SALT Report 1820 – The Michigan Court of Appeals upheld an assessment for additional sales tax against a Taxpayer who failed to maintain adequate records. The Taxpayer sells groceries, liquor, beer, wine, and other taxable merchandise in its retail store. In addition to the food sold as groceries, the Taxpayer also sells food for immediate consumption.
During an audit it was found that the Taxpayer did not keep records of the items used in the store to make the prepared foods. It was also learned that the Taxpayer did not keep its daily cash register receipts. Instead, he recorded the sales reported on the daily receipts onto a worksheet and then discarded the receipts.
Because the Taxpayer’s record keeping was deemed inadequate the auditor relied on supplier invoices to determine which items were used to make the prepared foods. The auditor then determined the average “markup” of those items based on the sale price versus the price the Taxpayer paid for the item. It was later determined that the Taxpayer was reporting the gross receipts from the sales of the prepared items as nontaxable income.
The Court ruled that the Taxpayer’s record-keeping made it impossible for the state to determine the amount of sales tax the Taxpayer owed. Therefore, the Taxpayer was assessed an additional tax liability of nearly $18,000 for the audit period. The Court also assessed a penalty for negligence in the amount of $1,740 plus $4,218 in interest.
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