84 Lumber Co. v. City of Northport

Citation: 250 So. 3d 567Docket: 2150876; 2150877; 2150878; 2150879; 2150880

Court: Court of Civil Appeals of Alabama; May 12, 2017; Alabama; State Appellate Court

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84 Lumber Company, Inc. has appealed a summary judgment from the Tuscaloosa Circuit Court favoring the City of Northport, the Tuscaloosa County Special Tax Board, and the City of Tuscaloosa in five circuit-court actions, leading to the dismissal of two appeals and the City of Northport from another. The court reversed the judgment in three specific appeals. Between 2008 and 2013, 84 Lumber initiated five actions disputing tax assessments, interest, and penalties levied by the taxing authorities. In the first case, 84 Lumber claimed improper denial of a sales tax refund and owed interest from the City of Northport. The other four cases challenged the methodology used by the taxing authorities to audit sales invoices, arguing that the sampling method was inappropriate and led to incorrect tax assessments, interest, and penalties. The circuit court consolidated these actions for discovery, and after a joint summary judgment motion filed by the taxing authorities and a subsequent response from 84 Lumber, the court ruled in favor of the taxing authorities on February 16, 2016. A post-judgment motion by 84 Lumber was denied by operation of law. The appeals were transferred to this court, which consolidated them and held oral arguments in March 2017. The evidence presented indicated a 5% sales tax structure in Tuscaloosa County, with specific distribution rules based on delivery locations, affecting the tax liabilities of 84 Lumber, which operates within Northport's corporate limits.

84 Lumber regularly delivers goods to various job sites in Tuscaloosa County, including areas within and outside the City of Northport and City of Tuscaloosa. Delivery addresses are recorded on sales invoices, but these do not specify the taxing jurisdiction or indicate whether deliveries were made within or outside city limits. Historically, 84 Lumber has used a zip code method for tax remittance, which has led to incorrect tax payments as the taxing jurisdictions do not align with zip code areas. Although the taxing authorities have audited 84 Lumber multiple times since the late 1990s and provided assistance to identify the correct taxing jurisdictions, 84 Lumber failed to implement an effective system for accurate tax remittance during the relevant periods.

In the related civil actions, the taxing authorities utilized a sampling method to determine owed sales taxes by examining invoices from selected months, identifying delivery points, and calculating the proper tax distribution. The audits revealed that while 84 Lumber generally paid the correct amount of sales taxes, it overpaid the City of Northport and underpaid the City of Tuscaloosa and the Tuscaloosa County Special Tax Board, resulting in interest and penalties assessed against 84 Lumber.

In the appeal (2150876), the circuit court upheld the City of Northport’s limitation of tax refunds to 36 months but did not rule on 84 Lumber’s claim for interest on that refund, which had not been addressed by the City. Since the circuit court did not conclusively resolve all claims in case number CV-07-1122, the appeal was dismissed due to lack of a final judgment, as required under Alabama law.

Appeal number 2150878 involves 84 Lumber's challenge to a tax assessment by the City of Tuscaloosa from September 2007. Although 84 Lumber claimed the assessment was final, it is acknowledged that the City issued a preliminary assessment. Under Section 40-2A-7(b)(5)b.1. of the Alabama Taxpayers' Bill of Rights, appeals can only be made from final assessments. Consequently, 84 Lumber lacked the right to appeal the preliminary assessment, resulting in the circuit court lacking subject-matter jurisdiction over the appeal. Orders related to this appeal, including adding the City of Northport as a party, are deemed void, leading to the dismissal of appeal number 2150878 with instructions for the circuit court to vacate its orders in case number CV-08-900285.

Appeal numbers 2150877, 2150879, and 2150880 stem from a summary judgment in case numbers CV-08-900078, CV-09-900384, and CV-13-900351, where the circuit court upheld the taxing authorities' use of a sampling method to assess sales taxes and imposed interest and penalties on 84 Lumber for incorrect remittances. 84 Lumber contends these determinations were erroneous. The City of Northport is dismissed from appeal number 2150879 since it was not a party in case number CV-09-900384, and its addition as an appellee was a mistake.

Addressing the merits, the circuit court ruled that 84 Lumber failed to maintain adequate records, justifying the taxing authorities' use of a sampling method as reasonable. 84 Lumber did not provide any legal authority against this ruling and had the opportunity to review its records but chose not to, resulting in a lack of precise tax reporting. The court found no legal error in the taxing authorities' methods.

Disagreement is expressed regarding the analysis of Section 40-2A-7, Ala. Code 1975, which mandates that taxpayers maintain accurate and complete records to enable the taxing authority to assess taxes correctly. This section requires businesses subject to sales tax to keep detailed records of transactions without imposing specific methodologies that could unduly burden taxpayers. The Alabama Department of Revenue has not established regulations defining the necessary content for "accurate and complete" records for sales tax purposes.

In a summary judgment motion, the taxing authorities claimed that a Tuscaloosa County business must document delivery locations relative to taxing jurisdictions. However, they failed to cite any statute or regulation mandating such records, and the testimony of auditor Barbara Hinton did not support this assertion. Hinton did confirm that auditors obtained tax returns, invoices, and revenue documentation from 84 Lumber to determine sales attributable to each jurisdiction by comparing delivery addresses to jurisdiction maps. Despite some missing invoices, the auditors successfully computed taxable sales percentages for each jurisdiction based on the available records.

The conclusion drawn is that 84 Lumber's records provided adequate information for the taxing authorities to ascertain taxes owed, thus fulfilling the requirements of Section 40-2A-7(a)(1). The precedent case, State v. Mims, illustrates that the courts have recognized non-specific record-keeping practices as acceptable as long as they allow for tax assessments.

The supreme court upheld the judgment while noting that the Department of Revenue had consistently accepted the grocer's tax remittances over the years without raising issues regarding his record-keeping. The court suggested that stricter bookkeeping requirements could be considered by lawmakers or the Department, which should provide taxpayers with warnings about potential consequences for inadequate record-keeping. The court's remarks did not support the taxing authorities' claim that 84 Lumber failed to maintain proper records. Although the authorities had alerted 84 Lumber about remitting taxes to the incorrect jurisdiction, the errors were traced to the use of zip codes rather than insufficient record-keeping. 

Section 40-2A-7(b) outlines that if a taxing authority finds a tax return to be inaccurate, it must use the most accurate information reasonably obtainable to calculate the correct tax. In this case, 84 Lumber had appropriate invoices available for inspection, which the authorities could have used to determine the correct taxes due. Hinton, in her deposition, indicated that a full audit of all invoices would yield the most accurate tax assessment, but due to the high volume of invoices, the auditors opted for a random sample approach. She acknowledged uncertainty regarding the accuracy of the results from this sampling method. Prior cases, including State v. Mims, highlight the issues surrounding the use of selective documentation for tax assessments, where the Department concluded significant underpayment based on limited documentation.

The trial court found that the grocer's business activity varied throughout the five-year assessment period and deemed the Department's sampling method speculative. The supreme court upheld this decision, noting the grocer's adequate record-keeping and ruling that the 44% error in audited invoices could not be extrapolated to the entire assessment period without evidence of similar errors during that time. In State v. Ludlam, a nursery owner contested a sales tax assessment; an accountant used a "test period" to determine that 80% of sales were exempt, despite the test period not aligning with the assessment period. The supreme court affirmed the trial court's ruling in favor of the nursery owner. The Wigley, Culp case established that sampling is permissible when a taxpayer fails to provide sufficient records, but this case indicated that 84 Lumber had adequate records for the entire assessment period. Missing invoices did not justify the use of sampling since the remaining invoices could have been reviewed to determine taxes due. The taxing authorities' claim that auditing every invoice would be too time-consuming was countered by the requirement that taxes be calculated from the most accurate information available, as outlined in Section 40-2A-7(b)(1). The use of sampling in cases with sufficient records was deemed arbitrary and capricious without a rational basis.

The legislature has not allowed exceptions for taxing authorities to bypass the use of the most accurate information in determining taxes, despite the extensive documentation large businesses generate. Courts maintain that without specific exceptions in statutes, it is presumed the legislature intended none. Consequently, courts must interpret the law as written. Under Section 40-2A-7(b)(5)c.3., a final assessment is presumed correct, placing the burden on the taxpayer to prove otherwise. In this case, 84 Lumber successfully demonstrated that the taxing authorities did not base their assessments on complete and accurate information, thereby overcoming the presumption of correctness and resisting a summary judgment motion. The circuit court's summary judgment regarding the validity of the assessments and associated interest and penalties was erroneous, leading to a reversal of that judgment. The appeals numbered 2150876 and 2150878 were dismissed, and the City of Northport was dismissed from appeal 2150879. Appeals 2150877, 2150879, and 2150880 were reversed and remanded for further proceedings. The opinions of the judges varied, with some concurring and others dissenting regarding the reversal of the summary judgment on tax assessments.

The taxing authorities have previously audited 84 Lumber Company, Inc. and found its record-keeping methods inadequate, offering assistance to improve them. Despite this, 84 Lumber continues to maintain inadequate records, hindering proper tax liability calculations. Consequently, the trial court concluded that 84 Lumber failed to keep accurate records, placing the burden of proof on the taxpayer to demonstrate the incorrectness of tax assessments as outlined in Ala. Code 1975, 40-2A-7(b)(5). The court emphasized that tax assessments are presumed correct, and 84 Lumber has not met the burden to prove otherwise, instead shifting the responsibility for accurate tax calculations to the taxing authorities. The document also references relevant laws and ordinances governing the taxing system in Tuscaloosa County. It clarifies that the circuit court did not consolidate the actions for trial but only for discovery, thus allowing each appeal to be treated as a separate civil action. Furthermore, it notes that there is no evidence that the taxing authorities ordered 84 Lumber to include specific information on its invoices, and while the authorities claimed they could not audit due to missing records, 84 Lumber provided evidence of compliance with audit requests. The discussion of 84 Lumber's additional arguments regarding the assessments and procedural rulings was deemed unnecessary based on the findings.