Thursday, March 15, 2012

West New York Restaurant

TAPAS DE ESPANA, INC., Plaintiff-Appellant, v. DIRECTOR, DIVISION OF TAXATION, Defendant-Respondent.

Case Information:

Docket/Court: A-0664-10T4, Superior Court of New Jersey, Appellate Division

Date Issued: 02/28/2012 Submitted December 5, 2011

Tax Type(s): Sales and Use Tax

On appeal from the Tax Court of New Jersey, Docket No. 012791-2009.

Friedrich & Friedrich, LLC, attorneys for appellant (Jay Joseph Friedrich, on the brief).

Paula T. Dow, Attorney General, attorney for respondent (Melissa H. Raksa, Assistant Attorney General, of counsel; Jill C. McNally, Deputy Attorney General, on the brief.


Before Judges Parrillo, Alvarez and Skillman.


Plaintiff Tapas de Espana, Inc., a corporation which formerly operated a restaurant located in West New York, appeals an August 12, 2010 grant of summary judgment to defendant, Director, New Jersey Division of Taxation (Director), affirming the Director's final determination of unpaid sales and use tax (SUT) and corporation business tax (CBT). For the reasons that follow, we affirm.

The Director audited plaintiff with regard to CBT due and owing from October 2001, through September 2004, and SUT due and owing from January 2002, through December 2005. The parties stipulated that the sample period would be plaintiff's fiscal year, from October 2003 through September 2004. Despite prior notification that an audit would be conducted, plaintiff was unable to produce source records, such as detailed cash register tapes and guest checks. Upon review of plaintiff's CBT returns for the audit period, the Director found plaintiff's reported markup of 1.58% to be unusually low; the Director also discovered a discrepancy of over $150,000 between plaintiff's cash register receipts in its general ledger and those recorded on its cash register tapes.

Accordingly, because of the scant available source records and the $150,000 discrepancy, the Director performed a markup analysis. The last two weeks of December 2005 were chosen as the sample period.

After an audited markup was generated, and the markup applied to reported purchases for each year, the resulting change in sales established an SUT deficiency of $146,457.36 plus penalties and interest, as well as a CBT assessment of $180,292.43 plus penalties and interest. A notice of assessment of final audit determination dated September 18, 2006, was served on plaintiff.

Plaintiff filed an administrative protest on October 20, 2006, objecting to the sample period as not representative because it included Christmas. Plaintiff also contended that the Director made various errors in calculation, resulting in an inflated markup, as it should only have been 1.76%.

The Director reviewed plaintiff's submissions, and adjusted its audited findings, reducing the markup from 2.4119% to 2.2227%. The Director did not, however, make adjustments where no backup documentation was supplied, including plaintiff's claim that insufficient allowance was made for waste, theft, and spoilage.

Plaintiff appealed the Director's February 20, 2009 final determination to the Tax Court. As recalculated, plaintiff's liabilities were $96,458 plus penalties and interest on SUT and $68,114 plus penalties and interest on CBT.

On April 27, 2010, the Director filed a motion for summary judgment seeking affirmance of her final determination. On June 1, 2010, plaintiff filed what is characterized as a “cross-motion for denial of summary judgment.” Despite this characterization, plaintiff's papers consisted of merely opposition to the Director's application and a demand for discovery of the Director's “audit manuals.” The Tax Court judge conducted a telephonic hearing, denied plaintiff's request for additional discovery, and awarded the Director summary judgment. We affirm essentially for the reasons stated in Judge Hayser's cogent and thorough eleven-page written opinion, adding only the following brief comments.

On appeal, plaintiff asserts that material issues of fact exist which should have prevented the grant of summary judgment. Plaintiff also asserts that the trial court erred in concluding that plaintiff miscalculated its tax liability, and made an additional error in refusing to grant discovery.

Summary judgment is granted if the record shows “there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law.” R. 4:46-2(c). In making the determination, the judge must ask “whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party.” Brill v. Guardian Life Ins. Co., 142 N.J. 520, 540 (1995) .

Furthermore, it is undisputed that “[b]are conclusions in the pleadings, without factual support in tendered affidavits, will not defeat a meritorious application for summary judgment.” U.S. Pipe & Foundry Co. v. Am. Arbitration Ass'n, 67 N.J. Super. 384, 399-400 (App. Div. 1961) .

An appellate court utilizes the same standard in reviewing summary judgments as is employed by the trial court in the first instance. Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998) . We ask whether a genuine issue of fact existed, and if not, whether the trial court's legal ruling was correct. Walker v. Alt. Chrysler Plymouth, 216 N.J. Super. 255, 258 (App. Div. 1987) .

Against this backdrop is an additional rule applicable to appellate review of Tax Court decisions. We are required, generally, to defer to the Tax Court's expertise. Our scope of review is limited. Estate of Taylor v. Dir., Div. of Taxation, 422 N.J. Super. 336, 341 (App. Div. 2011) . We are also required to factor into account the Director's unique expertise. Metromedia v. Dir., Div. of Taxation, 97 N.J. 313, 327 (1984) .

It is well-settled that the Director's assessments are presumptively correct. L & L Oil Service, Inc. v. Dir. Div. of Taxation, 340 N.J. Super. 173, 183 (App. Div. 2001) . This presumption cannot be overcome by mere unsubstantiated assertions on the part of the taxpayer. TAS Lakewood, Inc. v. Dir. Div. of Taxation, 19 N.J. Tax 131, 140 (Tax 2000) . Additionally, “the taxpayer cannot overcome the presumption simply by impugning the Director's methodology[,]” or pointing out deficiencies therein. Yilmaz Inc. v. Director, 22 N.J. Tax 204, 234 (Tax 2005), aff'd, 390 N.J. Super. 435 (App. Div.), certif. denied, 192 N.J. 69 (2007) . When the taxpayer maintains inadequate records, external indices and methodology such as employed in this case become necessary. Id. at 235. “[W]here it is the taxpayer's failure to comply with the statute that forced the Director to resort to the markup method in the first place,” the Director is not even obliged to establish that he used the most favorable method available to calculate the deficiencies. Id. at 235-36.

In this case, plaintiff seeks to overcome the presumption of correctness by alleging flaws in the methodology employed by the auditor which are not borne out by the record and lack specifics and supporting documentation. As the Tax Court judge found, plaintiff simply “failed to deliver [the] detailed source records” necessary to verify alleged sales, even though taxpayers are required to maintain such records pursuant to statute and regulation.

Plaintiff's assertions, unsupported by appropriate documentation, are nothing more than bald statements which do not cast doubt on the Director's statements of material facts, supported by exhibits, which were submitted with the motion. See Yilmaz, supra, 22 N.J. Tax at 228 . Because plaintiff has not provided the necessary detailed source records which might refute the Director's conclusions and overcome the presumption of correctness, we therefore agree with the Tax Court judge that the grant of summary judgment was proper.

As to the discovery request, plaintiff claims the trial court erred in refusing to compel the Director to produce the auditor's handwritten notes. The court found that all of plaintiff's discovery requests lacked merit, and were effectively mooted by the “Director's generous submissions accompanying her summary judgment motion.” Regarding plaintiff's request for audit manuals, the court correctly pointed out that because the Director's submissions clearly detailed the “audit review, analysis, and determinations[,]” the manuals themselves were unnecessary, as were the notes. The argument that in the absence of these manuals, taxpayers are unable to properly prepare their books and records is specious. In fact, in the absence of the manuals, the overwhelming majority of taxpayers are nonetheless able to maintain their records in accord with statute and regulation in such fashion as to avoid deficiency judgments. The court's ruling also noted that the Director's submissions included “audit work papers, and certifications and reports from the auditor's supervisor and the conferee,” making the request for the auditor's notes unnecessary.


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