Conga Corp. v. Comm'r of Revenue

• Citation: 868 N.W.2d 41
• Decision Date: 05 August 2015
• Docket Number: No. A14–1042.,A14–1042.
• Parties: CONGA CORPORATION, d/b/a Conga Latin Bistro, Respondent, v. COMMISSIONER OF REVENUE, Relator.
• Court: Minnesota Supreme Court

868 N.W.2d 41

CONGA CORPORATION, d/b/a Conga Latin Bistro, Respondent

v.COMMISSIONER OF REVENUE, Relator.

No. A14–1042.

Supreme Court of Minnesota.

Aug. 5, 2015.

Mark A. Pridgeon, Edina, MN, for respondent.

Lori Swanson, Attorney General, Shannon M. Harmon, Tamar N. Gronvall, Assistant Attorneys General, Saint Paul, MN, for relator.

OPINION

DIETZEN, Justice.

The Commissioner of the Minnesota Department of Revenue (“Commissioner”) conducted an indirect audit of the sales and use tax returns for respondent, Conga Corporation, d/b/a Conga Latin Bistro (“Conga”), for the tax periods from January 1, 2007 through March 31, 2010. Based on that audit, the Commissioner determined that Conga had unreported revenues for the relevant tax periods and issued an order assessing additional sales, use, and entertainment taxes, plus penalties and interest, against Conga. The tax court affirmed the Commissioner's order with respect to the assessment of 2007 taxes, but reversed with respect to the remainder of the audit period, concluding that the Commissioner's decision to conduct an indirect audit was not supported by substantial evidence in the record. Conga Corp. v. Comm'r of Revenue, No. 8264 R, 2014 WL 1711795, at *12 (Minn.T.C. Apr. 24, 2014). For the reasons that follow, we reverse and remand to the tax court for further proceedings consistent with this opinion.

Conga operates a restaurant, nightclub, and bar on East Hennepin Avenue in Minneapolis. In June 2009, the Commissioner notified Conga that an audit would be conducted for the period of January 1, 2007, through March 31, 2010.¹ The auditor met with Conga, reviewed its files and documents, and determined that Conga had no records for 2007 and that its records for the other tax periods were not reliable. As a result, the auditor decided to use an indirect audit method to reconstruct some of Conga's alcohol sales, some of its revenues from cover charges, and its estimates on use tax liability based on giveaways and payments. Specifically, the auditor reconstructed Conga's 2008 alcohol sales using the “unit volume method” to compare Conga's alcohol purchases (liquor, beer, wine) to its likely alcohol sales.² Based on this reconstruction, the auditor determined that Conga had $198,344.80 more in alcohol sales than it had reported in its Point–of–Sale (POS) system and on its sales tax returns for 2008. The auditor also determined that Conga had $45,500.04 in unreported cover charges and $1,274 in unreported service charges. By comparing Conga's unreported revenues as reconstructed to Conga's reported revenues for 2008, the auditor determined that Conga had underreported 33.326 percent of its total revenues for 2008. This underreporting rate was then applied to the sales and revenues reported by Conga to the Department of Revenue during calendar years 2007, 2009, and the first quarter of 2010 to calculate Conga's underreported revenues for the entire audit period.³ Based on these calculations, the Commissioner assessed Conga $160,105.37 in additional sales, use, and entertainment taxes, plus penalties and interest.⁴ Conga appealed the assessment to the Minnesota Tax Court pursuant to Minn.Stat. § 271.06 (2014). Conga argued, among other things, that the Commissioner's decision to use an indirect audit was improper and therefore the assessment was invalid.

At trial, the Commissioner presented evidence to explain the reasons for conducting an indirect audit. As explained by the Commissioner, the auditor had requested various documents from Conga, including the complete sales, purchases, and bookkeeping records for 2007, 2008, 2009. and 2010. Conga did not provide the requested records for 2007, but did provide some of the requested documents for the remainder of the audit period. Upon review of the records provided, the auditor identified discrepancies in several areas: between Conga's total liquor purchases as shown on supplier invoices versus its reported sales to the Department of Revenue; between Conga's bank deposits for 2008 versus the total revenues reported on its federal income tax return for that year; between income reported on Conga's income tax filings versus revenues reported on its sales and use tax filings; and between Conga's daily sales reports versus its monthly summaries and sales tax filings.

Based on these discrepancies, the auditor met with Conga representatives and requested additional information about the bar operations, as set forth in a detailed questionnaire. Sometime after that meeting, the auditor decided to conduct an indirect audit because Conga: (1) had been audited in the past; (2) had filed its sales and use tax returns late on five occasions; (3) had not filed returns for use tax, entertainment tax, or liquor gross receipts tax; (4) had no records for 2007; (5) had a discrepancy of $2,673 in liquor purchases; (6) had a discrepancy in its 2008 income and sales tax filings; and (7) had unexplained entries in its POS. At trial, the Commissioner presented additional reasons to support the decision to conduct an indirect audit, which are that: (8) Conga's owner commingled personal assets with those of the business; (9) some sales were made outside Conga's POS system; and (10) not all cover charges were deposited into Conga's corporate bank account.

The tax court turned first to the Commissioner's decision to conduct an indirect audit, and concluded that the Commissioner's authority to do so should be reviewed under the standard set forth in a provision of the Minnesota Administrative Procedure Act (MAPA), Minn.Stat. § 14.69 (2014). Conga Corp. v. Comm'r of Revenue, No. 8264 R, 2014 WL 1711795, at *15 (Minn.T.C. Apr. 24, 2014). Second, the tax court determined that an indirect audit is a “statistical or other sampling technique[ ]” within the meaning of Minn.Stat. § 270C.03, subd. 1(3) (2014), and therefore must be conducted in accordance with generally accepted auditing standards. Conga Corp., 2014 WL 1711795, at *15. Third, although the tax court upheld the Commissioner's use of the indirect audit method for 2007 because Conga was unable to provide any records for that year, the court concluded that the Commissioner's use of an indirect audit for the remainder of the audit period was not supported by the record, and therefore reversed the remainder of the Commissioner's assessment order.Id. at *12.

The Commissioner now seeks review by this court pursuant to Minn.Stat. § 271.10, subd. 1 (2014). On appeal, the parties dispute whether the Commissioner erred in conducting an indirect audit to assess taxes, and the appropriate remedy if the Commissioner erred.

I.

The Commissioner argues that the tax court erred as a matter of law by reviewing the decision to conduct an indirect audit under the standard of review set forth in Minn.Stat. § 14.69 ; by limiting the circumstances in which an indirect audit may be used to assess taxes; and by requiring an indirect audit to satisfy the requirements of Minn.Stat. § 270C.03, subd. 1(3), to be valid.

We review decisions from the Minnesota Tax Court to determine whether: (1) the tax court had jurisdiction; (2) the tax court's decision was supported by the evidence and was in conformity with the law; and (3) the tax court committed any other error of law. Minn.Stat. § 271.10, subd. 1 ; McLane Minn., Inc. v. Comm'r of Revenue, 773 N.W.2d 289, 292–93 (Minn.2009). We review the tax court's legal determinations de novo. Eden Prairie Mall, LLC v. Cty. of Hennepin, 830 N.W.2d 16, 20 (Minn.2013). But our review of the tax court's findings of fact is limited to determining whether there is sufficient evidence to support the court's decision. Dreyling v. Comm'r of Revenue, 753 N.W.2d 698, 701 (Minn.2008).

A.

The Commissioner first argues that Minn.Stat. § 271.06, subd. 6, governs review of the Commissioner's orders, and that the tax court erred by concluding that review of the Commissioner's decision to conduct an indirect audit was governed by Minn.Stat. § 14.69. See Conga Corp., 2014 WL 1711795, at *15.

The tax court acknowledged that its authority to review the Commissioner's order was governed by Minn.Stat. § 271.06, subd. 6, but concluded that there was no specific statutory standard that guided its review of the Commissioner's decision to use an indirect audit to assess taxes. The tax court relied on Minnesota Public Interest Research Group v. Minnesota Environmental Quality Council (MPIRG ), 306 Minn. 370, 237 N.W.2d 375 (1975), to conclude that judicial review of agency decisions was governed by Minn. Stat. § 14.69.

To determine the scope of judicial review of the Commissioner's assessment order and the underlying decision to use an indirect audit to assess taxes, we must interpret the relevant provisions of Minn.Stat. § 14.69, and Minn.Stat. § 271.06, subd. 6. Statutory interpretation is a question of law that we review de novo. In re Welfare of J.J.P., 831 N.W.2d 260, 264 (Minn.2013). The goal of all statutory interpretation is to ascertain and effectuate the intent of the Legislature. Minn.Stat. § 645.16 (2014). When interpreting a statute, we give words and phrases their plain and ordinary meaning. Staab v. Diocese of St. Cloud, 813 N.W.2d 68, 72 (Minn.2012). Further, we read the statute as a whole and give effect to all of its provisions. Id.

Section 14.69 sets forth the standard for judicial review conducted pursuant to Minn.Stat. §§ 14.63 –.68 (2014) of MAPA for a final decision in a contested case.⁵

The scope of judicial review of such a decision considers whether the decision is: “(a) in violation of constitutional provisions; or (b) in excess of the statutory authority or jurisdiction of the agency; or (c) made upon unlawful procedure; or (d) affected by other error of law; or (e) unsupported by substantial evidence in view of the entire record as submitted; or (f) arbitrary or capricious.”Minn.Stat. § 14.69. Notably, however, Minn.Stat. § 14.03 (2014) provides that the provisions of MAPA are not applicable to...