Soho Club, Inc. v. Department of Revenue

• Court: Appellate Court of Illinois
• Writing for the Court: COUSINS
• Citation: Soho Club, Inc. v. Department of Revenue, 645 N.E.2d 1060, 269 Ill.App.3d 220, 206 Ill.Dec. 808 (Ill. App. 1995)
• Decision Date: 20 January 1995
• Docket Number: No. 1-92-3399,1-92-3399
• Parties: , 206 Ill.Dec. 808 SOHO CLUB, INC., d/b/a Cabana Club, Plaintiff-Appellant, v. The DEPARTMENT OF REVENUE, Defendant-Appellee.

Page 1060

645 N.E.2d 1060

269 Ill.App.3d 220, 206 Ill.Dec. 808

SOHO CLUB, INC., d/b/a Cabana Club, Plaintiff-Appellant, v. The DEPARTMENT OF REVENUE, Defendant-Appellee.

No. 1-92-3399.

Appellate Court of Illinois First District, Fifth Division.

Jan. 20, 1995.

[269 Ill.App.3d 221] [206 Ill.Dec. 809] Michael Null and Associates, Chicago (Michael Null, Reed Lee, of counsel), for appellant.

Roland W. Burris, Atty. Gen. (Susan Frederick Rhodes, of counsel), for appellee.

Presiding Justice COUSINS delivered the opinion of the court:

On August 25, 1992, the trial court entered a decision and judgment order affirming the decision of an administrative law judge (ALJ) who determined that: (1) plaintiff, Soho Club, Inc., was subject to the Illinois Retailer's Occupation Tax Act (ROT Act) (35 ILCS 120/1 et seq. (West 1992)) for the tax years 1986 and 1987; and (2) plaintiff had not successfully rebutted defendant's, Illinois Department of Revenue's, prima facie case determining that plaintiff was subject to the ROT Act and that such taxes were owed by plaintiff for the tax years of 1986 and 1987. On appeal, plaintiff contends that the trial court erred in: (1) affirming the ALJ's determination that it is subject to the ROT Act; and (2) applying certain statutory presumptions in determining that plaintiff is subject to the ROT Act.

We affirm.

BACKGROUND

Plaintiff operates an adult entertainment club in Lake County, Illinois, known as the Cabana Club, which features nude and semi-nude dancing. At the club, plaintiff employs several women who take turns dancing nude or partially nude on a central stage within the club. Customers are charged $10 to enter the club which entitles them to watch the performances from tables or booths located near the stage. The cover charge also entitles customers to two beverages of either soft drinks or nonalcoholic near-beers (near-beers).

Customers can socialize with the dancers for an additional fee. A customer is charged an additional $10 if he wishes to socialize with the dancer for five minutes; $44 for 15 minutes; and $176 for an hour. Customers are often given additional drinks without being charged, especially if they choose to socialize with one of the off-duty dancers.

Defendant conducted an audit of plaintiff for the years 1986 and 1987. During the relevant period, plaintiff generated an income in the amount of $495,923. At a prehearing conference held on April 19, 1989, defendant requested plaintiff to produce its books and records for the period covered by the audit. Plaintiff, however, did not produce any such documents. However, pursuant to a subpoena, plaintiff provided defendant with the books and records for the 1985 tax year. Based on these records, defendant projected the taxes owed for the period in question and on or about December 3, 1988, served plaintiff a notice of tax liability stating that plaintiff owed the State of Illinois $41,712.92 in unpaid retailer's occupation tax, related interest, and penalties for the period beginning on January 1, 1986, and ending on December 31, 1987.

In response, in a letter to defendant dated December 13, 1988, plaintiff formally protested defendant's determination of its tax liability. The formal protest claimed that: (1) it had paid the correct amount of sales tax due for the years 1986 and 1987; (2) its revenues are primarily generated from providing entertainment to its customers, and, as such, (3) it was only subject to sales tax on approximately $400 per month, the amount spent on fountain drinks provided to customers. On July 25, 1989, a hearing was held before an administrative law judge (ALJ) wherein the parties introduced documentary and testimonial evidence.

At the hearing, defendant presented as evidence (1) the notice of tax liability; (2) an order by the ALJ setting the matter for a hearing; (3) audit work papers and various related documents; (4) corrections of plaintiff's tax returns which were prepared based on the audit information; and (5) plaintiff's letter of formal protest dated December 13, 1988. Included in the audit report were copies of plaintiff's tax returns for retailer's occupation tax for the period beginning on January 1, 1986, and ending on December 31, 1987, as well as computer printouts of the monthly payments of retailer's occupation tax made by plaintiff. After the presentation of the documentary exhibits, defendant rested its case.

Miss Sara Baughman testified on behalf of plaintiff. Miss Baughman testified that she is employed as a staff accountant by the accounting services firm, Alan G. Orlowsky, P.C., utilized by plaintiff. She assisted in the preparation of plaintiff's Federal income tax return for the tax year of 1987. She also assisted in the preparation of other tax forms going all the way back to January of 1986 which were filed with defendant's office, and the information used to prepare plaintiff's tax return was based on the general ledger sheets provided by Mr. Christofalos, the owner of plaintiff. She testified that she assisted in the preparation of monthly tax forms for retailer's occupation tax going all the way back to January 1, 1986, and that the purpose of filing retailer's occupation tax forms for plaintiff was to pay the sales tax on the fountain drinks plaintiff purchased to use in the operation of its business.

In addition, she stated that, at the direction of Mr. Christofalos, the monthly tax returns were completed based on an estimates provided by Mr. Christofalos which indicated that plaintiff was taxed on an estimated $400 a month in fountain drink sales, sometimes $425 a month. However, Miss Baughman testified that, in 1986, plaintiff was taxed for $2,945 in sales of near-beer and $750 for soft drinks and in 1987 for sales of $1,833 near-beers and for sales of $785 soft drinks. Although she was aware that the retailer's occupation tax returns should not be based on estimates provided by a taxpayer, but rather should be based on actual books and records, she explained the discrepancy in these figures by stating that the retailer's occupation tax returns were based upon estimates provided by Mr. Christofalos and that the corporate income tax returns were based on a general ledger and cash receipts provided by Mr. Christofalos.

Miss Baughman testified that the gross receipts for plaintiff's business were compiled weekly by Mr. Christofalos and sheets were provided to her employer. No cash register receipts were provided to the accountant. The only other documents provided by Mr. Christofalos to the accountant were general ledger sheets and occasional cash receipts.

Copies of plaintiff's Federal and State income tax return forms for 1986 and 1987 as well as the monthly tax returns for retailer's occupation tax were introduced into evidence. These documents bore no signatures. However, no documents were offered to support the expenses for soft drinks and near-beers listed in these exhibits. Included with these exhibits were notices from defendant that plaintiff had not submitted retailer's occupation tax returns for the period from August 1983 to November 1986. Miss Baughman testified that she was familiar with the 1986 income tax return and that the copy introduced for admission into evidence was a correct copy of the tax return that was filed with the government.

Michael Christofalos testified that he is the owner of plaintiff and the Cabana Club. He testified that the club is open six days of the week, Monday through Saturday, from 12 p.m. in the afternoon until 3 a.m. in the morning. He charges customers a $10 admission fee at the front door which entitles them to two free drinks of either soda or a nonalcoholic near-beer or one of each. If a customer wanted more than two drinks, the customer would sometimes be charged for the extra drinks and sometimes the extra drinks would be provided free of charge. Even though no food or other merchandise is sold at the club, other income is obtained from customers paying to spend time with the dancers.

He testified that while he used a cash register to tally the admission charges and money received from customers to spend time with the dancers, the cash register did not always contain a register tape. Even when there was a tape in the cash register, Mr. Christofalos did not keep it nor did he provide his accountant with any cash register tapes from his business. However, at the end of the evening, he can press a button on the cash register and the total amount would be displayed at the top of the register. According to him, there were two keys on the cash register. He would ring up the money collected for admission on one cash register key and the money collected for the dancers to sit with the customers on another register key.

Mr. Christofalos maintained a daily sheet on which he would record the money contained in the cash register at the end of every evening. The daily sheet also contained a record of money paid out to the dancers and suppliers. At the end of each week, he would compile the daily sheets onto weekly sheets, which were sent to the accountant every month.

Even though the accountant was provided with the weekly sheets every month, Mr. Christofalos was aware that the accountant was using an estimated figure of $400 a month to prepare the monthly retailer's occupation tax returns. He testified that his $400 estimate has been wrong and that he has been declaring more than his actual sale.

He also provided his accountant with ledgers that showed all of the business activity of the club. In addition, he maintained a corporate checking account and would write checks for distributors or for rent. Underneath the checks was a carbon from which the ledger would be recorded.

Mr. Christofalos purchased the near-beer and cans of syrup for the soft drinks, which were served through a fountain, from a distributor. If he ever ran out of these items, he would purchase soft drinks in bottles and...