The tax attorneys at Nardone Law Group in Columbus, Ohio, routinely advise individuals and businesses on state and federal tax issues, including those involving the Ohio Department of Taxation. When faced with a sales tax audit, appeal, or other litigation, many owners of restaurants and bars find themselves in unfamiliar territory and often end up owing additional sales tax, interest and penalties as a result of the audit, despite having adequate records of their sales. In many cases, the additional assessment could have been avoided with proper counsel from a tax attorney.
Vendor Tax Requirements via the Ohio Revised Code and the Ohio Administrative Code
Section 5739.11 of the Ohio Revised Code requires Ohio vendors to “keep complete and accurate records of sales, together with a record of the tax collected on the sales” and to “keep all invoices, bills of lading, and other such pertinent documents.” Additionally, Chapter 5703-9-02(A) of the Ohio Administrative Code elaborates on this requirement by requiring Ohio businesses subject to the Ohio sales tax to maintain complete and accurate records, which include:
1. Primary records such as purchase invoices, bills of lading, sales invoices, guest checks, exemption certificates, tax payment receipts, and cash register tapes; and
2. Secondary records such as bank deposit receipts and daybooks, journals, or any other records in which accumulated data is recorded. Secondary records must be supported by complete detailed primary records from which the secondary records were created.
Alternate Audit Methods, Including Purchase Mark-Up Analysis
If a vendor fails to maintain primary sales records, the Ohio Department of Taxation is permitted to use certain alternative methods to determine the correct amount of taxable sales. One of these methods is a purchase mark-up analysis, employed on a test or sample basis, whereby the auditor will use the vendor’s purchase invoices from a sample period to estimate the vendor’s sales figures at an attributed mark-up cost for the entire audit period. This method almost always leads to significantly increased sales tax liability because it does not account for reduced mark-ups or loss through spoilage, breakage or theft.
If a vendor has maintained primary records of its sales as required by the Ohio Administrative Code, then the vendor’s sales tax liability should be readily ascertainable without the use of alternate audit methods, and it should dispute any attempt by the Ohio Department of Taxation to use the mark-up or “test-check” method of estimating taxable sales. The Supreme Court of Ohio has held that the purpose of the record-keeping requirements, under O.R.C. 5739.11 and O.A.C. 5703-9-02, is to permit the Tax Commissioner to ascertain with clarity whether sales tax has been properly collected and remitted. McDonald’s v. Kosydar (1975), 43 Ohio St.2d 5.
Accordingly, “adequate records” are those that allow the Tax Commissioner to determine whether sales tax has been properly collected and remitted.” National Delicatessens v. Collins (1976), 46 Ohio St.2d 333. In order to protect itself, “the taxpayer need only keep complete and accurate records of his taxable sales, which he is under a duty to do by virtue of Section 5739.11, Revised Code.” S. S. Kresge Co. v. Bower (1960), 170 Ohio St. 405. If complete and accurate records of taxable sales are kept, then no speculation should be involved in a determination of the vendor’s sales tax liability. See, S.S. Kresge Co., at 409. Accordingly, a bar or restaurant can avoid an assessment of additional sales tax, that would almost certainly result from a mark-up analysis, simply by maintaining primary records of sales and having proper legal guidance during a sales tax audit.
Contact Nardone Law Group
If you are the owner of a bar, restaurant, drive-thru or convenience store and you are facing a sales tax audit by the Ohio Department of Taxation, or have been contacted by an Ohio Department of Taxation auditor, you should contact one of our experienced tax attorneys today. Nardone Law Group has vast experience representing bars and restaurants in sales tax audits, examinations, and litigation with the Ohio Department of Taxation. Our experienced tax lawyers will thoroughly review your case to determine what options are available to you.