New York—Sales and Use Tax: Use of Rent Factor Audit Methodology Upheld

The New York Division of Taxation's use of a rent factor audit methodology to estimate the sales and use tax due from a corporation that operated a restaurant and its sole owner was proper. The record established that the division made a proper written request for the taxpayers' books and records on more than one occasion and then thoroughly examined what was produced. The taxpayers only produced copies of federal income tax returns, a check book, some bank statements and sales figures written on envelopes. Notably, no guest checks, receipts or other source documents were available for review, and there was an obvious, large discrepancy between the gross sales listed on the federal returns and the sales tax returns filed. Although there was some discussion between the division and the taxpayers about using the differences between the federal returns and sales tax returns as a basis for an assessment, it was clear that the records produced made a detailed audit impossible. Thus, the division was clearly entitled to resort to the use of indirect methods, including the use of a rent factor, to determine the taxpayers' sales and sales tax liability. The division properly used the rent factor method, but had to make two adjustments to the application and results of the estimated methodology. The first involved the occupancy cost used by the division in its calculation of the taxpayers' gross sales, and the second was the length of the audit period in light of the taxpayers' sale of the restaurant business. Except for these two adjustments, the division's estimated audit method was upheld. Further, the imposition of penalties was proper.

Mad Den, Inc., New York Division of Tax Appeals, Administrative Law Judge Unit, DTA Nos. 823251 and 823252, September 22, 2011