DETERMINATIONS
Matter of New T&L Beer & Soda, Inc.; Judge Law; Division’s Reps: Adam Roberts and Eric Gee; Taxpayer’s Rep: Sang Sim; Articles 28 and 29 (by Joe Endres)
This case started with a sales and use tax audit of Loupat Enterprises, Ltd. (“Loupat”), a wholesale and retail beer and soda business. Loupat’s sales tax returns were prepared based upon an assumption that 80% of its sales were wholesale (i.e., nontaxable sales for resale) and 20% were retail (i.e., typically-taxable sales to end users). The case did not indicate on what facts this assumption was based – not a great starting position for a taxpayer that has the burden of proof. After being unable to reconcile Loupat’s sales tax returns to its records for two more-recent quarters, the auditor applied an indirect audit method based on an IRS publication providing financial ratios for retail and wholesale businesses in the beer, wine, and distilled beverage industry. Based on these general external figures, the auditor determined that the business owed $431,167 in additional sales tax.
During the pendency of the audit, Loupat sold its assets for $700,000 to Petitioner. A bulk sale notification was executed by Petitioner to notify the Division of the sale. In turn, the Division sent Petitioner a Notice of Claim instructing Petitioner not to pay monies to Loupat (and to instead place the monies in escrow) until the Division issued a bulk sales notice of release. These bulk sale notice and escrow requirements are designed to protect both the Division’s ability to collect against outstanding tax liabilities before the seller absconds with the sale proceeds, as well as to inoculate the purchaser from the seller’s liability. Though the determination does not explicitly state how Petitioner failed to take advantage of the bulk sale notice protections, Petitioner did not dispute that it failed to comply with the bulk sale requirements. By failing to do so, Petitioner became responsible for Loupat’s sales tax debt, in an amount not to exceed the purchase price.
Interestingly, after Loupat protested its $431,167 assessment, Loupat and the Division executed a stipulation reducing the tax liability to $98,000—less than 23% of the original assessed liability. The Division acknowledged that Loupat’s settlement also reduced Petitioner’s liability to the same degree.
Finally, Petitioner protested the remaining assessment, arguing that it should be cancelled because it could not determine how the remaining $98,000 was determined by the Division. The Judge rejected this argument asserting that it was Petitioner’s obligation to show by clear and convincing evidence that the original audit methodology and resulting assessment were erroneous. Because Petitioner failed to present any evidence contesting the original audit methodology, the ALJ sustained Petitioner’s adjusted liability. Apparently the Judge did not think that the Division’s reduction of more than 75% of the original liability constituted evidence that the original assessment methodology was flawed or the assessment was erroneous. The method missed the mark by more than a factor of three and it wasn’t fundamentally flawed? That seems a bit counterintuitive to me.
For a full review of New York’s bulk sales rules and the protections available to business asset purchasers, take a look at this previous article I authored with Tim Noonan.