A New York State Administrative Law Judge found that the Department’s indirect audit method was acceptable, in light of the absence of adequate records, to support an assessment of sales and use tax, and that the wife of the owner of the business was personally responsible for the unpaid sales and use tax. Matter of Susan Sacher, DTA No. 824107 (N.Y.S. Div. of Tax App., Jan. 16, 2014)

The Business at Issue.  The case arose out of the sales and use tax liability of BMW NY, Inc., which was owned and operated by Joel Sacher, husband of the petitioner Susan Sacher.   BMW NY operated BMW motorcycle franchises at two locations in New York State during 1998 through 2006. Mr. Sacher was responsible for the day-to-day operations of the two dealerships, and had full authority to manage the business. Ms. Sacher was a signatory on two of BMW NY’s business bank accounts, and provided both her personal guaranty, and a guaranty of the corporation, which she signed as secretary, to enable her husband to obtain the motorcycle franchise, at the insistence of BMW of North America, due to Mr. Sacher’s extensive business losses and resulting poor credit rating.

Ms. Sacher operated two businesses during the years at issue, both of which had office space in or adjacent to the BMW NY dealerships. She was a licensed insurance agent, and BMW NY customers were referred to her for motorcycle insurance. She also operated a wholesale business importing motor scooters into the U.S. from Italy, and BMW NY was the first dealership to sell the scooters.  Ms. Sacher received wages from BMW NY for 2002 and 2003 of approximately $35,000 per year, which, according to Mr. Sacher, were actually his wages paid to his wife to avoid creditors. She had little or no involvement in BMW NY’s business, and did not sign the sales tax returns.

The Audit.  The Department commenced a sales and use tax audit for the period from March 1998 through November 2001, requesting the production of all books and records. The only records produced were income statements for some of the years at issue, copies of certain late-filed income and sales tax returns, warranty sales information, and pages from a “police book,” which is a record of all vehicles brought to the dealership for resale, used by the police to check for stolen vehicles.  It also contains the “facility number” of the dealership, which is used by the Department of Motor Vehicles in conjunction with its issuance of Retail Certificate of Sale forms, known as MV-50s, which record the name and address of purchasers and the prices of the vehicles.

The auditor obtained records from the Department of Motor Vehicles, including the MV-50s, and used those records to compute a percentage of nontaxable sales.  The auditor estimated gross sales from federal and New York State corporate tax returns and income statements provided during the audit.  Using these estimates, additional taxable sales were computed, and BMW NY signed a Closing Agreement for a portion of the audit period, fixing the additional tax at over $1.4 million, plus penalty and interest.  Ms. Sacher also executed a Closing Agreement, in her own name and as a responsible person, for various periods, and another agreement for the periods 9/1/98 through 2/28/99 and 9/1/01 through 11/30/01 (the “separate periods”), stating that tax would be paid by July 31, 2009.  Apparently, payment was not received for the separate periods, and Notices of Determination were issued by the Department against Ms. Sacher.

The Decision. The ALJ found, first, that due to the failure of BMW NY to maintain and produce adequate records, as it is required to do by Tax Law § 1135(a)(1), the Department was justified in resorting to an indirect audit methodology, which need only be “‘reasonably calculated to determine the amount of tax due.’”  The auditor’s use of Department of Motor Vehicles records was found to be “entirely reasonable,” and the ALJ distinguished this case from others where, for example, a taxpayer proved through an expert witness that the auditor had relied on factors without any rational connection to the business, citing Matter of Fokos Lounge, Inc., TSB-D-91 (13)S (N.Y.S. Tax App. Trib., March 7, 1991).  Since the ALJ found that Ms. Sacher had not met her burden of establishing that the audit method was unreasonable, or that the tax as determined was erroneous, the audit method was upheld.

The ALJ then went on to determine that Ms. Sacher was indeed a responsible person, relying on her provision of both a personal guaranty and a corporate guaranty that she signed as secretary of BMW NY, without which the business would have been unable to operate.  She also held herself out to BMW of North America and various banks as a corporate officer, received “the benefit of the corporation’s profits” in the form of a salary for at least two years, and ran two businesses that “directly benefitted” from BMW NY. The ALJ also found that Ms. Sacher, while having little or no involvement in the operation of the business, did not establish that she “was thwarted by others in carrying out her corporate duties through no fault of her own,” but rather that she “chose not to inquire and simply to abdicate her responsibilities. . . to her husband, an individual with a history of extensive businesses losses and poor credit” (emphasis in original).  Combined with the fact that Ms. Sacher had admitted, in the consents she executed, to being a responsible person both before and after the separate periods now in dispute, the ALJ found Ms. Sacher was properly held responsible for BMW’s sales tax payment obligations.

Additional Insights

This case demonstrates two principles common to many sales tax disputes. First, in the absence of the records that are required to be maintained by every vendor, taxpayers and allegedly responsible parties always have an uphill battle to demonstrate that the method chosen by the auditor is unreasonable. While in a limited number of instances the burden has been met (see, for example, two cases covered in the August 2012 issue of New York Tax Insights: Matter of Richmond Deli & Bagels, Inc., and Matter of Forestview Rest., LLC), generally the methods chosen by auditors are upheld unless a taxpayer can demonstrate a concrete basis why the chosen method does not reach a correct result.

Second, it can also be very difficult to challenge a determination of personal responsibility. It is not enough, as the Sacher case makes clear, to establish that the individual had little or no involvement in running the business or paying the sales tax. Rather, to avoid personal responsibility, it is necessary to demonstrate that the individual could not have ensured that the taxes were paid, either because of an inability to control the company or because of having been actually excluded from control by others. Here, where Ms. Sacher had conceded liability as a responsible person for periods both before and after the separate periods at issue, it is unlikely that responsibility could have been avoided without a compelling explanation of how the separate periods were different.