SOAH DOCKET NO. 304-22-2306.63
CPA HEARING NO. 117,220
RE:  **************
TAXPAYER NO:    **************
AUDIT OFFICE:    **************
AUDIT PERIOD:   July 1, 2015 THROUGH November 30, 2018

Mixed Beverage Sales Tax/RDT

SOAH DOCKET NO. 304-22-2307.73
CPA HEARING NO. 117,221
RE:  **************
TAXPAYER NO:    **************
AUDIT OFFICE:    **************
AUDIT PERIOD:   July 1, 2015 THROUGH November 30, 2018

Mix Bvg Gross Rcpts/RDT

BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS

GLENN HEGAR
Texas Comptroller of Public Accounts

JANICE CAHALANE
Representing Respondent

**************
Representing Petitioner

 

COMPTROLLER’S DECISION

This decision is considered final on August 8, 2022, unless a motion for rehearing is timely filed; this date of finality is calculated based on the Administrative Procedure Act (APA).[1]  The failure to timely file a motion for rehearing may result in adverse legal consequences.

Administrative Law Judge (ALJ) Trevor Moore of the State Office of Administrative Hearings (SOAH) issued a Proposal for Decision (PFD) that includes Findings of Fact and Conclusions of Law.  SOAH served the PFD on each party and each party was given an opportunity to file exceptions and replies with SOAH in accordance with SOAH’s rules of procedure.  The ALJ recommended that the Comptroller adopt the PFD as written.

After review and consideration, IT IS ORDERED that the PFD is adopted as written.

The results from this Decision are Attachments A.  The ALJ’s letter to the Comptroller is Attachment B.  The PFD as written is Attachment C.  Attachments A, B, and C are incorporated by reference.

Attachments A reflect liabilities.[2]

The total sum of the tax, penalty, and interest is due and payable 20 days after a comptroller’s decision becomes final.[3]  If such sum is not timely paid, an additional penalty of 10 percent of the taxes due will accrue.

SIGNED on this 14th day of July 2022

GLENN HEGAR
Comptroller of Public Accounts

By: Lisa Craven
Deputy Comptroller

Attachments A, Texas Notifications of Hearing Results
Attachment B, ALJ’s letter to the Comptroller
Attachment C, Proposal for Decision as written

 

 

ATTACHMENT C

 

 

SOAH DOCKET NO. 304-22-2306.63
CPA HEARING NO. 117,220
RE:  **************
TAXPAYER NO:  **************

SOAH DOCKET NO. 304-22-2307.73
CPA HEARING NO. 117,221
RE:  **************
TAXPAYER NO:  **************

v.

TEXAS COMPTROLLER OF PUBLIC ACCOUNTS

BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS

 

Proposal for Decision

The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) audited ************** (Petitioner) for compliance with mixed beverage tax laws and made assessments for mixed beverage gross receipts tax (MBGRT) and mixed beverage sales tax (MBST). Petitioner requested redetermination, contending the average price for beer as applied in the audit is in error. Petitioner also argued the additional 50% penalty was not warranted and requested wavier of interest. Staff argues the proposed adjustments are not supported by the evidence. In this Proposal for Decision, the Administrative Law Judge (ALJ) recommends affirming the assessments.

I.  NOTICE, JURISDICTION, AND PROCEDURAL HISTORY

Staff referred the contested cases to the State Office of Administrative Hearings (SOAH) and, on April 4, 2022, issued Petitioner Notices of Hearing by Written Submission. On April 20, 2022, ALJ Trevor Moore issued Order No. 1, setting the hearings and joining the cases for the purpose of issuing a single PFD. Petitioner was represented by ************** of COMPANY A. Janice Cahalane represented Staff. The record closed June 15, 2022.

There are no issues of notice or jurisdiction in this proceeding; therefore, those matters are set out in the Findings of Fact and Conclusions of Law without further discussion here.

II.  REASONS FOR DECISION

A.  Evidence Presented

Petitioner did not submit evidence for the hearings. Staff submitted the pleadings the parties exchanged prior to referring the cases to SOAH and offered the following exhibits as evidence for each hearing:

1. 60-Day Letter;

2. Texas Notification of Audit Results;

3. Penalty and Interest Waiver Worksheet;

4. Audit Report;

5. Audit Plan; and

6. Audit Referral Report for Additional Penalty.

Staff’s exhibits are admitted into the record without objection.

B.  Agreements

Staff did not agree to make adjustments to the assessments.

C.  Material Facts

In the period at issue, Petitioner held a mixed beverage permit and operated a bar, COMPANY B, in CITY, Texas. In October 2018, Staff initiated a depletion analysis audit of Petitioner’s business for compliance with mixed beverage tax laws for the period July 1, 2015, through November 30, 2018. At the outset of the audit, Petitioner provided the Management and Employee Internal Control Questionnaire. No sales data, source records, or summary records were provided for the audit.

On October 17, 2018, the auditor performing the audit of Petitioner went to the bar to conduct a pour test to determine average serving sizes for distilled spirits. For draft beer, the auditor applied a pour of 16 ounces. However, Petitioner sold very little draft beer during the audit period (3 half-barrel kegs over the entire audit period). The majority of Petitioner’s purchases and sales were packaged beer, with the auditor considering each bottle or can as a single serving.

The auditor obtained Petitioner’s purchases of distilled spirits and beer from vendor- reported data and used the average pours and vendor-reported purchase data to calculate the number of individual alcoholic beverage services that were available for sale. The auditor noted that Petitioner purchased more than $252,500 in beer inventory during the audit period but only reported marked-up beer sales of $154, 355.

An average sales price for distilled spirits ($5.50), draft beer ($3.00), and packaged beer ($3.00) was established based on the prices provided by Petitioner in the Management Questionnaire and the auditor’s conversation with bar staff during the pour test. Relying on the average prices and the number of drinks available for sale, the auditor calculated the total receipts for each drink category. There error for distilled spirits was minimal and, therefore, there was no assessment for distilled spirits included in the audit. However, the total receipts for beer were calculated and compared to the reported receipts for beer to arrive at an error percentage of 384%. The error percentage was then applied to the reported amounts for beer to calculate the additional taxable sales of beer. The auditor reduced the total additional taxable sales by 5% to allow for undocumented losses and arrive at the total adjusted additional gross receipts. The auditor then added the total adjusted additional gross receipts to his reconciliation adjustments to calculate the total additional taxable sales. The appropriate tax rates were applied to the additional taxable receipts to calculate the additional MBST and MBGRT due.

On June 4, 2019, Staff issued Petitioner Texas Notifications of Audit Results assessing MBGRT and MBST liabilities consisting of tax, 10% penalty, 50% additional penalty, and accrued interest. The overall error rates for each tax type were 67.71% (MBST) and 66.92% (MBGRT).

Petitioner timely requested redetermination of both assessments, contending the average price for beer was incorrect, the 50% penalty was not applicable, and requesting interest waiver. Petitioner did not provide evidence in support of its contentions, and Staff asserts no adjustments are warranted.

D.  ALJ’s Analysis and Recommendations

A 6.7% tax is imposed on the gross receipts from the sale, preparation, or service of mixed beverages or from the sale, preparation, or service of ice or nonalcoholic beverages that are sold, prepared, or served for the purpose of being mixed with an alcoholic beverage and consumed on the premises of the permittee. Tex. Tax Code § 183.021; 34 Tex. Admin. Code § 3.1001. In addition, an 8.25% sales tax is assessed on each mixed beverage sold, prepared, or served in this state and on ice and each nonalcoholic beverage sold, prepared, or served by a permittee in this state for the purpose of being mixed with an alcoholic beverage and consumed on the premises of the permittee. Tex. Tax Code § 183.041; 34 Tex. Admin. Code § 3.1002. As a mixed beverage permit holder, Petitioner was required to maintain records that reflected the gross receipts from the sale or service of alcoholic beverages and to report and pay a tax on the gross receipts he received from the sale, preparation, or service of mixed beverages. See 34 Tex. Admin. Code §§ 3.1001(j)-(m), .1002(c)(4).

In examining the tax account of a permittee, the Comptroller may compute and determine the gross receipts tax and sales tax liability based on reports filed with the Comptroller, records or information obtained from the permittee, or records or information obtained from any seller who furnished alcoholic beverages to the permittee, or such other information that may come to the attention of the Comptroller. Id. §§ 3.1001(o)(1), .1002(c)(4). The Comptroller presumes that the disposition of all alcoholic beverages purchased by the permittee is taxable until established otherwise. Id. §§ 3.1001(o)(1), .1002(c)(4).

Mixed beverage audits are generally completed by “depleting” a taxpayer’s alcoholic beverage purchases by the estimated number of services that a taxpayer had available for sale. See, e.g., Comptroller’s Decision Nos. 115,139 and 115,140 (2019). The depletion-analysis methodology is recognized and accepted by the Comptroller for auditing mixed beverage taxpayers. See, e.g., Comptroller’s Decision No. 103,080 (2011).

The instant audit was based on vendor-reported purchase data and Petitioner’s records of prices at the bar. The ALJ finds that Staff’s evidence demonstrates, prima facie, that the audit used the best information available. It is therefore Petitioner’s burden to show audit error. See 34 Tex. Admin. Code § 1.26(e).

Petitioner argued that the average price for beer is inaccurate and does not account for the prices listed in the Management Questionnaire. However, the price of $3.00 applied in the audit is the same price for domestic beer listed in the questionnaire, and Petitioner did not submit evidence in support of a different price. Factual assertions in pleadings are not evidence. See, e.g., Comptroller’s Decision No. 111,587 (2015). The ALJ finds that Petitioner failed to establish audit error and recommends the assessments be affirmed.

Texas Tax Code § 111.061(b) authorizes a 50% penalty when the failure to pay the tax or file a report when due is the result of fraud or intent to evade the tax. Staff bears the burden to prove by clear and convincing evidence that the imposition of additional penalty for willful or fraudulent failure to pay tax is warranted. Id. § 1.26(b)(1). Clear and convincing evidence is evidence demonstrating that the thing to be proved is highly probable. See Black’s Law Dictionary (11th ed. 2019); see also Comptroller’s Decision No. 101,773 (2011).

Gross underreporting, along with other factors or no plausible explanation, is sufficiently indicative of intent to evade the tax to warrant the assessment of the fraud penalty. See, e.g., Comptroller’s Decision No. 111,804 (2015). The Tax Code defines gross error to mean that, after correction of the error, the amount due and payable exceeds the amount initially reported by at least 25%. Tex. Tax Code § 111.205(b).

As set out above, Petitioner did not provide records for the audit, the overall error rate for each assessment was over 60%, and Petitioner purchased almost $100,000 in beer inventory that was not reported to the Comptroller. The ALJ concludes Staff’s evidence demonstrates, clearly and convincingly, that Petitioner intended to evade the taxes due and that the assessment of the fraud penalty is warranted for each tax type.

Delinquent taxes draw interest beginning 60 days after the date due. Tex. Tax Code § 111.060(c). The Comptroller has discretionary authority to waive interest assessments and may exercise his discretion if interest was imposed as a result of undue delay caused by Comptroller personnel, reliance on advice provided by the Comptroller’s office, or natural disaster. Id. § 111.103; 34 Tex. Admin. Code § 3.5(e). To prevail, Petitioner must demonstrate, by a preponderance of the evidence, that interest waiver is warranted. See 34 Tex. Admin. Code § 1.26(e); see also Comptroller’s Decision Nos. 102,268 and 109,069 (2014). Though Petitioner requested waiver of interest, he did not offer any evidence to demonstrate any of the listed factors. Petitioner’s request for interest waiver should be denied.

III.  FINDINGS OF FACT

1. In the periods at issue, ************** (Petitioner) held a mixed beverage permit and operated a bar in CITY, Texas.

2. In October 2018, the Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) initiated a depletion analysis audit of Petitioner’s business for compliance with mixed beverage tax laws for the period July 1, 2015, through November 30, 2018.

3. At the outset of the audit, Petitioner provided the Management and Employee Internal Control Questionnaire. Petitioner did not provide sales data or any source or summary records for the audit.

4. On October 17, 2018, the auditor went to the bar to conduct a pour test to determine average serving sizes for distilled spirits.

5. The auditor used the average pours and vendor-reported purchase data to calculate the number of individual alcoholic beverage services that were available for sale. Each packaged beer was considered to be a single serving.

6. An average sales price for distilled spirits ($5.50), draft beer ($3.00), and packaged beer ($3.00) was established based on the prices provided by Petitioner in the Management Questionnaire and during the pour test.

7. Relying on the average prices and the number of drinks available for sale, the auditor calculated the total receipts for each drink category. As the error for distilled spirits was minimal, those drinks are not included in the audit.

8. The total receipts for beer were calculated and compared to the reported receipts for beer category to arrive at an error percentage of 384%.

9. The error percentage was then applied to calculate the additional taxable sales for beer.

10. The auditor reduced the total additional taxable sales by 5% to allow for undocumented losses and arrive at the total adjusted additional gross receipts.

11. The auditor added the total adjusted additional gross receipts to the reconciliation adjustments to calculate the total additional taxable receipts.

12. The appropriate tax rates were applied to the additional taxable receipts to calculate the additional Mixed Beverage Sales Tax (MBST) and Mixed Beverage Gross Receipts Tax (MBGRT) due.

13. On June 4, 2019, Staff issued Petitioner Texas Notifications of Audit Results assessing MBGRT and MBST liabilities consisting of tax, 10% penalty, 50% additional penalty, and accrued interest.

14. The overall error rates for each tax type were 67.71% (MBST) and 66.92% (MBGRT).

15. Petitioner timely requested redetermination of both assessments.

16. Staff referred the contested cases to the State Office of Administrative Hearings (SOAH), and, on April 4, 2022, issued Petitioner Notices of Hearing by Written Submission. The notices contained a statement of the nature of the hearings; a statement of the legal authority and jurisdiction under which the hearings were to be held; a reference to the particular sections of the statutes and rules involved; and a short, plain statement of the factual matters asserted, or an attachment that incorporated by reference the factual matters asserted in the complaints or petitions filed with the state agency.

17. On April 20, 2022, Administrative Law Judge (ALJ) Trevor Moore issued Order No. 1, which set the hearings and joined the cases for the purpose of issuing a single Proposal for Decision.

18. The record closed June 15, 2022.

19. Petitioner did not offer evidence for the hearing.

IV.  CONCLUSIONS OF LAW

1. The Comptroller has jurisdiction over these matters. See Tex. Tax Code ch. 111.

2. SOAH has jurisdiction over matters related to these hearings, including the authority to issue a proposal for decision with findings of fact and conclusions of law. See Tex. Gov’t Code ch. 2003.

3. Staff provided proper and timely notices of the hearings. See Tex. Gov’t Code ch. 2001; Tex. Tax Code § 111.009.

4. A 6.7% tax is imposed on the gross receipts from the sale, preparation, or service of mixed beverages or from the sale, preparation, or service of ice or nonalcoholic beverages that are sold, prepared, or served for the purpose of being mixed with an alcoholic beverage and consumed on the premises of the permittee. Tex. Tax Code § 183.021; 34 Tex. Admin. Code § 3.1001.

5. An 8.25% sales tax is assessed on each mixed beverage sold, prepared, or served in this state and on ice and each nonalcoholic beverage sold, prepared, or served by a permittee in this state for the purpose of being mixed with an alcoholic beverage and consumed on the premises of the permittee. Tex. Tax Code § 183.041; 34 Tex. Admin. Code § 3.1002.

6. As a mixed beverage permit holder, Petitioner was required to maintain records that reflected the gross receipts from the sale or service of alcoholic beverages and to report and pay a tax on the gross receipts he received from the sale, preparation, or service of mixed beverages. See 34 Tex. Admin. Code §§ 3.1001(j)-(m), .1002(c)(4).

7. In examining the tax account of a permittee, the Comptroller may compute and determine the gross receipts tax and sales tax liability based on reports filed with the Comptroller, records or information obtained from the permittee, or records or information obtained from any seller who furnished alcoholic beverages to the permittee, or such other information that may come to the attention of the Comptroller. The Comptroller presumes that the disposition of all alcoholic beverages purchased by the permittee is taxable until established otherwise. 34 Tex. Admin. Code §§ 3.1001(o)(1), .1002(c)(4).

8. Mixed beverage audits are generally completed by “depleting” a taxpayer’s alcoholic beverage purchases by the estimated number of services that a taxpayer had available for sale. See, e.g., Comptroller’s Decision Nos. 115,139 and 115,140 (2019).

9. The depletion-analysis methodology is recognized and accepted by the Comptroller for auditing mixed beverage taxpayers. See, e.g., Comptroller’s Decision No. 103,080 (2011).

10. Staff’s evidence demonstrates, prima facie, that the audit used the best information available.

11. It is Petitioner’s burden to show audit error. See 34 Tex. Admin. Code § 1.26(e).

12. Factual assertions in pleadings are not evidence. See, e.g., Comptroller’s Decision No. 111,587 (2015).

13. Petitioner failed to establish audit error.

14. Delinquent taxes draw interest beginning 60 days after the date due. Tex. Tax Code § 111.060(c).

15. The Comptroller has discretionary authority to waive interest assessments and may exercise his discretion if interest was imposed as a result of undue delay caused by Comptroller personnel, reliance on advice provided by the Comptroller’s office, or natural disaster. Tex. Tax Code § 111.103; 34 Tex. Admin. Code § 3.5(e).

16. To prevail, Petitioner must demonstrate, by a preponderance of the evidence, that interest waiver is warranted. See 34 Tex. Admin. Code § 1.26(e); see also Comptroller’s Decision Nos. 102,268 and 109,069 (2014).

17. Petitioner did not offer any evidence to demonstrate any of the listed factors for interest waiver.

18. Petitioner’s request for interest waiver should be denied.

19. A 50% penalty is applicable when the failure to pay the tax or file a report when due is the result of fraud or intent to evade the tax. Texas Tax Code § 111.061(b).

20. Staff bears the burden to prove by clear and convincing evidence that the imposition of additional penalty for willful or fraudulent failure to pay tax is warranted. 34 Tex. Admin. Code § 1.26(b)(1).

21. Clear and convincing evidence is evidence demonstrating that the thing to be proved is highly probable. See Black’s Law Dictionary (11th ed. 2019); see also Comptroller’s Decision No. 101,773 (2011).

22. Gross underreporting, along with other factors or no plausible explanation, is sufficiently indicative of intent to evade the tax to warrant the assessment of the fraud penalty. See, e.g., Comptroller’s Decision No. 111,804 (2015).

23. The Tax Code defines gross error to mean that, after correction of the error, the amount due and payable exceeds the amount initially reported by at least 25%. Tex. Tax Code § 111.205(b).

24. Staff’s evidence demonstrates, clearly and convincingly, that Petitioner intended to evade the taxes due and that the assessment of the fraud penalty is warranted for each tax type.

25. The assessments should be affirmed in their entirety.

SIGNED JUNE 16,2022.

TREVOR MOORE
ADMINISTRATIVE LAW JUDGE
STATE OFFICE OF ADMINISTRATIVE HEARINGS

 

 

 

ENDNOTES:

[1] The date calculated is 25 days after this decision is signed. See APA, Tex. Gov’t Code § 2001.146(a); S.B. 1095, Acts 2017, 85th Leg.   For additional guidance, refer to the Frequently Asked Questions Related to Motions for Rehearing, found here: http://comptroller.texas.gov/taxes/publications/96-1789.pdf

[2] At present, insufficient information is available to determine which items and amounts are disputed or undisputed for purposes of Tex. Tax Code, Ch. 112. In the absence of this information, the Comptroller will assume the entire amount of the assessment, as it appears in Comptroller’s Decision Attachment A, the Notification of Hearing Results, remains in dispute.  If Petitioner intends to sue the comptroller to dispute an amount of tax, penalty, or interest assessed in a deficiency redetermination or jeopardy determination under Tex. Tax Code, Ch. 111, Petitioner is required to file a motion for rehearing that “states the specific grounds of error and the disputed amounts associated with the grounds of error.” Tex. Tax Code § 112.201(a)(3). Petitioner should refer to Tex. Tax Code, Ch. 112, for further guidance regarding a suit after redetermination.

[3] See Tex. Tax Code § 111.0081(c).