9611753H



HEARING NO. 35,015

IN RE: ************

TAXPAYER NO: ************
AUDIT OFFICE: ************
AUDIT PERIOD: April 1, 1993 
through August 31, 1994 

MIXED BEVERAGE GROSS 
RECEIPTS TAX/RDT 

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

BETTY J. MARKS
Administrative Law Judge

ANNE K. PEREZ
Representing Tax Division

************
Representing Petitioner


HEARING NO. 35,314

IN RE: ************

TAXPAYER NO: ************
AUDIT OFFICE: ************
AUDIT PERIOD: January 1, 1987 
through September 30, 1994 

SALES AND USE TAX/RDT 

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

BETTY J. MARKS
Administrative Law Judge

ANNE K. PEREZ
Representing Tax Division

************
Representing Petitioner

COMPTROLLER'S DECISION

PRELIMINARY DISCUSSION:

At the Request of Petitioner, these matters have been consolidated. Due to the 
consolidation, Hearing No. 35,015, originally set for hearing before 
Administrative Law Judge Weiss was transferred to my docket.  An oral hearing 
was held on both matters on April 24, 1996. The Tax Division was represented by 
Roy G. Scudday who presented the testimony of Shannon Lollar (SL), a senior 
auditor in Audit Headquarters and a member of the Fraud Committee, and the 
testimony of Anthony D. Turner (AT), the Comptroller's auditor who performed 
both the mixed beverage tax and sales and use tax audits of Petitioner. 
Petitioner was represented by ************.

Notice has been taken of the Comptroller's records that relate to Petitioner or 
the issues raised in this hearing. Unless otherwise indicated, all Section 
references are to Title 2, Texas Tax Code Annotated, and all Rule references 
are to sections of Title 34, Texas Administrative Code. 

On August 14, 1996, Petitioner filed Exceptions to the July 30, 1996 Proposed 
Comptroller's Decision.  The Tax Division filed its Response on August 20, 
1996. The ALJ and the Comptroller have considered the Exceptions and the 
Response, and this Comptroller's Decision represents the ruling thereon.

PETITIONER'S CONTENTIONS: 

1. "The auditor's audit methodology in calculating taxable sales is replete 
with errors and false assumptions."

2. "In addition, the auditor has made [a] jeopardy assessment and set up a 
fraud penalty of fifty percent (50%). Petitioner has never deliberately and/or 
intentionally remitted less Texas sales and use tax than was due and owing. The 
mistake, if any, was due to an honest error, misunderstanding or lack of 
knowledge of taxable transactions. Finally, Petitioner does not have a history 
of being tardy in filing his ... reports or in the payment of the ... tax."

3. Absent a showing of fraud by the Tax Division, the sales tax assessment 
attributable to the period January 1, 1987, through December 31, 1990 is barred 
by the statute of limitations.

FINDINGS OF FACT:

1. Petitioner is a mixed beverage permittee. 

2. Petitioner was audited for mixed beverage gross receipts tax compliance for 
the period referenced above. As a result of the audit, on December 21, 1994, 
Petitioner was sent a Texas Notice of Tax Due totaling $************ in mixed 
beverage gross receipts taxes, penalty (inclusive of the penalty for late 
filing as well as the fraud penalty pursuant to Section 111.061), and interest 
through the date of the Notice. 

3. Petitioner was also the holder of a sales tax permit for six outlets during 
the audit period. (Source:  Comptroller's computer records). These outlets 
included two clubs, namely CLUB A and CLUB B, owned and operated by Petitioner 
which are referred to by Petitioner in his pleadings. 

4. Petitioner was also audited for limited sales and use tax compliance for the 
period referenced above. As a result of the audit, on December 21, 1994, 
Petitioner was sent a Texas Notice of Tax Due totaling $************ in state 
and local taxes, penalty (inclusive of the penalty for late filing as well as 
the fraud penalty pursuant to Section 111.061), and interest through the date 
of the Notice. 

5. Petitioner's timely filed request for a redetermination of each assessment 
and his request that both matters be consolidated, resulted in this 
consolidated hearing.

6. According to the testimony of The Audit Section's Fraud Coordinator, an 
Internal Revenue Service (IRS) special agent contacted her and advised her that 
the IRS had seized Petitioner's records and that such records were being made 
available to the Comptroller's office. The IRS agent requested that Petitioner 
not be notified of any audit by the Comptroller pending the IRS's criminal 
investigation of Petitioner. By agreement, Petitioner was not contacted by the 
auditor during the audit.

7. The records of Petitioner obtained by the Comptroller's office from the IRS 
included the federal tax returns, canceled checks, daily cash register tapes, 
bank statements, and purchase invoices. The Comptroller's office was also given 
copies of sales tax returns filed by Petitioner on which Petitioner's name 
appears as the signatory.

8. For purposes of the mixed beverage gross receipts tax audit, since the IRS 
had no records of sales of mixed beverages, the auditor contacted the suppliers 
listed on the purchase invoices obtained from the IRS to determine his audit 
projections. The auditor determined that a sample audit would be conducted for 
purposes of calculating the mixed beverage gross receipts tax; however, because 
Petitioner's records were incomplete, a random sample was not used. According 
to the Notification of Sampling Procedures for State Tax Audit, the sample was 
in accordance with the sampling procedures set out in the notice which states, 
in pertinent part, that:

"1. The records to be examined in performing the sample will include (but are 
not limited to): "federal income tax records, sales invoices, daily tapes, bank 
statements and other records available."
...
8. The results of the sample will be applied to the population using the 
following procedures:  
"Average price calculations. The average prices for drink sales will be used 
for days that appear to be complete in the audit. A number of tapes are 
missing. Therefore no computer generated random sample can be performed. The 
average price for each drink category will be determined by dividing the total 
dollar amount of drink sales by the total number of drinks sold on that day. An 
average will be obtained for all days reviewed. The amount attained will be 
forwarded to Schedule "A" worksheet."

9. For purposes of the sales tax audit, again the auditor used information 
obtained from suppliers listed on the purchase invoices obtained from the IRS 
to determine his audit projections for beer sales by Petitioner. The auditor 
determined that a sample audit would be conducted for purposes of calculating 
additional taxable sales; however, because Petitioner's records were 
incomplete, a random sample was not used. According to the Notification of 
Sampling Procedures for State Tax Audit, the sample audit was in accordance 
with the sampling procedures set out in the notice which states, in pertinent 
part, that:

"1. The records to be examined in performing the sample will include (but are 
not limited to): "federal income tax records, sales invoices, daily tapes, bank 
statements and other records available." 
...
8. The results of the sample will be applied to the population using the 
following procedures:
"The adjustments for this audit will be based on differences between reported 
sales, IRS returns, and deposits. A deposit analysis was obtained from the IRS. 
For years 1987-1988 estimated sales for each quarter will be obtained by 
dividing each year by four. Four representing the number of quarters in a year. 
 For the periods 1989- June 1993, monthly amounts will be used. Estimated 
monthly sales will were determined by dividing yearly federal income tax 
returns by twelve. Twelve representing the number of months in a year. 
Remaining periods will be estimated using the quarterly methodology as 
described above. For the year 1993, estimated sales will be determined after 
subtracting mixed beverage sales from the gross amount. Adjustments for 1994 
will consist of an adjustment for the 942 period only. Per IRS records, in 
excess of $************ were deposited during that period. Adjustments for 
periods 1991-1993 were made using a deposit analysis prepared by the IRS. 
Adjustments for 1990 were made by using the differences from IRS reported 
amounts and sales reported amounts. Adjustments for 1986-1988 were made from 
deposits."

10. The mixed beverage gross receipts tax audit indicates underreporting by 
$************ over the seventeen month audit period (approximately 59% more 
than the amount reported). The sales tax audit indicates that $************ was 
underreported for the audit period (approximately 102% more than the amount 
reported). Both percentages of underreporting constitute "gross errors" of 25% 
or greater than the amount initially reported pursuant to the provisions of 
Section 111.205 dealing with exceptions to the limitations period for 
assessments. 

11. No evidence was submitted to show that the audit sample used by the auditor 
in either audit did not accurately reflect the business operations of 
Petitioner or that the sampling method used by the auditor was not in 
accordance with generally recognized sampling techniques.

12. According to the testimony of the examining auditor and the Audit Section's 
Fraud Coordinator, the primary reason for the assessment of the fraud penalty 
in this case was the substantial underreporting of tax indicated in both 
audits. In both cases, the amount assessed far exceeded 25% of the amount 
reported.  SL testified that it was the Audit Section's policy that where the 
amount not reported is 25% or greater, it is considered a "gross error," and 
consideration is given to assessing the fraud penalty. 

13. Petitioner submitted no evidence in support of any of his contentions.

DISCUSSION AND CONCLUSIONS OF LAW:

Mixed Beverage Gross Receipts Tax

By virtue of legislation passed in 1993 the responsibility and authority for 
the collection and administration of the mixed beverage tax was transferred 
from the Texas Alcoholic Beverage Commission (TABC) to the Comptroller when 
Chapter 183 - Mixed Beverage Tax was added to the Tax Code effective January 1, 
1994. [FOOTNOTE: Chapter 183 was added by Acts 1993, 73rd Leg., ch. 934, 
Section 106, eff. Jan. 1, 1994.]  Pursuant to Section 183.021, a tax "... at 
the rate of 14 percent is imposed on the gross receipts of a  permittee 
received from the sale, preparation, or service of mixed beverages or from the 
sale, preparation,  or service of ice or non alcoholic beverages that are sold, 
prepared, or served for the purpose of being mixed with an alcoholic beverage 
and consumed on the premises of the permittee." [FOOTNOTE: Section 183.021 
replaced Section 202.02 of the Alcoholic Beverage Code.] Under Sections 183.022 
and 183.023 a permittee is required to file a sworn tax return with the 
Comptroller not later than the 20th day of each month stating the total gross 
taxable receipts and other information required by the Comptroller and to pay 
the tax due with such return. Petitioner acknowledges that he was licensed on 
April 2, 1993, by the TABC to sell mixed beverages and that he was therefore 
"... required to report and remit Texas mixed beverage gross receipts tax on 
the sale of mixed beverages." However, Petitioner asserts that the sampling 
methodology used by the auditor is in error and that the fraud penalty should 
not have been imposed. 

Sales and Use Tax

Under the sales tax statutes, retailers are required to file sales tax reports 
and remit the sales tax collected. (Section 151.403 and 151.401). Section 
151.054 provides that all gross receipts of a seller are presumed taxable. This 
presumption may be rebutted by the timely presentation of a valid resale or 
exemption certificate to the Comptroller by the seller. In this case Petitioner 
offers neither specific information nor documentary evidence to support its 
contention that either audit is incorrect. Rule 1.7 of the Comptroller's Rules 
of Practice and Procedure requires Petitioner to identify the items scheduled 
in the audit that are covered by its contentions. Contrary to this requirement, 
Petitioner's assertions are general in nature and ones for which no supporting 
documentation was submitted. The courts have found on many occasions that bare 
assertions, without any supporting evidence, are not sufficient to overcome the 
presumption of validity afforded to the Comptroller's assessment. Baker v. 
Bullock, 529 S.W. 2d 279 (Tex. Civ. App. - Austin 1975, writ ref'd n.r.e.) and 
State v. Glass, 723 S.W. 2d 325 (Tex. Civ. App. - Austin, 1987, writ ref'd 
n.r.e.). Additionally, Petitioner has the burden of proving, by the 
preponderance of the evidence, that the audit is in error in accordance with 
Rule 1.40(2)(B) and since no evidence was submitted, Petitioner has failed to 
meet its burden of proof in this regard. However, Petitioner does not appear to 
claim that its sales were either exempt or for resale. Instead Petitioner 
asserts that, as with the assessment for mixed beverage gross receipts tax, the 
sampling methodology used by the auditor is in error. Further, Petitioner 
claims that the fraud penalty should not have been imposed in connection with 
the sales tax assessment. Finally, Petitioner argued at the oral hearing that 
absent a showing of fraud by the Tax Division, the sales tax assessment 
attributable to the period January 1, 1987 through December 31, 1990, is barred 
by the statute of limitations.

Sampling Methodology

As to the Comptroller's use of sampling auditing methods in performing an 
audit, Section 111.0042(b) provides as follows:

"Sampling auditing methods are appropriate if:

(1) the taxpayer's records are so detailed, complex, or voluminous that an 
audit of all detailed records would be unreasonable or impractical;

(2) the taxpayer's records are inadequate or insufficient, so that a competent 
audit for the period in question is not otherwise possible; or

(3) the cost of an audit of all detailed records to the taxpayer or to the 
state will be unreasonable in relation to the benefits derived and sampling 
procedures will produce a reasonable result."

Additionally, Section 111.0042(c), (d), and (e) describe the appropriate 
circumstances for sampling and the means by which a taxpayer may challenge the 
sampling technique as follows:

(c) Before using a sample technique to establish a tax liability, the 
comptroller or his designee must notify the taxpayer in writing of the sampling 
procedure to be used.

(d) The sample must reflect as nearly as possible the normal conditions under 
which the business was operated during the period to which the audit applies. 
If a taxpayer can demonstrate that a transaction in a sample period is not 
representative of the taxpayer's business operations, the transaction shall be 
eliminated from the sample and be separately assessed in the audit. If records 
are inadequate to reflect accurately the business operations of the taxpayer, 
the comptroller or his designee shall determine the best information available 
and base his audit report on that information.

(e) If the taxpayer demonstrates that any sampling method used by the 
comptroller was not in accordance with generally recognized sampling 
techniques, the audit will be dismissed as to that portion of the audit 
established by projection based upon the sampling method, and a new audit may 
be performed."

Thus, Section 111.0042(b) authorizes the Comptroller to use sampling audit 
techniques to establish a tax liability. The use of sampling was necessary here 
in both audits due to the inadequacy of Petitioner's records. (Finding of Fact 
Nos. 8 and 9). 

Sections 111.0042(d) and (e) provide taxpayers with two avenues of challenging 
the accuracy of sample audits. First, if a taxpayer can show that a given 
transaction within a sample period is not representative of its business 
operations, then that transaction will be withdrawn from the sample and 
assessed separately.  Second, the taxpayer can attempt to have the sample 
dismissed by showing that the sampling method used by the auditor was not in 
accordance with generally recognized sampling techniques. 

Petitioner has not shown either of these challenges to be present. Petitioner 
did argue that there were seven errors in the methodology used by the auditor; 
however, the Tax Division responds to each such alleged error as follows:

"1. The auditor assumed that all liquor purchases were for resale.

Petitioner has provided no documentation to show that there were other uses 
made of the liquor purchases.

2. The auditor assumed that all purchases were for one liter containers.

The Tax Division agrees that purchases should be adjusted to show the purchase 
of 26-750 ml. bottles. At the same time, there should be added adjustments for 
wine purchases. The auditor had assumed that these two items would cancel each 
other out.

3. The sales price of mixed drinks on certain of the sample dates were 
abnormally high.

The sample dates were selected because they were among the only days for which 
there was complete information. The auditor was forced to rely on the best 
information available. Therefore, any abnormalities were due to Petitioner's 
lack of records.

4. The audit fails to account for the ending inventory.

The inventory records were not available. As there was no indication of the 
beginning inventory, there was no consideration taken of the ending inventory.

5. The auditor failed to subtract complimentary drinks.

Petitioner provided no records to show complimentary drinks.

6. The average price of drinks calculations failed to included the typical mix 
of happy hour-priced drinks.

The auditor took happy hour-priced drinks into consideration when calculating 
the average price.

7. Spillage was not considered when calculating inventory.

There were no spillage records. As no inventory records were available, there 
was no consideration taken of spillage."

Other than these allegations of error in both sample audits, Petitioner 
presented no argument that the sampling method used by the auditor did not 
accurately reflect the business operations of Petitioner or that the sampling 
method used by the auditor was not in accordance with generally recognized 
sampling techniques. Furthermore, even if an argument to that effect can be 
surmised, no evidence was submitted by Petitioner in either regard. (Finding of 
Fact No. 11). Therefore, Petitioner has failed to show that the sample audit is 
in error in either of the two ways allowed by Section 111.0042, and Contention 
1 must be denied. 

Section 111.061(b) Penalty

As to the issue of the imposition of Section 111.061(b) penalty in both audits, 
Section 111.061(b) provides as follows:

"(b) Except where another penalty for fraud or intent to evade tax is 
specifically provided, if it is determined that the failure to pay the tax or 
file a report when due was a result of fraud or an intent to evade the tax, an 
additional penalty of 50 percent of the tax shall be imposed."
(Emphasis added).

In cases such as this which involve the imposition of the penalty under Section 
111.061(b), the burden of proof is on the Tax Division to prove by clear and 
convincing evidence that the imposition of such penalty is warranted." Rule 
1.40(1)(B). If the Tax Division prevails by so proving, then Section 111.061(b) 
requires the Comptroller to assess the fraud penalty. Therefore, the issue is 
whether the Tax Division has demonstrated, by clear and convincing evidence, 
that Petitioner's "... failure to pay the tax or file a report when due was a 
result of fraud or an intent to evade the tax." I believe that it has done so 
in the case of both the mixed beverage gross receipts tax and sales tax audits. 


Petitioner's contention as to the imposition of the fraud penalty is premised 
in part on the argument that intent cannot have been shown because none of the 
information used in either audit was obtained from Petitioner nor was he ever 
contacted and asked about his intent. Such argument is disingenuous. Petitioner 
requested this administrative proceeding and has been given more than 
sufficient opportunity to come forward with whatever records or evidence he 
might have to explain the gross underreporting of sales tax as well as mixed 
beverage gross receipts tax. To hold that a taxpayer may defeat an assessment 
under such circumstances would thwart the specific mandates of the statute and 
rules as to a taxpayer's responsibilities under the tax laws. Under the tax 
statutes and the Comptroller's rules, it is clear that a taxpayer is obligated 
to maintain adequate records. (See Section 111.0041, Section 151.025, and Rules 
3.282 and 3.286 relating to the auditing of taxpayer records and taxpayer 
recordkeeping requirements, respectively). 

By statute, when records are inadequate, the auditor must use the best records 
available. Section 111.0042(d) provides, in pertinent part, that "... [I]f 
records are inadequate to reflect accurately the business operations of the 
taxpayer, the comptroller or his designee shall determine the best information 
available and base his audit report on that information." Using the best 
information available, the Tax Division provided uncontroverted evidence that 
Petitioner underreported the sales and mixed beverage taxes due for the audit 
periods. The mixed beverage gross receipts tax audit indicates underreporting 
by $************ over the seventeen month audit period (approximately 59% more 
than the amount reported). The sales tax audit indicates that $************ was 
underreported for the audit period (approximately 102% more than the amount 
reported). Both percentages of underreporting constitute "gross errors" of 25% 
or greater than the amount initially reported pursuant to the provisions of 
Section 111.205 dealing with exceptions to the limitations period for 
assessments. (Finding of Fact. No 10). Petitioner has submitted no documentary 
evidence or plausible explanation for such underreporting. Furthermore, as the 
Tax Division argues, such underreporting constitutes a "gross error." That is, 
under the provisions of Section 111.205, dealing with exceptions to the 
limitations period for assessments, an error of 25% or more over the amount 
initially reported is considered a "gross error." [FOOTNOTE: Effective 
September 1, 1993, Section 111.205(3) became Section 111.205(b).]

Previous Comptroller's Decisions have held that the gross underreporting of 
taxable sales (along with other factors or no plausible explanation), is 
sufficiently indicative of intent to evade the tax to warrant the assessment of 
the fraud penalty. (Comptroller's Decision Nos. 31,328 (1994), 31,078 (1994), 
30,075 (1993), and 27,203 (1991)). In Comptroller's Decision No. 31,078, Chief 
Administrative Law Judge Neel considered a situation in which the fraud penalty 
[FOOTNOTE: The fraud penalty in Comptroller's Decision No. 31,078 and in the 
other Decisions cited was imposed under Section 151.502 rather than Section 
111.061; however, the same standard of proof is applicable (e.g., there must be 
clear and convincing evidence that imposition of the fraud penalty is 
warranted).] was imposed solely on the basis of the following facts: (i) the 
taxpayer's records were inadequate, (ii) its sales were underreported, and 
(iii) the underreporting error was a "gross error" (25% or more) under Section 
111.205. Judge Neel states:

"What the Tax Division argues, in essence, is that even though this section 
admittedly deals with exception situations to the standard four-year statute of 
limitations, it does evidence what the Legislature considers to be a gross 
error in the reporting of taxes due and payable to the State of Texas, i.e., an 
error of 25% or more calculated by dividing the amount of unreported tax by the 
amount of tax reported. The ALJ cannot disagree, and concludes, based upon the 
error rates reflected in Finding of Fact No. 13, that Petitioner was grossly 
underreporting his taxable sales and tax owed the State of Texas from the 
inception of the audit period through June 1990. Moreover, without sound 
evidence to the contrary, the ALJ agrees with the Tax Division that such gross 
underreporting, especially when considered in conjunction with the other two 
factors, constitutes clear and convincing evidence of Petitioner's intent, 
through June 1990, to evade taxes owed the State of Texas." 

In addition, nothing in any prior Comptroller's Decisions I reviewed concerning 
the imposition of the fraud penalty supports a different conclusion. (See, 
Comptroller's Decision Nos. 33,452 (1995), 32,238, 32,164, 31,327, 30,867, 
30,659, and 30,036 (all decided in 1994), and 29,193 (1992), involving both 
underreporting as well as tax collected but not remitted. Additionally, 
although it was determined in Comptroller's Decision Nos. 31,500 (1994), and 
31,734 (1995), involving failure to remit collected tax, that the Tax Division 
did not prove its case, I find each of those cases are distinguishable not only 
as to the particular facts but also because in each the taxpayer was found to 
have submitted credible testimony as to lack of intent in the failure to remit 
collected tax).

Based upon the record before me, I conclude that the Tax Division has met its 
burden of proof showing by clear and convincing evidence that the failure to 
pay the tax was the "result of fraud or an intent to evade the tax." 
Consequently, imposition of the fraud penalty in both assessments against 
Petitioner in issue here was warranted and Petitioner's Contention 2 must be 
denied.

Having so found, Petitioner's Contention 3 as to the statute of limitations is 
moot because it is conditioned upon the Tax Division's failing to prove that 
the fraud penalty is warranted. However, even had that not been the case, 
Section 111.205 provides that the statute of limitations is inapplicable not 
only when a false or fraudulent report is filed by a taxpayer, but also when 
there is a "gross error" in reporting tax due.  Clearly, under the facts here, 
there was such "gross error"(as defined in Section 111.205) both as to the 
sales tax and the mixed beverage gross receipts tax. Therefore, Contention 3 
must also be denied. 

RECOMMENDATIONS:

Based on the findings of fact, conclusions of law, and discussions contained 
herein, it is recommended that:

1. the mixed beverage gross receipts tax audit be amended to make the 
adjustments to purchases to show the purchase of 26-750 ml bottles and to 
include wine purchases as set out in the Tax Division's Response to 
Petitioner's Reply dated February 20, 1996; and

2. except as amended, Petitioner's contentions be denied, and each of the audit 
assessments be upheld in all respects.

Signed this 15th day of November, 1996.


BETTY J. MARKS
Administrative Law Judge


Hearing Nos. 35,015 & 35,314


ORDER OF THE COMPTROLLER


The above decision of the Administrative Law Judge, resulting in Petitioner's 
liability as set out in Attachment A, which is incorporated by reference, is 
approved and adopted in all respects. This decision becomes final twenty (20) 
days from the date of this Order, and the total sum of the tax, penalty and 
interest amounts is due and payable within twenty (20) days thereafter. If such 
sum is not paid within such time, an additional penalty of ten percent of the 
taxes due will accrue, and interest will continue to accrue.

If a rehearing is desired, a Motion for Rehearing must be filed with the clerk 
of the Administrative Law Judges within twenty (20) days from the date of this 
Order, and must state the grounds upon which the motion is based.

RENDERED and ISSUED this 15th day of November, 1996.


JOHN SHARP
Comptroller of Public Accounts
of the State of Texas



ACCESSION NUMBER: 9611753H  
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 11/15/1996
TAX TYPE: BEVERAGE