Karras v. State, Dept. of Revenue, No. 16394

• Court: Supreme Court of South Dakota
• Writing for the Court: WUEST; 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
• Citation: 441 N.W.2d 678
• Parties: Chris KARRAS d/b/a Time-Out Steak House and Restaurant, Appellant, v. The STATE of South Dakota, DEPARTMENT OF REVENUE, Appellee. . Considered on Briefs
• Docket Number: No. 16394
• Decision Date: 23 March 1989

Page 678

441 N.W.2d 678 Chris KARRAS d/b/a Time-Out Steak House and Restaurant,
Appellant,
v.
The STATE of South Dakota, DEPARTMENT OF REVENUE, Appellee. No. 16394. Supreme Court of South Dakota. Considered on Briefs March 23, 1989.
Decided May 31, 1989.

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

Page 679

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

Page 680

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...