200711050H



HEARING NO.  46,266

RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: October 1, 2000 Through March 31, 2004

SALES AND USE TAX/RDT

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

SUSAN COMBS
Texas Comptroller of Public Accounts

JACK ARVIN
Representing Tax Division

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


COMPTROLLER’S DECISION

PRELIMINARY DISCUSSION:

This case was heard at an oral hearing on October 12, 2006.  Petitioner, 
************** was represented at the hearing by **************, who presented 
the testimony of **************.  The Tax Division was represented by Assistant 
General Counsel Jack Arvin, who presented the testimony of Donnis M. Boutte’, 
of the ************** Audit Office.

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

On October 31, 2006. Petitioner filed Exceptions to the October 17, 2006, 
Proposed Comptroller’s Decision.  The Tax Division filed its Response to these 
Exceptions on November 14, 2006.  The ALJ and the Comptroller have considered 
the Petitioner’s Exceptions and the Tax Division’s Response, and this 
Comptroller’s Decision represents the ruling thereon.

AGREEMENT OF THE PARTIES:

Based on documentation supplied by Petitioner, the auditor agreed to adjust the 
audit by including soft drink purchases in the calculation of taxable sales, 
and lowering the mark-up on tobacco to 18%.

PETITIONER'S CONTENTION:

1. Petitioner contends that the markup percentages and estimated sales figures 
used by the auditor are not representative of its operation.

2. Petitioner contends that the 50% penalty should not be assessed.

FINDINGS OF FACT:

1. ************** (Petitioner) operates a convenience store.

2. Petitioner was audited for sales and use tax compliance for the period 
October 1, 2000 through March 31, 2004.  As a result of the audit, on January 
18, 2005, the Comptroller sent Petitioner a Texas Notification of Audit 
Results, showing an amount due that included tax, penalty, an additional 50% 
penalty, and interest through the date of the Notice.  Petitioner’s timely 
filed request for redetermination resulted in this proceeding. 

3. At the time of the audit the auditor was provided a summary general ledger, 
some purchase invoices, and bank statements.  The auditor did not receive 
register tapes, daily or monthly summaries, or complete purchase records.  

4. The auditor secured beer purchase invoices from ************** (COMPANY A), 
and ************** (COMPANY B) for 2003.  The auditor conducted a shelf test in 
June or July of 2004 to determine Petitioner’s mark-up on beer.  She divided 
the average case price by the number of beers to determine the average purchase 
price per beer, $.61.  She then compared the purchase prices per beer to the 
sales price of 12 packs, six packs, and singles to determine the average 
mark-up for beer, 33%.  (For singles she used the average of two can prices as 
the average sales price.)   The auditor applied that mark-up to the beer 
purchases for 2003 to estimate the sales of beer for that year.

5. The auditor secured tobacco purchase invoices from ************** (COMPANY 
C) for 2003.  The auditor conducted a shelf test in June or July of 2004 to 
determine Petitioner’s mark-up on cigarettes.  She then compared the purchase 
prices per pack of the three brands that made up 90% of Petitioner’s sales to 
the sales price of those brands to determine the average mark-up for 
cigarettes, 23%.  (The Tax Division has agreed to reduce this mark-up to 18% 
based on cash register tapes provided subsequent to the audit.)   The auditor 
applied that mark-up to the cigarette purchases for 2003 to estimate the sales 
of cigarettes for that year.

6. Petitioner failed to maintain adequate records to calculate the percentages 
sales of the three main taxable categories—beer, tobacco, and 
sodas/candy/taxable food.  Based on Audit Procedure AP 92, the auditor 
estimated that beer represented 27% of total sales, and that tobacco also 
represented 27% of total sales.  Based on the estimated total beer and 
cigarette sales for the 2003, the auditor calculated the estimated total gross 
sales for 2003, and, based on that estimate, calculated the estimated soft 
drink and candy sales for 2003 to determine the estimated total taxable sales 
for 2003, from which she deducted 5% for spillage, etc., to determine the net 
additional taxable sales for 2003.  Utilizing that figure for 2003, the auditor 
estimated the quarterly taxable sales for the remaining 11 quarters of the 
audit period to determine the estimated total taxable sales for the audit 
period from which she subtracted food stamp sales and reported taxable sales, 
resulting in $************** in unreported tax due. 

7. Subsequent to the audit, Petitioner submitted cash register tapes for 11 
months from which the auditor could determine the percentage of sales and, 
using the shelf test results, the mark-up on sodas.  As a result, she 
recalculated the estimated total gross sales for 2003 with beer sales 
representing 27%, cigarette sales at the 18% markup percentage representing 
27%, and soda sales representing 16% (using a 23% mark-up), and, based on that 
estimate, calculated the estimated candy sales for 2003 to determine the 
revised estimated total taxable sales for 2003.  From that figure she deducted 
food stamp sales, reported taxable sales, and 5% for spillage, to determine 
additional taxable sales for 2003.  She then divided the additional taxable 
sales by the reported taxable sales to determine the error rate for 2003, 
302.7866%.  The auditor then applied that error rate to the reported taxable 
sales for the audit period to determine additional taxable sales for the audit 
period, resulting in $************** in unreported tax due. 

8. Subsequent to the audit, ************** reviewed Petitioner’s records, and 
in January 2006 conducted a shelf test of all beer, soda, tobacco, and 
candy/taxable food products.  From that shelf test, he calculated mark-ups of 
13.58% on cigarettes, 16.8% on beer, and 19.08% on soda.  Based on his review 
of the purchase invoices, which he concluded were complete, ************** 
determined that $************** sales tax was unreported for 2001, 2002, and 
2003.  No comparison was made between Petitioner’s purchase invoices and the 
vendor records supplied to the auditor.  ************** did not calculate the 
unreported tax for the first quarter of 2004.

9. Petitioner is a corporation owned by **************, President, and 
**************, Vice President.  Mr. ************** signed the sales tax 
returns during the audit period.  The vendor records for 2003 showed 
$************** in tobacco purchases.  Petitioner reported $************** in 
taxable sales for that same period.

DISCUSSION AND CONCLUSIONS OF LAW:

PETITIONER’S FIRST CONTENTION:

Petitioner’s first contention should be denied.

Petitioner contends that the estimation used by the auditor was erroneous 
because it relied on vendor records when Petitioner’s purchase records were 
complete, the mark-ups used were too high, and the estimated sales figures 
calculated for 2003 were inappropriately applied to the rest of the audit 
period.  The Tax Division responds that this estimated audit was based on the 
best information available.

Comptroller Rule 3.281(b) provides that retailers must keep records that 
“reflect the total gross receipts from sales,” and “reflect the total purchases 
of taxable items.”  When the records are insufficient, Rule 3.281(c)(1) 
provides that the Comptroller “will estimate the tax liability based on any 
information available, including, but not limited to, records of suppliers.”

Because Petitioner was unable to provide register tapes for the convenience 
store, complete purchase invoices, or daily and monthly summaries, the auditor 
had to use purchase information from Petitioner’s vendors and estimate the 
liability based on Audit Procedure AP 92.  This procedure requires the auditor 
to use a mark-up method using purchase information obtained from the taxpayer 
and/or vendors, establish mark-ups by performing a shelf test, and then apply 
the mark-ups to the purchase information.  If purchases are not available for 
all taxable categories, the auditor uses the average taxable sales method, 
which consists of taking the available purchase categories, applying the 
mark-ups, and then dividing the computed sales by the percentage of average 
sales to total sales for those categories, 27% for beer, 27% for cigarettes, 
16% for soft drinks, 9% for candy, etc.  

The auditor compared the purchase records provided by Petitioner to those 
secured from the vendors, and determined that the Petitioner’s records were 
incomplete.  As a result, she proceeded to estimate the liability pursuant to 
AP 92.  Because complete beer and cigarette vendor records were only available 
for 2003, the auditor used that year as her base period.  When Petitioner 
supplied additional records, the auditor adjusted the estimated sales for 2003. 
 Then, rather than using the estimated sales for 2003 as the base of estimated 
sales for the other periods of the audit as she had originally done, she 
calculated an error rate for 2003 and applied that error rate to the reported 
taxable sales for those other periods.  This resulted in a lesser liability for 
Petitioner.

Petitioner still contests the approach used by the auditor, arguing that the 
purchase records were complete, and that no reliance on vendor records was 
necessary.  However, when third-party records show more purchases than those 
records produced by the purchaser, it is reasonable to assume that the 
third-party records are more accurate.  As a result, without any documentary 
evidence explaining the differences, the auditor was justified in relying on 
the vendor records.

Petitioner also contends that the mark-ups used by the auditor were based on 
too limited a shelf test.  However, the shelf test performed by the auditor was 
only a quarter later than the end of the audit period, and even with its 
limitations, would be expected to reflect a more accurate picture of 
Petitioner’s operations during the audit period than a test conducted a year 
and a half later.  

Under Rule 1.40(2)(B), Petitioner is required to demonstrate by a preponderance 
of the evidence that the audit results under review are in error.  Although 
************** reviewed Petitioner’s records and reached different conclusions, 
he has failed to provide source documents to show by a preponderance of the 
evidence that the mark-ups and the estimated taxable sales calculated by the 
auditor in the revised schedules are in error.  Petitioner’s failure to keep 
the required sales records is the reason that the auditor was forced to use an 
alternate method of auditing Petitioner in the first place, and Petitioner’s 
complaints about the auditor’s methodology without backup source records are 
not sufficient to set aside the revised schedules.

PETITIONER’S SECOND CONTENTION:

Petitioner’s second contention should be denied.

Section 111.061(b) provides that "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 due shall be imposed." 

Rule 1.40(1)(B) provides that the burden of proof is on the Tax Division to 
prove "by clear and convincing evidence, if the issue is whether the imposition 
of additional penalty for willful or fraudulent failure to pay tax is 
warranted."  The question, then, is whether the Tax Division has proven by 
clear and convincing evidence that Petitioner intentionally evaded the tax by 
knowingly failing to remit tax.  If the Tax Division prevails on this issue, 
then Section 111.061(b) permits the assessment of the fraud penalty.

The Tax Division asserts that the substantial amount of unreported taxable 
sales is clear and convincing evidence of Petitioner’s intent to evade paying 
sales tax.  The primary question is whether Petitioner "intended to evade" the 
payment of the tax when due.  Comptroller Decision No. 32,579 (1996) held that 
"scienter" (knowledge or willfulness) necessary to show fraudulent or 
intentional evasion (and not merely neglect) must generally be gleaned from the 
taxpayer's actions during the audit period (e.g., what was done at the time 
rather than what is later said to have been the intent).  Further, generally 
only when viewed together do such actions become indicative, much less 
conclusive, of taxpayer's intent. 

The Comptroller has held on many occasions that 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 Decision Nos. 35,015 and 35,314 (1996).  Based on the 
adjusted audit, Petitioner did not remit over $************** in sales tax.  
One of Petitioner’s two officers, **************, also one of the owners of 
Petitioner, signed the sales tax returns.  Petitioner reported taxable sales in 
2003 that were less than half of Petitioner’s tobacco purchases alone for that 
same period.  The totality of the circumstances demonstrates that Petitioner 
had the requisite intent to evade payment of the sales taxes, and the 
assessment of the fraud penalty was proper.

RECOMMENDATION: 

The audit liability should be revised as agreed to by the Tax Division, and the 
revised liability should then be upheld in its entirety.


ROY G. SCUDDAY
Administrative Law Judge

HEARING NO. 46,266

ORDER OF THE COMPTROLLER

The above decision resulting in Taxpayer's liability as set out in “Attachment 
A,” which is incorporated by reference, is approved and adopted in all 
respects.  The decision becomes final twenty days after the date Petitioner 
receives notice of this decision, and the total sum of the tax, penalty, and 
interest amounts is due and payable within twenty 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 either party desires 
a rehearing, that party must file a Motion for Rehearing, which must state the 
grounds for rehearing, no later than twenty days after the date Petitioner 
receives notice of this decision.  Notice of this decision is presumed to occur 
on the third day after the date of this decision.

Signed on this 14th day of November 2007.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller




ACCESSION NUMBER: 200711050H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 11/14/2007
TAX TYPE: SALES
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