Opinion
Nos. 41206 and 41207
Decided March 20, 1968.
Motor transportation companies — Ohio highway use tax — Faulty returns not reflecting correct mileage traveled — Audit showing percentage-of-error factors over representative period — Commissioner's authority to make assessments — Contest — Burden of proof.
Where motor transportation companues amenable to the Ohio highway use tax law make concededly faulty returns to the Tax Commissioner over a period of years, which returns do not reflect the true and correct taxable mileage traveled by their motor vehicles over Ohio highways, and where an admittedly correct audit of the companies' records by the Tax Commissioner over a representative period of time shows the percentage-of-error factors present in the returns as made, the Tax Commissioner, under the provisions of Section 5728.10, Revised Code, and by inherent authority may make assessments against the companies covering the entire periods involved, based upon the percentage-of-error factors disclosed by the audit, and if the companies contest such assessments, it is incumbent on them to show in what manner and to what extent the Tax Commissioner was wrong.
APPEALS from the Board of Tax Appeals.
These two cases, consolidated for hearing and decision by the Board of Tax Appeals and involving highway use tax assessments, are in this court on an appeal by the Tax Commissioner from the decision of the board, which decision reversed the final determinations of the Tax Commissioner in substantial part.
In the first case, the Tax Commissioner issued a highway use tax assessment against Midwest Transfer Company, covering the period from October 1, 1959, to March 1, 1962. Acting upon the petition for reassessment, the commissioner confirmed the assessment as originally made but conditionally canceled the penalty as provided by Section 5728.10, Revised Code. From such final determination, an appeal was taken to the Board of Tax Appeals under Section 5717.02, Revised Code.
In the second case, the Tax Commissioner issued a highway use tax assessment against Emery Transportation Company, covering the period from October 1, 1959, to March 31, 1963. Upon entertaining the petition for re-assessment, the commissioner modified his original assessment by reducing the amount thereof and by conditionally removing the penalty as authorized by statute. From such final determination, a statutory appeal was perfected to the Board of Tax Appeals.
Stipulations of fact were entered into by and between the attorneys for Midwest Emery Freight System, Inc., successor in interest to both Midwest Transfer Company and Emery Transportation Company, and the Tax Commissioner. Important parts thereof are that during the assessment periods involved the two corporations against which the assessments were made were separate entities but operated on a co-operative basis; that the records of the two corporations were kept at Chicago, Illinois, and were intermingled; that, by the method used in keeping the records, errors occurred in computing the mileage covered by the vehicles of the two corporations in traveling over Ohio highways; that the audit of the two companies' records, conducted by the commissioner's representatives, extended from April 16 to August 15, 1962, and covered the second quarter of 1960; and that the commissioner's representatives were informed that they would be required to vacate the space set aside on the companies' premises for the audit by September 1, 1962.
During the audit, errors were found, and the amount which each company actually owed the state of Ohio for the second quarter of 1960 was determined. This amount was in excess of that which the companies had reported to the Tax Commissioner. The amount determined and the percentage of error found by the audit for the second quarter of 1960 were conceded to be correct by the companies. It was proposed that the companies amend their returns for all other quarters involved by the application of the percentage-of-error factors determined by the audit for the second quarter of 1960. The commissioner's representatives prepared amended returns on the basis proposed and submitted them to the companies for signature and filing. This was refused on advice of counsel. This conduct resulted in the commissioner's final determinations for the entire periods involved, calculated on the basis of the audit of the companies' records for the second quarter of 1960. As noted above, appeals were taken from such determinations to the Board of Tax Appeals. It was agreed that the appeals be submitted to the board upon the stipulations of fact, the transcripts of the Tax Commissioner as certified to the board and briefs of counsel.
The final paragraph of the decision of the Board of Tax Appeals, concurred in by two of the board members, recites:
"* * * it is the decision of the Board of Tax Appeals that the final order of the Tax Commissioner must be, and hereby is, affirmed to the extent only that said final order confirms highway use tax assessments made against appellants for the second quarter of the calendar year 1960. It is the further decision of the Board of Tax Appeals that said final order must be, and hereby is, reversed with respect to the confirmance by the Tax Commissioner of the assessments involved in the other tax return periods here in issue."
Mr. Theodore K. High, for appellees.
Mr. William B. Saxbe, attorney general, and Mr. Edgar L. Lindley, for appellant.
Section 5728.10, Revised Code, provides, among other things:
"In the event any person required to file a highway use tax return * * * files an incorrect return * * * for the period covered by the return, the Tax Commissioner may make an assessment against such person, based upon any information in his possession, for the period for which such tax was due." (Emphasis supplied.)
Because of the improper system of reporting used by the appellees, the Tax Commissioner became convinced that appellees had substantially underreported the mileage traveled over Ohio highways by their motor vehicles which were subject to the highway use tax law. His audit of appellees' records for the second quarter of 1960 substantiated appellant's conviction.
Appellees' improper and erroneous reporting existed over all the periods of time involved herein, and the errors found by the audit for the second quarter of 1960 could fairly and logically be carried over in the same proportions and with the same percentage-of-error factors and applied to the periods which were not audited The stipulations of fact indicate that the commissioner's representatives were discouraged by the appellees from proceeding further with the audit for additional periods.
Appellees, by their own improper and erroneous reporting, invited the commissioner's investigation and audit, and, if his findings and the assessments based thereon were faulty and incorrect, the burden rested on the appellees to show in what manner and to what extent he was wrong. This they did not do.
Although there is no specific authorization in the highway use tax law as there is in the sales tax law (Section 5739.10, Revised Code) for the Tax Commissioner to conduct a test check where a taxpayer's records are insufficient and to apply the results of such test check to the receipts of the taxpayer for the entire period covered by the audit, we think Section 5728.10, Revised Code, is broad and comprehensive enough to approve the course of procedure followed by the commissioner, and even in the absence of express statutory authority we are of the opinion that the commissioner had the inherent right to proceed as he did.
It was the duty of the commissioner to insist that returns be made in correct form so that proper assessments could be made, and it was the duty of the appellees to furnish returns which accurately reflected the mileage covered by their vehicles over Ohio highways. The Tax Commissioner was serving the interest of his employer, the state of Ohio, by ascertaining to the best of his ability, and in the only practical manner that he could, appellees' true indebtedness to the state of Ohio. Admittedly, the returns made by appellees were improper and erroneous. The audit showed that conclusively and showed further the percentage of error which had occurred, computed over a representative period of time. In our view, the commissioner was warranted in applying such percentage of error to the periods not audited, especially when appellees produced nothing in rebuttal.
We agree with the conclusion of the dissenting member of the Board of Tax Appeals that the Tax Commissioner was justified in making his assessments against appellees based upon the definite information in his possession as disclosed by the concededly correct audit, and that the duty then rested on appellees to show that the Tax Commissioner had miscalculated the mileage covered by appellees' vehicles over Ohio highways during all of the periods in issue.
In the case of Mitchell Bros. Truck Lines v. Hill, 227 Or. 474, 363 P.2d 49, the Supreme Court of Oregon approved a method of assessment for the use of highways similar to the one adopted and followed by the Tax Commissioner in the instant case. That court held further that it was incumbent on the taxpayer to show that the formula used produced an erroneous result.
The Oregon case was cited and quoted from in Russo v. Donahue, 10 Ohio St.2d 201, 212, 226 N.E.2d 747, 754.
For the reasons stated, the decision of the Board of Tax Appeals, insofar as it reversed the final determinations of the Tax Commissioner with respect to assessments made for periods other than the second quarter of the calendar year 1960, is reversed, and, otherwise, the final determinations of the Tax Commissioner are affirmed.
Decision affirmed in part and reversed in part.
MATTHIAS, O'NEILL, HERBERT, SCHNEIDER and BROWN, JJ., concur.
TAFT, C.J., concurs in the syllabus without the words, "by inherent authority," and in the judgment.