Yesterdays of Lake Charles, Inc. v. Calcasieu Parish Sales & Use Tax Department
Docket: No. 14-414
Court: Louisiana Court of Appeal; May 13, 2015; Louisiana; State Appellate Court
Yesterdays of Lake Charles, Inc. and Cowboy’s Nightlife, Inc., owned by C.O. Vallet, underwent a four-year audit by the Calcasieu Parish School System Sales and Use Tax Department on November 3, 2009, covering financial activity from January 1, 2005, to December 31, 2008. Both clubs operated as cash businesses, with Cowboy’s catering to a college demographic and Yesterdays appealing to an older audience. Vallet provided the Collector with the necessary financial documents, including bank statements and deposit slips, which had been routinely submitted to his CPA for tax preparation over the past twenty years. The Louisiana Department of Revenue had previously audited the clubs in 2008 without raising any issues regarding taxes owed. The Collector claimed the clubs were randomly selected for audit, despite Vallet's skepticism about the randomness of the selection. The audit led to additional tax assessments, interest, and penalties totaling $155,662.95 for Yesterdays and $49,973.99 for Cowboy’s. The clubs contested these assessments in court, and the trial court ruled in their favor, later awarding attorney fees. The Collector's subsequent motion for a new trial was denied. On appeal, the Collector argued that the trial court erred in determining the ambiguity of recordkeeping statutes and in accepting the clubs' bank statements as sufficient documentation for tax purposes. The appellate court affirmed the trial court’s decision.
The Collector claims that clubs were obligated to retain their 'Z-tapes' from registers as adequate records, a position contested due to the absence of prior notices mandating such retention for audit purposes. The taxing authority did not establish a specific requirement for 'Z-tape only' records. Initial tax assessments for Yesterdays on January 19, 2010, started at $217,190.49, escalating to a final amount of $155,662.95 after adjustments for interest and penalties. Similarly, Cowboy’s faced an initial assessment of $219,161.87, ultimately reduced to a final total of $49,973.99. The Collector argues that the trial court improperly shifted the burden of proof, citing ambiguity in R.S. 47:337.29, but this was rejected as the trial court's judgment was deemed supported by the record and not legally erroneous. Tax statutes favor interpretation in favor of the taxpayer, especially when multiple reasonable interpretations exist, and penalties must be strictly construed. Louisiana Revised Statutes 47:337.29 outlines the requirements for dealers to maintain suitable records and permits the collector to inspect them, while imposing fines or imprisonment for violations. The statute emphasizes the necessity of 'suitable records' without specifically defining them.
Ambiguous and undefined terms in tax regulations provide no clear guidance to taxpayers regarding the necessary records for tax audits. The Collector failed to publish a list of required documents until after assessing Vallet’s businesses, despite the Louisiana Department of Revenue and the IRS having accepted the taxpayer's filings based on the records provided during this audit for twenty years. The statute specifies only the need for "suitable records," a term that lacks precise definition from the Collector or other tax authorities prior to the assessments. Evidence shows that taxpayers have long been uncertain about what constitutes "suitable records," with the Collector only reiterating vague statutory language and referring to an unavailable list. Kathy Pettis, a former audit supervisor, testified that commonly accepted sales records include bank statements and tax returns, as endorsed by the Louisiana Association of Tax Administrators (LATA). The Collector's cited cases do not support its position; in Calcasieu Parish School Board v. Parker, the court emphasized the taxpayer's responsibility to maintain records, which was not the issue in the current case where records were adequately provided. In contrast, the Schwegmann Bros. case involved a taxpayer aware of acceptable methods, which is unlike the current taxpayer's situation.
In the Schwegmann case, the only evidence countering the Collector's audit results, which relied on actual sales register tapes from both low and high volume days, was testimony from a Schwegmann executive. This executive admitted ignorance regarding the calculation method used to derive figures, relying instead on an unspecified individual with an unnamed degree from the University of Alabama. Schwegmann did not provide any alternative audit figures to challenge the Collector's findings, leaving the audit effectively unrefuted.
The taxpayer had historically used records, including bank statements and deposit slips, which he believed were adequate for tax purposes. The Collector's sudden demand for 'Z-tapes' as proof of total sales was deemed unfair, as no prior requirement had been established for such records. The bank deposit method had long been accepted by federal authorities to verify tax liability. The trial court found no evidence of fraud by the taxpayer in declaring sales amounts and acknowledged the taxpayer's full cooperation during the audit.
The trial court also rejected the Collector's claim of legal error regarding its arbitrary tax calculation. According to Louisiana Revised Statutes 47:337.28(A), a Collector may estimate sales only in cases of grossly incorrect or fraudulent reporting, which was not applicable here. The taxing authority was satisfied with the taxpayer's income reporting, and adjustments were not made in the state audit. The Collector admitted to initially providing inflated figures to garner the owner's attention, which ultimately proved inaccurate. The Collector did not adhere to statutory requirements outlined in La.R.S. 47:337.35, which mandates proper examination of returns and notification to the taxpayer regarding any sampling procedures used for audits.
The sampling procedure must yield a sample that accurately reflects the business's normal operating conditions during the audit period. If the taxpayer or collector can show that a transaction is not representative, it will be excluded from the sample and evaluated separately. If the taxpayer proves that the collector's sampling method was not in line with generally recognized techniques, that portion of the audit will be redone using a compliant sample. Guidance for these techniques will follow standards from the American Institute of Certified Public Accountants.
The Collector failed to provide any evidence that the businesses, Yesterdays and Cowboy’s, agreed in writing to the tax computation methodology prior to the audit. Ms. Pettis testified that the Collector did not notify the taxpayer as required about tax computation methods. Testimony indicated that the Collector's methodology did not accurately reflect the business operations during the audit period, as required by La.R.S. 47:337.35(C)(2). Field auditor Jonathon Thomas acknowledged that his initial audit did not account for factors such as spillage, breakage, and giveaways and admitted that initial estimates for Cowboy’s were grossly overstated. Although he did not concede similar overstating for Yesterdays, the initial audit figures compared to the final assessment were also inflated.
Thomas utilized sampling data from Yesterdays after it had been rebuilt into a larger facility, yet he lacked knowledge about the new club's patron capacity and failed to recognize its significance for income estimations during the audit period. The auditor determined an unreasonable nightly patron count of 610 for Yesterdays, while its actual capacity was only 350. The auditors did not seek to verify this capacity from the fire department or any other sources, as they believed that liquor purchase amounts were sufficient for estimating sales.
Pettis acknowledged a lack of operational knowledge regarding the businesses audited, including specifics on pricing strategies, operational nights, and customer capacity. She could not provide accepted sampling techniques or standards from the American Institute of Certified Public Accountants, relying instead on a CPA who did not propose alternative methodologies. Pettis stated it is the Collector’s responsibility to determine the correct tax amount during an audit. Vallet contested the audit's figures, asserting that the auditor's nightly attendance estimate of 610 for Yesterdays was inaccurate, given that historical data indicated a much lower average. He highlighted that the new Yesterdays had a capacity of 1,000 and that typical Friday and Saturday attendance was 150-300, with Sunday nights being unprofitable. Vallet disputed the claim of $700,000 annual profit, arguing the club was unprofitable, leading to its closure due to the building's condemnation. The trial court found that the Collector did not meet statutory requirements, particularly regarding the methodology used in the audit, leading to discrepancies between initial and final assessments. The court rejected the Collector's claim of an existing suspension agreement based on insufficient evidence, ruling that the taxes for Yesterdays from 2005 and 2006 had prescribed. Under La.R.S. 47:337.28.1, arbitrary assessments do not interrupt prescription, and the dealer is entitled to reimbursement for litigation costs.
Costs recoverable under this section are limited to 10% of the arbitrarily assessed taxes, interest, and penalties, with the court having discretion over their reasonableness. Assessments cannot deprive a taxpayer of their constitutional right to a three-year prescriptive period for tax assessments, as established by Article VII, Section 16 of the Louisiana Constitution. The provisions of La.R.S. 47:337.28.1 are designed to prevent arbitrary assessments. The taxpayer provided adequate records, despite the Collector failing to notify them over several years that only 'Z-tapes' would suffice to demonstrate revenue. The court upheld the trial court's denial of the Collector's motion for a new trial, affirming that an appellate court can only reverse such a decision upon showing an abuse of discretion. The Collector did not demonstrate that the evidence it claimed was newly discovered could not have been obtained earlier with due diligence, as it was aware of payments made during the audit but failed to gather relevant evidence in time. Consequently, the trial court’s ruling was affirmed, with appeal costs assessed against the Collector.
During the trial, it was revealed that the Collector no longer possessed a document called the 'Agreement to Suspend Prescription of Sales and Use Taxes,' which the Collector claimed extended the prescriptive period for the taxpayer Yesterdays to December 31, 2010, for tax years 2005 and 2006. Yesterdays had filed an unopposed Amended Petition arguing that the tax claims were prescribed, and the court found the Collector had the burden to prove otherwise. Louisiana law stipulates a three-year prescription period for most taxes, which can be interrupted or suspended under certain conditions. The statute defines a false or fraudulent return as one filed with the intent to evade taxes, which requires evidence of intent. The trial court found no such evidence of intent to defraud by the taxpayer, Vallet, who was deemed honest and forthcoming throughout the proceedings, leading to a conclusion that there was no manifest error in the trial court's ruling.
