On appeal from the Tax Court of New Jersey, Docket No. 240-2003, whose decision is reported at 22 N.J. Tax 204 (Tax 2005).
The opinion of the court was delivered by: Axelrad, J.T.C. (temporarily assigned).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Axelrad, R.B. Coleman and Gilroy.
This case presents the novel issue of the standard of proof necessary to overcome the presumed correctness of the Director, Division of Taxation's ("Director's") state tax assessments based on an audit of a cash business, involving only factual issues and the methods employed by the Director. In a reported opinion, the Tax Court judge applied the standard utilized in local property tax cases, Pantasote Co. v. City of Passaic, 100 N.J. 408, 413 (1985), i.e., cogent evidence that is "definite, positive and certain in quality and quantity to overcome the presumption" of correctness of the assessment. Yilmaz, Inc., v. Dir., Div. of Taxation, 22 N.J. Tax 204, 236 (Tax 2005). We affirm.
The following facts were adduced during the three-day trial before Judge Menyuk. Plaintiff Yilmaz, Inc. operated a restaurant and bar known as the Bridgewater Pub. In March 1999, the Division commenced an audit of plaintiff's business. Plaintiff had virtually no record of its receipts for the 1995 through 1998 audit period as required by statute from which to verify the gross receipts reported on its tax returns; it did not retain cash register receipts, did not use guest checks and did not maintain summary records of sales.*fn1 Accordingly, the Director's auditor used an indirect "markup" procedure to reconstruct the income and receipts of plaintiff's cash business and determine the sales tax assessment and deficiency and resulting increases in the corporate business tax (CBT) and gross income tax (GIT) withholding assessments. Under this methodology, the auditor selects a test period, which in this case was the calendar year l997. The auditor then compared the cost of goods sold by plaintiff for that period, as developed from invoices and the records of suppliers, to the menu prices, developing a ratio of selling price to cost, or "markup." The auditor then applied that ratio to the cost of purchases for each year covered by the audit to arrive at an estimate of gross receipts subject to sales tax for the audit period.*fn2
Using the gross sales determined from his markup analysis, the auditor computed a sales tax deficiency and recomputed plaintiff's CBT for l995, l996 and l997 and computed the tax for l998 because no return had been filed for that year, and made assessments for all of the audit years. He also made an assessment of additional GIT (withholding) based on his calculation of adjusted employee wages and estimated salary attributed to Mr. Yilmaz in the absence of any documentation or evidence presented by plaintiff to support the information reported on the returns. On August 21, 200l, the Director issued a notice of assessment related to the final audit determination.
Following a protest and conference hearing, the overall markup ratio was reduced slightly and the tax assessments were reduced. Plaintiff appealed to the Tax Court, contending the Director utilized unreasonable and arbitrary assumptions in the markup analysis and failed to account for inventories it maintained. The Director contended plaintiff's records were wholly deficient, and the State auditor's assumptions were reasonable in light of the inadequacy of records or other evidence to support plaintiff's claims. Judge Menyuk affirmed the Director's final determination, assessing deficiencies of sales tax, N.J.S.A. 54:32B-l to -29, and corporate business tax, N.J.S.A. 54:10A-1 to -41, for the January 1, 1995 through December 31, 1998 audit period; and gross income tax (withholding), N.J.S.A. 54A:7-1 to -7, for the January 1, 1996 through December 31, 1998 audit period. On August 11, 2005, the court entered an order for judgment against plaintiff in the amount of $129,531.78.
On appeal, plaintiff argues the Tax Court erred in: (1) establishing as the burden of proof that it had to present "cogent evidence that must be 'definite, positive and certain'" in order to overcome the presumption of correctness attaching to the assessments; (2) excluding evidence regarding the markup factor used in an audit conducted subsequent to the one at issue; (3) rejecting the testimony of its accountant as not credible; and (4) failing to recognize alleged inherent flaws and wholly arbitrary assumptions in the State auditor's markup methodology and calculations. We are not persuaded by any of these arguments and affirm substantially for the reasons articulated by Judge Menyuk in her cogent and comprehensive written opinion. We add the following comments regarding the court's adoption of the Pantasote standard to state tax assessments.
As appropriately defined by the court, the principal issue at trial was the "reasonableness of the methods employed by the Director for an audit period where the plaintiff had virtually no records of its receipts." Yilmaz, supra, 22 N.J. Tax at 230. The Tax Court began its analysis with the well settled principle that the Director's assessments of tax are presumed to be correct and the plaintiff has the burden of overcoming the presumption. Id. at 231 (citing Atlantic City Transp. Co. v. Dir., Div. of Taxation, 12 N.J. 130, 146 (1953) (other citations omitted)). The cases have recognized that the "naked assertions" of the taxpayer, without supporting records or documentation, are insufficient to rebut the Director's presumption. See ibid.; TAS Lakewood, Inc. v. Dir., Div. of Taxation, 19 N.J. Tax 131, 140 (Tax 2000); Ridolfi v. Dir., Div. of Taxation, 1 N.J. Tax 198, 202-03 (Tax 1980). The court noted, however, that the extent of the burden of proof placed on the taxpayer to overcome the presumption was ill-defined, and the case law needed a specific, workable standard.
Judge Menyuk articulated a logical and viable standard, supported by case law and consistent with the state tax reporting and recordkeeping statutes, which we expressly endorse. Taking guidance from our Supreme Court's reference to local property tax case law in Atlantic City Transportation Company, supra, the Tax Court adopted the standard applied in local property taxation, as it was a "reasonable and practical one." Yilmaz, supra, 22 N.J. Tax at 236. The Tax Court held that when a taxpayer challenges an assessment by the Director based on an audit of a cash business, involving only factual issues and the methods employed by the Director, the taxpayer can rebut the presumption that the assessment is correct only by cogent evidence that is "definite, positive and certain in quality and quantity to overcome the presumption." Pantasote, supra, 100 N.J. at 413 (quoting Aetna Life Ins. Co. v. City of Newark, 10 N.J. 99, 105 (1952)).
In the absence of evidence that the amount of the assessment is "far wide of the mark," the taxpayer cannot overcome the presumption simply by attacking the Director's methodology. Id. at 414-15. As the court noted, the Director is given broad authority to determine the tax from any available information and, if necessary, to estimate the tax from external indices. See N.J.S.A. 54:32B-19; Ridolfi, supra, 1 N.J. Tax at 203. The court appropriately rejected plaintiff's suggestion that the onus should be on the Director to establish that it used "the most reasonable means available" or "the best possible method" to estimate the taxpayer's receipts. The court reasoned that it would be contrary to the purpose of the recordkeeping statute to place such a high burden and expense on the Director when it was plaintiff's own failure to maintain proper records that "forced the Director to resort to the markup method in the first place." Yilmaz, supra, 22 N.J. Tax at 235-36. Looking to another local property tax case, which provided for a limited hearing where a taxpayer failed to comply with a statute that required it to provide financial information to a taxing district, the Tax Court elaborated upon the extent of evidence required to satisfy the burden of proof:
[The taxpayer's] evidence must focus on the reasonableness of the underlying data used by the Director and the reasonableness of the methodology used. An "aberrant" methodology will overcome the presumption of correctness. An imperfect methodology will not. [Yilmaz, supra, 22 N.J. Tax at 236 ...