BEFORE THE UTAH STATE TAX COMMISSION
Petitioner, : FINDINGS OF FACT,
: CONCLUSIONS OF LAW,
v. : AND FINAL DECISION.
AUDITING DIVISION OF THE : Appeal No. 90-1645
UTAH STATE TAX COMMISSION :
: Account No. XXXXX
STATEMENT OF CASE
This matter came before the Utah State Tax Commission for a formal hearing on XXXXX. Paul F. Iwasaki, Presiding Officer, heard the matter for and on behalf of the Commission. Present and representing the Petitioner was XXXXX. Present and representing the Respondent was XXXXX, Assistant Attorney General.
Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. The tax in question is sales tax.
2. The audit period in question is XXXXX through XXXXX.
3. The Petitioner operates a retail store which sells novelty items, party decorations, and numerous other items. Prior to XXXXX, the Petitioner handled its tax exempt sales transactions in a correct manner. That is, when a tax exempt sale was made, the Petitioner would have the purchaser complete a tax exemption certificate.
4. In XXXXX, the Petitioner changed its procedure for handling tax exempt sales. The reason for the change was that the Petitioner was led to believe by other parties that it could merely keep a tax exempt number for each organization on file and refer to those exemption numbers when tax exempt sales were made. Thereafter, the Petitioner no longer required a separate certificate made for each tax exempt sale.
5. Based upon the Petitioner's newly adopted method of handling tax exempt sales, it became impossible to distinguish which sales were tax exempt sales and which were not.
6. The audit deficiency was based upon the use of projecting the estimated yearly deficiencies from a sample of the first quarter's actual figures. Using that methodology, an error ratio of XXXXX, XXXXX, and XXXXX was used for the years XXXXX, XXXXX, and XXXXX respectively.
7. The Petitioner requested that a more equitable result would be reach if those percentages were added up and then divided to obtain an average error rate to be used for each of the three years.
8. As a result of the audit, a deficiency amount of $$$$$, which included interest, was assessed.
CONCLUSIONS OF LAW
Taxpayers selling tangible personal property or services to exempt customers are required to keep records verifying the nontaxable status of such sales. Records shall include:
1. Sales invoices showing the name and identity of the customer; and
2. Exemption certificates for exempt sales of tangible personal property or services if the exemption category shows on the exemption certificate form.
The burden of proving that a sale is for resale or otherwise exempt is upon the person who makes the sale. If any agent of the Tax Commission requests the vendor to produce a valid exemption certificate or other similar acceptable evidence to support the vendor's claim that a sale is for resale or otherwise exempt, and the vendor is unable to comply, the sale will be considered taxable and the tax shall be payable by the vendor. (Utah State Tax Commission Administrative RuleR865-19S-23.)
DECISION AND ORDER
In the present case, although the Petitioner may have satisfied itself that the sales it made to tax exempt organizations were indeed legitimate by checking those purchases with the tax exempt information contained in its files, the Petitioner erred in not requiring a tax exemption certificate to be completed for each sale or otherwise maintaining sales invoices for such sales.
The failure of the Petitioner to keep adequate records prevented the Auditing Division from distinguishing those sales which were legitimately made tax exempt from those which were not. It is to prevent such a problem from occurring that the rule exists.
The Petitioner does not deny that the procedures it used were incorrect. The Petitioner does, however, request that some form of equitable relief be provided because although the exemption certificates were not individually filled out for each separate purchase, the legitimacy of each person was checked with its own files. Therefore, sales tax was not collected where valid exemptions existed and collected, and remitted where they did not. Thus, the state was never without any funds to which it otherwise would not be entitled to.
Alternatively, the Petitioner requests that the projection methodology employed in estimating the amount of deficiency be adjusted by averaging the error rate over the three year period rather than establishing a separate error rate for each separate year in the audit.
With respect to the exemption certificate issue, the Tax Commission finds that the Petitioner failed to adequately document those sales which were tax exempt and, thus, did not comply with requirements of the rule. Therefore, the determination of the Auditing Division in assessing the sales tax deficiency is affirmed.
With respect to the projection methodology issue, the Tax Commission finds that the methodology employed by the Auditing Division was reasonable, and accurately reflected the proper amount of sales tax deficiency. The Tax Commission rejects the Petitioner's recommendation that a substitute method be employed because that method does not accurately represent the estimated tax due.
Based upon the foregoing, the determination of the Auditing Division is affirmed. It is so ordered.
DATED this 8 day of MARCH, 1991.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger O. Tew
Joe B. Pacheco G. Blaine Davis