An audit assessment issued to an Alabama taxpayer was largely upheld upon challenge, with several adjustments being made upon review by the Alabama Tax Tribunal. The taxpayer, a convenience store operator, was issued an audit assessment by the Department of Revenue (DOR) for sales tax due for the period of November 2010 through February 2016, including a fraud penalty.
The audit report stated that the taxpayer provided no bank records of deposits or cash payouts, and that no income tax returns had been filed. As a result, the auditors used the “purchase mark-up” audit method to estimate taxable sales for the audit period.
The taxpayer made a number of arguments in challenging the audit assessment, including:
Since the preliminary assessment of sales tax was not entered until May 6, 2019, which was outside of the two-year limitation period for fraud actions, the DOR’s assessment based on fraud was untimely. As a result, the timeliness of the sales tax assessments depends on the second bullet point above. The taxpayer correctly pointed out that the assessment was untimely for the periods in which the due date of the return or the date the return was filed was before May 6, 2013 even if the 25% underreporting rule was invoked. For subsequent periods, the DOR argued that the 25% threshold was met for all months except November and December 2015.
Since the taxpayer failed to maintain sales records for the audit period, the DOR applied a purchase markup of 35%. The 35% markup is based on Internal Revenue Service information regarding percentage markups for gas stations and grocery stores.
The taxpayer also argued that the 199% markup for prepared food sold by the taxpayer was unreasonable. However, the taxpayer did not provide any evidence to contradict the markup. In the absence of any records to contradict the DOR’s use of the 199% markup on prepared food and 35% markup on other items, the taxpayer failed to show that the estimates were erroneous.
The taxpayer also argued that the purchase markup was not adjusted for theft and spoilage. However, the taxpayer did not provide records of the amount of theft and spoilage. Additionally, the IRS markup accounts for theft and spoilage.
As a result, the taxpayer’s challenges to the markup percentages used by the DOR were unsuccessful. The DOR properly applied the six-year statute of limitations (based on underreporting of 25% or more) to the periods of May 6, 2013 onward, with the exception of November and December 2015, as noted above. The taxpayer’s other challenges were rejected.
The Alabama Tax Tribunal directed the DOR to recalculate the sales tax final assessment by reducing the tax portion of the assessment to eliminate periods outside the statute of limitations and by removing the fraud penalty since the assessment contained both a late payment penalty and a fraud penalty, which is prohibited. (Linden Food Mart, LLC v. Alabama Department of Revenue, Alabama Tax Tribunal, No. S. 19-1089-JP, September 1, 2023)