Opinion
Docket No. 010929-2007 Docket No. 010928-2007
12-05-2012
Re: Custom Lawn Sprinkler Co., LLC v. Director, Division of Taxation Jose Rosario and Sherri Rosario v. Director, Division of Taxation
Paul J. Ritz, Esq. Heather Lynn Anderson Deputy Attorney General
NOT FOR PUBLICATION WITHOUT APPROVAL OF
THE TAX COURT COMMITTEE ON OPINIONS
Patrick DeAlmeida
Presiding Judge
Paul J. Ritz, Esq. Heather Lynn Anderson
Deputy Attorney General
Dear counsel:
This letter constitutes the court's opinion granting the defendant Director, Division of Taxation's motion for summary judgment in the above-referenced matters. The Director issued a final determination assessing sales and use tax, penalties and interest against plaintiff Custom Lawn Sprinkler Co, LLC ("Custom Lawn") for the period July 1, 2001 to June 30, 2005. The assessment arose from an audit by a Division of Taxation employee in which it was determined that Jose Rosario, the sole shareholder and principal of Custom Lawn, failed to maintain adequate books and records relating to the operation of the company, did not document sales the company contends were tax exempt, and filed tax returns which underreported Custom Lawn's income. The company's tax liability was estimated by the Director's staff based on the limited and incomplete records produced by Custom Lawn during the audit and a subsequent administrative conference. In addition, Custom Lawn's underreported income was attributed as personal income to Mr. Rosario, given his controlling interest in the company. This resulted in a second final determination assessing gross income tax against Mr. Rosario and his wife Sherri Rosario for tax years 2002 through 2004.
For the reasons explained more fully below, the court concludes that no genuine issue of material fact exists with respect to the validity of the Director's final determinations. Because Custom Lawn did not maintain contemporaneous business records, the Director has significant latitude in determining the company's tax liabilities through reasonable estimates based on available information. The final determinations reflect a reasonable, and indeed lenient, method of calculating plaintiffs' tax liabilities for the years in question. In opposition to the Director's motion, plaintiffs offer little more than their attorney's opinion of how he would have estimated plaintiffs' tax liabilities. While plaintiffs' counsel is also an accountant, his proffer of an alternative method of calculating plaintiffs' tax obligations is insufficient to overcome the summary judgment standard. The final determinations, therefore, are affirmed.
I. Findings of Fact and Procedural History
This letter opinion sets forth the court's findings of fact and conclusions of law on defendant's motion for summary judgment. R. 1:7-4. The following findings of fact are based on the certifications and exhibits submitted by the parties on the motion.
Plaintiff Custom Lawn is a limited liability company of which plaintiff Jose Rosario is the sole shareholder and principal. Plaintiff Sherri Rosario is the wife of Jose Rosario, with whom she filed joint New Jersey gross income tax returns during the relevant periods.
Custom Lawn began operations in October 2000. The business provides three categories of services: (1) the installation, maintenance and repair of lawn sprinkler systems; (2) snow removal; and (3) demolition and debris removal, referred to in some records as container services. The parties are in agreement that the receipts received for Custom Lawn's services are subject to sales tax, with the exception of the installation of lawn sprinkler systems, which the parties agree is a capital improvement not subject to sales tax. See N.J.S.A. 32B-3(b)(2) (exempting from sales tax receipts from "service rendered in installing property which, when installed, will constitute an addition or capital improvement to real property . . . ."). Charges for the maintenance and repair of sprinklers are subject to sales tax. Ibid. In addition, the parties agree that with respect to all categories of services provided by Custom Lawn, some of Custom Lawn's customers are tax-exempt entities which are not subject to sales tax on any transaction.
It is also undisputed that Custom Lawn failed to maintain adequate books and records during the relevant tax years. The entity did not issue invoices to its customers. This practice, which is contrary to Custom Lawn's statutory responsibilities, undercuts precise identification of tax exempt sales. Without itemized invoices, it is not possible to determine with precision whether receipts from a transaction are for sprinkler installation, which is exempt from sales tax, sprinkler repair and maintenance, which are not exempt from sales tax, or some other service. For a large number of transactions, the only evidence Custom Lawn produced were written proposals for the installation of sprinklers. The proposals were not signed by the customers and it is not possible to determine from the proposals whether the proposed installations took place, whether the scope of the proposals changed before installation, and whether and when payments were made for the installations.
In addition, Custom Lawn also did not complete and maintain for its installation projects forms ST-8, the Certificate of Exempt Capital Improvement, required by N.J.A.C. 18:24-5.7(a). Form ST-8, which is to be signed by both a contractor and a property owner, attests to the fact that a construction project constituted a capital improvement not subject to sales tax. Nor did Custom Lawn collect, complete or maintain any documentation with respect to the tax exempt status of its customers. See N.J.A.C. 18:24-2.5. Custom Lawn contends that it provided services to tax exempt entities. It did not, however, produce evidence that it collected the necessary proof that those entities were not required to pay sales tax.
Finally, Custom Lawn produced no records establishing that it regularly collected sales tax on taxable transactions, that it kept track of sales tax it collected, and that it periodically transmitted sales tax to the Director. Although Custom Lawn, through Mr. Rosario, filed timely income tax returns for the relevant tax years, the figures on the returns were based on an accountant's estimates of the amount of Custom Lawn's revenues and expenses. The accountant did not use complete, contemporaneously created records of Custom Lawn's sales to complete the company's returns or to determine the company's tax liabilities. The tax returns were, in effect, the accountant's best guess at Mr. Rosario's and Custom Lawn's tax obligations to the State.
In September 2005, an employee of the Division of Taxation began an audit of Custom Lawn. The audit arose from records uncovered during the audit of one of Custom Lawn's customers which revealed that Custom Lawn had not issued invoices to that customer for services provided. Despite repeated requests from the auditor, Custom Lawn failed to produce a general ledger, a cash disbursement journal, a purchase journal, a sales journal, canceled checks, complete vendor invoices, bank statements, payroll records, tax returns, documentation of capital improvements it installed, or documentation of the tax exempt status of its customers. It later became apparent that these documents were not produced because the company did not create and maintain contemporaneous records of its business activities. Custom Lawn produced an incomplete set of customer invoices and written proposals it prepared for the installation of sprinkler systems. No backup documents were produced to support the taxpayer's contention that the written proposals materialized into actual sales or of the amounts paid for the installations.
Due to the insufficiency of Custom Lawn's records the auditor estimated the entity's liabilities based on the sparse documents produced during the initial audit. Because the auditor's assessment of tax ultimately was modified after an administrative appeal, it is not necessary to provide a detailed analysis of the auditor's calculations. It will suffice for purposes of this opinion to note that on June 6, 2006, the auditor issued a Notice of Assessment Related to Final Audit Determination assessing $166,034.94 in sales and use tax against Custom Lawn for the period July 1, 2001 to June 30, 2005. With interest and penalties the assessment totaled $219,480.50. This determination was based, in part, on the auditor's conclusion that Custom Lawn had underreported its income in the years in question.
Based on the determination that Custom Lawn had underreported its income, the auditor imputed to Jose Rosario additional income for gross income tax purposes. With penalties and interest, the gross income tax assessment for Jose Rosario, and by extension his wife, totaled $17,301.66 for tax years 2002 through 2004. This assessment was set forth in a June 6, 2006 Notice of Assessment Related to Final Audit Determination.
The plaintiffs filed timely requests for administrative conferences at the Division. An administrative conference was held on February 1, 2007. Plaintiffs' counsel participated in the hearing and provided additional, but still incomplete, records: (1) a few proposals for the installation of lawn sprinkler systems; (2) documentation that a few of Custom Lawn's customers were tax exempt entities during tax year 2004; and (3) evidence that some of Custom Lawn's projects during 2006 were capital improvements exempt from sales tax.
Plaintiffs' counsel also submitted three ledgers relating only to 2004: one related to sprinkler installation, repair and maintenance, one related to snow removal and one related to demolition and debris removal. The ledgers were not contemporaneous records of Custom Lawn and were created by plaintiff's counsel, who is also an accountant, in preparation for the administrative conference. It is not clear how the ledgers were created, as no backup materials, such as invoices, bank deposits, tax exemption certificates or other documentation, were provided.
Accepting as accurate the amounts reported in the ledgers submitted by plaintiffs' counsel, the conferee determined that Custom Lawn's income was underreported on the 2004 tax return by $210,151.72. The ledgers reported gross receipts of $1,074,942.72 for 2004, but the tax return reported gross receipts of $864,791. This represents an underreporting factor of 1.24. The auditor applied this error factor to the income reported on returns for the other years in the audit period to arrive at adjusted gross receipts for the periods at issue.
To determine the amount of Custom Lawn's receipts exempt from sales tax the conferee examined the sparse documents produced by the taxpayer. Although completed Division of Taxation forms ST-5, Non-Profit Tax Exempt Certification, were not provided by Custom Lawn, the conferee concluded from the names of some of Custom Lawn's customers that several of the customers were tax exempt (e.g., boards of education). In addition, in a few instances, completed forms ST-8, reporting capital improvements, although executed long after the subject transactions, were accepted by the conferee, provided the forms matched payments reported on the ledgers. The conferee also accepted as exempt any transaction in which a sprinkler installation proposal could be linked to a ledger deposit entry. Those ledger entries that indicated receipts from a sprinkler installation without an installation proposal or other documentation to verify the transaction were not considered exempt by the conferee.
After employing this approach, the conferee determined for tax year 2004 that 47.72% of snow removal receipts, 85.82% of debris removal receipts, and 51.73% of sprinkler receipts were exempt from sales tax. These percentages were proportionately applied to the gross receipts reported on the three ledgers and the conferee determined that 58% of Custom Lawn's overall receipts in 2004 were exempt from sales tax.
To determine Custom Lawn's tax liabilities, the conferee began with the income reported on Custom Lawn's tax returns. He applied to that figure the 1.24 error factor he previously determined. To the result of that calculation the conferee applied a 58% exemption rate. The resulting figure, 42% of the adjusted reported income for each relevant tax year, was determined to be subject to sales tax. The conferee applied a 6% sales tax to the receipts determined to be taxable. The amount of sales tax already submitted by Custom Lawn with its returns was deducted from the amount due. The conferee determined a total sales tax liability of $83,006.70. This is approximately half the amount assessed after the initial audit.
During the periods at issue the sales tax was imposed at a rate of 6%. The sales tax rate was raised to 7% in 2006. L. 2006, c. 44.
After calculation of interest and penalties, the conferee determined Custom Lawn's outstanding tax obligation to be $123,923.57.
The conferee adjusted Jose Rosario's gross income tax obligation and determined that he had an income tax obligation for 2002 and 2003 in excess of the amount determined after the initial audit. Because the statute of limitations for those tax years had passed, the conferee upheld the smaller amount determined to be due by the auditor for those tax years. The conferee determined, however, that Mr. Rosario owed additional income tax in the amount of $13,135.79 for tax year 2004 for which the statute of limitations had not expired. After application of interest and penalties Mr. Rosario's gross income tax obligation was determined to be $29,002.11.
On August 31, 2007, the Director issued final determinations adopting the conferee's assessments. In addition to the interest and penalties assessed against Custom Lawn by the conferee, the Director imposed a 5% tax amnesty penalty because the company failed to seek amnesty during the amnesty period that expired on June 10, 2002. See N.J.S.A. 54:53-18.
On December 3, 2007, Custom Lawn filed a Complaint in this court challenging the Director's final determination assessing sales and use tax against the company. The Complaint alleges that the "Division double-counted receipts in its analysis and did not give proper credit for all ST-8 and ST-5 exemptions. Further documentation to follow."
On December 3, 2007, Jose and Sherri Rosario filed a Complaint in this court challenging the Director's final determination assessing gross income tax against the couple. The Complaint alleges that the "division doubled (sic) counted income receipts of Jose A. Rosario's LLC business entity, resulting in an improper assessment of additional Gross Income Tax. Further documentation to follow."
After the completion of discovery, the Director moved for summary judgment. As required by R. 4:46-2(a), the Director submitted a detailed Statement of Material Facts Not in Dispute with supporting certifications.
Plaintiffs opposed the motion. They failed to fulfill the requirements of R. 4:46-2(b) to either admit or dispute each of the material facts the Director alleges are not in dispute. The court, therefore, considers all of the facts contained in the Director's Statement of Material Facts Not in Dispute, which the court finds to be sufficiently supported by certifications, to be admitted for purposes of the motion. R. 4:46-2(b). Plaintiffs' three-page opposition brief cites not a single statute, regulation, court rule, or judicial opinion. See Celino v. General Accident Ins., 211 N.J. Super. 538, 544 (App. Div. 1986)("The function of the brief is a written presentation of legal argument."). It is difficult, therefore, to discern with precision the legal basis for plaintiffs' opposition to the Director's motion.
Plaintiffs' argument begins with the concession that "[t]he essential facts of this matter are not in dispute." (Pb1). In their brief, plaintiffs state that they do not contest the Director's use of the 2004 tax year to determine Custom Lawn's income underreporting factor. Nor do plaintiffs contest the 1.24 underreporting factor, the calculation of Custom Lawn's income for the relevant tax years, or the income imputed to the Rosarios for gross income tax purposes. Plaintiffs also do not contest the percentage exemption rate attributed to Custom Lawn's receipts from snow removal and demolition and debris removal services. With respect to their tax liabilities, plaintiffs' sole dispute is with the exemption rate attributed by the Director to Custom Lawn's sprinkler-related receipts.
Plaintiffs' opposition brief does not contain page numbers. (Pb1) refers to the first page of the brief following the cover.
Plaintiffs' argue that the 51.73% exemption rate employed by the Director "simply defies logic and common sense in light of the practical realities of the Plaintiff's business activities." (Pb2). Plaintiffs instead propose using a 75.9% exemption rate for Custom Lawn's receipts related to sprinklers. Evidentiary support for this argument is absent from the record.
According to the brief, the "bread-and-butter of the taxpayer's business is installation of sprinkler systems." (Pb2). The brief then reports, without the benefit of an evidentiary citation, that "[i]nstallation of a new system, even for a small residential customer, is rarely less than $1,000.00 and is often far in excess of that amount, ranging into the $10,000.00 and over range for large scale commercial or multiple property residential installations." (Pb2). The brief continues, again without an evidentiary citation, "[c]onversely, the Plaintiff's activities related to periodic maintenance and repair of existing systems is relatively nominal, rarely exceeding $500.00 and typically amounting to no more than $60.00." (Pb2).
According to plaintiffs, this argument is supported by four pages attached to their opposition brief as Exhibit A. The attached documents are not accompanied by an Affidavit providing an evidentiary foundation for their consideration by the court, explaining how they were created, who drafted the documents, or what they represent. See R. 1:6-6 (requiring motions based on facts not appearing in the record or not judicially noticeable be supported on affidavits made on personal knowledge, setting forth only facts admissible in evidence to which the affiant is competent to testify and which may have annexed thereto certified copies of all papers or parts thereof referred to therein).
At oral argument on the Director's motion it was determined that the documents attached to plaintiffs' opposition brief were created by plaintiffs' counsel, who reviewed the documents produced by plaintiffs and provided his own analysis of how to determine plaintiffs' tax liabilities. The first page contains two columns of calculations, one entitled "Per Conferee's Report" and the other "Proposed Settlement." The "proposed settlement" proposes application of a 79.3% exemption rate (the brief refers to a proposed 79.5% exemption rate) for sprinkler receipts which would reduce Custom Lawn's outstanding sales tax obligation, before interest and penalties, to $37,086. The remaining three pages of the attachment contain a list of customer names and invoice amounts. Plaintiffs' entire argument with respect to its tax liability is predicated on the attorney's proposed settlement, which, plaintiffs argue, creates a genuine issue of material fact because the proposal demonstrates that the final determination "is dramatically out of sync with the economic realities of the Plaintiff's business." (Pb2). The 79.5% exemption rate and the contention that the Director's determination is flawed are based entirely on what plaintiffs' counsel described as his knowledge and observations of the lawn sprinkler installation business obtained from Mr. Rosario. Counsel stated that he considered any receipt over $1,000 as a receipt from sprinkler installation, although he considered some transactions of over $1,000 to be for sprinkler repairs and maintenance if the transaction included several payments of less than $1,000. No explanation was provided for these seemingly arbitrary standards. According to plaintiffs' brief, "[w]ithout looking at a detailed analysis of each customer proposal, the taxpayers (sic) list of customer receipts has a 'res ipsa loquitor' (sic) quality to it . . . ." (Pb2).
Counsel confirmed at oral argument that, in the event the matter proceeded to trial, plaintiffs would not offer any business records beyond those produced during the audit and administrative conference. In addition, during discovery plaintiffs did not identify an expert witness they would call at trial. Counsel stated that Mr. Rosario would be presented at trial to explain the nature of his business, a subject that is not in dispute.
Custom Lawn also opposed the 5% amnesty penalty assessed against it by the Director. Plaintiffs argue that it was unfair to impose a penalty because of their refusal to abandon their challenge to the Director's final determinations in exchange for amnesty. As was the case with respect to their challenge to their underlying tax liabilities, plaintiffs cite no statute, regulation or legal precedent in support of their position.
II. Conclusions of Law
Summary judgment should be granted where the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law. R. 4:46-2 (c). In Brill v. Guardian Life Ins. Co. of Amer., 142 N.J. 520, 523 (1995), our Supreme Court established the standard for summary judgment as follows:
[W]hen deciding a motion for summary judgment under Rule 4:46-2, the determination whether there exists a genuine issue with respect to a material fact challenged requires the motion judge to consider whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party in consideration of the applicable evidentiary standard, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party.
In addition, the court's analysis is influenced by the familiar principle that the Director's interpretation of tax statutes is entitled to a presumption of validity. "Courts have recognized the Director's expertise in the highly specialized and technical area of taxation." Aetna Burglar & Fire Alarm Co. v. Director, Div. of Taxation, 16 N.J. Tax 584, 589 (Tax 1997)(citing Metromedia, Inc v. Director, Div. of Taxation, 97 N.J. 313, 327 (1984)). The scope of judicial review of the Director's decision with respect to the imposition of a tax "is limited." Quest Diagnostics, Inc. v. Director, Div. of Taxation, 387 N.J. Super. 104, 109 (App. Div.), certif. denied, 188 N.J. 577 (2006). The Supreme Court has directed the courts to accord "great respect" to the Director's application of tax statutes, "so long as it is not plainly unreasonable." Metromedia, supra, 97 N.J. at 327. See also GE Solid State, Inc. v. Director, Div. of Taxation, 132 N.J. 298, 306 (1993)("Generally, courts accord substantial deference to the interpretation an agency gives to a statute that the agency is charged with enforcing.")(citations omitted).
"When an administrative agency interprets and applies a statute it is charged with administering in a manner that is reasonable, not arbitrary or capricious, and not contrary to the evident purpose of the statute, that interpretation should be upheld, irrespective of how the forum court would interpret the same statute in the absence of regulatory history." Blecker v. State, 323 N.J. Super. 434, 442 (App. Div. 1999). "[C]ourts are not free to substitute their judgment as to the wisdom of a particular administrative action for that of the agency so long as that action is statutorily authorized and not otherwise defective because arbitrary or unreasonable." Sutton Warehousing, Inc. v. Director, Div. of Taxation, 290 N.J. Super. 686, 697 (App. Div. 1996)(quotations omitted). "However, despite that deference, an administrative agency's interpretation will not be followed when the agency extends a statute 'to give it a greater effect than its language permits.'" Oberhand v. Director, Div. of Taxation, 193 N.J. 558, 568 (2008)(quoting GE Solid State, supra, 132 N.J. at 306).
Additionally, the Sales and Use Tax Act was enacted as a revenue raising measure and is intended to be broadly read. Adamar of New Jersey v. Director, Div. of Taxation, 17 N.J. Tax 80, 85-86 (Tax 1997), aff'd, 18 N.J. Tax 70 (App. Div. 1999); Advo, Inc. v. Director, Div. of Taxation, 25 N.J. Tax 504, 511 (Tax 2010). "Our Legislature has established a presumption that transactions are taxable." UPS Oasis Supply Corp. v. Director, Div. of Taxation, 23 N.J. Tax 320, 334 (Tax 2007). The burden of proving the non-taxable status of any transaction rests on the person required to collect the tax. N.J.S.A. 54:32B-12(b)
The court finds that plaintiffs raised no genuine issues of material fact with respect to the validity of the Director's final determinations. In the absence of contemporaneously created records of the relevant transactions and in light of Custom Lawn's failure to document the tax exempt nature of some of its customers, the Director made a reasonable determination of the company's outstanding tax obligations. As a result, the Director is entitled to judgment in his favor as a matter of law. Plaintiffs' attempt to create a material dispute of fact based on their counsel's "proposed settlement" of this matter is insufficient to overcome the summary judgment standard. Plaintiffs submitted no admissible evidence suggesting that the Director acted unreasonably in calculating plaintiffs' tax liabilities given the taxpayers' failure to create and maintain records of their business activities.
During the years at issue, the Sales and Use Tax Act imposed a 6% sales tax on receipts from
every sale, except for resale, of the following services . . . [i]nstalling tangible personal property . . . or maintaining, servicing, repairing tangible personal property . . . except . . . services rendered in installing property which, when installed, will constitute an addition or capital improvement to real property, property or land, other than landscaping services and other than installing carpeting and other flooring.
[N.J.S.A. 54:32B-3(b)(2).]
As an entity that sold services Custom Lawn is a "person[] required to collect tax." N.J.S.A. 54:32B-2(w). The vendor is required to collect the tax when collecting the price of the services sold. N.J.S.A. 54:32B-12(a). "If the customer is given any sales slip, invoice, receipt or other statement or memorandum of the . . . service charge . . . the tax shall be stated, charged and shown separately on the first of such documents given to him." Ibid. In addition,
[u]nless a seller shall have taken from the purchaser a certificate, signed by the purchaser if in paper form, and bearing the purchaser's name and address and the number of the purchaser's registration certificate, to the effect that the property or services . . . was otherwise exempt . . . or the purchaser, prior to taking delivery, furnishes to the seller any affidavit, statement or additional evidence, documentary or otherwise, which the director may require demonstrating that the purchaser is an exempt organization . . . the sale shall be deemed a taxable retail sale.The Director has adopted form ST-5, Exempt Organization Certificate, as the documentary proof necessary for a seller to refrain from collecting sales tax from an exempt purchaser. He also adopted form ST-8, Certificate of Exempt Capital Improvement, as the documentary proof necessary for a seller to refrain from collecting sales tax on receipts from the installation of tangible property that constitutes a capital improvement to real property.
[N.J.S.A. 54:32B-12(b).]
Pursuant to N.J.A.C. 18:24-2.5, a vendor must retain records associated with exempt transactions. The regulation provides
(a) In the case of sales upon which no tax has been collected by virtue of the acceptance of a duly completed resale or exemption certificate by the seller in lieu of collecting the sales tax, pursuant to such rules as may have been promulgated, individual sales slips, invoices, receipts, statements, memoranda of price, or cash register tapes recording such sales shall be retained for a period of not less than four years from the last date of the quarterly (or monthly) period for the filing of sales tax returns to which individual sales records pertain.
(b) Summary records will not be considered to be adequate evidence of the accuracy of exemption certification.
[N.J.A.C. 18:24-2.5.]
This regulatory requirement is in addition to the vendor's statutory obligation to maintain records of both purchases and sales for inspection and examination by the Director. N.J.S.A. 54:32B-16. That statute provides:
[e]very person required to collect any tax imposed by this act shall keep records of every purchase . . . [and] sale . . . and of all amounts paid, charged or due thereon and of the tax payable thereon, in such form as the director may by regulation require. Such records shall include a true copy of each sales slip, invoice, receipt, statement or memorandum upon which [N.J.S.A. 54:32B-12(a)] requires that the tax be stated separately. Such records shall be available for inspection and examination at any time upon demand by the director or his duly authorized agent or employee and shall be preserved for a period of three years, except that the director may consent to their destruction within that period or may require that they be kept longer.Persons required to collect sales tax must remit the tax, along with a tax return, to the Director on a periodic basis. N.J.S.A. 54:32B-17; N.J.S.A. 54:32B-18. When records or returns are incomplete or insufficient, the Director has broad authority to determine the tax from whatever information may be available. N.J.S.A. 54:32B-19. As noted above, the record maintenance and retention requirements are incorporated in the Director's regulations. N.J.A.C. 18:24-2.3(a). A vendor's records "may be deemed incorrect or insufficient if . . . [a]n evaluation of the accounting system discloses that the system does not provide adequate internal control procedures which assure the accuracy and completeness of the transactions recorded in the books and records [or the] records are not maintained in accordance with the general outlines of this chapter." N.J.A.C. 18:24-2.15.
[N.J.S.A. 54:32B-16.]
Effective January 1, 2009 the record retention period was extended to four years. L.2008, c. 123, §14.
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It is undisputed that Custom Lawn failed to fulfill its statutory and regulatory obligations to collect sales tax and maintain records relating to its sales tax collections duties. During the audit and administrative appeal, the taxpayer produced no contemporaneously maintained ledgers, sales records, purchase records, invoices, statements, receipts, bank records, canceled checks, form ST-5 or form ST-8 exemption certificates, or other indicia of its proper collection and remittance of sales tax. The entity's tax returns were completed by an accountant who estimated Custom Lawn's sales and made suppositions regarding the percentage of Custom Lawn's receipts which were exempt from sales tax. Having not maintained the records necessary to demonstrate that Custom Lawn properly collected and remitted sales tax on its transactions, the taxpayer placed itself in the position of having its tax obligations estimated by the Director using whatever information was available to the auditor and administrative conferee.
As Judge Menyuk explained in Yilmaz, Inc. v. Director, Div. of Taxation, 22 N.J. Tax 204, 235 (Tax 2005), aff'd, 390 N.J. Super. 435 (App. Div.), certif. denied, 192 N.J. 69 (2007), "the Director is given wide latitude to establish the tax due from such information as may be available and if necessary the tax may be estimated from external indices. That does not mean that the Director must seek out any information that may be available anywhere. It is the taxpayer's statutory obligation to maintain records and make them available to the Director." (citations omitted). The Director need not use the most reasonable means of arriving at the taxpayer's liability. Instead, the inquiry into whether the Director's determination will be upheld "is a reasonable and practical one." Id. at 236. "That is, the presumption that the Director's assessment is correct can be rebutted only by cogent evidence that must be 'definitive, positive and certain in quality and quantity to overcome the presumption.'" Ibid. (quoting Pantasote Co. v. City of Passaic, 100 N.J. 408, 413 (1985)). "That evidence must focus on the reasonableness of the underlying data used by the Director and the reasonableness of the methodology used." Id. at 236 (quoting Ocean Pines, Ltd v. Borough of Point Pleasant, 112 N.J. 1, 11 (1988)). "An 'aberrant' methodology will overcome the presumption of correctness. An imperfect methodology will not." Id. at 236 (citations omitted).
Here, the methodology used by the Director to estimate Custom Lawn's tax liability was entirely reasonable. The Director's conferee was presented with no contemporaneously maintained records of Custom Lawn's transactions. The ledgers presented by Custom Lawn at the administrative conference were created many years after the transactions at issue, were incomplete, and were not supported by backup documents from which their accuracy could be determined. It would not have been unreasonable for the Director to have rejected the ledgers entirely as unreliable. The conferee, however, accepted as accurate the total receipts reported on the ledgers. Those totals exceeded the amounts reported on tax returns for the relevant years. Surely, it was reasonable for the Director to adopt an error rate that reflects the difference in amounts. Plaintiffs do not contest this point.
The conferee thereafter examined the ledgers and identified Custom Lawn customers whose tax exempt status was apparent from their names, such as boards of education. Again, the conferee reasonably could have refused to allow for exemptions in the absence of proof that Custom Lawn's customers were tax exempt. In addition, the conferee deemed exempt all transactions in which the conferee could match receipt entries on the ledgers to a proposal for the installation of sprinklers and others for which a completed, albeit late, form ST-8 was provided. Here, the conferee acted in an entirely reasonable fashion, having given plaintiffs the benefit of the doubt with respect to any transaction for which even a modicum of proof supporting a tax exemption was provided.
The reasonableness of the conferee's approach is corroborated by the fact that plaintiffs do not contest the determination that 47.72% of Custom Lawn's snow removal receipts and 85.82% of Custom Lawn's debris removal receipts were exempt from taxation. Custom Lawn disputes only the Director's determination that 51.73% of Custom Lawn's sprinkler receipts were exempt from sales tax. Yet, the Director used the same methodology to determine the exemption rate for each category of Custom Lawn's receipts. The taxpayer offers no explanation for why that methodology was acceptable for snow removal and debris removal receipts but was flawed for sprinkler installation receipts.
The sole basis for the taxpayers' opposition to summary judgment is their attorney's analysis of plaintiffs' tax liabilities presented, essentially, as a proposed settlement. Plaintiffs' counsel, of course, is not an expert witness in this matter. His interpretation of the records produced below and his proffer of an alternative method for calculating plaintiffs' tax liabilities are not evidence. The court is sympathetic to the difficult position in which counsel was placed by clients who failed to fulfill their statutory and regulatory obligations to create and maintain records of business activities over a period of several years. In such circumstances, the path to a successful challenge to the Director's assessment of taxes is steep.
The question before the court, however, is whether the Director acted reasonably in determining plaintiffs' tax liabilities, not whether another reasonable, and more lenient, interpretation of the evidence could have obtained. The fact that plaintiffs' counsel believes that a 79.5% exemption rate for sprinkler sales would have been reasonable does not mean that the Director's use of a 51.73% rate was unreasonable. Nor does the opinion of plaintiffs' counsel, even if it were to be considered as evidence by the court, create a material dispute of fact with respect to the reasonableness of the Director's final determinations.
As explained in Coliseum Pizzeria, Inc. v. Director, Div. of Taxation, 24 N.J. Tax 369, 373 (Tax 2008), where the Director has assessed tax in the context of a taxpayer's failure to maintain adequate records, the summary judgment standard does not require a trial based on the taxpayer's unexplained and unquantified objections to the auditor's determinations. To avoid summary judgment in favor of the Director a taxpayer must "tender some particularized issue concerning the data utilized or the soundness of the reconstruction methodology." Id. at 376. "Naked assertions" that the Director's assessment is unsupported are insufficient to rebut the presumption of validity attached to his final determinations based on available information in the absence of the taxpayer having created and maintained books and records. TAS Lakewood, Inc. v. Director, Div. of Taxation, 19 N.J. Tax 131, 140 (Tax 2000).
In response to the Director's motion, plaintiffs produced no credible evidence, let alone evidence that is certain in quality and quantity, which creates a material dispute of fact with respect to the reasonableness of the Director's final determinations. Plaintiffs conceded that all records in their possession had been produced during the audit and administrative conference and no further evidence would be produced at trial. The only witness plaintiffs offered to call at trial was Mr. Rosario who, plaintiffs proffered, would testify with respect to the nature of Custom Lawn's business. The nature of Custom Lawn's business, however, is not in dispute. The parties are in agreement that receipts from the company's installation of sprinkler systems are not subject to sales tax. The only question before the court is whether the Director acted reasonably when he calculated plaintiffs' tax liabilities based on the limited documentation produced by plaintiffs. Without contemporaneous records, such as itemized invoices, bank records and ledgers, Mr. Rosario's testimony explaining the nature of his business would be irrelevant to the question of the reasonableness of the Director's assessment of tax based on plaintiffs' incomplete business records.
Plaintiffs' challenge to the Director's imposition of an amnesty penalty is unpersuasive. As a threshold matter, plaintiffs do not provide a statutory citation for the amnesty program they challenge. The Legislature has authorized various periods over the past several years in which certain taxpayers may pay outstanding tax obligations without the imposition of full penalties and interest. The terms of the programs differ. Because plaintiffs have not identified the program which they challenge or the particular aspects of the statutory framework under which the penalty they dispute was imposed their argument is unclear.
It appears from the record that the amnesty program at issue was authorized by N.J.S.A. 54:53-18. This is so because the final determination issued with respect to Custom Lawn references an amnesty program that expired on June 10, 2002, the period covered by N.J.S.A. 54:53-18. Taxpayers electing to participate in the program could pay outstanding tax obligations without interest, penalties or costs of collection that would otherwise be due. Ibid. Participation in the program requires that the taxpayer forfeit its right to administrative and judicial challenge to the underlying tax. N.J.S.A. 54:53-18c. In addition, the statute requires the imposition of a 5% penalty, which shall not be subject to waiver or abatement, upon any tax liabilities eligible for amnesty that are not satisfied during the amnesty period. N.J.S.A. 54:53-18b.
Plaintiffs cite no statute, rule, constitutional provision or legal precedent in support of their claim that the Director's assessment of an amnesty penalty was unjust. The legal contours of plaintiffs' argument are, therefore, undefined. Plaintiffs' counsel argues that the "inherent basis" of the amnesty program does not apply to plaintiffs because they have "always been compliant with the tax law in NJ, albeit differing on the appropriate amount due." (Pb2). This statement, at least as far as it describes plaintiffs' compliance with our State's tax laws, is quite plainly untrue. The motion record firmly establishes that plaintiffs have failed at every turn to comply with tax statutes and regulations that require the creation and maintenance of business records for the purpose of determining tax liabilities with precision. Taxpayers who fail to maintain business records fall squarely within the intended target of amnesty programs, which encourage taxpayers with uncertain tax obligations to comply with the tax laws.
Plaintiffs also argue that imposition of an amnesty penalty "would amount to effectively disenfranchising them of their rights to legitimately dispute the amount of tax imposed upon them." (Pb3). Apparently, this argument, which is not supported by any legal citations, refers to the fact that participation in an amnesty program (and avoidance of an amnesty penalty for not participating) requires a taxpayer to forfeit legal challenges to the tax obligations satisfied through amnesty. In the absence of any legal support for their position and in light of the fact that plaintiffs' tax liabilities "were known to the taxpayer or which, by reasonably inquiry, could have been known" to the taxpayers at the time of the amnesty program that ended in 2002, the court concludes that plaintiffs have not raised a material issue of disputed fact sufficient to overcome the presumption that the Director's imposition of an amnesty penalty was valid. See United Parcel Serv. v. Director, Division of Taxation, 25 N.J. Tax 1, 54 (Tax 2009).
The court will enter Judgments granting the Director's motion for summary judgment and affirming the final determination at issue in each of the above-referenced matters.
Very truly yours,
________
Patrick DeAlmeida, P.J.T.C.