SEBA, LLC v. Director of Revenue ( 2020 )

In the
Missouri Court of Appeals
Western District
SEBA, LLC, )
)
Appellant, ) WD83083
)
v. ) OPINION FILED: June 9, 2020
)
DIRECTOR OF REVENUE, )
)
Respondent. )
Appeal from the Administrative Hearing Commission
Before Division Two: Mark D. Pfeiffer, Presiding Judge, Alok Ahuja, Judge and
Gary D. Witt, Judge
SEBA, LLC ("SEBA") appeals from the Administrative Hearing Commission
("Commission") finding that SEBA is "liable for unpaid sales tax in the amount of
$38,540.44, minus the sales tax assessed on $26,567.57 in income generated from SEBA's
exempt sales." The Commission also found that SEBA "is also liable for additions to sales
tax owed and statutory interest." Article V, sections 3 and 11 of the Missouri Constitution
require that this case be transferred to the Supreme Court of Missouri.
Statement of Facts
SEBA operates a donut shop called Eddie's South Town Donuts, in St. Louis,
Missouri.1 The Department of Revenue ("Department") conducted an audit of SEBA's
sales during October 1, 2011, through September 30, 2014 ("audit period"). During the
audit period, Brad Arteaga was the owner and sole member of SEBA. Eddie Strickland
("Strickland") was the business's sole, paid employee. Strickland worked at SEBA daily
to make donuts by hand, wait on customers, and clean the store. Arteaga was solely
responsible for handling SEBA's financial affairs, and Arteaga went to the store once or
twice a week to collect money, credit card receipts, checks, and related paperwork for
SEBA. SEBA contracted with, Joseph Otten ("Otten"), a tax accountant, bookkeeper, and
financial advisor to file its sales tax returns. Otten prepared all returns during the audit
period relying on documents provided by Arteaga including SEBA's bank statements,
credit card statements, and check stubs written by Arteaga. SEBA did not use Z-tapes.2
SEBA's cash register printed one receipt for each transaction, and SEBA either gave the
receipt to the customer or threw the receipt away.
On October 16, 2014, Lisa Hoffman3 ("Hoffman"), an auditor with the Department,
requested copies of SEBA's business records, including sales, use, and withholding tax
returns, and supporting schedules; federal income tax returns; depreciation schedules, sales
journals, sales invoices, sales tax exemption certificates and letters, detailed general
1
For consistency, we refer to Eddie's South Town Donuts as SEBA.
2
Z-tapes are "tapes printed from the cash register that summarizes the day's sales[.]" United States v.
Koudanis, 207 F. Supp. 3d 115, 121 (D. Mass. 2016).
3
Hoffman had been employed by the Department for approximately two months when the audit first began.
She was still in training, but her supervisor approved all of her work.
2
ledgers, purchase invoices, payroll registers and W-2's, 1099-K forms, and bank
statements. The only documents provided to Hoffman from SEBA were its federal income
tax returns, depreciation schedules, bank statements, 1099-K forms, purchase invoices,
payroll registers, W-2s, and a general ledger. Because the records provided to Hoffman
were incomplete, Hoffman requested that SEBA retain individual cash register receipts for
its sales in December 2014 and track its inventory of donuts made in the shop during the
month. In response, SEBA provided only partial receipts for the month of December 2014.
Hoffman later requested that SEBA maintain and provide proper receipts for April 2015
through June 2015, but SEBA failed to retain the requested records.
Hoffman again requested sales receipts for July 2015, and SEBA provided her with
a notebook4 prepared by Strickland containing handwritten entries of its reported number
of donuts made for wholesale and retail, donuts sold at retail, and donuts thrown away as
waste. SEBA also provided Hoffman with its reported credit card batch totals, cash register
transaction receipts, and a calculation tape for the month. SEBA provided 490 cash register
receipts totaling $3,950.23 in sales not including the sales tax paid by the customer. Based
on those records the average retail sale was $8.06.
Hoffman noted several discrepancies in SEBA's July 2015 records. First,
Strickland's handwritten records only reported its donut sales and did not report any sales
for donut holes. Second, SEBA's records indicated that SEBA had $5,590.75 in wholesale
donut sales, but the checks and credit payments totaled $4,356.49. Third, SEBA reported
4
The notebook was not offered into evidence. Arteaga testified that he misplaced the notebook and could
not recall where it had been stored.
3
that it sold 349.6 dozen retail donuts for the month but made 768 dozen; SEBA claimed
that 418.4 dozen were donated to a food pantry. Fourth, each sales receipt had a transaction
number, and the first receipt was numbered 1512 and the last receipt was numbered 3066.
SEBA provided 490 receipts from which Hoffman believed, based on the receipt numbers,
there should have been 1,555. SEBA argued that the discrepancy was based on the fact it
would print a second receipt for customers who requested one, but Hoffman did not find
this explanation accurate as over two-thirds of the receipts were unaccounted for. Fifth,
because SEBA did not have a register capable of making a Z-tape, Hoffman requested
SEBA track its daily sales on a calculation tape. The calculation tape provided was
inconsistent with the receipts provided, and SEBA offered no explanation for this
discrepancy.
Because of these irregularities, Hoffman estimated SEBA's July 2015 sales and then
used this estimate to estimate SEBA's sales during the audit period. Hoffman multiplied
the average receipt total ($8.06) by the difference in transaction numbers on the receipt
($1,555) for a total of $12,535.93 in retail sales. Hoffman then added the wholesale orders
paid by check ($2,944.49), wholesale orders paid by credit card ($1,412.00) for a total of
$4,356.49 in wholesale sales. The estimated gross sales for SEBA in July 2015 totaled
$16,892.42 ($12,535.93+$4,356.49). Hoffman then calculated a cash/credit sales ratio for
July 2015. In doing so, Hoffman took the combined retail and wholesale credit card
payment per batch total ($4,699.42) and divided it by the total estimated sales ($16,892.42),
from which she determined that 28% of SEBA's total sales were credit card sales. Hoffman
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estimated that SEBA's cash sales were $12,193.10, which meant that SEBA's cash sales
constituted 72% of its total sales.
Hoffman then applied these ratios to the known credit card sales during the audit
period to estimate gross sales for the audit period. Hoffman added $6,700.73 in Groupon
sales. Hoffman also subtracted SEBA's exempt sales for the entities which SEBA provided
valid exemption certificates. Because SEBA did not provide exemption certificates for St.
John the Baptist Catholic Church ("St. John"), Emmanuel Episcopal Church, Phillips 66
Station, Seven-Eleven, Waters Auto Centers, Inc., and St. Patrick Center, Hoffman
included sales to these entities in her calculation for sales tax owed.5 Hoffman concluded
that SEBA under-reported its taxable sales on its sales tax returns in the amount of
$400,483.72 during the audit period. Based on the amount of under-reported taxable sales
Hoffman determined it failed to pay $23,431.89 in sales tax. Hoffman also recommended
additions to tax in the amount of 5% because SEBA "displayed intentional disregard and
negligence by failing to double check [its] sales tax figures to verify they were accurate."
The Department assessed SEBA with a total liability of $38,540.44, which includes the
$34,313.87 in underpaid taxes, $1,715.70 based on a five percent addition to the tax, and
$2,510.87 in interest as of January 1, 2016.
5
At the hearing, SEBA established that its sales to Phillips 66 Station and Seven-Eleven were exempt from
sales tax because it provided signed exemption certificates for these entities, which were accepted into evidence.
These exempt sales totaled $26,567.57. SEBA referenced the Official Catholic Directory ("Directory"), which
SEBA believes identifies St. John and St. Patrick Center as entities affiliated with Archdiocese of St. Louis
("Archdiocese"). SEBA did not offer the Directory into evidence at the hearing and it is not in the legal file before
this court.
5
SEBA filed a complaint appealing the Department's assessment of sales tax,
additions to tax, and statutory interest for the audit period. The Commission held a hearing
on February 22, 2019. The Commission found that SEBA was liable for unpaid sales tax
in the amount of $38,540.44, minus the sales tax assessed on $26,567.57 (the sales to
Emmanuel Episcopal Church, Phillips 66 and Seven-Eleven). The Commission found that
SEBA was liable for additions to tax because "SEBA was negligent in its report of its
taxable sales. It failed to keep adequate records and what records it did retain were
inconsistent." The Commission also found SEBA liable for statutory interest.
Discussion
SEBA asserts three points on appeal. First, it alleges that the Commission erred in
finding SEBA had $400,483.72 in taxable total sales during the audit period, and was liable
for $34,313.87 in additional sales tax. Second, it argues that the Commission erred in
ruling SEBA failed to prove its sales to St. John and St. Patrick Center were exempt. Third,
SEBA argues that the Commission erred in in imposing a 5% addition to tax as a penalty
in that SEBA was not negligent as a matter of law because it double checked its records
before filing its returns.
Before we address the merits, we must determine if jurisdiction lies with this Court.
"Although neither party raised an issue concerning our appellate jurisdiction, the Court has
an obligation, acting sua sponte if necessary, to determine its authority to hear the appeals
that come before it." Maly Commercial Realty, Inc. v. Maher, 582 S.W.3d 905, 910 (Mo.
App. W.D. 2019) (internal citations and quotation marks omitted). The Missouri
Constitution confers exclusive appellate jurisdiction to the Missouri Supreme Court in all
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cases involving the construction of the revenue laws of this state. MO. CONST. art. V, § 3.
"Revenue law" is defined as a law that "directly creates or alters an income stream to the
government . . . establishes or abolishes a tax or fee, changes the rate of an existing tax,
broadens or narrows the base or activity against which a tax or fee is assessed, or excludes
from or creates exceptions to an existing tax or fee." Alumax Foils, Inc. v. City of St. Louis,
939 S.W.2d 907, 910 (Mo. banc 1997). "Construction" of a law is defined as "determining
the meaning and proper effect of language by a consideration of the subject-matter and
attendant circumstances in connection with the words employed." Hermel, Inc. v. State
Tax Comm'n, 564 S.W.2d 888, 897 (Mo. banc 1978). However, a case does not involve
the construction of a revenue law if the law at issue has already been interpreted by the
Supreme Court, and the appellate court can dispose of the issue by merely applying that
construction of the law to the facts of the case. Twelve Oaks Motor Inn v. Strahan, 96
S.W.3d 106, 108-09 (Mo. App. S.D. 2003); Equitable Life Assurance Soc'y of
U.S./Marriott Hotels, Inc. v. State Tax Comm'n of Mo., 852 S.W.2d 376, 383 (Mo. App.
E.D. 1993).
In the instant case, the Commission assessed a five percent addition to tax penalty
against SEBA finding that SEBA was negligent in its report of its taxable sales because it
failed to keep adequate records and what records it did retain were inconsistent. The
General Assembly did not define "negligence" in Chapter 144. SEBA relies on Hiett v.
Director of Revenue, 899 S.W.2d 870, 872 (Mo. banc 1995) to argue that the proper
definition of "negligence" is a failure to make a reasonable attempt to comply with the tax
laws. However, the Hiett court's definition of "negligent" referred to Missouri's income
7
tax statutes contained in Chapter 143 rather than Missouri's sales tax laws contained in
Chapter 144. Furthermore, the Department urges this court to define "negligence" as the
federal government did in 26 U.S.C. § 6662 (2018) to "include[] any failure to make a
reasonable attempt to comply with the provisions of [the Internal Revenue Code]. . . ."
Because the meaning of "negligence" as it pertains to section 144.250 has not been
provided by the General Assembly nor has it been defined by our Supreme Court, we lack
jurisdiction to construe its meaning. See Hiett, 899 S.W.2d at 871-72 (Supreme Court
finding it had exclusive jurisdiction to define "negligence" under Chapter 143).
The Department argues that this court has jurisdiction to hear this appeal pursuant
to Armstrong-Trotwood, LLC v. State Tax Commission, 516 S.W.3d 830 (Mo. banc 2017).
It argues that the 5% addition to the tax assessed pursuant to section 144.250.3 constitutes
a penalty provision and the interpretation of this provision does not constitute the
"construction of the revenue laws of this state." Id. at 834. We disagree. In Armstrong-
Trotwood, the question before the court addressed the way in which certain counties
assessed real property and the impact of those assessments on the tax burden of property
owners on the cost of operation of multi-county taxing districts. Id. The Supreme Court
held that in order to fall under the provisions of article V, section 3 the issue must satisfy
three elements: "(1) construction (2) of revenue laws (3) of this state." Id. (quoting Alumax
Foils, Inc. at 910). The Court held, in part, that the proper determination of the assessment
of real property affects the revenue of political subdivisions of the state, but not a revenue
law "of the state." Id. In contrast, the collection of state sales taxes directly affects an
income stream to the state. Section 144.250.3 specifically refers to the five percent penalty
8
provision as "added to the tax" and as an "addition to tax" and these amounts are deposited
into the state treasury. We find that the interpretation of the penalty provisions of section
144.250.3 fall within the exclusive jurisdiction of the Supreme Court under article V,
section 3. State ex rel. Goldberg v. Barber & Sons Tobacco, Inc., 649 S.W.2d 859, 860
(Mo. banc 1983)(exercising original appellate jurisdiction where taxpayer challenged
assessment of interest and penalties on delinquent tax liability).
Even if some but not all of the issues presented in this case fall within the exclusive
jurisdiction of the Supreme Court, appeals are not bifurcated and the "appeal is properly
lodged in the court having jurisdiction over all issues in the case." State ex rel. Union Elec.
Co. v. Pub. Serv. Comm'n, 687 S.W.2d 162, 165 (Mo. banc 1985). Therefore, this matter
must be transferred to the Supreme Court for full resolution of the issues presented.
Conclusion
This case is hereby transferred to the Supreme Court of Missouri pursuant to article
V, section 11 of the Missouri Constitution.
__________________________________
Gary D. Witt, Judge
All concur
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