Yesterdays of Lake Charles, Inc. v. Calcasieu Parish Sales & Use Tax Dep't

• Decision Date: 13 May 2016
• Docket Number: No. 2015–C–1676.,2015–C–1676.
• Citation: 190 So.3d 710
• Court: Louisiana Supreme Court
• Parties: YESTERDAYS OF LAKE CHARLES, INC. v. CALCASIEU PARISH SALES AND USE TAX DEPARTMENT. Cowboy's Nightlife, Inc. v. Calcasieu Parish Sales and Use Tax Department.

190 So.3d 710

YESTERDAYS OF LAKE CHARLES, INC.

v.CALCASIEU PARISH SALES AND USE TAX DEPARTMENT.

Cowboy's Nightlife, Inc.

v.Calcasieu Parish Sales and Use Tax Department.

No. 2015–C–1676.

Supreme Court of Louisiana.

May 13, 2016.

Rainer Anding Talbot Mulhearn, Robert R. Rainer, Drew Michael Talbot, Baton Rouge, LA, Scofield, Gerard, Pohorelsky, Gallaugher & Landry, Scott James Scofield, Lake Charles, LA, Andrea Albright Crawford, for Applicant.

Breazeale, Sachse & Wilson, LLP, David Robert Kelly, for Respondent.

GUIDRY

, J.

This matter involves the interpretation and application of the Uniform Local Sales Tax Code (“ULSTC”), La.Rev.Stat. 47:337.1 et seq.

The trial court found ambiguity in the language of the ULSTC requiring the plaintiff nightclubs to “keep and preserve suitable records” of all sales and expenditures. The trial court then found the tax collector had failed to show that the records actually kept by the clubs, in this case, bank statements and deposit slips, were not “suitable records” within the meaning of the ULSTC. The trial court further found the tax collector's assessment was arbitrary and that the tax collector had failed to establish that its methodology for auditing the taxpayer was proper. Accordingly, the trial court ordered the tax collector to refund amounts paid under protest by the clubs. The trial court further determined that prescription had run on the sales taxes for the years 2005 and 2006 for one of the clubs, aside from those taxes admittedly withheld by the clubs. Finally, the trial court denied the tax collector's motion for new trial and awarded attorney fees to the clubs. For the reasons set forth below, we reverse the trial court's judgment ordering a refund of the taxes and interest paid under protest by the clubs. We further reverse the trial court's award of attorney fees. In all other respects, the judgment of the trial court is affirmed, and the matter is remanded to the trial court for further proceedings.

FACTS AND PROCEDURAL HISTORY

Yesterdays of Lake Charles, Inc. (Yesterdays) and Cowboy's Nightlife, Inc. (“Cowboy's”) are cash-based bars or nightclubs located adjacent to each other in Calcasieu Parish. The clubs are owned by Clarence Vallet, who opened Cowboy's in 1991, with a capacity of up to 1,000 patrons, and Yesterdays in 2001, with a capacity of 350.¹ They both offered various promotions, giveaways, and incentives to attract customers, while Yesterdays hired bands. The clubs conceded their taxable transactions included selling alcohol and collecting cover charges. As retail vendors who make taxable sales, the clubs were thus “dealers” required by law to charge, collect, and remit sales taxes as the tax collector's agents. See La.Rev.Stat. 47:337.18(A)(5)

. The clubs must report “gross sales” and sales taxes each month. See La.Rev.Stat. 47:337.18(A)(1)(a). The clubs were audited commencing on November 3, 2009, by the Calcasieu Parish School System Sales and Use Tax Department (“Collector,” see La.Rev.Stat. 47:301 ) for years 2005 through 2008, on the basis that the clubs had violated their duties as tax collection agents for the Calcasieu Parish School System.

The clubs, as the trial court found and about which there is little dispute, used the following system for the reporting and remitting of sales taxes: To account for cash sales, the managers would meet at the end of the night with the bartenders, each of whom was assigned a cash register. The bartenders would each bring the drawer from their register, along with the register's “z-tape.” According to the testimony of the Collector's auditor, a “z-tape” or register tape is a printed tape produced by the cash register that reflects the amount of all sales transactions recorded on the particular machine. See also Travia's, Inc. v. Dept. of Taxes, 194 Vt. 585, 86 A.3d 394, 396 (2013)

. The manager would count the cash and match the total against the z-tapes to balance the registers at the end of the night. The cash was then placed into a safe located on the premises of the nightclubs. On the following Monday, the cash was deposited by the managers into each club's respective bank account. Mr. Vallet testified that it was solely the managers' responsibility to deposit the cash. The clubs' bookkeeper, a Certified Public Accountant (“CPA”), was then given the deposit receipts and monthly bank statements. The CPA would then report the bank deposits as the taxable sales, multiply that amount by the applicable tax rate, and remit that sum as sales taxes. Mr. Vallet testified that he has used this system for twenty-two years on the advice of his CPA for reporting and remitting sales taxes, and that at no point prior to the audit period in question was this system deemed unacceptable by the Collector.

Although the clubs conceded the z-tapes would be the best evidence of sales, the tapes were neither printed nor retained after their use for internal purposes. Mr. Vallet admitted the clubs kept no record of the number of people who entered the bars or the cover charges collected and deposited. The testimony further revealed the clubs used undocumented amounts of cash revenue to pay undocumented expenses before making the bank deposits. These expenses included cash payments to bands at Yesterdays, totaling some $205,000, according to Mr. Vallet, as well as cash disbursements to off-duty sheriff's deputies and bouncers for both clubs, totaling some $14,400.² The clubs kept no records of these cash expenditures and disbursements. Both Mr. Vallet and his CPA later admitted the bank deposit slips were therefore imprecise records of actual gross sales because an unrecorded portion of the moneys collected was not deposited in the bank. The bank deposit records did not accurately reflect actual sales, necessarily resulting in an underpayment of taxes.

The parties stipulated Yesterdays reported total sales of $2,249,098.00 for the tax period at issue and paid total sales taxes to the Collector of $107,637.94. Cowboy's reported total sales of $3,945,053.00 and paid the Collector taxes totaling $188,951.00 for the period at issue. The parties also stipulated, for the same period, Yesterdays paid state sales taxes totaling $89,964.00 and Cowboy's paid the state $157,801.00.

As a result of the audit, the Collector issued a Notice of Collector's Intent to Assess additional taxes due to the Calcasieu Parish School System, dated January 19, 2010. An accompanying cover letter explained that an examination of the clubs' sales tax returns indicated a discrepancy in the reporting of sales transactions for the audit period. The letter stated the sales tax returns were unable to be reconciled due to the lack of support for the amounts on the sales tax returns “such as z-tapes, shift change reports, etc.” Consequently, the auditors reviewed all purchases of beer and liquor from the clubs' vendors for three months in each year of the four-year period, and a mark-up was applied to determine the taxable sales the Collector stated should have been reported. The sales figures were also used to determine the cover charges that should have been reported as sales. For liquor, the number of bottles was converted to ounces, and the number of drinks was calculated at 1.5 ounces per drink, which price was estimated at $4.75 per drink. Cover charges were determined at a ratio of three drinks for every cover charge, which was estimated to be $5. For beer, the number of bottles of beer purchased was adjusted for dollar nights at the club by dividing the number by four (four weeks in a month) and multiplying that number by $1; the remaining bottles were estimated to have been sold at $2.75 per bottle on average. Like liquor, one cover charge of $5 was assigned for every three bottles of beer sold.

The Notice of Intent to Assess dated January 19, 2010, estimated Yesterdays' taxes due to the Calcasieu Parish School System in the amount of $217,190.49, and with interest and penalties, totaled $376,088.65. The Notice informed the clubs they could timely file a written protest and request a hearing. Protests by the clubs resulted in two hearings before the School Board, following which the clubs gradually provided additional information such as closure of the clubs due to Hurricanes Rita and Ike, promotional nights, spillage, frozen beer, door charges, non-alcoholic drinks, happy hours, and complimentary beverages. As more information was provided to the Collector by the clubs, Yesterday's estimated taxes due were reduced to $115,712.16 in the first Amended Assessment, dated July 10, 2010, then lowered to $92,362.81 on July 29, 2010, in the second Amended Assessment, and ultimately assessed at $85,353.60 on August 26, 2010. With interest and penalties the final assessment resulted in a tax bill for Yesterdays totaling $155,662.95. In the Collector's initial Notice of Intent to Assess for Cowboy's, issued on January 19, 2010, the amount due was assessed at $219,161.87 and with interest and penalties totaled $366,989.50. The first Amended Assessment dated July 10, 2010 lowered the assessed amount to $56,183.17; the second Amended Assessment again lowered the amount to $35,415.15; and the Final Assessment for Cowboy's was $29,292.42. With interest and penalties added to the tax assessed, the final total for Cowboy's was $49,973.99.

The clubs ultimately paid the amounts under protest and filed suit challenging the final assessments and the methodology used in reaching them. The trial court ruled in favor of Yesterdays and Cowboy's, ordering a refund of the amounts paid, but deferred a ruling on the issue of attorney fees due the clubs. The Collector filed a motion for new trial, which the trial court denied. At the hearing on the motion for new trial, the court awarded attorney fees to the clubs pursuant to La.Rev.Stat. 47:337.13.1(B)(1)

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Thereafter, the Collector appealed the trial court's judgment. In a split decision, the court of appeal affirmed the trial court's...