On appeal from the Tax Court of New Jersey, Docket No. 004957-2001.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted January 24, 2011
Before Judges Lisa, Sabatino and Alvarez.
Plaintiff Kathleen A. Tartivita operates an exotic bar, Jay Kay Jay, Inc. (JKJ), located in Keansburg. Defendant Director of the Division of Taxation (the Director) issued plaintiffs a modified notice of assessment, related to a final audit determination after administrative review, of $105,994 in Sales and Use Tax (SUT) and Corporation Business Tax (CBT), and $21,481 in Gross Income Tax (TGI-EE). Plaintiffs appealed to the Tax Court, and, after a trial, the Tax Court upheld the Director's assessment. For the reasons that follow, we affirm.
Tartivita is JKJ's president, and the on-site manager of its business, in existence since October 1992, trading as "Pumps Plus." She is JKJ's sole shareholder and president. In addition to functioning as an adult-themed bar which sells alcoholic beverages, food, and cigarettes, customers play billiards and observe exotic dancers. The business is open six days a week and has a maximum capacity of ninety patrons. JKJ employed ten people and paid its dancers as needed on a cash basis. Tartivita owns the building and receives rent from the corporation. She personally maintained JKJ's financial records, prepared and filed its tax returns, and paid corporate bills. Tartivita only kept cash register summary tapes of the daily sales, discarding more detailed versions. She compiled a spreadsheet reflecting gross receipts, but did not maintain or preserve other documents.
Marjorie Charnack, the Director's Auditor, initially requested JKJ's corporate records on July 25, 1997. This request was reported on October 23, 1997. On March 3, 1998, Tartivita provided the following JKJ records: copies of CBT-100s for 1993 through 1996; copies of federal 1120 forms for 1993 through 1996; general ledger worksheets for 1992 through 1996; worksheets for purchases; sales journal worksheet for 1992 through 1996; purchase disbursement journals for 1992 through 1996; and invoices, inventory purchases, and expenses for 2006.*fn1
Charnack, however, did not receive JKJ's detailed cash register tapes, bank statements, cancelled checks, W-2s or W-3s, depreciation schedules, 1099 forms, or price list. Charnack requested the missing records, along with a summary of JKJ's internal controls.
Upon concluding these necessary records were unavailable, Charnack notified JKJ's counsel she would therefore use the Investigation Unit's price and serving size estimates to perform a mark-up analysis. Charnack finished this analysis, to verify the accuracy of JKJ's reported gross sales, by June 15, 1999. She used 1996 as the sample year in part because it had the most records. Charnack ultimately accepted JKJ's reported alcohol purchases because the figures closely matched third-party vendor purchase information. Auditor John Mastellone provided Charnack with a $700 estimate of soda purchases because there were no records for the sale of soda without alcohol.
JKJ also did not produce any records for food or cigarette purchases for 1996, even though both items were sold during this period. Tartivita testified she did not provide these records because, prior to 1997, an independent food vendor operated the kitchen; however, she produced no records evidencing an agreement between JKJ and a concessionaire.*fn2 Tartivita stated she would pay the vendor at the end of each week depending on the amount of food sold. Her testimony that JKJ paid all sales tax on food sales conflicted with the post-audit report, and JKJ did not charge this third-party food vendor rent. Mastellone testified it would be unusual for JKJ to have an independent food concessionaire, and Charnack used Mastellone's $200 estimate for weekly food purchases accordingly.
Tartivita admitted cigarettes were sold but that she kept no sales records of them. Mastellone estimated JKJ sold at least fifteen packs per week, which the Investigation Unit purchased at $3.50 per pack. Tartivita claimed JKJ sold cigarettes behind the bar only after 1997 as, prior to that date, cigarettes were sold only in vending machines. Although JKJ reported $43,943 as the overall cost of goods sold for 1996, the total audited purchases totaled $56,727.
The Director issued a notice of assessment related to final audit determination on March 3, 1999, advising JKJ it owed SUT and CBT in the amount of $164,584.40. The Director also issued a notice to Tartivita advising her she owed TGI-EE totaling $29,702.75. Plaintiffs contested the amount due, and after administrative review the Director reduced both sums to $105,994 and $21,481 respectively.
Plaintiff appealed the final determination to the Tax Court, which conducted a hearing. The only employee who testified on Tartivita's behalf was Kimberly Sloane, who managed the business when Tartivita was absent, and who was present during the 1993 through 1997 SUT audit, N.J.S.A. 54:32B-1 to -29, and the 1992 through 1996 CBT audit, N.J.S.A. 54:10A-1 to -41. The three matters were ultimately dismissed as to SUT, CBT, and TGI-EE because, on November 21, 2008, the judge affirmed the Director's tax assessments in their entirety. He found the Director had the authority to use a mark-up analysis to verify the accuracy of the reported information because plaintiffs did not maintain required records, such as the detailed register tapes. The judge was also concerned that JKJ produced no food or cigarette invoices, despite the sale of those items during the sample audit period. He noted that, although the Director's methodology was not perfect,*fn3 it was reasonable and legally sufficient because plaintiffs failed to provide ...