in-20250326-IR-045250132NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE SUPPLEMENTAL LETTER OF FINDINGS: 04-20231013 Gross Retail and Use Tax For the Years 2018, 2019, and 2020 HOLDING Combination Gas Station/Convenience Store was unable to meet its burden of establishing that the Department’s proposed assessment of additional sales tax was wrong; the Department found that Convenience Store’s alternative calculation did not meet the statutory burden of establishing that the audit’s calculation was wrong, and the suggested calculation was correct. ISSUE

I. Gross Retail and Use Tax – Convenience Store Sales.

Authority: IC 6-2.5-1-2; IC 6-2.5-2-1; IC 6-2.5-4-1; IC 6-2.5-5 et seq.; IC 6-2.5-9-3; IC 6-8.1-5-1; IC 6-8.1-5-4; Dept. 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. Taxpayer argues that the Department’s assessment of additional sales tax is overstated because, at this supplemental hearing level, Taxpayer now has sufficient documentation to fully account for its taxable sales during the three years under audit. STATEMENT OF FACTS Taxpayer is an Indiana convenience store which sells cigarettes, tobacco products, lottery tickets, auto supplies, health items, beauty items, groceries, fountain drinks, ice, newspapers, dairy products, snack foods, and various other “nonfood items.” The Indiana Department of Revenue (“Department”) conducted an audit review of Taxpayer’s business records and tax returns. In particular, the Department reviewed Taxpayer’s ST-103 sales tax returns, financial statements, bank records, withholding records, and “purchase invoices for the tax year 2020 with partial invoices from 2018 and 2019.” The Department’s audit report concluded that Taxpayer’s “[r]eported sales were deemed unreliable since the combined purchases for grocery and cigarette[s] were higher than reported sales for 2018, 2019, and 2020.” As a result, the audit reverted to reliance on guidelines published by the “National Association of Convenience Stores.” The audit did so on the grounds that the Association compiled and published reference data. The Association’s report included “convenience store sales, profits, top-in-store categories, profits of categories, etc.” The audit concluded that, based on the “best information available,” Taxpayer owed additional sales tax on otherwise unreported in-store sales. Given the apparent discrepancy between the amount of vendor purchases, the amount of sales reported by Taxpayer, and the statistical information available, the Department assessed Taxpayer approximately $250,000 in additional sales tax. Taxpayer disagreed and submitted a protest to that effect. An administrative hearing was scheduled during which Taxpayer was entitled to explain the basis for the protest. A Letter of Findings was issued April 2023 in which the Department acknowledged that Taxpayer’s assessment might have been smaller (or greater) if the original documentation had been presented during the original audit. However, in considering Taxpayer’s protest, the Department was unable to agree that Taxpayer “met its burden of establishing that the assessment was ‘wrong’ as required by IC 6-8.1-5-1(c).” Taxpayer has not established that the Department should not defer to the original audit findings. Taxpayer disagreed with the April 2023 Letter of Findings’ conclusions and submitted a rehearing request. The rehearing was granted, Taxpayer’s supplemental documentation was reviewed both at the administrative hearing and the audit level, and this Supplemental Letter of Findings results.

I. Gross Retail and Use Tax – Convenience Store Sales.

DISCUSSION The issue is whether Taxpayer has met its burden of proof and established that the assessment of additional sales and use tax was either wholly incorrect or simply overstated. As a threshold issue, it remains 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.” 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. In assessing the audit report, the relevant Indiana law, and Taxpayer’s argument, the Department bears in mind that “when [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, interpretations of Indiana tax law contained within this decision, as well as the original audit, are entitled to deference. Pursuant to IC 6-2.5-2-1, a sales tax, known as state gross retail tax, is imposed on retail transactions made in Indiana unless a valid exemption is applicable. IC 6-2.5-5 et seq. Retail transactions involve the transfer of tangible personal property. IC 6-2.5-1-2; IC 6-2.5-4-1. A retail merchant – such as Taxpayer – is required to “collect the tax as agent for the state.” IC 6-2.5-2-1(b). The retail merchant “holds those taxes in trust for the state and is personally liable for the payment of those taxes . . . .” IC 6-2.5-9-3. It should be pointed out that, “Every person subject to a listed tax must keep books and records so that the [D]epartment 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). In addition, IC 6-8.1-5-4(c) provides that, “A person must allow inspection of the books and records and returns by the department or its authorized agents at all reasonable times.” Id. The Department’s audit report noted that “[t]he [T]axpayer did not provide any cash register tapes, cash paid outs, or any supporting records to verify the total sales.” In the absence of contemporaneous and complete records, the Department was required by law to issue an assessment based upon whatever alternative and reliable means available to the Department. In particular, IC 6-8.1-5-1(b) provides that “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.” (Emphasis added). See also 45 IAC 15-5-1. Taxpayer disagrees with the Department’s conclusions for multiple reasons: (1) the audit relied on speculative third-party business authorities; (2) Taxpayer properly reported all convenience store sales; (3) the audit failed to consider that it operated two different cash registers; and (4) the Department’s audit should have relied on its bank records in making the assessment. The Department concluded that the National Association of Convenience Stores’ reports and press releases provided, in part, the “best information available.” In addition, the audit relied on purchase records provided by Taxpayer’s cigarette and other vendors. Taxpayer argues that the Department’s audit assessment was overstated because the third-party guidance relied upon by the Department – such as the National Association of Convenience Stores and vendor records – was unreasonable, unacceptable, and beyond industry standards. As explained in the audit’s written report, this is how the Department applied the now-challenged standards. As to the two cash registers, Taxpayer explained why the initial audit review was wrong when it concluded that Taxpayer failed to report all taxable sales. Taxpayer operates two cash registers at its store. One of the registers is wired into its accounting software; the second register is not. In other words, Taxpayer indicates that none of the sales from that second register were accounted for in its financial records. However, Taxpayer indicates that it can now account for any otherwise apparent discrepancy. According to Taxpayer, it routinely gathers all store proceeds and deposits those proceeds into its bank account. By subtracting the amount of money recorded by its first register from the amount deposited in the bank account, the sales which went through the second register can be determined. For example, if Taxpayer made a $1,000 bank deposit on June 1, and if the first register recorded $250 in sales during that preceding period, then the second register must account for the $750 apparent discrepancy. Taxpayer has now provided what it purports to be additional documentation sufficient to meet the statutory burden of proof requirement. That documentation consists of multiple “Store Sales Summary Report[s]” which lists monthly fuel sales, credit card transactions, coupon sales, lottery sales, and lottery payouts. Taxpayer made the cumulative calculation as indicated above and concludes that this calculated differential establishes that Taxpayer originally reported and remitted sales and use tax correctly. In requesting the rehearing, Taxpayer provided additional information in support of its “calculated differential.” The Department here acknowledges Taxpayer’s efforts to buttress its argument by offering these documents. However, as a preliminary observation, the Department notes that none of the inventory purchases are identified, and the ATM transactions are not documented. At a substantive level, the newly provided inventory spreadsheets simply confirm the original audit’s conclusion that Taxpayer could not account for all its sales. The documentation confirms that Taxpayer was transferring money from its cash registers into its ATM machine and also depositing cash into other accounts. As to the ATM deposits, Taxpayer does not explain whether the deposits represent taxable transactions or simply an internal cash reconciliation. Taxpayer is equally unclear as to the extent in which money taken from the cash register does or does not represent upstream taxable purchases. However, the most telling - and yet still unexplained discrepancy – is between Taxpayer’s purchases and its reported sales. For 2018, there is an unexplained discrepancy of approximately $280,000 between inventory purchases and reported sales. For 2019, there is an unexplained discrepancy of approximately $72,000 between inventory purchases and reported sales. For 2020, there is an unexplained discrepancy of approximately $320,000 between inventory purchases and reported sales. The Department here will set aside as unlikely the proposition that Taxpayer is selling its products at a loss year-after-year or that Taxpayer is not “marking up” its wholesale purchases and selling its inventory at retail prices. This wholesale/resale differential is substantial. Taxpayer paid approximately $2,077,000 to its vendors during 2018, 2019, and 2020, while it reported approximately $1,421,000 in store sales during that same period. The Department again recognizes certain weaknesses pointed out in the Letter of Findings. Taxpayer’s calculation accounts only for cash transactions and does not necessarily account for credit card and other non-cash customer purchases. The argument accounts for cash sales but does not differentiate between taxable sales (e.g. candy, auto parts) and transactions such as exempt food items. Although the Department does not necessarily challenge otherwise apparently good-faith efforts on Taxpayer’s part, the argument necessarily assumes that the amount Taxpayer deposited in the bank is identical to the amount of cash sales which occurred during the corresponding period. In addition, there is a discrepancy between the amount of cigarettes and other items it bought from its vendors and Taxpayer’s reported cigarette and other sales. In the continued absence of verifiable source documentation that Taxpayer should have maintained as required under law, Taxpayer has not met its burden of establishing that the assessment was “wrong” as required by IC 6-8.1-5-1(c). Taxpayer has not established that the Department should not now defer to the original audit findings. At the outset of this decision, the issue was defined as whether “Taxpayer now has sufficient documentation to fully account for its taxable sales during the three years under audit.” It does not. FINDING Taxpayer’s protest is respectfully denied. January 13, 2025 Replaces Finding Document at: New