Chartair, Inc. v. State Tax Commission, 65 N.Y.2d 831 (1985)

A taxpayer challenging a tax assessment based on a test period and markup audit bears the burden of proving the inaccuracy of the audit.

Summary

Chartair, Inc. challenged a sales tax assessment by the State Tax Commission. The Commission’s auditor, finding the taxpayer’s records inadequate, used a test period and markup audit to estimate the tax due. Chartair argued that the audit was inaccurate because it didn’t account for employee purchases, theft, waste, and loss leaders. The Court of Appeals held that the auditor’s method was reasonable given the inadequate records and that Chartair failed to meet its burden of proving the audit’s inaccuracy by presenting sufficient evidence of these losses.

Facts

Chartair’s sales tax records consisted of cash register tapes showing total sales and sales tax collected by category, but not itemizing each transaction. The State Tax Commission’s auditor determined that, based on the available tapes, it was not possible to ascertain whether tax had been charged on all taxable items or the correct amount of tax charged. Consequently, the auditor employed a test period and markup audit to estimate the tax due from Chartair. Chartair disputed the audit’s accuracy, arguing that it failed to account for factors such as employee purchases, theft, waste, and “loss leaders.”

Procedural History

The State Tax Commission determined that Chartair owed additional sales tax based on the audit. Chartair challenged the determination. The Appellate Division’s judgment was reversed in favor of the State Tax Commission and the Tax Commission’s original determination was reinstated by the Court of Appeals.

Issue(s)

Whether the State Tax Commission’s use of a test period and markup audit to estimate sales tax due was arbitrary or without rational basis given the inadequacy of the taxpayer’s records.

Whether Chartair met its burden of proving the inaccuracy of the tax assessment by providing sufficient evidence of losses due to employee purchases, theft, waste, and loss leaders.

Holding

1. No, because the taxpayer’s records were inadequate to determine the correct sales tax owed.

2. No, because Chartair failed to present sufficient direct proof or expert testimony to establish the extent of such losses.

Court’s Reasoning

The Court of Appeals reasoned that the auditor’s use of a test period and markup audit was justified under Tax Law § 1138(a)(1) because Chartair’s records were insufficient to determine whether the correct sales tax had been collected. The Court cited Matter of Markowitz v State Tax Commn., 54 AD2d 1023, affd 44 NY2d 684 in support of this point.

Regarding Chartair’s challenge to the audit’s accuracy, the court emphasized that the burden of proof rested on the taxpayer to demonstrate the audit’s inaccuracy. The Court cited Matter of Petroleum Sales & Serv. v Bouchard, 64 NY2d 671, affg 98 AD2d 882. The court found that Chartair failed to meet this burden because it presented neither direct proof of the alleged losses nor expert testimony establishing the extent of such losses regularly occurring in the industry. The absence of such evidence left the court with no basis to conclude that the audit was inaccurate. The court noted that, to successfully challenge a tax assessment, the taxpayer must provide concrete evidence, not just unsubstantiated claims.