The New York State Tax Appeals Tribunal has affirmed the decision of an Administrative Law Judge that a company operating a sports bar was not entitled to a refund of sales and use tax paid pursuant to a consent agreement that had resolved an audit of the years in issue. Matter of RJB Slick’s, Inc. N/K/A RKB Ventures, Inc., DTA No. 825079 (N.Y.S. Tax App. Trib., Feb. 8, 2018).
Facts and Audit. Petitioner RJB Slick’s, Inc. (“Slick’s”) operated a sports bar known as Slick Willie’s in Tonawanda, New York. The Department audited Slick’s for the period March 1, 2004, through February 28, 2007, and requested all books and records. In response, Slick’s produced records that included “z tape summaries,” daily records of free drinks, incomplete bank statements, and incomplete purchase invoices. The auditor also visited the bar and obtained completed audit questionnaires and bar fact forms from Rudolph Bersani, the sole owner of Slick’s who was involved in all operations of the bar. The auditor determined the records were inadequate to conduct a complete audit, and therefore he reviewed purchases of beer and liquor for a test period of September 1, 2008, through November 30, 2008; computed a markup percentage using a bar price list of December 4, 2006; and applied the percentage to purchases. The initial audit findings were sent to the company’s representative in February 2008 and were then adjusted based on additional information provided by the representative. Eventually, in a letter dated October 31, 2008, the representative stated that Slick’s was in agreement with the audit findings as long as penalties were abated, and the Department mailed a statement of proposed audit changes for execution by Slick’s for the agreed-upon amount without penalties. When the statement was not returned, the auditor met Mr. Bersani at the bar, where the statement, including the language that Slick’s consented to the assessment, was executed. Payment was made on November 19, 2008, accompanied by a letter from the company’s representative.
On November 17, 2010, an application for refund was filed by Slick’s, now claiming that the audit method that was the subject of the consent was unreasonable. The original auditor was assigned to review the refund claim, and he found that no new records or information had been submitted and that an alternative analysis conducted by the auditor using the company’s own records resulted in a higher tax liability than that determined on audit. The Department denied the refund.
ALJ Hearing and Determination. In its petition to the Division of Tax Appeals, Slick’s alleged that the statement of proposed audit change had been executed by Mr. Bersani under duress and that he was misled by the Department. It also claimed that the Department’s use of a test period mark-up method was improper because the company’s records were sufficient to conduct an audit and that the audit methodology used by the Department was unreasonable.
At the hearing, the auditor testified to the inadequacies and discrepancies in the records, noting the absence of complete sales records, and to his review of affidavits from bartenders, which he found were unsubstantiated and contradicted by information provided during the audit. The auditor described the negotiations and adjustments to the original audit calculations to which he had previously agreed and the circumstances surrounding the execution of the statement of proposed audit change. The manager of the business testified that she was the exclusive programmer of pricing details for the cash registers and that she had never been asked by Mr. Bersani or the company’s representative to produce documents relating to the cash registers. She testified about specials offered during the audit period, but did not present evidence that verified the quantity sold or per drink cost. Slick’s also presented the testimony of a sales tax consultant, who performed his own analysis using an alternative markup method, but acknowledged that he relied on estimates as a starting point.
The ALJ found that the audit had a rational basis because of the company’s consent to the proposed assessment and that, in light of that consent, Slick’s had the burden to prove its correct sales tax liability, which it had not done.
Tribunal Decision. The Tribunal affirmed the ALJ’s determination. First, it reviewed the facts and circumstances surrounding Mr. Bersani’s execution of the statement of proposed audit changes and found that the company’s then-representatives, both attorneys, had sought a negotiated settlement and that the terms they requested were contained in the final statement, which had been the result of negotiations during which both the Department and Slick’s agreed to certain adjustments. The letter from the company’s representatives, according to the Tribunal, “plainly expresses agreement with the terms of the consent,” and the final letter enclosing payment on November 19, 2008, raised no issue about Mr. Bersani having been induced to sign a consent involuntarily but instead indicated satisfaction with the audit process. The Tribunal agreed with the ALJ that any conflicting evidence in the record regarding whether the check had been given to the auditor by Mr. Bersani rather than mailed with the November 19 letter was insignificant and that there was insufficient evidence to support Mr. Bersani’s claim that he had been told by the auditor that a tax warrant would be filed if the consent were not signed.
The Tribunal then acknowledged that Slick’s did retain the right to file a refund and to contest denial of that refund in the Division of Tax Appeals, even though it signed the consent. However, the Tribunal found that, because a consent had been executed, the rational basis for the assessment was deemed established, and “petitioner has effectively conceded the reasonableness of the audit method and audit computations.” In order to contest the assessment, therefore, Slick’s had to prove by clear and convincing evidence that its actual liability was less than the amount to which it had consented, by producing records sufficient to substantiate its taxable sales. The Tribunal found that Slick’s failed to meet that burden, since it had not offered computation of the amounts it contended were correct but merely challenged the method used by the Department. Furthermore, the Tribunal found that, even if the reasonableness of the audit method were properly in dispute, Slick’s had failed to demonstrate that its records were sufficient for a detailed audit or to establish any error in the method used.
It is common for audits to be resolved through the use of a statement of proposed audit changes that is signed by the taxpayer and often results from a negotiation process in which both the taxpayer and the Department agree to concede certain issues and arrive at an acceptable computation for purposes of wrapping up an audit. While a taxpayer retains the ability to pay the amount of the audit changes and thereafter seek a refund, this case highlights the risk incurred in such a process. The Tribunal has made it clear that, by signing the consent, the taxpayer will be deemed to have conceded the reasonableness of the audit method and will have a high burden to come forward with clear and convincing evidence to demonstrate what it contends is its true taxable sales and use tax liability. Taxpayers should carefully consider the pros and cons of signing a consent, and their representatives need to make sure taxpayers understand the potential risks, if they are contemplating further challenges to the audit.