Seba, LLC v. Dir. of Revenue, No. SC 98601

CourtUnited States State Supreme Court of Missouri
Writing for the CourtGEORGE W. DRAPER III, Chief Justice
Citation611 S.W.3d 303
Parties SEBA, LLC, Appellant, v. DIRECTOR OF REVENUE, Respondent.
Docket NumberNo. SC 98601
Decision Date24 November 2020

611 S.W.3d 303

SEBA, LLC, Appellant,
v.
DIRECTOR OF REVENUE, Respondent.

No. SC 98601

Supreme Court of Missouri, en banc.

Opinion issued November 24, 2020


SEBA was represented by Ronald L. Hack, Mary Anne Lindsey and Grace E. Shemwell of Evans & Dixon LLC in St. Louis, (314) 621-7755.

The director was represented by Emily A. Dodge of the attorney general's office in Jefferson City, (5730 751-7344, and Thomas A. Houdek of the department of revenue in Jefferson City.

GEORGE W. DRAPER III, Chief Justice

The Administrative Hearing Commission (hereinafter, "the AHC") determined SEBA, LLC (hereinafter, "SEBA"), doing business as Eddie's Southtown Donuts (hereinafter, "Eddie's"), was liable for unpaid state sales tax, statutory interest, and a 5 percent addition to tax owed as assessed by the director of revenue (hereinafter, "the director"), from October 1, 2011, through September 20, 2014. SEBA seeks judicial review of the AHC's decision. This Court has jurisdiction pursuant to article V, section 3 of the Missouri Constitution.1 The AHC's decision is affirmed.

Factual and Procedural History

In 2007, Brad Arteaga (hereinafter, "Arteaga") and Eddie Strickland (hereinafter, "Strickland") formed SEBA to facilitate the opening of Eddie's, a donut shop located in the City of St. Louis. Arteaga purchased the building for their business, procured all of the donut shop's equipment, and handled the financial responsibilities. Strickland was Eddie's sole, paid employee who was responsible for all of the shop's day-to-day operations, including making the donuts by hand, selling donuts, ordering supplies, and delivering wholesale orders to customers. Eddie's was open from 5 a.m. to noon, seven days a week to sell donuts, coffee, and other drinks.

Initially, Eddie's clientele consisted exclusively of walk-in customers purchasing donuts and coffee. Retail customers could pay with cash or a credit card. Eddie's had a used cash register with a single tape that produced a single receipt. The receipt did not indicate whether the customer paid with cash or a credit card. Neither the cash register nor SEBA had a secondary method, such as a Z-tape, to track retail

611 S.W.3d 307

sales.2 Strickland either gave the customer the receipt or threw it away. Arteaga knew nothing about using a Z-tape or "double receipts" to track sales. The credit card machine did not record individual transactions; instead, it produced a single batch receipt at the end of the day indicating total sales. Strickland wrapped this receipt around the cash received for Arteaga to deposit.

As walk-in business declined, Arteaga procured several wholesale customers, which he estimated comprised approximately 80 percent of Eddie's business. Wholesale orders were paid for by check or credit card. Arteaga kept copies of wholesale customer invoices, tax exemption certificates, and tax exempt letters in a metal desk in an adjoining room to Eddie's.

Joseph Otten ("hereinafter, "Otten") was Arteaga's accountant who prepared SEBA's tax returns, sales tax reports, and payroll reports. Arteaga provided Otten with paycheck stubs, bank statements, and credit card statements to prepare SEBA's sales tax returns. Otten recommended his clients keep Z-tapes and acknowledged not all clients provided him with bank statements to prepare the sales tax returns because they provided actual sales numbers or Z-tapes. Otten reviewed the bank and credit card statements with Arteaga. Arteaga determined which sales were wholesale compared with retail by assuming the high-dollar deposits were wholesale and the low-dollar deposits were retail.

The director initiated an audit of SEBA's tax records for October 1, 2011, through September 30, 2014. Because the auditor assigned to perform the audit had been in that capacity for two months and still was undergoing training, the auditor's supervisor assisted with the audit. The auditor requested several documents for the audit period, but SEBA produced only limited, incomplete documents. The auditor informed SEBA of its statutory responsibility to retain all business operation records and listed specific documents to retain. Because the audit period records were incomplete, the auditor requested SEBA retain individual cash register receipts for December 2014, along with the beginning and ending inventory of donuts made for the month. SEBA provided limited receipts for the month. The auditor next requested records for April 2015 through June 2015, but SEBA did not retain or produce the requested records.

The auditor then requested sales documents for July 2015. SEBA presented the auditor with a notebook Strickland prepared containing handwritten entries of the reported number of donuts sold for wholesale, retail, and discarded as waste. SEBA provided its credit card batch totals, cash register transaction receipts for retail sales, credit card receipts, and a calculation tape tracking retail sales for the month. SEBA also provided some exemption letters and other documentation to verify wholesale customers.

The auditor found SEBA's July 2015 records unreliable because they contained several discrepancies. Because of these discrepancies, the auditor estimated SEBA's July 2015 retail sales and then used this amount to estimate its retail sales during the audit period.3 The auditor

611 S.W.3d 308

determined SEBA's estimated gross sales for July 2015 totaled $16,892.42. The auditor then calculated a cash-to-credit sales ratio for July 2015. The auditor determined that 28 percent of SEBA's total sales were credit card sales and 72 percent of its total sales were cash sales. The auditor applied these ratios to the known credit card sales to estimate gross sales for the audit period. The auditor subtracted exempt sales for the entities to which SEBA provided valid exemption certificates, which did not include all of SEBA's wholesale customers.

The auditor concluded SEBA underreported its taxable sales in the amount of $400,483.72 during the audit period. The auditor determined SEBA failed to pay $23,431.89 in sales tax based on the underreported taxable sales. The auditor imposed a 5 percent addition to tax because SEBA "displayed intentional disregard and negligence by failing to double check [its] sales tax figures to verify they were accurate." The auditor's supervisor agreed with imposing the addition to tax. The department of revenue (hereinafter, "the department") assessed SEBA with a total liability of $38,540.44, which included $34,313.87 in underpaid taxes, $1,715.70 as the 5 percent addition to the tax, and $2,510.87 in statutory interest.

SEBA filed a petition for review with the AHC challenging perceived flaws in the auditor's methodology and seeking to establish additional tax exempt sales. The AHC held an evidentiary hearing at which Arteaga, Otten, and the auditor testified. SEBA did not offer the notebook into evidence because Arteaga testified that, after the audit, he could not recall where he stored it. Arteaga also explained several requested records for the audit period were discarded when the metal desk was removed by a tenant who leased space in the building Eddie's occupied.

The AHC determined SEBA was liable for unpaid sales tax in the amount of $38,540.44, minus the sales tax assessed on $26,567.57 in income generated from SEBA's exempt sales to three organizations the auditor initially included. The AHC found SEBA liable for statutory interest and determined the 5 percent addition to tax was appropriate because SEBA was negligent in reporting its taxable sales because it failed to keep adequate, accurate records. SEBA seeks judicial review of the AHC's decision.

Standard of Review

"This Court will affirm the [AHC]’s decision when it is authorized by law and supported by competent and substantial evidence upon the record as a whole unless clearly contrary to the reasonable expectations of the General Assembly." St. Louis Rams LLC v. Dir. of Revenue , 526 S.W.3d 124, 126 (Mo. banc 2017) (quoting Krispy Kreme Doughnut Corp. v. Dir. of Revenue , 488 S.W.3d 62, 67 (Mo. banc 2016) ) (internal quotation omitted); see also section 621.193, RSMo 2016.4 The AHC "may disregard evidence which in its judgment is not credible, even though there is no countervailing evidence to dispute or contradict it." Krispy Kreme , 488 S.W.3d at 67 (Mo. banc 2016) (quoting State ex rel. Rice v. Pub. Serv. Comm'n , 359 Mo. 109, 220 S.W.2d 61, 65 (Mo. 1949) ). "The rule is established in this [s]tate that the triers of fact under their duty to weigh the evidence may disbelieve evidence although it is uncontradicted and unimpeached." Id. at 67-68.

611 S.W.3d 309

Total Taxable Retail Sales

SEBA argues the AHC erred in affirming the auditor's calculation of total taxable sales during the audit period and finding it was liable for $34,313.87 in additional sales tax because its ruling was based on speculation and conjecture and was unsupported by competent and substantial evidence on the whole record. SEBA argues the auditor's methodology and findings concerning Eddie's average retail sales for July 2015, its cash-to-credit ratio, and total retail sales were based on speculation and conjecture. SEBA asserts these findings were...

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2 practice notes
  • Scheumbauer v. City of St. Louis, ED 109260
    • United States
    • Court of Appeal of Missouri (US)
    • 28 Septiembre 2021
    ...is to give effect to the legislative intent as reflected in the plain language of the statute at issue." SEBA, LLC v. Dir. of Revenue, 611 S.W.3d 303, 316 (Mo. banc 2020). "Absent statutory definition, words used in statutes are given their plain and ordinary meaning." Id. The plain and ord......
  • Bd. of Comm'rs of the Cnty. of Franklin v. Twentieth Judicial Circuit of Mo., SC 99010
    • United States
    • United States State Supreme Court of Missouri
    • 12 Octubre 2021
    ...is to give effect to legislative intent as reflected in the plain language of the statute at issue." SEBA, LLC v. Dir. of Revenue , 611 S.W.3d 303, 316 (Mo. banc 2020) (quoting Parktown Imp., Inc. v. Audi of Am., Inc. , 278 S.W.3d 670, 672 (Mo. banc 2009) ). The plain language of section 21......
2 cases
  • Scheumbauer v. City of St. Louis, ED 109260
    • United States
    • Court of Appeal of Missouri (US)
    • 28 Septiembre 2021
    ...is to give effect to the legislative intent as reflected in the plain language of the statute at issue." SEBA, LLC v. Dir. of Revenue, 611 S.W.3d 303, 316 (Mo. banc 2020). "Absent statutory definition, words used in statutes are given their plain and ordinary meaning." Id. The plain and ord......
  • Bd. of Comm'rs of the Cnty. of Franklin v. Twentieth Judicial Circuit of Mo., SC 99010
    • United States
    • United States State Supreme Court of Missouri
    • 12 Octubre 2021
    ...is to give effect to legislative intent as reflected in the plain language of the statute at issue." SEBA, LLC v. Dir. of Revenue , 611 S.W.3d 303, 316 (Mo. banc 2020) (quoting Parktown Imp., Inc. v. Audi of Am., Inc. , 278 S.W.3d 670, 672 (Mo. banc 2009) ). The plain language of section 21......

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