." This "precluded" any redetermination. She found the Taxpayer's computerized register system (which coded each menu item) should have been able to "repudiate any inaccuracies" of the audit yet no "such evidence" was provided. As to plaintiffs' explanation for the bank deposits, she stated that the "lack of reconciliation between the bank deposits and sales" indicated "a deficiency of internal controls." She continued that the audited assessment was "not based on the bank deposit but on a markup analysis: therefore, the information is moot at this stage" since the "bank deposits were still not reconciled to deposits." She then postulated that the soda purchases seemed too low, were likely included in the food purchases, which were given a much lower markup than should be given to soda, and that overall the audit was "favorable" to the Taxpayer since Taxation also accepted the wastage factor and the serving size of liquor. She also noted that the "reported" markups (reported receipts less purchases) of less than 3% were "simply not practicable." Nonetheless, she gave a further "concession" by removing items which were marked-up over 6% since they were "questionable," and provided an additional reduction for "non-receipts." This resulted in a slight lowering of the overall markup to 3.62%.
As to the use tax assessment, the conferee noted that the Taxpayer never provided the requested general ledgers for any year other than 2008. She noted that the items examined by the auditor did not reveal any "extraordinary items." Neither did the Taxpayer indicate any significant differences in expenses from one audit year to another, per the conferee. She also noted that when she computed in two alternate ways, the resulting tax was higher than the auditor assessed, plus the Taxpayer did not take advantage of the 2009 amnesty program. She affirmed the assessment because the Taxpayer provided no evidence of having paid sales tax on the sampled expenses and did not "demonstrate" the unfairness of the audit methodology.
One computation was by her projecting use tax from 2008 times four (the number of audit years). The second was by the conferee projecting use tax findings from 2008 "by applying the ratio to total deductions reported on the" 2007-2009 CBT returns.
As to the weight to be given to the federal audit of Taxpayer (for tax year 2008, which was settled for a minimal amount), the conferee noted that without details of the federal audit, she could not consider the same vis-à-vis Taxation's audit.
In opposition to the instant motion, plaintiffs' provided certifications dispute Taxation's basis for, and claim of, inadequate books and records, as well as the audit methodology. They contended that the auditor completely failed to consider POS records, which showed the daily and monthly summaries. They stated that Taxpayer used the POS to record all purchases, and all receipts, cash or credit, since it had installed the POS program on each one of its eight cash registers. The POS tallied the daily receipts/totals and automatically downloaded the same onto Taxpayer's Quick Books, Taxpayer's method of electronic accounting/bookkeeping. The monthly totals form the basis for the Taxpayer's sales tax returns. The accountant's certification included (in a USB flash drive) a sample of daily summaries of cash register reports for March 2011; annual summaries of receipts for 2008-2011; and summaries for the months of February 2008 and July 2011 as a sample of the sales/reports information generated by the POS program. He also attached (in a USB flash drive) a sample of other business records (general ledger account for October 2007 to December 2007, 2008-2010, January 2011 to September 2011; balance sheets for 2008-2011; income statements for 2008-2011; credit card samples tracing sales from POS to bank deposits for March, June, September, and October 2008). FINDINGS
An order granting summary judgment shall be rendered if "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law." R. 4:46-2(c). An issue of fact is genuine "only if, considering the burden of persuasion at trial, the evidence submitted by the parties on the motion, together with all legitimate inferences therefrom favoring the non-moving party, would require submission of the issue to the trier of fact." Ibid. Although the evidence is to be viewed most favorably toward the non-moving party, summary judgment may not be denied simply because the non-movant demonstrates the existence of a disputed fact. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540-41 (1995). Rather, denial is appropriate only where the evidence is of such a quality and quantity that reasonable minds could return a finding favorable to the party opposing the motion. Id. at 534, 540.
A corporate taxpayer is obligated to retain adequate business records for examination and inspection by Taxation. N.J.S.A. 54:32B-16; N.J.A.C. 18:24-2.3; N.J.A.C. 18:24-2.4. Absent records, Taxation is afforded broad authority in determining the tax due from any information that may be available, including external information. N.J.S.A. 54:32B-19; Yilmaz, Inc. v. Director, Div. of Taxation, 22 N.J. Tax 204, 231, 235 (Tax 2005), aff'd, 390 N.J. Super. 435 (App. Div.), certif. denied, 192 N.J. 69 (2007); see also Alpha I, Inc. v. Director, Div. of Taxation, 19 N.J. Tax 53 (Tax 2000) (indicating that where taxpayer destroys records prematurely, it places itself in jeopardy for additional tax).
N.J.S.A. 54:32B-19 states that if a sales tax return "is not filed, or if a return when filed is incorrect or insufficient, the amount of tax due shall be determined by" Taxation "from such information as may be available. If necessary, the tax may be estimated on the basis of external indices, such as stock on hand, purchases, rental paid, number of rooms, location, scale of rents or charges, comparable rents or charges, type of accommodations and service, number of employees or other factors."
Per Taxation's regulations, a taxpayer must make available to Taxation, "[a] true copy of all sales slips, invoices, receipts, statements, memoranda of price, or cash register tapes, issued to any customer . . . and records of every purchase and purchase for lease," which records must be retained "for four years from the date of filing of each quarterly sales tax return." N.J.A.C. 18:24- 2.3(a). If summary records are maintained "which show . . . total receipts and taxable receipts," a taxpayer should nonetheless "maintain individual sales slips, invoices, receipts, statements, memoranda of price, cash register tapes, or guest checks." N.J.A.C. 18:24-2.4(a). Pre-2016, a taxpayer could "dispose of individual sales slips, invoices, receipts, statements, memoranda of price, or cash register tapes, . . . after the lapse of a period not less than 90 days from the last date of the most recent quarterly (or monthly) period for the filing of sales tax returns to which such individual sales documents pertained." Ibid.
Effective May 16, 2016, such records must be maintained for a period of four years from the last date of the most recent quarterly period for the filing of sales tax returns," and further, retain the "summary sales records" for at least "four years from the last date of the quarterly period for the filing of sales tax returns." See 47 N.J.R. 2919(a) (Dec. 7, 2015); 48 N.J.R. 824(a) (May 16, 2016).
Because of the above statutory and regulatory scheme, Taxation has broad discretion to estimate an assessment in the absence of adequate books and records. Absent "documentary evidence or records or corroborative testimony," the "bare testimony is insufficient" to overcome the presumptive correctness of Taxation's assessment. TAS Lakewood v. Director, Div. of Taxation, 19 N.J. Tax 131, 139 (Tax 2000); Ridolfi v. Director, Div. of Taxation, 1 N.J. Tax 198 (Tax 1980). However, the presumptive correctness can be overcome with proof of "bona fide business records" which are qualitatively and quantitatively credible. Duncan Truck Stop, Inc. v. Director, Div. of Taxation, 4 N.J. Tax 367, 375-76 (1982).
(1) Sales Tax Assessment
The material facts as to the sales tax assessment, viz., the adequacy of books and records, are hotly contested. First and fundamentally, plaintiffs raise a serious dispute as to a material fact: the validity of deeming the sample year 2008 gross receipts as inaccurate based on the 2008 bank statements, and concluding all the bank deposits for that year as taxable gross sales. The record here clearly shows that Taxation refused to consider Taxpayer's explanation for the discrepancy or the supportive documents in this regard. The auditor did not "attempt to reconcile gross receipts any further," since he had decided that a markup was "necessary." The conferee dismissed the attempted explanation, claiming the issue was moot, and if anything, only showed that the Taxpayer lacked sufficient "internal controls." If however, these receipts were artificially inflated, and then further increased due to the additional markup (which is also disputed by plaintiffs), it poses a material issue of disputed fact, namely, the validity of the very basis for the increased sales tax assessment for 2008. Since 2008 was the sample representative year, an error in this one year could be an indication of an error for other extrapolated years.
Thus, the outright rejection of plaintiffs' attempted explanations (which were provided with backup) as to the 2008 bank deposits precludes a decision on this issue by summary judgment because it disputes a material fact as to the validity of Taxation's conclusion of the gross sales for the sample period, which was carried forward to other audit years via extrapolation. Further, because the main reason for embarking on a markup analysis was the irreconcilable bank deposits, the court finds that summary judgment on the reasonableness of the audited sales tax due to an increased markup is also inappropriate.
The next material issue of fact in genuine dispute is the alleged lack of the itemized register entries, which comprise the cash register daily summaries/totals. Taxation argues this undisputedly establishes that Taxpayer's books and records were inadequate, thus requires affirmance of Taxation's sales tax assessment. Plaintiffs aver that summaries are accepted by Taxation's own regulations, which also state that daily invoices need not be retained past ninety days. Further, they allege that neither the auditor nor the conferee perused the POS records although they had repeatedly offered the same for review. They contend their computerized recordkeeping, including the POS, was meant to reduce/eliminate paper method of bookkeeping, thus, they do not keep paper records since everything is input in the computer. Per plaintiffs, the POS software can trace individual computer entries, but Taxation simply insists on hard copies, which is unreasonable due to volume.
Plaintiffs raise meritorious issues which preclude decision on summary judgment. First, the auditor chose 2008 as the sample representative year for the audited tax years. For this sample year, Taxpayer provided ten categories of business records. The auditor still deemed them inadequate because there were no daily guest checks as backup. However, by the time he commenced his audit in early 2011, the ninety--day period for tax year 2008 had long expired. Thus, Taxpayer's provision of sales/receipts summaries for the sample year 2008 accorded with the regulatory requirement. Therefore, Taxation's determination that Taxpayer's books and records was "INADEQUATE," does not state a credible reason for summary judgment in favor of Taxation.
Second, while Taxation is correct that the 90-day regulatory limit does not apply to the first quarter 2011, this sample period (as further narrowed down to two weeks in March 2011) was used only for markup purposes, not to initially determine the adequacy of books and records.
Third, even ignoring that the first quarter of 2011 was used as a sample period only for markup analysis, there is still a materially disputed fact as to whether the sales/receipts summaries must be rejected via this summary judgment because individual guest checks or sales slips were allegedly not provided as a backup to the summaries. Initially, as observed by this court:
Cash register tapes are source documents that enable [Taxation] to spot check the accuracy of the summary records. In other words, although not absolutely required by the regulations, if summary records are available, cash register tapes are helpful, and if an auditor has reason to believe that a taxpayer's summary records are
inaccurate, and no cash register tapes are available, the use of a markup analysis is appropriate.
[Charley O's, Inc. v. Director, Div. of Taxation, 23 N.J. Tax 171, 187 (Tax 2006)]
Thus, summary records are not automatically evidence of inadequate books and records. Similarly, document production need not only be by hard copies. For example, N.J.A.C. 18:24-2.3(d)(2) states that if a taxpayer has an "automatic data processing tax accounting system," then it "must provide an opportunity to trace any transaction back to the original source or forward to a final total. If printouts are not made of the transaction details at the time they are processed, then the system must have the ability to reconstruct these transactions."
Taxpayer contends that its POS software has the ability to reconstruct transactions as explicated in the preceding regulation. Taxpayer will attempt to prove so at trial. Taxpayer has consistently stated that its "computerized cash registers . . . do not generate cash register tapes." It also told Taxation that credit card guest checks or receipts were available for perusal but due to sheer volume is located at its accountant's place of business. As evident from the daily summaries for March 2011, credit cards sales are a prominent method of payment by Taxpayer's customers. Thus, the credit card receipts would undoubtedly be back-up documents which Taxation can peruse to check the accuracy of the summaries. Yet, Taxation deems the summaries as proof of inadequate books and records.
During oral argument of the motion, Taxation contended that March 2011 summaries are themselves inaccurate, thus, further evidencing inadequacy of books and records due to lack of back-up breakdown. It noted that a quick examination of the daily total of the category "Retail" did not match its monthly total for March 2011.
The court's check of the "Food," "Beverage," "Bottled Wine," and "Retail" categories for March 2011 showed that their aggregate daily totals matched their monthly totals. The same was not true of the categories "Beer," "Glass Wine," "Liquor," and "Frozen," where the aggregate daily totals were lesser than the monthly totals by $916.25; $470.50; $470.25; and $374 respectively, thus, the monthly gross summaries for these four categories were $2,231 more than the daily gross summaries ($279,417.7, total of monthly gross receipts versus $277,186.70 total of daily summary of gross receipts). Plaintiffs' counsel frankly admitted that there could be some discrepancies however, they were not significant. The court agrees that this minor discrepancy does not establish a per se unreliability of summaries, and does not allow for a legal conclusion of inadequacy of books and records. This is especially where the four other categories did not differ in totals, and the monthly receipts, which are used to file the S&U returns, were greater than the daily totals.
The court finds that Taxpayer's proffer of the POS system and entries, which if they allege correctly was consistently rejected review by Taxation (the Audit Report does not even mention a POS), precludes a decision on a summary judgment motion on the issue of Taxpayer's adequacy of books and records. It is inappropriate to summarily decide the material issue of the inadequacy of books and records without considering contrary factual proofs proffered by plaintiffs, and not perused by Taxation. See, e.g., Yilmaz, supra, 22 N.J. Tax at 236 (presumptive correctness of an assessment can be overcome if the taxpayer can prove otherwise with cogent evidence that must "focus on the reasonableness of the underlying data used by the Director and the reasonableness of the methodology used.").
The conferee acknowledged that Taxpayer had a computerized register system (which coded each menu item), but rejected a review since no "evidence" was provided. --------
These above reasons also constitute the basis for finding that grant of summary judgment on the personal gross income tax assessments on the individual plaintiffs is inappropriate. Those assessments are purely a consequence of the corporate audit, thus, until that corporate audit's validity is tried, the court cannot affirm the TGI assessments by way of summary judgment.
(2) Use Tax Assessment
Plaintiffs' only opposition to the use tax assessment was that it should have been limited to "purported out-of-state purchases, as required under the use tax statute," rather than on the "annual gross receipts." First, it is incorrect that use tax is only on out-of-state purchases. Rather, use tax is "compensating," which means it is imposed on property or services for which sales tax was not collected. N.J.S.A. 54:32B-6. This is why the tax rate is the same. Ibid.; see also N.J.S.A. 54:32B-14(b) (if a "customer has failed to pay" sales tax to the seller, then "such tax shall be payable by the customer directly to the director and it shall be the duty of the customer to file a return with the director and to pay the tax to the director within twenty days of the date the tax was required to be paid").
Second, and more importantly, the bare assertion of legal grounds against the assessment does not rise to the level of a genuine issue of a material fact. There was no proof that Taxpayer paid any sales tax on the expenses sampled. No evidence such as certifications from the vendor who supplied the property or services corroborates that sales tax was collected from the Taxpayer. Absent such evidence, the court does not find the opposition to the use tax assessment would require "submission of the issue to the trier of fact," for purposes of denying summary judgment motion. Simply arguing that the error percentage should not be computed as a ratio of expenses to gross receipts does not in and of itself establish that the use tax computation was based on an aberrant methodology and devoid of reason. CONCLUSION
For the aforementioned reasons, the court denies Taxation's summary judgment as to the validity of the sales tax assessment, and grants the motion as to the use tax assessment. Since the error rate for the use tax was based upon the 2008 audited gross receipts, and the validity of the same is to be tried, the amount of use tax to be assessed cannot be affirmed at this stage.
Very Truly Yours,
/s/
Mala Sundar, J.T.C.