New York Maintains Assessment Based on Observation Test.

In a recent Tax Appeals Case, the New York Division of Tax Appeals continued an auditor’s observation method for testing taxable sales. In the initial stages of an audit of a local diner, the auditor assigned to the case was provided with improper documentation of daily cash receipts. When the auditor determined that the information provided was not reliable, she requested further documentation and an observance of the diner from inside the taxpayer’s location. The taxpayer denied the auditor’s request. Instead, the auditor issued an observation request stating that state revenue investigators would be present for a period of 24 hours commencing on a Friday morning. Three different investigators monitored the count of individuals eating at the restaurant. The auditor utilized the head count and a menu provided by the taxpayer’s representative to calculate a median price per person. Upon receipt of the assessment based on the observation method, the taxpayer filed a written disagreement stating that the observation method utilized was improper. The taxpayer stated that the day that was observed was unusual due to increased business related to a local brownout that was not typical of a normal Friday. The Division of Tax Appeals disallowed the taxpayer’s contention due to the lack of proper documentation provided to the auditor. Since the observation test was well documented and prepared, the taxpayer was liable for all tax, penalties, and interest assessed. (Cronos Enterprises, Inc., New York Division of Tax Appeals, Administrative Law Judge Unit, DTA Nos. 819477, 819478, 819479, and 819480, March 10, 2005)

Posted on July 27, 2005