In the Matter of the Petition of BEIJING CHINA BUFFET, INC. for Revision of a Determination or Refund of Sales and Use Taxes under Articles 28 and 29 of the Tax Law for the Period September 1, 2004 through February 28, 2007.
In the Matter of the Petition of PING DI CHEN for Revision of a Determination or Refund of Sales and Use Taxes under Articles 28 and 29 of the Tax Law for the Period December 1, 2004 through February 28, 2007.
In the Matter of the Petition of YONG LI for Revision of a Determination or Refund of Sales and Use Taxes under Articles 28 and 29 of the Tax Law forthe Period December 1, 2004 through February 28, 2007.
Docket/Court: 822635; 822636; 822637, New York Tax Appeals Tribunal
Date Issued: 02/23/2012
Tax Type(s): Sales and Use Tax
Petitioners, Beijing China Buffet, Inc., Ping Di Chen and Yong Li, filed an exception to the determination of the Administrative Law Judge issued on September 23, 2010. Petitioners appeared by the Law Offices of Stephen K. Seung (Stephen K. Seung Esq. and Robert Nizewiz, Esq., of counsel). The Division of Taxation appeared by Mark Volk, Esq. (Michael Hall, of counsel).
Petitioners filed a brief in support of their exception. The Division of Taxation filed a brief in opposition. Petitioners filed a reply brief. Oral argument, at petitioners' request, was heard on September 14, 2011 in New York, New York.
After reviewing the entire record in this matter, the Tax Appeals Tribunal renders the following decision.
I. Whether the Division of Taxation properly determined additional sales and use taxes due from Beijing China Buffet, Inc., Ping Di Chen and Yong Li for the period September 1, 2004 through February 28, 2007 using an estimated audit methodology. 1
II. Whether the estimated audit methodology utilized by the Divison of Taxation was rational and reasonably calculated to reflect the taxes due.
FINDINGS OF FACT
We find the facts as determined by the Administrative Law Judge. These facts are set forth below.
Petitioner, Beijing China Buffet, Inc. (Beijing), 2 operated a Chinese buffet-style restaurant at 2429 Military Road, Niagara Falls, New York, between September 1, 2004 and February 28, 2007 (the audit period) making sales of food and drink.
An audit appointment letter, dated March 5, 2007, was mailed to petitioner's representative, Shiugeen Chin, CPA, to review petitioner's sales and use tax records for the period September 1, 2004 through February 28, 2007. The appointment was scheduled for April 30, 2007 and requested that specific records pertinent to the audit period be made available at that time, including: sales tax returns; federal income tax returns; New York State corporation tax returns; the general ledger; general journal and closing entries; all exemption documentation to support nontaxable sales; chart of accounts; fixed asset purchase and sales invoices for the audit period; expense purchases; merchandise purchases; bank statements and canceled checks and deposit slips for all bank accounts maintained by petitioner; cash receipts journal; cash disbursement journal; the corporate book; depreciation schedules for the audit period; State Liquor Authority license in effect for the audit period; utility bills; guest checks; and cash register tapes for the audit period.
On March 27, 2007, the auditor received a power of attorney from petitioner's new representative, Evelyn Kung, CPA, and traveled to her office to review petitioner's records, which consisted of federal income tax returns, bank statements, canceled checks, wage reporting statements, sales summaries, purchase records for food and beverages and utility bills. At this time, the auditor informed Ms. Kung that petitioner did not have adequate sales and purchase records.
The auditor performed a detailed review of petitioner's fixed asset or capital accounts and determined that tax had not been paid on some assets valued at $19,984.00, which resulted in additional tax due of $1,629.23. Petitioner provided no documentation to demonstrate that sales tax had been paid on these asset purchases.
Since petitioner did not maintain a general ledger, cash register tapes or guest checks, there was no source documentation for sales. Additionally, the purchase records maintained by petitioner along with information the Division of Taxation (Division) received from vendors indicated purchases for the fiscal year ended October 31, 2005 of $92,508.45, while the federal income tax returns filed for the same period stated purchases (cost of goods sold) of $76,995.00. A similar discrepancy was found for the fiscal year ended October 31, 2006, where petitioner's records indicated purchases of $125,275.28, but the federal tax return recorded only $98,799.00. Given the lack of source documentation for sales and the unreliability of the purchase information available, the Division concluded that it would be impossible to perform a detailed audit of petitioner's records to determine petitioner's tax liability for the audit period and resorted to an indirect audit methodology.
In choosing a methodology, the Division rejected a markup test due to the lack of reliable purchase information and the fact that petitioner operated a buffet style restaurant that prevented an accurate determination of the quantities of food sold. Instead, it was decided to do a cash-tocredit card sales analysis, utilizing the results of a one-day observation test and petitioner's own records of credit card sales as disclosed in banking records.
The Division's investigators conducted an observation at petitioner's restaurant, the Beijing China Buffet, on Thursday, November 8, 2007 from 10:30 A.M. to 8:00 P.M. The restaurant was located on a high volume traffic road close to the Niagara Prime Outlet Mall. There was seating for approximately 240 patrons. Customers pay for their meals upon entering regardless of whether they are eating in or taking the food out.
Between 11:00 A.M. and 8:00 P.M., there were 96 transactions, 16 of which were take-outs. The total value of all the transactions was $1,454.91, of which 14 were credit card transactions totaling $238.80, or 16.41% of the total. The amounts reported by the investigators from the observation were inclusive of sales tax. However, when the tax was backed out of the sales total, it amounted to $1,347.14. Credit card sales exclusive of tax amounted to $221.11 and cash sales totaled $1,126.03. Based on these figures, the resulting cash-to-credit card sales ratio was 5.093.
The total amount of cash sales could not be determined from petitioner's records. In fact, petitioner's Key Bank monthly bank statements from December 2004 through February 2007 indicated that there were no cash deposits at all for the months of January, April and August 2006 and nine other months with cash deposits of $100.00 or less.
Of the ten vendor/suppliers that appeared in petitioner's records for the period September 2004 through October 2005, only one was paid by check, with all others compensated in cash.
Because credit card deposits were made directly into petitioner's bank account by the credit card companies, credit card sales could be tracked and substantiated by the Division. The Division took the credit card deposits that were made into petitioner's bank account for the audit period, 3 $453,319.78, and applied the cash-to-credit card ratio determined in the observation test, 5.0923, to said figure (on a quarterly basis) to arrive at a projection of cash sales for the audit period, $2,360,128.7. The appropriate tax rate was applied for each quarter to arrive at total audited tax due on sales of $189,884.98. After giving credit for tax reported of $52,195.68, the additional tax on sales due per the audit was determined to be $137,689.30.
Based upon the audit findings, the Division issued to Beijing China Buffet, Inc., a Statement of Proposed Audit Change, dated November 21, 2007, which set forth additional sales and use tax due of $139,318.52, plus penalty and interest for the period September 1, 2004 through February 28, 2007. The additional tax due was comprised of the additional tax due on capital asset purchases for which petitioner did not offer any substantiation and the additional tax on sales as projected from the observation test and petitioner's books and records.
On or about January 11, 2008, petitioner's representative, Evelyn Kung, CPA, sent the Division a calculation of the cash-to-credit ratio based upon petitioner's records for the months of August through December 2007. 4 According to the calculations, petitioner recorded 4,540 sales during these five months with $113,882.00 in cash sales and $93,734.00 in credit card sales. These figures yielded a cash-to-credit card sales ratio of 1.215.
Petitioner took the credit card deposits for all the months of the audit period, netted the deposits of 15% to allow for tips, and then applied its own cash-to-credit card ratio (1.215) to determine cash sales and then total sales. Petitioner then backed out sales tax to determine sales net of tax, applied the sales tax rates used by the Division in its analysis to arrive at its own sales tax liability. Reported sales were subtracted to determine additional tax due. For the period December 2004 through February 2007, petitioner estimated additional tax due on sales of $ 19,061.05.
Upon review of petitioner's calculations, the auditor concluded that he could not accept petitioner's projections based upon a cash-to-credit card sales ratio of 1.215 since it did not take into account the months during the audit period where there were no cash deposits to the bank account and many others less than $100.00. The auditor believed that failing to recognize such data made the projections “self-serving” and eroded any credibility that could be ascribed to petitioner's conclusions drawn therefrom. The auditor believed that the data used by petitioner in its calculations was not indicative of the circumstances that presented themselves during the audit period.
Petitioner Ping Di Chen was the vice-president of Beijing China Buffet, Inc., during the period in issue. He came to the United States in 1998 from China and began working at the Beijing China Buffet sometime prior to October 2004 as a cook. He does not speak or read the English language and has little formal education.
In October 2004, Mr. Ping Di Chen and Mr. Yong Li took over the restaurant from the prior owner. Mr. Chen continued to work in the kitchen, cooking and ordering food. He was a signatory on the corporate bank account and did sign checks, including at least one for the payment of sales tax with the return for the quarter ended February 28, 2007 and others for expense purchases. He also signed sales tax returns filed during the audit period. He was listed on, and executed, the Application for Registration as a Sales Tax Vendor as an officer (vice-president) of the corporation in November 2004. In addition, Mr. Chen was listed as an officer on both the 2005 and 2006 federal income tax returns.
Mr. Yong Li was also listed as an officer, president, on the Application for Registration as a Sales Tax Vendor, was a signatory on the corporation's bank account, signed most of the sales tax returns filed during the audit period, and was listed as an officer on the federal income tax returns for the fiscal years ended October 31, 2005 and 2006. The auditors also observed checks issued by Mr. Li for the corporation's expense purchases. Mr. Chen stated that Mr. Li had acted as manager for an undisclosed period, but that they delegated that responsibility to persons they hired for most of the audit period. Managers were hired to bridge the language barrier and generally help them with the operation of the business. Mr. Chen also stated that Mr. Li helped their accountant to prepare tax returns.
Mr. Yong Li left the business sometime in January 2007.
THE DETERMINATION OF THE ADMINISTRATIVE LAW JUDGE
The Administrative Law Judge analyzed the statute and case law regarding sales tax audits. After reviewing the record, the Administrative Law Judge found that the Division made proper records requests and that petitioner failed to produce adequate books and records for the audit period. As such, the Administrative Law Judge concluded that the Division was properly entitled to estimate petitioner's sales tax liability.
The Administrative Law Judge observed that Courts have found it reasonable for the Division to extrapolate the results of a one-day observation test over a multi-year audit period. In the instant matter, the Administrative Law Judge found the Division's use of the cash-to-credit card sales ratio to be reasonable because it addressed major discrepancies in petitioner's records. The Administrative Law Judge observed that a taxpayer challenging an audit bears the burden of proving, by clear and convincing evidence, that the audit results were either unreasonably inaccurate or clearly erroneous.
The Administrative Law Judge determined that petitioner failed to carry its burden in this regard. Upon review, the Administrative Law Judge rejected petitioner's arguments based upon Matter of Cjefa Pizza, Inc. (Division of Tax Appeals, January 8, 2009 ) because Administrative Law Judge determinations lack precedential value and petitioner inaccurately interpreted that determination. The Administrative Law Judge also rejected petitioner's attacks on the audit methodology utilized, because speculation about possible alternative audit methods does not meet the standard of clear and convincing evidence. Having addressed the arguments regarding the underlying deficiency, the Administrative Law Judge turned to whether the individual petitioners were responsible persons.
The Administrative Law Judge observed the relevant statutes for determining whether an individual is a responsible person for sales tax. Upon reviewing the record and briefs, the Administrative Law Judge found that Ping Di Chen conceded liability for the assessed taxes and that Yong Li failed to raise a valid defense. However, the Administrative Law Judge directed the Division to adjust the period to December 1, 2004 through January 31, 2007 for Yong Li because the record shows that he left the corporation as of January 2007.
The Administrative Law Judge sustained the assessed penalties because petitioner failed to adduce evidence showing reasonable cause for abatement of such penalties.
ARGUMENTS ON EXCEPTION
Petitioner raises arguments that are substantially similar to those argued before the Administrative Law Judge. While petitioner does not argue against utilizing a one-day observation test, petitioner contends that it is unreasonable for the Division to use the cash-tocredit card sales ratio from a one-day observation test and apply it to petitioner's records.
Petitioner contends that the cash-to-credit card ratio is too inaccurate and resulted in a deficiency that is not reasonably related to the amount due. Petitioner supports its position with testimonial evidence and a report generated by its accountant. Petitioner disagrees with the Division's decision to estimate cash sales by applying a cash-to-credit card sales ratio to petitioner's credit card sales, which were derived from petitioner's records. Petitioner argues that the Division cannot use the cash-to-credit ratio and, instead, must apply total sales from the one-day observation test to the entire audit period. Petitioner Ping Di Chen and Yong Li raised no argument on exception regarding their status as responsible persons.
The Division argues that the Administrative Law Judge properly concluded that petitioner failed to meet its burden of proof and sustained the subject Notices. The Division distinguishes this matter from those cited by petitioner based on the fact that the subject audit was based upon petitioner's own records, as opposed to an external index. Further, the Division argues that the auditor fully articulated the reasoning behind each step of the audit and why the cash-to-credit card sales ratio was utilized. As such, the Division submits that it has established a rational basis for the audit and that it was incumbent upon petitioner to introduce evidence that the results were either clearly erroneous or unreasonably inaccurate. The Division contends that petitioner failed to introduce sufficient evidence to prove either proposition and that, at best, petitioner's argument amounts to an alternative methodology, not proof that the utilized method was unreasonably inaccurate or clearly erroneous.
We affirm the determination of the Administrative Law Judge.
This Tribunal has often articulated the standard for reviewing a determination based on an estimated audit methodology. In Matter of AGDN, Inc. (Tax Appeals Tribunal, February 6, 1997) , we stated as follows:
a vendor ... is required to maintain complete, adequate and accurate books and records regarding its sales tax liability and, upon request, to make the same available for audit by the Division (see, Tax Law §§ 1138[a]; 1135; 1142; see, e.g., Matter of Mera Delicatessen, Tax Appeals Tribunal, November 2, 1989 ). Specifically, such records required to be maintained 'shall include a true copy of each sales slip, invoice, receipt, statement or memorandum' ( Tax Law § 1135 ). It is equally well established that where insufficient records are kept and it is not possible to conduct a complete audit, 'the amount of tax due shall be determined by the commissioner of taxation and finance from such information as may be available. If necessary, the tax may be estimated on the basis of external indices...' (Tax Law § 1138[a]; see, Matter of Chartair, Inc. v. State Tax Commn., 65 AD2d 44, 411 NYS2d 41, 43 ).
When estimating sales tax due, the Division need only adopt an audit method reasonably calculated to determine the amount of tax due (Matter of Grant Co. v. Joseph, 2 NY2d 196, 159 NYS2d 150, cert denied 355 US 869 ); exactness is not required (Matter of Meyer v. State Tax Commn., 61 AD2d 223, 402 NYS2d 74, lv denied 44 NY2d 645, 406 NYS2d 1025 ; Matter of Markowitz v. State Tax Commn., 54 AD2d 1023, 388 NYS2d 176, affd 44 NY2d 684, 405 NYS2d 454 ). The burden is then on the taxpayer to demonstrate, by clear and convincing evidence, that the audit method employed or the tax assessed was unreasonable (Matter of Meskouris Bros. v. Chu, 139 AD2d 813, 526 NYS2d 679 ; Matter of Surface Line Operators Fraternal Org. v. Tully, 85 AD2d 858, 446 NYS2d 451 ).
Our review of the records reveals that the Division made a clear and unequivocal written request for petitioner's books and records. Petitioner introduced no source documents, such as sales invoices, complete purchase invoices or cash register tapes, that would permit the Division to conduct a complete audit for the entire period (see Matter of Vebol Edibles v. Tax Appeals Trib., 162 AD2d 765 , lv denied 77 NY2d 803  ; Matter of Club Marakesh v. State Tax Commn., 151 AD2d 908 , lv denied 74 NY2d 616  ). Accordingly, we hold that the Division was entitled to resort to external indices to estimate the amount of taxes due (see Matter of Urban Liqs. v. State Tax Commn., 90 AD2d 576  ).
The primary issue presented in this case is whether petitioner established that the selected audit method resulted in either unreasonably inaccurate or clearly erroneous amount of tax due (Matter of Scarpulla v. State Tax Commn., 120 AD2d 842  ; Matter of Surface Line Operators Fraternal Org. v. Tully, supra).
We note that “[c]onsiderable latitude is given an auditor's method of estimating sales under such circumstances as exist in [each] case” (Matter of Grecian Sq. v. State Tax Commn., 119 AD2d 948, 950  ). Whether the audit method used was “reasonably calculated to reflect the taxes due” (Matter of W.T. Grant Co. v. Joseph, supra at 206 ) can only be determined based on information made available to the auditor before the assessment is issued (see e.g. Matter of Queens Discount Appliances, Tax Appeals Tribunal, December 30, 1993 ; Matter of House of Audio of Lynbrook, Tax Appeals Tribunal, January 2, 1992 ).
We find that it was reasonable for the Division to estimate petitioner's liability by utilizing petitioner's records and a cash-to-credit card ratio generated from a one-day observation test. During the audit, petitioner provided the Division with bank statements for the entire period. These documents indicated deposits from major credit card vendors, which allowed the auditor to compute the amount of credit card sales for the entire period. Petitioner's actual cash sales remained an unknown, which is critical since a significant portion of petitioner's business was cash sales. To determine cash sales, the Division monitored petitioner's sales during a one-day field audit and generated a cash-to-credit card sales ratio. The Division then estimated cash sales by applying this ratio to credit card sales, and assessed petitioner based on the total underreported amount.
Upon review, we find that the Administrative Law Judge properly rejected petitioner's challenges to the accuracy of the audit method. As a general proposition, any imprecision in the results of an audit arising by reason of a taxpayer's own failure to keep and maintain records of all of its sales as required by Tax Law § 1135(a)(1) must be borne by that taxpayer (Matter of Markowitz v. State Tax Commn., supra; Matter of Meyer v. State Tax Commn., supra). Petitioner specifically complains that the cash-to-credit card sales ratio resulted in a larger number of total sales than those actually generated by petitioner. However, petitioner failed to adduce any source documentation that would support that conclusion. We also agree with the conclusion that the test period audit, conducted by petitioner's accountant, merited little consideration because the results did not appear to be an accurate reflection of the business during the audit period.
We find petitioner's challenge to be without merit because it provided no source documentation, such as sales invoices, complete purchase invoices or cash register tape records, either on audit or at hearing, that would establish the actual amount of petitioner's sales. Absent any records, petitioner's arguments do not provide any grounds for changing the Division's audit results. As such, we conclude that petitioner failed to carry its burden of showing the audit to be unreasonably inaccurate or clearly erroneous.
Petitioner asserts that Matter of 33 Virginia Place (Tax Appeals Tribunal, December 23, 2009) requires a reversal or modification of the Administrative Law Judge's determination. In Matter of 33 Virginia Place, the Division estimated the taxpayers' liability using an external index because the petitioners failed to maintain adequate books and records. However, in that case, at hearing, the auditor could not articulate a rational basis for the selected audit methodology. The taxpayers submitted expert testimony and evidence showing that the Division misapplied its selected audit methodology. As such, we cancelled the notices therein because the taxpayers met their burden of proof.
This matter is distinguishable from Matter of 33 Virginia Place. Herein, the Division estimated petitioner's tax liability from petitioner's own records and from data gathered from an observation test at petitioner's place of business. At the hearing, the auditor repeatedly provided the rationale for choosing to apply the cash-to-credit card sales ratio to the estimated credit card sales. Moreover, petitioner introduced no persuasive evidence challenging the audit methodology or its rationale. As noted by the Administrative Law Judge, we find petitioner's arguments to be insufficient to meet its burden of proof. Accordingly, we conclude that petitioner failed to provide any grounds for either modifying or canceling the Notice of Determination issued to Beijing China Buffet, Inc.
We also find that the Administrative Law Judge properly sustained the penalties assessed against petitioner. In establishing reasonable cause for the abatement of penalties, the taxpayer faces an onerous task (see Tax Law § 1145[a][iii]; Matter of Philip Morris, Tax Appeals Tribunal, April 29, 1993 ). Petitioner bears the burden of showing reasonable cause such that the nonpayment of taxes was beyond the control of petitioner and due to no fault of its own (Matter of F & W Oldsmobile v. State Tax Commn., 106 AD2d 792  ). Herein, petitioner advanced no argument that would permit the abatement of penalties. Accordingly, the penalties assessed against petitioner are sustained.
Petitioner raised no argument challenging the determination that Ping Di Chen and Yong Li were responsible persons under the Tax Law. However, we agree that the record supports the Administrative Law Judge's conclusion that Yong Li left the corporation as of January 2007 and that this petitioner should be liable only for the period December 1, 2004 through January 31, 2007.
We have reviewed and considered petitioner's remaining arguments, and we find them without either support or merit.
Accordingly, it is ORDERED, ADJUDGED and DECREED that:
1. The exception of Beijing China Buffet, Inc., Ping Di Chen, and Yong Li is denied;
2. The determination of the Administrative Law Judge is affirmed;
3. The petitions of Beijing China Buffet, Inc., and Ping Di Chen are denied; the petition of Yong Li is granted to the extent indicated in conclusion of law “F” of the Administrative Law Judge's determination, but in all other respects is denied;
4. The Notices of Determination, dated March 3, 2008, issued to Beijing China Buffet, Inc. and Ping Di Chen are sustained and the Notice of Determination, March 3, 2008, issued to Yong Li, as modified in paragraph “3” above, is sustained.
DATED: Albany, New York, February 23, 2012
/s/ James H. Tully, Jr.
James H. Tully, Jr.
/s/ Charles H. Nesbitt
Charles H. Nesbitt
The officers were not assessed for the quarter ended November 30, 2004.
Herein, references to the three petitioners together will be singular (i.e. petitioner).
The Division explained in its workpapers that the bank records with which it was presented showed a balance of $10,273.20 for the period ended December 2004. This presumably came from the January statement as a carry forward or starting balance. The Division's bank deposit analysis disclosed that, on average, 92.83% of the account balance was the result of credit card deposits. It concluded from the balance of $10,273.20 that 92.83%, or $9,536.61, represented credit card sales for December 2004.
In its brief, the Division asserted that the letter from Ms. Kung with the attachments was not admitted into evidence. At hearing, petitioner had the document identified and marked as Petitioner's Exhibit 1. After being marked, the document became the focal point of several pages of questioning. There is no indication in the record that the Division objected, or would have objected, to its introduction given the extensive discussion and the assumed inclusion of the letter and its attachments in the official audit file. By oversight, the Administrative Law Judge did not formally receive these documents in evidence. Under these circumstances, it is reasonable to expressly state here that the letter from Ms. Kung, identified as Exhibit 1 in the record, has been admitted into evidence (see also State Administrative Procedure Act § 306 ; 20 NYCRR 3000.15 [d]).