Paris Handbag LLC v. Comissioner of Revenue

Decision Date02 May 2018
Docket Number8934-R
PartiesParis Handbag LLC, Appellant, v. Comissioner of Revenue, Appellee.
CourtTax Court of Minnesota

This matter came on for trial before The Honorable Bradford S Delapena, Chief Judge of the Minnesota Tax Court.

Nixon Ayeni, Attorney at Law, represents appellant Paris Handbag LLC.

Wendy S. Tien, Assistant Minnesota Attorney General, represents appellee Commissioner of Revenue.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER FOR JUDGMENT

Appellant Paris Handbag LLC operated retail kiosks that sold a variety of items, including some clothing. Following a sales and use tax audit, appellee Commissioner of Revenue determined that Paris had under-reported its taxable sales. The Commissioner assessed Paris additional tax based upon all of Paris' reported gross receipts. We affirm the Commissioner's assessment.

The court, having heard and considered the evidence adduced at trial and the arguments of counsel, and upon all of the files, records, and proceedings herein, now makes the following:

FINDINGS OF FACT

1. Between January 1, 2011, and September 30, 2015 (the tax periods in issue), appellant Paris Handbag LLC operated retail kiosks and a storefront in the Rosedale Center.

2. Beginning in April 2014, Paris operated retail kiosks in the Burnsville Center.

3. Paris sold various goods including Zubaz pants; sunglasses toy helicopters and associated parts; as well as knives and other bladed items.

4. Paris filed with the Commissioner of Revenue sales and use tax returns for the tax periods in issue. These returns indicated that only a portion of Paris' gross receipts arose from taxable retail sales.

5. The Commissioner audited Paris' sales and use tax returns for the tax periods in issue. During the audit, Paris did not provide the Commissioner with documentation establishing that it made tax-exempt sales.

6. On January 26, 2016, the Commissioner issued an assessment for $61, 020.69 in additional tax, a penalty, and interest. The order assessed $52, 387.73 in additional tax, $5, 381.59 of penalty, and $3, 251.37 of interest.

7. On April 27, 2016, Paris timely filed a Notice of Appeal in this court. Paris alleged, among other things, that it made tax-exempt sales.

CONCLUSIONS OF LAW

1. Paris submitted sufficient evidence to rebut the prima facie validity of the Commissioner's assessment.

2. Paris failed to prove that its tax liability should be based on any amount lower than all of its reported gross receipts for the tax periods in issue.

ORDER FOR JUDGMENT

The Commissioner's January 26, 2016 Notice of Change in Sales and Use Tax assessing Paris Handbag LLC $59, 387.73 in additional tax, $5, 381.59 of penalty, and $3, 251.37 of interest for the tax periods in issue is affirmed.

IT IS SO ORDERED. THIS IS A FINAL ORDER. ENTRY OF JUDGMENT IS STAYED FOR 15 DAYS. LET JUDGMENT BE ENTERED ACCORDINGLY.[1]

MEMORANDUM

Bradford S. Delapena, Chief Judge

I. Historical And Procedural Facts

Between January 1, 2011, and September 30, 2015 (the tax periods in issue), appellant Paris Handbag LLC operated retail kiosks and a storefront in the Rosedale Center.[2] Beginning in April 2014, Paris also operated retail kiosks in the Burnsville Center.[3] Fady Qumseya owned Paris; his brother, Elias Qumseya, [4] was its sales manager.[5] Paris sold various goods including Zubaz pants; sunglasses; toy helicopters and associated parts; as well as knives and other biaded items.[6] Paris contends that it also performed some service work, including toy helicopter repairs and knife sharpening.[7] Some of Paris" kiosks recorded sales by means of a point-of-sale ("POS") system; others were equipped on]y with a cash register.[8]

Paris filed with appellee Commissioner of Revenue sales and use tax returns for the tax periods in issue.[9] These returns indicated that only a portion of Paris7 gross receipts arose from taxable retail sales.[10]

A. Commissioner's Audit and Assessment

Revenue Tax Specialist John Weiser audited Paris' sales and use tax returns for the tax periods in issue.[11] Before contacting Paris, Weiser noticed that Paris had not paid certain local taxes[12] and that its "gross receipts ... were larger than the taxable sales that were filed." [13] A potential explanation for this difference was that Paris had made some exempt sales.[14]

In September 2014, Weiser sent Paris correspondence announcing the audit and asking Paris to provide business records, including purchase invoices, sales invoices, bank statements, merchant account statements, and POS reports.[15] In late October 2014, Weiser met Fady Qumseya at Paris' Rosedale location.[16] Weiser observed that Paris' kiosks "used point-of-sale systems, " and saw that Paris sold, among other things, Zubaz pants.[17] Qumseya gave Weiser bank and merchant account statements, [18] the only business records Paris would provide during the audit.[19] When Weiser asked for POS reports, Qumseya replied that the system for printing such reports had ""crashed." [20] Although Weiser viewed some POS reports on a Paris computer during the audit, [21] none were submitted as evidence by either party.

On June 24, 2015, Weiser issued subpoenas in a second attempt to obtain the business records listed in his initial audit correspondence.[22] Paris never responded to the subpoenas.[23]

On January 26, 2016, the Commissioner issued an assessment for $61, 020.69, which consisted of $52, 387.73 in additional tax, [24] $5, 381.59 of penalty, and $3, 251.37 of interest.[25]Reasoning that Paris had not documented any nontaxable sales, the Commissioner assessed tax based on all of Paris' reported gross receipts for the tax periods in issue (rather than only on that portion of its gross receipts that Paris had characterized as arising from taxable sales).[26]

B. Paris' Appeal

On April 25, 2016, Paris timely filed a Notice of Appeal in this court.[27] In an attachment, Paris asserted that it "sold novelty items, radio controlled aircraft, Knife sharpening, repair of glasses and knives and [sold] clothing."[28] Paris observed that under Minnesota law, gross receipts from some retail sales-such as those from repair labor, "special tooling, " bundled sales, and extended warranty contracts-are either entirely or partially exempt from sales tax.[29]

In November 2016, the Commissioner served written discovery requesting evidentiary support for each allegation contained in Paris' Notice of Appeal. Paris Handbag LLC v. Comm'r of Revenue, No. 8934-R, 2017 WL 2484394, at *2 (Minn. T.C. May 31, 2017). Paris' responses were incomplete:

For example, Paris failed to respond to the Commissioner's request for a list of gross receipts by sale category. In response to the Commissioner's interrogatory about sales made under optional maintenance contracts, Paris responded only that "[m]ost of the business done in those years were mostly repairs and maintenance." In response to the Commissioner's interrogatory about "bundled transactions, " Paris asserted that "invoices of supplies list the purchase of spare parts and such was used to fix" radio-controlled helicopters. Paris provided to the Commissioner numerous invoices documenting Paris's purchases of two types of items: (1) toy helicopter parts; and (2) clothing (Zebra Pants) ....

Id. (record citations omitted). After the close of discovery, the Commissioner filed a motion for summary judgment arguing that Paris could identify no evidence that her assessment was incorrect. Id. Paris opposed the Commissioner's motion asserting, among other things, that it had made nontaxable sales of Zubaz. Id. at *2-3.

We denied the Commissioner's motion, concluding that Paris' alleged sale of Zubaz was a disputed issue of material fact that foreclosed summary judgment. Id. at *4. We agreed with the Commissioner "that the purchase records for Zubaz pants do not prove that Paris actually sold those items of clothing at retail, " but noted that we were required to resolve any doubt about that issue in favor of Paris, the party opposing summary judgment. Id. at *10. We likewise agreed with the Commissioner "that without records documenting its clothing sales, Paris may have a difficult time establishing a tax liability lower than the assessment." Id. at *$;. Indeed, we cautioned: "That deficiency may prove fatal at trial, during which Paris will carry the burden of proof to demonstrate 'the amount of taxes owed/ " Id. (quoting Conga Corp. v. Comm'r of Revenue, 868 N.W.2d41, 53 (Minn. 2015)).

II. Governing Law

Minnesota's sales and use tax regime "embodies a comprehensive tax system created to impose an excise tax on the sale, use, storage, or consumption within Minnesota of tangible personal property and certain other commodities and services." Color-Ad Packaging, Inc. v. Comm'r of Revenue, 428 N.W.2d 806, 806 (Minn. 1988). The tax is imposed "on the gross receipts from retail sales... made in this state or to a destination in this state ...." Minn. Stat. § 297A.62, subd. 1 (2016). A "retail sale" means "any sale, lease, or rental of tangible personal property for any purpose, other than resale ...." Minn. Stat. § 297A.61, subd. 4(a)(1) (2016). "For the purpose of the proper administration" of Minnesota's sales and use tax regime, Minnesota law presumes that "all gross receipts are subject to the tax." Minn. Stat. § 297A.665(a)(1) (2016). In addition, "[t]he burden of proving that a sale is not a taxable retail sale is on the seller." Minn. Stat. § 297A.665(b) (2016). Clothing, defined as "human wearing apparel suitable for general use, " is exempt. Minn. Stat. § 297A.67, subd. 8(a) (2016).

An order of the Commissioner is prima facie valid, Minn. Stat § 271.06, subd. 6 (2016), and is thus "dispositive in...

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