Without a state sales tax professional on your side, fighting a state sales tax assessment can be challenging. Time and time again, taxpayers fail to provide sufficient evidence to support their argument that a state tax assessment is wrong. Lacking enough evidence, the assessment is often upheld in favor of your state.
Factual Background
In Case 115,327, a mixed beverage retail store fell victim to the lack of evidence trap. During the audit, the Texas taxpayer did not provide records adequate to the auditor’s liking. As a result, the auditor relied on purchase data and credit card sales. In addition to the tax due, the Texas auditor also assessed interest, a 10% penalty, and an additional whopping 50% penalty as well. After failing to get the audit resolved with the Comptroller, the cases found their way in the State Office of Administrative Hearings (“SOAH”).
State Law
On appeal, SOAH affirmed the Comptroller’s assessment. Specifically, pursuant to 34 Tex Admin Code 3.1001, SOAH determined that the Comptroller can estimate an assessment from the available information if the taxpayer fails to maintain adequate records. Being that the records were not sufficient the Comptroller had the ability and did, in fact, assess the available information.
Like most states, in a Texas tax audit, once the Department is authorized to assess, the taxpayer must show its incorrect. Despite arguing that the assessment was wrong on all fronts, the taxpayer only provided a single register printout to summarize sales for one of the years. Without any corroborating evidence, the judge was forced to rule in the Comptroller’s favor with respect to the tax at issue.
Further, the taxpayer disputed the 50% penalty on top of the Texas sales tax, interest, and 10% penalty. Texas Tax Code § 111.061 allows for a 50% penalty when there is a fraud or intent to evade the tax. In regular English, according to Texas law, if there is gross underreporting (>25%) without a plausible explanation, the 50% penalty is allowed. Here, the Taxpayer did not provide adequate records and did not have a reasonable explanation as to why, so the judge agreed with the 50% penalty as well.
Take-Aways
The recent Texas decision is another example as to why it is so important to have someone well versed in sales tax to combat the Texas Comptroller in SOAH. Having redundant, consistent, and logical evidence can be just as, if not more important to build and win your case. Having a qualified representative to assist in this matter could have resulted in a completely different outcome for this business. A sales tax professional can also provide some pressure to Comptroller to settle your case before trial as well.
Sales Tax Helper has over five decades of cumulative experience in assisting taxpayers who need to litigate their tax matters to get just results. Our firm focuses on the tough situations, the times when hard-hitting actions are needed to take a negative situation and get the very best out of it. Additionally, we work with CPAs and tax consultants whose clients need aggressive legal help when dealing with the Comptroller or other tax authorities. In fact, we have found that is not uncommon for the start of the controversy process to be the most effective settlement tactic the taxpayer has.
Resources:
- Mixed Beverage Sales Tax/RDT, CPA HEARING 115,327
- Tax Code § 111.0081(c)
- Texas Tax Code § 111.0611. Personal Liability for Fraudulent Tax Evasion
- Texas Tax Code § 111.061. Penalty on Delinquent Tax or Tax Reports
- Tax Code § 111.205(b)
- Tax Code § 111.103; 34 Tex. Admin. Code § 3.5(e)
- http://comptroller.texas.gov/taxes/publications/96-1789.pdf.
- Tax Code §§ 111.009, 105; APA, Tex. Gov’t Code § 2001.146; S.B. 1095, 85Th Leg., 2017; 34 Tex. Admin. Code § 1.35.
- APA, Tex. Gov’t Code § 2001.146(g).