Summary
In Servomation Corp. v. Kosydar (1976), 46 Ohio St.2d 67 [75 O.O.2d 147, 346 N.E.2d 290], we held this discretionary power valid and constitutional as an exercise of the state's police power.
Summary of this case from Gen. Motors Corp. v. TracyOpinion
No. 75-1054
Decided April 28, 1976.
Taxation — Sales taxes — Assessment — Test checks — R.C. 5739.10 and 5739.13 — Methods employed by Tax Commissioner — Validity.
APPEAL from the Board of Tax Appeals.
This appeal arises out of a sales tax audit by the Tax Commissioner of 36 "Red Barn" restaurants presently owned and operated by Servomation Corporation, appellant herein.
Appellant's menu includes both food and nonfood items such as soft drinks. From an examination of cash register tapes at different outlets, agents of the commissioner noted that the tapes, in most cases, did not classify food and nonfood items. Many of the tapes were missing or unidentifiable as to date.
The agents found further that the outlets retained only one week of menu tickets per month and that many tickets which did not indicate a sale of food items for consumption off the premises also did not show sales tax had been charged.
Additionally, the agents determined that appellant was not properly collecting sales tax on soft drinks and, for a portion of the audit period, had been remitting sales tax to the state at a flat rate of percent rather than at varying effective rates.
Based upon these findings, the commissioner decided to conduct a test check of each outlet. The agents obtained seven days of available menu tickets and cash register tapes from each outlet, except stores numbered 13 and 42 where more sophisticated cash registers allowed the agents to conduct a check from the tapes. Because appellant had instructed its employees to write "to go" on those tickets where food items were to be consumed off the premises, the agents included, as taxable sales, the amounts from tickets not marked "to go." The agents decided, however, that large orders of chicken should not be deemed taxable even if the menu tickets were not marked "to go."
Using these initial figures, the amount of tax that should have been charged was computed, and an effective rate was thereby determined. The agents then applied the effective rate at each outlet to the percentage of taxable sales and, taking into consideration the tax already paid, arrived at the amount of liability at issue herein.
Subsequent to these findings, the agents also conducted a three-day observation period at most of the outlets and obtained menu tickets and cash register tapes. Using substantially the same procedure as above, the agents verified the results of the seven-day check.
Appellant appealed the commissioner's assessment and penalty to the Board of Tax Appeals. The board affirmed the final order of the commissioner, finding that the test checks were both authorized and valid.
The cause is now before this court upon an appeal as of right.
Messrs. Glander, Brant, Ledman Newman, Mr. Charles F. Glander and Mr. James H. Ledman, for appellant.
Mr. William J. Brown, attorney general, Mr. John C. Duffy, Jr., and Mr. Clinton J. Miller, III, for appellee.
Appellant concedes that under this court's decision in McDonald's v. Kosydar (1975), 43 Ohio St.2d 5, 330 N.E.2d 699, the commissioner was authorized to conduct test checks pursuant to R.C. 5739.10. It contends, however, that the methods used to compute the assessment were invalid.
R.C. 5739.10 provides, in pertinent part:
"* * * [W]here a vendor does not have adequate records of receipts from his retail sales in excess of fifteen cents or sales of food for human consumption on the premises where sold, the tax commissioner may refuse to accept the vendor's return and, upon the basis of test checks of the vendor's business for a representative period, and other information relating to the sales made by such vendor, determine the proportion that taxable retail sales bear to all his retail sales. * * *"
Because of appellant's failure to charge sales tax on soft drinks, and its remission of tax by some outlets at a flat rate for part of the audit period, the commissioner was also authorized to conduct the tests under R.C. 5739.13, which states, in part:
"* * * When information in the possession of the commissioner indicates that the amount required to be collected under the provisions of Section 5739.02 of the Revised Code is, or should be, greater than the amount remitted by the vendor, the commissioner may upon the basis of test checks of a vendor's business for a representative period, which are hereby authorized, determine the ratio which the tax required to be collected under Section 5739.02 of the Revised Code bears to the receipts from the vendor's taxable retail sales, which determination shall be the basis of an assessment as provided in this section. * * *"
The relevant statutory language within R.C. 5739.10 and 5739.13 authorizes assessments upon the basis of test checks of the "vendor's business for a representative period."
In McDonald's, supra, the commissioner attempted to use an average of figures derived from a test check of four outlets to arrive at an assessment against an outlet in Springfield, Ohio. Because R.C. 5739.10 requires a check of the "vendor's business," the court disallowed the assessment. Here, the commissioner conducted a test check from information obtained from each outlet and, thereby, satisfied the requirement that the check be of the "vendor's business."
To meet the requirement that the test check be "fir a representative period," it must be conducted under conditions which approximate, as nearly as possible, the conditions under which the business was operated by the taxpayer during the audit period. Cherry Street Corp. v. Porterfield (1971), 27 Ohio St.2d 260, 272 N.E.2d 124. The commissioner's test check, through the use of information on menu tickets from one week of taxpayer's business at individual outlets, did not run afoul of that standard. It reflected the normal business procedure of appellant, and was based on the actual mode of operation during the audit period. See Cherry Street Corp., supra. In that respect, the commissioner's decision to include, as taxable sales, the amounts from those menu tickets not marked "to go" was not unreasonable, insofar as appellant had instructed its personnel to mark "to go" on tickets which were not taxable.
The record does not reflect, nor does appellant contend, that the one week periods upon which the checks were based represented a time when unusual weather or business conditions occurred which could have influenced the results of the tests.
We find further that it was not improper for the commissioner to determine the rate equivalent to the rate at which appellant in fact collected the tax from consumers and to use that information in reaching an assessment against the remaining outlets. See Russo v. Donahue (1967), 10 Ohio St.2d 201, 226 N.E.2d 747; McDonald's v. Kosydar, supra.
Appellant asserts further that R.C. 5739.13 fails to establish specific guidelines governing the remission of a penalty imposed by that section and, therefore, that such penalties must be refunded upon payment and proper application.
R.C. 5739.13 states, in part:
"A penalty of fifteen per cent shall be added to the amount of every assessment made under this section. The commissioner may adopt and promulgate rules and regulations providing for the remission of penalties added to assessments made under this section."
Rule TX-11-05 provides, in part:
"In the event a tax assessment to which a fifteen percent penalty has been added under the provisions of the Ohio Sales Tax * * * laws is paid in its entirety, including penalty, within thirty days after the date on which the notice of assessment is served on the person assessed, the Tax Commissioner may remit such part of the penalty as he may deem proper."
Although R.C. 5739.13 makes the imposition of a penalty mandatory, it gives the commissioner sole discretion to determine whether a penalty shall be remitted. Because this discretion relates to the state's collection of sales tax under its police power, and the adoption of specific standards to govern the remission of penalties would be impracticable, conferring of such discretion upon the commissioner by R.C. 5739.13 is valid and constitutional. See Matz v. J.L. Curtis Cartage Co. (1937), 132 Ohio St. 271, 7 N.E.2d 220; State v. Switzer (1970), 22 Ohio St.2d 47, 257 N.E.2d 908.
It is our conclusion that the test checks were not improper and the assessments are thereby affirmed.
Decision affirmed.
O'NEILL, C.J., HERBERT, CORRIGAN, STERN, CELEBREZZE, W. BROWN and P. BROWN, JJ., concur.