Karras v. State, Dept. of Revenue, 16394

Decision Date23 March 1989
Docket NumberNo. 16394,16394
Citation441 N.W.2d 678
PartiesChris KARRAS d/b/a Time-Out Steak House and Restaurant, Appellant, v. The STATE of South Dakota, DEPARTMENT OF REVENUE, Appellee. . Considered on Briefs
CourtSouth Dakota Supreme Court

Bradley C. Grossenburg of Woods, Fuller, Shultz & Smith, P.C., Sioux Falls, for appellant.

Timothy T. Weber, Sp. Asst. Atty. Gen., Pierre, for appellee; Roger A. Tellinghuisen, Atty. Gen., Pierre, on the brief.

WUEST, Chief Justice.

Chris Karras (Karras), d/b/a the Time-Out Steakhouse and Restaurant in Sioux Falls, South Dakota, appeals a circuit court judgment ordering him to pay additional sales taxes and interest because he underreported his gross sales for 1980 through 1982. We affirm in part and reverse in part.

Karras owned and operated the Time-Out Steakhouse and Restaurant from 1975 until 1985. In February, 1983, the South Dakota Department of Revenue (Department) conducted a routine sales and use tax audit of Karras' books and records. This audit concerned the period from January, 1980, through December, 1982. At the start of the audit, the auditor, Laura Coome (Coome), asked Karras to produce his business records. Karras had failed to keep sales receipts, cash register tapes or sales journals, apparently adhering to the "shoe-box" method of bookkeeping. Consequently, he was able to produce only randomly kept purchase invoices.

Coome attempted to conduct the audit, using these invoices. She was unable to do so, however, because their accuracy and completeness could not be verified. Thereafter, Coome obtained Karras' bank statements and federal income tax returns. Using these records, she determined that Karras' cost of goods sold for 1982 was $378,000. Coome estimated Karras' cost of goods sold to be forty percent of his gross sales. She then determined that Karras' gross sales for 1982 amounted to $946,205. After verifying the accuracy of the gross sales for 1982, 1 Coome also determined Karras' gross sales for 1980 and 1981. These totals also were based upon Karras' cost of goods sold as indicated by his federal income tax returns for the respective years.

Based upon the aforementioned calculations, Coome found that Karras had underreported his gross sales for 1980 through 1982. She then assessed against Karras additional sales and use taxes in the amount of $57,113 as well as interest through March, 1985, in the amount of $46,211. On June 23, 1986, the Department, pursuant to SDCL 10-45-37, issued a jeopardy assessment in the amount of the tax deficiency and interest--$103,324. A notice of tax lien subsequently was filed against Karras' property.

Karras contested the audit and was granted an administrative hearing. The Secretary of the Department upheld the audit and Karras appealed to the circuit court. The circuit court affirmed the Secretary's decision and ordered Karras to pay the tax deficiency and interest. Karras now appeals to this court, asserting that (1) the Department's method of determining the amount of sales taxes due was arbitrary and unreasonable; (2) the statute of limitations bars collection of the sales tax for the first quarter of 1980; and (3) he has paid in full the sales taxes for the period of 1980 through 1982.

Our standard of review in matters, such as this, which concern an appeal from an administrative agency's decision is well-established. We review the record to determine whether the agency's findings of fact are clearly erroneous in light of all the evidence contained therein and whether its conclusions of law, which are freely reviewable, are affected by mistake of law. SDCL 1-26-36; Hanson v. Penrod Const. Co., 425 N.W.2d 396, 397 (S.D.1988); Strackbein v. Fall River Cty. Hwy. Dept., 416 N.W.2d 270, 272 (S.D.1987); Permann v. Dept. of Labor, Unemp. Ins. D., 411 N.W.2d 113, 115-17 (S.D.1987).

In his first contention, Karras essentially challenges the sufficiency of the evidence upon which was based the Department's finding of fact that the audit revealed a sales tax deficiency. Karras claims that he provided adequate records to enable Coome to conduct the audit and that the methods used to determine and verify his gross sales were baseless. We find his argument illaudable.

It cannot be disputed that Karras was subject to the sales tax provisions contained in SDCL ch. 10-45. Consequently, he was required to maintain accurate records of his sales. SDCL 10-45-45 provides:

Every person subject to tax under this chapter shall keep records and books of all receipts and sales, together with invoices, bills of lading, copies of bills of sale, and other pertinent papers and documents. Such books and records and other papers and documents shall, at all times during business hours of the day, be subject to inspection by the secretary of revenue or his duly authorized agents and employees to determine the amount of tax due. Such books and records shall be preserved for a period of three years unless the secretary of revenue, in writing, authorized their destruction or disposal at an earlier date. 2

We believe that the purpose of this statute is clear. SDCL 10-45-45 mandates keeping books and records of sales and receipts so that the Department may verify the accuracy of sales taxes collected by a retailer and remitted to the state. Failing to keep adequate records does not preclude proper verification of sales taxes by the Department, but such verification certainly is less precise. In circumstances where a retailer's books and records are found to be insubstantial, the Department may resort to other available information and auditing techniques to determine whether a sales tax deficiency exists. See City of Lennox v. Wendell, 278 N.W.2d 635 (S.D.1979).

In City of Lennox, this court was faced with a situation which was similar to that in the present case. There, the Department audited a city-owned bar to determine the sales taxes owed to the state. Because the bar's records were too incomplete to serve as a basis for the audit, the Department reconstructed the gross sales from information indicating the bar's cost of goods sold and previous profit margins on off- and on-sale beer and liquor. We approved this method of extrapolating gross sales, holding that it was "reasonable under the circumstances and based upon substantial evidence." Id. at 637.

The record in the present case shows that Karras failed to keep adequate books and records upon which an audit could be based. When initially asked to produce such records, Karras was able to provide only a box of randomly kept purchase invoices. Coome attempted to proceed with the audit by contacting Karras' suppliers in order to verify these invoices. Because the information she received from the suppliers was incomplete, Coome determined that an audit based upon said invoices would be inaccurate. She then obtained Karras' bank statements and federal income tax returns. These records enabled her to determine Karras' cost of goods sold. As previously indicated, Coome estimated Karras' costs of goods sold to be forty percent of his gross sales. This percentage was considered to be a restaurant industry standard. In addition, Karras advised Coome that his cost of goods sold was in the range of thirty-seven to forty-two percent. Using Karras' cost of goods sold for the years in question, Coome then determined his gross sales for each year.

Coome verified Karras' cost of goods sold for 1982 by using the aforementioned two methods. In regard to the "meals served" method, Coome testified at the hearing that Karras originally told her that his restaurant served 700 to 800 meals per day. Although Karras now claims that this figure was substantially lower, he failed to produce at the hearing his records which indicated the number of customers served each day. Coome's estimate of the average cost of a meal was based upon her own dining experiences at the Time-Out Steakhouse and Restaurant and review of the menu.

Karras also challenges the "total deposits" method, claiming...

To continue reading

Request your trial
11 cases
  • Reif, Matter of
    • United States
    • South Dakota Supreme Court
    • December 11, 1991
    ...common intelligence would understand the statute's meaning. We recently addressed the clarity of SDCL 10-45-45 in Karras v. State, Dept. of Revenue, 441 N.W.2d 678 (S.D.1989). In Karras, we found the statute's purpose was clear, and mandated keeping sufficient records so Department could ve......
  • Jiricek v. Woonsocket School Dist. No. 55-4
    • United States
    • South Dakota Supreme Court
    • January 14, 1992
    ...a liability created by statute accrues, we must examine the statute or statutes which create the liability. See Karras v. State, Dept. of Revenue, 441 N.W.2d 678, 681 (S.D.1989). 4 District contends the cause of action accrued after each paycheck was issued when the District failed to make ......
  • McCauley v. South Dakota School of Mines and Technology
    • United States
    • South Dakota Supreme Court
    • July 9, 1992
    ...of law are given no deference on appeal and are freely reviewable. SDCL 1-26-36; Hendrickson's, 462 N.W.2d at 656; Karras v. State, Dept. of Revenue, 441 N.W.2d 678 (S.D.1989); Sharp v. Sharp, 422 N.W.2d 443 (S.D.1988). Questions of fact, however, are given greater deference. SDCL 1-26-36. ......
  • Northern States Power Co., Matter of
    • United States
    • South Dakota Supreme Court
    • July 29, 1992
    ...of law are given no deference on appeal and are freely reviewable. SDCL 1-26-36; Hendrickson's, 462 N.W.2d at 656; Karras v. State, Dept. of Revenue, 441 N.W.2d 678 (S.D.1989); Sharp v. Sharp, 422 N.W.2d 443 (S.D.1988). Questions of fact, however, are given greater deference. SDCL 1-26-36. ......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT