in-20250528-IR-045250254NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 03-20242423 Withholding Tax For the Tax Years 2020, 2021, and 2022 HOLDING In challenging the Department’s assessment of withholding taxes, Restaurant was unable to establish that it had no employees and that it was operated by the two owners, unpaid volunteers, and relatives. Restaurant’s own applications for both federal and municipal grant payroll programs contradicted Restaurant’s explanations. ISSUE

I. Withholding Tax – Calculation and Assessment.

Authority: I.R.C. § 451; I.R.C. § 3401 et. seq.; I.R.C. § 3401; I.R.C. § 3402; Treas. Reg. § 31.3401; Treas. Reg. § 31.3402; IC 6-3-4-8; IC 6-8.1-5-1; Indiana Dept’ of State Rev. 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); Wendt LLP v. Indiana Dept’ of State Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012); Scopelite v. Indiana Dept’ of Local Gov’t Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Lafayette Square Amoco, Inc. v. Indiana Dept’ of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); 45 IAC 3.1-1-97; I.R.S. Publication 15; Department of the Treasury: Paycheck Protection Plan. Taxpayer argues that the Department’s assessment of Indiana and county withholding tax was overstated because Taxpayer has no paid employees. STATEMENT OF FACTS Taxpayer is an Indiana restaurant which provides its customers dining room and drive-through food services. The Indiana Department of Revenue (“Department”) conducted an audit of Taxpayer’s business records and withholding tax documents. According to the audit report, the Department reviewed the owners’ “1040 Income Tax Returns . . . bank statements and credit card statements . . . . ” The audit resulted in an assessment of additional withholding tax for 2020, 2021, and 2022. Taxpayer disagreed with the assessment and submitted a protest to that effect. An administrative hearing was conducted by telephone in order to provide Taxpayer’s owners and representative the opportunity to explain the basis for the protest. This Letter of Findings results and is based on a review of the original source documents and on Taxpayer’s arguments and explanations.

I. Withholding Tax – Calculation and Assessment.

DISCUSSION The issue is whether Taxpayer has met its burden of establishing that the Department’s audit made a mistake when it assessed Taxpayer withholding tax because, according to Taxpayer, it had no employees during 2020, 2021, and 2022. As with any assessment, it is Taxpayer’s responsibility to establish that the 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.” See also 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. In assessing whether a taxpayer has met that burden, the Department bears in mind that poorly developed and non-cogent arguments are subject to waiver. Scopelite v. Indiana Dept, of Local Gov’t Fin., 939 N.E.2d 1138, 1145 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dept’ of State Revenue, 977 N.E.2d 480, 486 n.9 (Ind. Tax Ct. 2012). When an agency is charged with enforcing a statute, the courts defer to the agency’s reasonable interpretation of that statute “over an equally reasonable interpretation by another party.” Indiana Dept’ of State Rev. v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Indiana withholding requirements piggy-back the federal standards, statutes, rules, and regulations. To correctly examine an employer’s income tax withholding responsibility, we must refer to I.R.C. § 3401 et. seq., which is under “Employment Taxes” for the purpose of “Collection of Income Tax at Source on Wages.” I.R.C. § 3402(a)(1) requires an employer to withhold income tax on wages it paid to its employees. I.R.C. § 3401 defines what constitutes “wages” for income tax purposes, which in relevant part, provides: Treas. Reg. § 31.3401(f)-1(a) further explains that, unless specifically excluded such as I.R.C. § 3401(a)(16)(A), (B), or Treas. Reg. § 31.3401(a)(16)-1, “[t]ips received after 1965 by an employee in the course of his employment are considered to be wages, and thus subject to withholding of income tax at source.” See Treas. Reg. § 31.3401(a)-1(b)(11); 31.3402(k)-1; See also Treas § 451(c) stating “tips included in a written statement furnished an employer by an employee pursuant to section 6053(a) shall be deemed to be received at the time the written statement including such tips is furnished to the employer”). I.R.C. § 3402(k) specifically requires the employer to withhold income tax on tips, which provides, in relevant part, as follows: Treas. Reg. § 31.3402(k)-1(a)(1) details the general rules which apply to tips, as follows: Treas. Reg. § 31.3402(k)-1(a)(2) explains further: Treas. Reg. § 31.3402(k)-1(a)(3) provides that employees may furnish funds to employers to be withheld, as follows. Recognizing that an employer may not be able to fully deduct and withhold all taxes on tip income from the wages under the employer’s control or from the funds turned over by the tipped employees, Treas. Reg. § 31.3402(k)-1(c)(1) further establishes a priority of the taxes to be withheld, which provides: Treas. Reg. § 31.3402(k)-1(c)(2) further offers some examples to illustrate the application of the priority. In short, an employer is required to first withhold the taxes on the non-tip wages it paid to the tipped employees. Thereafter, if there is any remaining amount available, the employer is required to withhold the taxes on tips in the following order: (1) FICA taxes under I.R.C. § 3101, (2) federal income tax under I.R.C. § 3402, and (3) state and local taxes. In other words, after the statutorily required withholding taxes from the non-tip wages has been satisfied, the employer must then deduct and withhold federal taxes imposed on tip income from the remaining non-tip wages, which are under its control. Under the federal procedures, if the amount of remaining wages is not sufficient to cover the federal amount required to be withheld on tip income, the amount of tax which remains unsatisfied should be withheld from the wages under the control of the employer the following pay period. I.R.S. Publication 15, at 17-18; see also Form 8027 and instructions. Every employer is required to withhold taxes on payments of wages it pays to its employees pursuant to IC 6-3-4-8(a) (as in effect during July 1, 2021, to December 31, 2023), which states in part as follows: Accordingly, IC 6-3-4-8(a) requires an employer to “withhold, collect, and pay over income tax on wages paid by such employer to such employee . . . [in] the amount prescribed in withholding instructions issued by the department.” IC 6-3-4-8(a)(1) provides that the employer is “liable to the state of Indiana for the payment of the tax required to be deducted and withheld.” (Emphasis added). IC 6-3-4-8 specifically provides that the employer is liable for the amount that it was required to withhold. 45 IAC 3.1-1-97 further explains in relevant part: Thus, employers are “withholding agents . . [required to] make return of and payment to the Department . . . tax due, for either County and State.” Id. “All amounts deducted and withheld by an employer shall immediately upon deduction become the money of the State.” Id. The regulation further states, “In the case of delinquency or nonpayment of withholding tax, the employer is liable for such tax, penalties, and interest.” Id. The audit determined that Taxpayer had employees for whom Taxpayer was obligated to withhold state and county income taxes. As explained in the Department’s audit report: The audit also reviewed “checks issued to individuals that listed date ranges on the [check] memo.” The audit also “discovered loan documentation for a PPP (Paycheck Protection Program) loan” that was granted to the Taxpayer in 2020. The loan application that was signed by the taxpayer [and] stated that the restaurant had employees.” The Paycheck Protection Program stated that the loan “provid[ed] small businesses with the resources they need to maintain their payroll, hire back employees who may have been laid off, and cover applicable overhead.” U.S. Department of the Treasury: Paycheck Protection Plan, https://home.treasury.gov/policy-issues/coronavirus/assistance-for-small-businesses/paycheck- protection-program. (Last visited January 27, 2025). Taxpayer also applied for and received a “grant from the [municipality] for $10,000 and [which] says its purpose was to retain employees.” Relying on 45 IAC 3.1-1-97, which states that employers are required to withhold tax on wages subject to employees’ adjusted gross income tax, and on IC 6-8.1-5-1(b), which requires that the Department “make a proposed assessment of the amount of the unpaid tax on the basis of the best information available to the department,” the Department issue the assessment addressed here. The Department calculated the assessment amount as follows: Taxpayer’s argument is that it had no employees during the years at issue and – as a result – was under no obligation to withhold taxes on what are – according to Taxpayer – an absence of any employee wages. As explained by Taxpayer’s representative, “At no time during the audit period were employees retained or paid by the restaurant.” Taxpayer also stated that there was no evidence of checks containing a “vacation pay” or checks issued to individuals containing date ranges. According to Taxpayer, the owners’ adult children assisted in the restaurant operations when necessary “but they were not paid.” In other instances, Taxpayer states that unpaid volunteers assisted the owners in operating the restaurant. According to Taxpayer, the volunteers report any tips they received on their individual income tax returns. Taxpayer states that the Paycheck Protection Program $5,000 grant was “no more than any other sole proprietorship qualified for based on the income on the 2019 schedule C.” As to the $10,000 municipal grant, Taxpayer explains that “the only requirement of the [municipal] grant was a 20[percent] decline in business.” Taxpayer also explains that the assessment was overstated because its restaurant was closed two weeks out of the year and because the Department overstated the number of hours the restaurant was open. The Department’s audit stated that it had reviewed checks which – at least on the surface – indicated that Taxpayer was issuing employee wages. The five checks were issued at various times during 2021. The notation on three checks indicated that the check represented “3 days’ pay,” “2 days,” “7 days’ vacation pay,” and a fourth was issued to cover the cost of “mowing.” The checks were issued for $300, $200, $400, $500, and $600. The checks were numbered 6354, 6366, 6408, 6617, and 6659. When asked to provide copies of the five checks, Taxpayer indicated that the checks were no longer available. During the course of the pandemic, Taxpayer applied for and received a $5,000 loan (later forgiven) from the Small Business Administration (“SBA”). The application indicates that the purpose of the loan was for “payroll protection” and that the applicant was required to provide detailed explanation of the work performed, the hourly rates paid its employees, and the number of hours its employees worked. In submitting the PPP application, Taxpayer was required to certify as follows: Taxpayer’s application for the PPP loan indicated that it had two employees and that’s “average monthly payroll” was $2,030. The application also included Taxpayer’s certification that Taxpayer “was in operation on February 15, 2020, and had employees for whom it paid payroll taxes or paid independent contractors, as reported on Form(s) 1099-MISC.” Taxpayer also applied for and received a $10,000 “job retention” PPP grant from the local municipality. The municipality explained that the purpose of the grant program was to aid in “the retention of jobs held by low and moderate (LMI) income individuals employed by companies within the corporate limits of [municipality].” The grant application required that Taxpayer provide a “Letter on Business Letterhead Signed by the Owner stating how many employees will be retained with this grant[.]” Taxpayer completed the application stating it had two “Full-Time Employees” that worked at least thirty-two “hours per week or more.” In applying for the grant, Taxpayer stated it would “help my business to retain 2 employees . . . and allow my business to remain open and operating.” Taxpayer stated that it had two employees who were each full-time employees working and average forty hours each week and that each received a $15,000 “average yearly income.” The municipal grant request required that the applicant “certify that, to the best of my knowledge, all information found in all grant survey forms pertaining thereto, are correct and has been gathered in an appropriate and ethical manner.” The certification page cautioned as follows: The Taxpayer’s two owners signed the grant application. Taxpayer’s argument here is that it has no employees. According to Taxpayer, the restaurant is staffed by its two owners, unpaid volunteers, and unpaid relatives. The Department will set aside issues raised by the now unavailable five checks. However, the two grant applications are at direct variance with Taxpayer’s argument. The grant applications – verified and submitted on behalf of Taxpayer – indicate that it has two full-time employees, they both work forty or more hours each week, and that they both earn a yearly $15,000 salary. In assessing the withholding tax, the Department did what it was required to do under IC 6-8.1-5-1(b) which mandates: Taxpayer’s arguments, and the information contained with the payroll protection applications, cannot be reconciled here. In the absence of verifiable supporting documentation from Taxpayer, Department is unable to agree that Taxpayer has met its statutory burden under IC 6-8.1-5-1(c) of establishing that the assessment was wrong. FINDING Taxpayer’s protest is respectfully denied. March 7, 2025 Replaces Finding Document: New