Peter Sidote : Determination Dta Nos
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STATE OF NEW YORK DIVISION OF TAX APPEALS __________________________________________ In the Matter of the Petitions : of : PETER SIDOTE : DETERMINATION DTA NOS. 825772, for Revision of Determinations or for Refund of : 825899, 825964, Sales and Use Taxes under Articles 28 and 29 of AND 825965 the Tax Law for the Periods June 1, 2008 through : February 28, 2010 and June 1, 2010 through May 31, 2013. : __________________________________________ Petitioner, Peter Sidote, filed petitions for revision of determinations or for refund of sales and use taxes under Articles 28 and 29 of the Tax Law for the periods June 1, 2008 through February 28, 2010 and June 1, 2010 through May 31, 2013. A hearing was held before Barbara J. Russo, Administrative Law Judge, at the offices of the Division of Tax Appeals in New York, New York, on October 2, 2014 at 10:30 A.M., with all briefs to be submitted by February 26, 2015, which date commenced the six-month period for issuance of this determination. Petitioner appeared by Sales Tax Defense LLC (Mark L. Stone, CPA, and Jennifer Koo, Esq., of counsel). The Division of Taxation appeared by Amanda Hiller, Esq. (Michael J. Hall). ISSUES I. Whether Peter Sidote was a person responsible for the collection and payment of sales and use taxes on behalf of POP, Inc., d/b/a Party Time Beverages, within the meaning and intent of Tax Law §§ 1131(1) and 1133(a). -2- II. Whether the Division of Taxation has met its burden of proof for the assertion of fraud penalties against petitioner pursuant to Tax Law § 1145(a)(2). III. Whether, in the alternative to fraud penalties, petitioner is liable for penalties asserted pursuant to Tax Law § 1145(a)(1). FINDINGS OF FACT 1. P.O.P., Inc., d/b/a/ Party Time Beverage (POP) was a retail and wholesale beverage distributor located in Brentwood, New York. 2. POP leased premises from The Mayflower Property Equities Corp. (Mayflower).1 Petitioner, Peter Sidote, was the president and principal of Mayflower. 3. Petitioner is a businessman with 20 years of experience. 4. On November 3, 2008, the Division of Taxation (Division) sent a letter to POP stating that the business’s sales and use tax records had been scheduled for a field audit for the period December 1, 2005 through August 31, 2008. The letter stated that “[a]ll books and records pertaining to the sales and use tax liability, for the audit period, must be available on the appointment date.” The appointment date indicated on the letter was November 25, 2008. A records requested list was attached to the letter specifying the books and records to be provided by POP. 5. By letter dated May 27, 2010, the Division notified POP that the audit period was expanded to include the period December 1, 2005 through February 28, 2010 (the first audit). The Division again requested that the corporation produce all books and records relating to the 1 Mayflower’s name also appears in the record as The May Flowers Property Equities, Inc., and The May Flowers Property Equities Corp. -3- expanded audit period and included a second records request list. On January 31, 2011, the Division sent an additional request for records to POP. 6. During the course of the audit, POP did not provide all the records requested by the Division. Records provided by POP included bank statements, purchase invoices for January 2011, some exemption certificates and quick-book invoices for some nontaxable sales. POP’s representative informed the Division that the business’s records were seized by the Suffolk County District Attorney’s office (DA’s office). The Division determined that POP’s sales records were inadequate because no original source documentation was provided such as register tapes, daybooks or backup to sales tax returns. The sales records did not allow the auditor the opportunity to trace any transaction back to the original source or forward to a final total. The Division’s auditor also reviewed the files seized by the DA’s office. The auditor determined that POP’s books and records, which were seized by the DA’s office, were inadequate to conduct an audit. 7. The auditor reviewed POP’s bank deposits and determined that bank deposits were not in substantial agreement with its books and records. Bank deposits exceeded reported sales by approximately $2,090,952.09. The auditor requested and obtained third-party information from POP’s vendors and performed a mark-up test using the cost and selling prices provided by POP. The auditor determinated a markup of 27%, which was applied to audited purchases of $7,015,457.62, resulting in audited gross sales of $8,909,631.18. The auditor reviewed register Z-out tapes (Z-tapes) obtained from the DA’s office for the period May 12, 2009 through June 28, 2009. Based on the auditor’s review of those Z-tapes, that auditor calculated a nontaxable -4- ratio of 12.77%, and applied that ratio to the entire audit period.2 The auditor determined the resulting audited taxable sales in the amount of $7,771,871.28. Credit was given for reported taxable sales of $1,044,131.00, resulting in a determination that POP had additional taxable sales of $6,727,740.28 and tax due of $580,267.60. 8. A second audit of POP’s books and records was conducted for the period March 1, 2010 through November 30, 2012. Based upon the second audit, POP entered into a consent agreement, signed by Charles Malave as president of POP, agreeing to tax in the amount of $63,502.22 plus interest for the second audit period. 9. The Division determined that petitioner and Charles Malave were responsible persons for the collection and payment of sales and use taxes on behalf of POP. 10. On August 26, 2011, the Division issued a Notice of Determination (L-036562007-8) to petitioner as an officer or responsible person of POP, asserting sales and use taxes due for the period June 1, 2008 through February 28, 2010, in the amount $284,986.83, plus penalty in the amount of $444,228.06 and interest. On August 27, 2013, the Division issued a Notice of Determination (L-040021414-2) to petitioner as an officer or responsible person of POP, asserting sales and use taxes due for the period June 1, 2010 through November 30, 2012, in the amount $118,945.22, plus penalty in the amount of $43,597.97 and interest. On October 1, 2013, the Division issued a Notice of Determination (L-040163258-7) to petitioner as an officer or responsible person of POP, asserting sales and use taxes due for the period March 1, 2013 through May 31, 2013 in the amount of $1,502.65 plus penalty in the amount of $250.22 and interest. This notice was based on a return filed by POP reporting tax due of $1,502.65 without 2 The auditor testified that she used Z-tapes from June, July and August 2009 to calculate the nontaxable ratio, but the Division’s audit report and workpapers show that Z-tapes were used from the period May 12, 2009 through June 28, 2009. -5- remitting payment. On October 1, 2013, the Division issued another Notice of Determination (L- 040163259-6) to petitioner as an officer or responsible person of POP, asserting sales and use taxed due for the period December 1, 2012 through February 28, 2013 in the amount of $5,650.46 plus penalty in the amount of $938.97 and interest. This notice was based on a return filed by POP reporting tax due in the amount of $11,695.46 and remitting partial payment of $6,045.00. The notices of determination issued to petitioner do not state the Tax Law section upon which penalties were asserted. 11. During the course of the audit POP executed a series of consents extending the period of limitations for assessment of sales and use taxes under Articles 28 and 29 of the Tax Law. Charles Malave signed the consents as president of POP. 12. POP and Recycling in Communities, Inc., a/k/a Redem Enterprises, Inc., d/b/a CMG Marketing (Recycling), operated side by side out of the same building in Brentwood, New York. The building was owned by Mayflower. Petitioner was the president and owner of Recycling. Recycling operated a bottle and can redemption business. 13. Petitioner, POP, Recycling, Mayflower and others came under a criminal investigation and were charged by the Suffolk County DA with grand larceny, falsifying business records, and scheming to defraud. The basis of the criminal charges was a scheme conducted by petitioner and others in which they knowingly purchased previously redeemed bottles and cans and then redeemed them a second time to third parties. POP’s records were seized by the DA’s office in relation to the criminal investigation. Manhattan Beverage, one of POP’s vendors, indicated during the first audit that POP often returned more bottles and cans than were purchased during the period at issue. -6- 14. When redeeming the bottles and cans, petitioner received payment by cash or check, but sometimes the payment was made in merchandise such as soda or beer. The soda and beer received from distributors in exchange for the empty bottles and cans petitioner returned would go to POP. Petitioner also used POP to pass through the proceeds from the redemption scheme. 15. On June 30, 2011, petitioner entered into a plea agreement with the DA’s office. As part of the agreement, petitioner signed a Settlement Agreement and Consent to Forfeiture with Order individually and on behalf of POP and Mayflower, dated October 18, 2012.