SEBA, LLC v. Dir. of Revenue

623 S.W.3d 147

SEBA, LLC, Appellant,

v.DIRECTOR OF REVENUE, Respondent.

WD 83083

Missouri Court of Appeals, Western District.

OPINION FILED: June 9, 2020

Gary D. Witt, Judge

SEBA, LLC ("SEBA") appeals from the Administrative Hearing Commission ("Commission") finding that SEBA is "liable for unpaid sales tax in the amount of $38,540.44, minus the sales tax assessed on $26,567.57 in income generated from SEBA's exempt sales." The Commission also found that SEBA "is also liable for additions to sales tax owed and statutory interest." Article V, sections 3 and 11 of the Missouri Constitution require that this case be transferred to the Supreme Court of Missouri.

Statement of Facts

SEBA operates a donut shop called Eddie's South Town Donuts, in St. Louis, Missouri.¹ The Department of Revenue ("Department") conducted an audit of SEBA's sales during October 1, 2011, through September 30, 2014 ("audit period"). During the audit period, Brad Arteaga was the owner and sole member of SEBA. Eddie Strickland ("Strickland") was the business's sole, paid employee. Strickland worked at SEBA daily to make donuts by hand, wait on customers, and clean the store. Arteaga was solely responsible for handling SEBA's financial affairs, and Arteaga went to the store once or twice a week to collect money, credit card receipts, checks, and related paperwork for SEBA. SEBA contracted with, Joseph Otten ("Otten"), a tax accountant, bookkeeper, and financial advisor to file its sales tax returns. Otten prepared all returns during the audit period relying on documents provided by Arteaga including SEBA's bank statements, credit card statements, and check stubs written by Arteaga. SEBA did not use Z-tapes.² SEBA's cash register printed one receipt for each transaction, and SEBA either gave the receipt to the customer or threw the receipt away.

On October 16, 2014, Lisa Hoffman³ ("Hoffman"), an auditor with the Department, requested copies of SEBA's business records, including sales, use, and withholding tax returns, and supporting schedules; federal income tax returns; depreciation schedules, sales journals, sales invoices, sales tax exemption certificates and letters, detailed general ledgers, purchase invoices, payroll registers and W-2's, 1099-K forms, and bank statements. The only documents provided to Hoffman from SEBA were its federal income tax returns, depreciation schedules, bank statements, 1099-K forms, purchase invoices, payroll registers, W-2s, and a general ledger. Because the records provided to Hoffman were incomplete, Hoffman requested that SEBA retain individual cash register receipts for its sales in December 2014 and track its inventory of donuts made in the shop during the month. In response, SEBA provided only partial receipts for the month of December 2014. Hoffman later requested that SEBA maintain and provide proper receipts for April 2015 through June 2015, but SEBA failed to retain the requested records.

Hoffman again requested sales receipts for July 2015, and SEBA provided her with a notebook⁴ prepared by Strickland containing handwritten entries of its reported number of donuts made for wholesale and retail, donuts sold at retail, and donuts thrown away as waste. SEBA also provided Hoffman with its reported credit card batch totals, cash register transaction receipts, and a calculation tape for the month. SEBA provided 490 cash register receipts totaling $3,950.23 in sales not including the sales tax paid by the customer. Based on those records the average retail sale was $8.06.

Hoffman noted several discrepancies in SEBA's July 2015 records. First, Strickland's handwritten records only reported its donut sales and did not report any sales for donut holes. Second, SEBA's records indicated that SEBA had $5,590.75 in wholesale donut sales, but the checks and credit payments totaled $4,356.49. Third, SEBA reported that it sold 349.6 dozen retail donuts for the month but made 768 dozen; SEBA claimed that 418.4 dozen were donated to a food pantry. Fourth, each sales receipt had a transaction number, and the first receipt was numbered 1512 and the last receipt was numbered 3066. SEBA provided 490 receipts from which Hoffman believed, based on the receipt numbers, there should have been 1,555. SEBA argued that the discrepancy was based on the fact it would print a second receipt for customers who requested one, but Hoffman did not find this explanation accurate as over two-thirds of the receipts were unaccounted for. Fifth, because SEBA did not have a register capable of making a Z-tape, Hoffman requested SEBA track its daily sales on a calculation tape. The calculation tape provided was inconsistent with the receipts provided, and SEBA offered no explanation for this discrepancy.

Because of these irregularities, Hoffman estimated SEBA's July 2015 sales and then used this estimate to estimate SEBA's sales during the audit period. Hoffman multiplied the average receipt total ($8.06) by the difference in transaction numbers on the receipt ($1,555) for a total of $12,535.93 in retail sales. Hoffman then added the wholesale orders paid by check ($2,944.49), wholesale orders paid by credit card ($1,412.00) for a total of $4,356.49 in wholesale sales. The estimated gross sales for SEBA in July 2015 totaled $16,892.42 ($12,535.93+$4,356.49). Hoffman then calculated a cash/credit sales ratio for July 2015. In doing so, Hoffman took the combined retail and wholesale credit card payment per batch total ($4,699.42) and divided it by the total estimated sales ($16,892.42), from which she determined that 28% of SEBA's total sales were credit card sales. Hoffman estimated that SEBA's cash sales were $12,193.10, which meant that SEBA's cash sales constituted 72% of its total sales.

Hoffman then applied these ratios to the known credit card sales during the audit period to estimate gross sales for the audit period. Hoffman added $6,700.73 in Groupon sales. Hoffman also subtracted SEBA's exempt sales for the entities which SEBA provided valid exemption certificates. Because SEBA did not provide exemption certificates for St. John the Baptist Catholic Church ("St. John"), Emmanuel Episcopal Church, Phillips 66 Station, Seven-Eleven, Waters Auto Centers, Inc., and St. Patrick Center, Hoffman included sales to these entities in her calculation for sales tax owed.⁵ Hoffman concluded that SEBA under-reported its taxable sales on its sales tax returns in the amount of $400,483.72 during the audit period. Based on the amount of under-reported taxable sales Hoffman determined it failed to pay $23,431.89 in sales tax. Hoffman also recommended additions to tax in the amount of 5% because SEBA "displayed intentional disregard and negligence by failing to double check [its] sales tax figures to verify they were accurate." The Department assessed SEBA with a total liability of $38,540.44, which includes the $34,313.87 in underpaid taxes, $1,715.70 based on a five percent addition to the tax, and $2,510.87 in interest as of January 1, 2016.

SEBA filed a complaint appealing the Department's assessment of sales tax, additions to tax, and statutory interest for the audit period. The Commission held a hearing on February 22, 2019. The Commission found that SEBA was liable for unpaid sales tax in the amount of $38,540.44, minus the sales tax assessed on $26,567.57 (the sales to Emmanuel Episcopal Church, Phillips 66 and Seven-Eleven). The Commission found that SEBA was liable for additions to tax because "SEBA was negligent in its report of its taxable sales. It failed to keep adequate records and what records it did retain were inconsistent." The Commission also found SEBA liable for statutory interest.

Discussion

SEBA asserts three points on appeal. First, it alleges that the Commission erred in finding SEBA had $400,483.72 in taxable total sales during the audit period, and was liable for $34,313.87 in additional sales tax. Second, it argues that the Commission erred in ruling SEBA failed to prove its sales to St. John and St. Patrick Center were exempt. Third, SEBA argues that the Commission erred in imposing a 5% addition to tax as a penalty in that SEBA was not negligent as a matter of law because it double checked its records before filing its returns.

Before we address the merits, we must determine if jurisdiction lies with this Court. "Although neither party raised an issue concerning our appellate jurisdiction, the Court has an obligation, acting sua sponte if necessary, to determine its authority to hear the appeals that come before it." Maly Commercial Realty, Inc. v. Maher, 582 S.W.3d 905, 910 (Mo. App. W.D. 2019) (internal citations and quotation...