BEFORE THE STATE BOARD OF EQUALIZATION
FOR THE STATE OF WYOMING
IN THE MATTER OF THE APPEAL OF )
RONALD E. WAUGH D/B/A CAPT’N RON’S )
RODEO BAR FROM A SALES AND USE TAX ) Docket No. 2003-24
AUDIT ASSESSMENT BY EXCISE DIVISION )
OF THE DEPARTMENT OF REVENUE )
FINDINGS OF FACT
CONCLUSIONS OF LAW
DECISION AND ORDER
APPEARANCES
Ronald E. Waugh doing business as Capt’n Ron’s Rodeo Bar (Petitioner) appearing pro se.
William F. Russell, Assistant Attorney General, for the Department of Revenue (Department).
DIGEST
The matter came before the State Board of Equalization (Board) on a Case Notice filed November 26, 2002, by Petitioner who was assessed additional sales tax and interest by the Department as a result of an audit. An order setting the matter for hearing was entered on April 21, 2003. The matter was heard from February 23, 2004 to February 25, 2004, by the Board consisting of Roberta A. Coates, Chairman, Alan B. Minier, Vice-Chairman, and Thomas R. Satterfield, Board Member, with Gayle R. Stewart acting as hearing officer.
The issue in this matter is:
Whether the amount of past taxes owed was correctly estimated by the Department?
JURISDICTION
The Board is required to “[d]ecide all questions that may arise with reference to the construction of any statute affecting the assessment, levy and collection of taxes, in accordance with the rules, regulations, orders and instructions prescribed by the Department.” Wyo. Stat. Ann. §39-11-102.1(c)(iv). The rules of practice and procedure for appeals before the Board involving tax matters contemplate appeals from final administrative decisions of the Department. Rules, Wyoming State Board of Equalization, Chapter 2, §2. The rules require appeals to be filed with the Board within thirty (30) days of any administrative decision. Rules, Wyoming State Board of Equalization, Chapter 2, §5(e).
Petitioner timely filed its appeal. The Board is required to decide all issues relating to this appeal and give a written decision, citing findings of fact and conclusions of law following a hearing. Rules, Wyoming State Board of Equalization, Chapter 2, §34. Upon application of any person adversely affected, the Board is mandated to review final Department actions concerning state excise taxes, and "[h]old hearings after due notice in the manner and form provided in the Wyoming Administrative Procedure Act and its own rules and regulations of practice and procedure." Wyo. Stat. Ann. §39-11-102.1(c)(viii), Wyo. Stat. Ann. §§16-3-101 through 16-3-115.
DISCUSSION
Petitioner’s business records were so poor that the Department of Audit (DOA) was unable to audit his records. The auditor reconstructed Petitioner’s business activities by using the invoices for Petitioner’s purchases of alcohol for his bar. Petitioner questioned some of the assumptions the auditor used in reconstructing the sales.
The assumptions Petitioner attacks are as follows:
A. A serving of beer at Petitioner’s bar is 16 ounces instead of the 14 ounce assumption the DOA used. Petitioner proved his business reasons and that the serving containers hold 16 ounces.
B. The DOA reduced sales prices for the alcohol sold for consumption off the premises, package sales, and estimated the percent of package sales. Petitioner disagrees with the percentage allowed by the DOA for package sales. Petitioner failed to prove the DOA’s assumed percentage was incorrect.
C. The DOA did not allow shrinkage for spills and waste for hard liquor but did allow a ten percent reduction for shrinkage for keg beer. This was inconsistent. An allowance for shrinkage of hard liquor should be allowed.
D. The DOA assumed an average serving for hard liquor was 1.75 ounces. Petitioner argues the average serving is 2.25 ounces to 3 ounces. Petitioner failed to prove a serving is larger than 1.75 ounces.
E. The DOA estimated Petitioner’s liquor sales by a method of back calculation from Petitioner’s wholesale purchase of liquor. The DOA relied on liquor purchases for 1998, 1999 and 2000 to compute sales for those years. The DOA relied on an average of those three years to estimate sales for six months in 1996 and all of 1997 and 2001. Petitioner argues that the DOA could and should have used actual wholesale purchases for 2001 to calculate sales in 2001, since his 2001 wholesale purchases were considerably below the average purchases for 1998, 1999 and 2000. Petitioner presented convincing evidence that the records of wholesale purchases in 2001 should have been used to estimate liquor sales in 2001.
FINDINGS OF FACT
I. GENERAL
1. Petitioner operates a bar in Hulett, Wyoming. Capt’n Ron’s Rodeo Bar is licensed for both on premises sale and package sales of liquor and beer. Petitioner also sells food and other miscellaneous items. [Stipulated Updated Summary of Uncontroverted Facts, ¶1].
2. The DOA issued a Preliminary Audit Letter in November of 2002 showing past due taxes of $57,220.00. After a meeting with Petitioner a revised Preliminary Audit Letter was issued on December 6, 2002 showing past due taxes in the amount of $32,377.15. After further correspondence with Petitioner a Final Audit Letter was issued on February 28, 2003. [Tape Recording of Hearing].
3. The audit was conducted for the period beginning July 1, 1996 and ending December 31, 2001. [Stipulated Updated Summary of Uncontroverted Facts, ¶2]. The final audit showed a tax deficiency of $24,593.84 and interest of $15,849.36, for a total assessment of $40,443.20. No penalty was levied. [Exhibit 500].
4. The Petitioner’s business records were insufficient to support a complete audit so the auditor projected sales based upon invoices and receipts from Petitioner’s vendors. [Stipulated Updated Summary of Uncontroverted Facts, ¶3]. The auditor reported incomplete cash register tapes that were not continuous, and there were no general ledgers or bookkeeping records. Petitioner could not provide a ledger to the auditor because of a computer hard drive crash. Petitioner did have annual profit and loss statements. The business checking account was commingled with Petitioner’s personal account. [Tape Recording of Hearing].
5. Because of the inability to audit Petitioner’s business records, the auditor contacted the vendors that sold alcohol to the Petitioner for purchase information. The vendors had complete invoices for 1998, 1999, and 2000. The auditor used the complete years to create an average to estimate taxes due for six months in 1996, and all of 1997 and 2001. [Exhibit 503; Tape Recording of Hearing].
6. Petitioner agreed his business records were bad for 1996, 1998, 1999 and they were better in 2000 and 2001. Petitioner believes he had full records for 1997 and 2001 and the auditor should not have used an estimate. The Department admitted that there was not a systematic audit for 2001 because the audit was being completed in 2001. [Tape Recording of Hearing]. We do not find Petitioner’s records for 2001 to be complete because Petitioner admitted he did not keep records during the “Ham-n-Jam” which is over thirty percent of his business. The DOA had access to all of Petitioner’s purchases of hard liquor from the State of Wyoming. The DOA should have used the actual 2001 information rather than rely on an artificially low estimate. This is particularly true when the years the DOA used showed much larger purchases than that purchased in 2001. [ Tape Recording of Hearing; Exhibit 109 p. A16].
7. The Petitioner is a graduate in business from Black Hills State College but is a self described “lousy bookkeeper.” Petitioner testified that when his father was tending bar he did not ring all the sales into the cash register so the tapes were incomplete. When Petitioner’s spouse was tending bar she did not always ring sales into the new cash register correctly. [Tape Recording of Hearing].
8. Petitioner’s major beer vendors, Big Horn Beverage and Metz Beverage, kept invoices for every sale to Petitioner. The invoices are kept for four years so when Petitioner was audited there were no invoices from Big Horn Beverage for June 1996 to December, 1996, and all of 1997. [Tape Recording of Hearing].
9. Petitioner bought a limited amount of beer from a third, and minor vendor, Teton Beverage. The DOA did not obtain invoices from the third vendor. The DOA estimates of amounts sold do not include sales from the supplies of Teton Beverage, so there may be a underestimate of sales. [Tape Recording of Hearing].
10. According to Petitioner’s accountant over 37% of the annual sales occur during a promotional event called the “Ham-n-Jam.” [Exhibit 100, p. 3]. The “Ham-n-Jam” is an annual one day event sponsored by Petitioner where a pig is roasted and served. “Ham-n-Jam” occurs during a national motorcycle rally. There were over 112,000 motorcycles in the town of Hulett during the 1998 “Ham-n-Jam”. Beer vendors and other volunteers assisted Petitioner during “Ham-n-Jam”. The vendors and their staff set up tents and sold liquor on Petitioner’s property using Petitioner’s liquor license. There were no cash registers at the tents and there were no tallies kept. Petitioner kept records from the tent sales by picking up the cash at the tents. [Tape Recording of Hearing].
11. One of the vendors agreed that most of the sales at “Ham-n-Jam” are single cans of beer. The average charge per can in 2001 was between $2.00 or $2.50. Therefore, the sale of a case of beer by single can at “Ham-n-Jam” would collect $48.00 for a case of beer. [Tape Recording of Hearing].
12. The Petitioner asserts that the Department has adopted no specific audit standards for bars. [Tape Recording of Hearing].
13. The Department accepted the audit findings of the DOA and issued an assessment of $40,443.20 dated March 3, 2003. [Stipulated Updated Summary of Uncontroverted Facts, ¶4].
14. On March 27, 2003, Petitioner timely filed an appeal of the Department’s assessment. [Stipulated Updated Summary of Uncontroverted Facts, ¶5].
15. Petitioner agrees he owes $1,300 for unpaid use tax. [Petitioner Statement of Uncontroverted Facts; Tape Recording of Hearing].
16. Petitioner hired an accountant to compute an estimate of taxes owed. The Accountant, Rauland J. Webber, CPA, had access for cash register receipts for part of 2001. Mr. Webber concluded from an estimate using the 2001 sales information that the DOA’s calculation for the sales of keg beer was $9,000 too high because the DOA assumed the Petitioner served 14 ounce beers and the Petitioner serves 16 ounce beers. [Exhibits 100, 112]. Mr. Webber argues the DOA’s calculation of the percentage of beer sold for consumption on the premises is incorrect because there was no adjustment of other items, such as cigarettes, sold. [Exhibit 100; Tape Recording of Hearing].
17. Mr. Webber compared the cash register tapes to the sales information and records kept by Petitioner for 2001 and found an acceptable level of accuracy. [Tape Recording of Hearing; Exhibit 100].
18. Petitioner, his wife, and his now deceased father have been the bartenders, except during the annual “Ham-n-Jam” when approximately 40 people serve as bartenders, some are employees and some are volunteers. [Tape Recording of Hearing].
KEG BEER SALES
19. The Petitioner sells draft beer from kegs. To determine revenue from the sales of draft beer from the kegs, the DOA had to determine how many servings of beer there were in each keg. The DOA assumed there were more ounces per keg than the Petitioner (1984 was assumed by the DOA and 2048 was assumed by Petitioner’s expert). The DOA then multiplied the number of kegs Petitioner purchased by the number of ounces for gross total ounces. Then the DOA reduced the gross total ounces by ten percent for shrinkage to estimate net total ounces. Then the DOA divided the net total ounces by 14 (assuming a 14 ounce serving) to derive total servings. Finally, the DOA multiplied the number of servings by that type of beer’s price to estimate sales. [Exhibit 506, p. 15; Tape Recording of Hearing].
20. Petitioner testified and demonstrated that he serves draft beer from the kegs at a rate of sixteen ounces per serving. Petitioner has always used a 16 ounce serving glass and uses 16 ounce plastic glasses during the “Ham-n-Jam.” The DOA estimated servings to be 14 ounces because the auditor assumed that the 16 ounce glass would not have enough room for 16 ounces of beer and a beer “head.” Petitioner demonstrated that in his serving glasses there is ample room for the beer “head” and 16 ounces of beer. [Tape Recording of Hearing].
21. Petitioner explained that he served a larger beer to attract customers from his competition, which serves beer in 12 ounce containers. [Tape Recording of Hearing].
22. The Department and the DOA did not know the 14 ounce assumption was an issue because Petitioner did not raise objections to this assumption during meetings about the audit. [Tape Recording of Hearing].
23. The DOA assumed a price per serving of beer from the keg at a price of $0.95 until October, 2000, and then it was assumed the price was $1.43 for Budweiser beer and $1.19 for Busch beer. The DOA assumed a lower price per serving than Petitioner’s expert witness. [Tape Recording of Hearing].
24. The DOA reduced the estimate for beer sales from a keg by ten percent for shrinkage due to spills, theft and other reasons. [Tape Recording of Hearing; Exhibit 506].
SALES FOR CONSUMPTION OF BEER ON PREMISES VERSUS PACKAGE SALES
25. The original audit did not assume a percent of the alcohol was package sales. After meeting with the Petitioner, the DOA allocated a percentage of the alcohol to package sales and, therefore, a reduced price would be charged and less sales tax would be due. [Tape Recording of Hearing].
26. The DOA calculated that 56.43% of the beer was sold for consumption on site and that 43.57% of the beer was package sales. This was determined from the 2001 receipts and the spread sheet ratio from those receipts. The DOA used the dollars from the sales and not the number of units to calculate the ratio because the cash register tapes did not show units of sales. [Exhibit 506, p. 10; Tape Recording of Hearing].
27. Petitioner calculates a percentage of beer sold for consumption on the premises to be approximately 30% and a 70% for package sales. This is based on an analysis of 2001 sales of units sold. [Exhibit 100, pp. 5-6].
28. When Mr. Webber, Petitioner’s witness, looked at the invoices they did not distinguish whether the units being sold were 18 packs or full cases of beer. So a calculation based on units is difficult because the unit may be an 18 pack (3/4 of a case) which sells for a higher price than a full case. [Tape Recording of Hearing].
SALES OF HARD LIQUOR
29. To estimate sales of hard liquor, the DOA estimated that the average servings were 1.75 ounces. Then the DOA got information as to the type of liquor and the number of ounces in each bottle for that type. They then divided each bottle size by 1.75 to estimated the number of servings per bottle. Then the DOA multiplied the number of bottles per type for total servings and then multiplied the number of total servings timed Petitioner’s price list to estimate total sales. There was no adjustment for “spillage.” [Exhibit 507; Tape Recording of Hearing].
30. Petitioner told the auditor that he poured 1.5 ounces of liquor per serving when the auditor was on site. After the preliminary audit meeting, Petitioner represented that he served an average of 1.75 ounces per serving and the DOA accepted the 1.75 ounces per serving. [Tape Recording of Hearing].
31. The Preliminary Statement filed by Petitioner stated that the serving size was 1.75 ounces but in the hearing the Petitioner is arguing that the serving size varies from 1.75 ounces to 3 ounces during the “Ham-n-Jam.” The prices are higher at the “Ham-n-Jam” but the increase in price is in direct proportion to the serving size. [Tape Recording of Hearing].
32. The DOA was told that the average serving size for liquor is 1.5 ounces by other bar owners and the Wyoming Liquor Commission. [Tape Recording of Hearing].
33. Petitioner attempted to demonstrate that he poured 2.25 ounces to 3 ounces by using old pour spouts but failed to carry his burden of proof due to the failed demonstration. [Tape Recording of Hearing].
34. Petitioner argues that, like keg beer, there should be an allowance for shrinkage for hard liquor. The DOA argued that it adjusted for shrinkage by rounding down in the calculations. The DOA did not reduce the estimate of sales for hard liquor by ten percent as it did for the estimate of sales for keg beer. [Tape Recording of Hearing].
35. Petitioner admitted on cross examination that he had no method to measure shrinkage. [Tape Recording of Hearing].
36. The DOA used the price list from Petitioner in calculating revenue for the audit. [Exhibit 513; Tape Recording of Hearing]. Petitioner argues the price list was incorrect because the listed price should be reduced since they included taxes. DOA demonstrated an adjustment for taxes was made in the prices used. [Tape Recording of Hearing].
CONCLUSIONS OF LAW
I. GENERAL LAW
37. The Case Notice of the Petitioner was timely filed and the Board has jurisdiction to determine this matter.
II. BURDEN OF PROOF
38. The Rules of the Board state in relevant part that:
Except as specifically provided by law or in this section, the Petitioner shall have the burden of going forward and the ultimate burden or persuasion, which burden shall be met by a preponderance of the evidence. If Petitioner provides sufficient evidence to suggest the Department determination is incorrect, the burden shifts to the Department to defend its action. For all cases involving a claim for exemption, the Petitioner shall clearly establish the facts supporting an exemption.
Rules, Wyoming State Board of Equalization, Chapter 2, §20.
III. THE STATUTE
39. There is no dispute that Petitioner is a vendor and is liable for the payment of sales tax and has an obligation to keep records pursuant to Wyo. Stat. Ann. §39-15-107:
(a) Returns, reports and preservation of records. The following shall apply:
(ii) Every vendor and person liable for the payment of sales tax under this article shall preserve for three (3) years at his principal place of business, suitable records and books as may be necessary to determine the amount of tax for which he is liable under this article, together with all invoices and books showing all merchandise purchased for resale. All records, books and invoices shall be available for examination by the department during regular business hours except as arranged by mutual consent.
(iii) If any vendor or person liable for the payment of sales tax under this article fails to comply with paragraph (ii) of this subsection, he shall bear the burden of proof as to the correctness of any assessment of taxes imposed by the department for the period for which records were not preserved in any court action or proceeding;
40. Petitioner admitted numerous times that his records for July to December, 1996, were incomplete. He also admitted that his records for 1998, 1999, and 2000 were incomplete.
41. Petitioner argued that his records for 1997 and 2001 were sufficient and should have been used. Petitioner failed to present evidence that the 1997 records were reliable or complete. The Department did not have to accept Petitioner’s records for 1997. Also Petitioner admitted he did not have complete records for 2001 because he did not have records for the “Ham-n-Jam” and therefore the Department did not have to accept Petitioner’s 2001 records.
42. Petitioner admits suitable records and books were not kept for 1998, 1999, 2000 and a portion of 1996. Therefore, the Petitioner has the burden to demonstrate that the assessment of taxes by the Department was incorrect.
43. To meet his burden, Petitioner has attacked certain assumptions made by the Department and the auditor to determine taxable value.
44. Some of the assumptions that are in dispute are the following:
a. There are fewer servings in a keg of beer than estimated by the DOA because the serving size was 16 ounces rather than 14 ounces.
b. There were more package sales than estimated by the DOA.
c. There are fewer servings per bottle of hard liquor than estimated by the DOA.
d. There should be an adjustment to the estimated price per serving of hard liquor for taxes included in the price list.
e. There should be an allowance from the estimate of sales of hard liquor for shrinkage, spills and for waste.
f. The estimate of 2001 hard liquor sales should be based on 2001 invoices not an estimate.
45. The Petitioner demonstrated that the serving containers used in the bar to serve keg beer hold 16 ounces. The DOA was arbitrary in reducing the serving size from 16 ounces to 14 ounces. A recalculation using the 16 ounce serving should occur.
46. The DOA convincingly explained that its estimate of on premises consumption compared to package sales was reasonably based on dollar sales. The estimate offered by Petitioner’s accountant was not persuasive because units of sale varied in size between 18 packs and cases of beer and the cash register tapes failed to document unit size.
47. Petitioner attempted to demonstrate that the serving size of hard liquor was more than 1.75 ounces but his demonstration failed. The DOA’s assumption is generous considering industry standards.
48. Petitioner failed to present evidence as to the prices actually charged. The DOA’s use of Petitioner’s price list to estimate per serving sales of hard liquor is reasonable.
49. It was inconsistent for the DOA to allow a shrinkage for keg beer sales and not for hard liquor sales. Therefore, the Department should reduce the estimate for hard liquor on premises sales for shrinkage.
50. It was an error to average three years sales of hard liquor to estimate 2001 sales when 2001 actual invoice information was available. Therefore, the sales estimate for 2001 should be adjusted based on the actual wholesale purchase information.
51. Petitioner argues that rules should be adopted by the Department to provide guidance to bar owners and to the DOA. It is not clear what Petitioner thinks should be addressed in rules. The Department has adopted rules addressing the bar business:
Taxes Calculated on Gross receipts. Where receipts do not normally accompany each sale e.g. (coin operated vending, bars, movie theaters) vendors must maintain records of tax calculated on the following formula;
Tax = Gross Receipts - (Gross Receipts÷(1 + Tax Rate ))
Example Gross Receipts = $1,000
Tax Rate = 6%
Tax = $1,000 - ($1,000÷(1 + .06))
Tax = $1,000 - 943.40
Tax = 56.60
Rules, Wyoming Department of Revenue Chapter 2, §§ 7(j), 15(mm).
52. If Petitioner had kept accurate records of his gross receipts it would not have been necessary for the auditor and the Department to make any assumptions. It would not have been necessary to estimate shrinkage, serving size or package sales. There is no immediate demand for the Department to adopt further rules.
53. If Petitioner thought there was a need to adopt rules to assist in the reporting, audit and payment of sales tax for bars it is within Petitioner power to petition for rule-making. Wyo. Stat. Ann. §16-3-103.
ORDER
IT IS THEREFORE HEREBY ORDERED: The decision of the Department of Revenue is affirmed in part and reversed in part. The matter is remanded to the Department of Revenue to recalculate the amount of sales tax due when the following adjustments are made:
A. The Department shall recalculate liquor sales for 2001 using Petitioner’s actual wholesale purchases, rather than the average calculated sale for the preceding three years.
B. The Department shall recalculate the sales tax due from July 1, 1996 to December 31, 2000 with adjustments to the following assumptions:
I. Assume servings of beer from kegs to be 16 ounces.
ii. Adjust the estimation of sales for hard liquor for shrinkage and waste.
C. The Department’s decision is affirmed in all other respects.
Pursuant to Wyoming Statute §16-3-114, and Rule 12, Wyoming Rules of Appellate Procedure, any person aggrieved or adversely affected in fact by this decision may seek judicial review in the appropriate district court by filing a petition for review within 30 days of the date of this decision.
Dated this 11th day of May, 2004.
STATE BOARD OF EQUALIZATION
_____________________________________
Roberta A. Coates, Chairman
______________________________________
Alan B. Minier, Vice Chairman
_____________________________________
ATTEST: Thomas R. Satterfield, Board Member
_______________________________
Wendy Soto, Executive Secretary