Court Opinion

ID: 4194722
Source: CourtListenerOpinion
Date Created: 2017-08-10 14:06:27.32434+00
Date Added: 2024-06-11T14:40:12.080444
License: Public Domain

STATE OF MICHIGAN

                           COURT OF APPEALS

GARFIELD MART, INC.,                                                FOR PUBLICATION
                                                                    August 8, 2017
               Petitioner-Appellant,                                9:05 a.m.

v                                                                   No. 333094
                                                                    Tax Tribunal
DEPARTMENT OF TREASURY,                                             LC No. 14-005162-R

               Respondent-Appellee.

Before: CAVANAGH, P.J., and METER and M. J. KELLY, JJ.

PER CURIAM.

        Respondent, Michigan Department of Treasury, conducted an audit of petitioner, Garfield
Mart, Inc.’s, sales tax return for tax years 2007 through 2011. As a result of the audit, the
Department discovered that Garfield Mart had under-reported its sales resulting in a tax
deficiency, and the Department issued Garfield Mart a Final Assessment for $236,591.25,
including penalty and interest. Garfield Mart appealed the assessment to the Michigan Tax
Tribunal, alleging that its sales of certain prepaid wireless calling arrangements were not subject
to sales tax under MCL 205.52(2)(b) of the general sales tax act (GSTA), MCL 205.51 et seq.,
and that the audit was inaccurate. The Tribunal disagreed and entered a Final Opinion and
Judgment in favor of the Department. Garfield Mart now appeals by right. For the reasons
stated in this opinion, we affirm in part, reverse in part, and remand for further proceedings.

                                        I. BASIC FACTS

         Garfield Mart is a gas station and convenience store that sells gas, cigarettes, lottery
tickets, phone cards, groceries, and other miscellaneous items. Relevant to this dispute, Garfield
Mart also sells “wireless calling arrangements” for prepaid cellphones, including “PINless top-up
minutes” and electronic personal identification numbers (EPIN). Generally, PINless top-up
minutes allow an individual to automatically add minutes to a prepaid cellphone via wireless
download upon completion of payment, whereas an EPIN customer refills minutes on a prepaid
cellphone only after entering a PIN into the cellphone. Garfield Mart is able to provide these
services to its customers through a “PayGo prepaid system,” which is essentially an electronic
interface provided to Garfield Mart by Marceco Ltd. Under its contract with Marceco, Garfield
Mart sells these wireless calling arrangements to customers and retains a 5 to 10 percent
commission on the sale. Because this system is entirely electronic, no traditional phone cards are
necessary.

                                                -1-
        To purchase PINless top-up minutes, a customer gives his cellphone number to the
cashier, who in turn enters that number and the amount of the purchase into a credit-card-type
terminal. After the clerk presses “enter,” the terminal prints out a receipt reflecting the
transaction amount and a reference number is also on the receipt. The additional minutes
purchased are then wirelessly downloaded to the customer’s cellphone and are available
immediately. The receipt is given to the customer, who may need the reference number in the
event there is a problem with the service.

        Some of Garfield Mart’s customers using the Marceco service elect to purchase an EPIN
as opposed to the PINless top-up. In these instances, a receipt is printed showing the details of
the transaction and also including a PIN number and directions on how to use the PIN. To
access the additional purchased minutes, the customer must dial a 1-800 number and enter the
PIN. Garfield Mart does not store these PIN numbers electronically at the store; rather, the
Marceco terminal generates the PIN number upon purchase and it is delivered via the internet
and printed on the receipt provided to the customer.

        The Department conducted an audit of Garfield Mart’s reported sales tax for the July
2007 through June 2011 tax years. Because Garfield Mart failed to maintain adequate records of
its sales, the Department applied an indirect sampling methodology by which it estimated
Garfield Mart’s sales for the audit period using the best information available over a three-month
period. The audit revealed that Garfield Mart had under-reported its sales of merchandise
(cigarettes and general taxable items) and the wireless calling arrangements, and had over-
reported its deductions to food. After adjusting for these deficiencies, the Department
determined that Garfield Mart owed $178,463 in unpaid sales tax.

        Garfield Mart contested the audit results by requesting an informal conference before the
Department, asserting in part that the gross sales of the wireless calling arrangements are not
taxable. The Department disagreed, positing that such sales are taxable under MCL
205.52(2)(b), which states that the general sales tax applies to “[t]he sale of a prepaid telephone
calling card or a prepaid authorization number for telephone use, rather than for resale, including
the reauthorization of a prepaid telephone calling card or a prepaid authorization number.”

        The hearing referee agreed, in part, with Garfield Mart and issued an Informal
Conference Recommendation concluding that under MCL 205.52(2)(b) the EPIN transactions
are taxable while the PINless top-up transactions are not taxable. Notwithstanding the hearing
referee’s recommendation, the Department issued a Decision and Order of Determination
levying sales tax on both wireless calling arrangements. Consistent with this decision, the
Department then issued a Final Assessment against Garfield Mart for a net tax liability of
$178,463. The Final Assessment also included a negligence penalty of $17,847 and interest in
the amount of $40,281.25, for a total bill of $236,591.25.

       Garfield Mart filed an appeal before the Michigan Tax Tribunal, alleging that no sales tax
was due, in part, because it merely receives commissions from Marceco and PINless top-up
services are not taxable under the GSTA. An administrative law judge (ALJ) held a hearing.
Garfield Mart presented a single witness, its store manager, Aved Ahmad. Ahmed testified to
the general nature of the PINless top-up and EPIN sales. He further clarified that Garfield Mart
did not sell any telephone calling cards, which he characterized as a plastic card that contains a

                                                -2-
PIN, which is uncovered by scratching the back of the card. He explained that the owner then
uses the PIN to access the purchased telephone service associated with the PIN each time the
customer wishes to use the service.

        The Department presented the testimony of its auditor, Sarah Johnson, who explained the
audit methodology. Johnson said that although she requested documentation from Garfield Mart
for the sample period, February through March 2011, she never received any inventory reports,
general ledgers, purchase spreads, or “Z-tapes,” which record daily sales at the cash register. To
verify Garfield Mart’s sales in the absence of Z-tapes, Johnson used Garfield Mart’s purchases
(of merchandise, cigarettes, etc.), applied a “mark-up” to the purchases to arrive at “projected
sales,” and compared that number to the sales that Garfield Mart actually reported. As a result of
the audit, Johnson found that Garfield Mart under-reported sales and over-reported deductions.
She testified that adjustments were made to both merchandise (which included cigarettes and
general taxable items) and the wireless calling arrangements, as well as to the food deduction.

        At the conclusion of the evidence, Garfield Mart argued that the PINless top-up sales
were not subject to sales tax because no calling card or PIN is used and further that the EPIN
sales were not subject to sales tax because the EPIN technology did not exist when the statute
was enacted. Garfield Mart also asserted that the Department sampling method was faulty; more
specifically, it asserted that the adjustment for food allowance used an inconsistent methodology
and that fluctuations in inventory and cigarette rebates were not properly accounted for. The
Department countered that both PINless top-up sales and EPIN sales are taxable, pointing out
that in both instances, the customer is “re-authorizing an existing account of credit balance for
prepaid telephone use.” With respect to the accuracy of the audit, the Department argued that the
audit was based on the best evidence available and that Garfield Mart had not submitted any
evidence showing that the audit was inaccurate.

        Thereafter, the ALJ entered a Proposed Opinion and Judgment affirming the Final
Assessment. In its factual findings, the ALJ found that “[t]he purported ‘receipt’ issued by the
MARCECO terminal was a paper prepaid telephone card evidencing the type of transaction (i.e.,
top-up or EPIN), which was utilized to enforce the top-up transactions, if necessary, or finalize
the EPIN transactions[,]” and that Garfield Mart “was responsible for the payment of sales taxes
on the top-up and EPIN transactions.” In its conclusions of law, the ALJ framed the issue as
whether the wireless calling arrangements “resulted in the sale of prepaid telephone calling
cards, prepaid authorization numbers, or the reauthorization of prepaid authorization numbers”
such that they are subject to sales tax under MCL 205.52(2)(b). The ALJ, relying on dictionary
definitions, construed “prepaid telephone calling card” as “a piece of paper, cardboard, or plastic
given to a customer in exchange for money that contains information that can be used for
telephone calls or telephone service (i.e., minutes).” The ALJ then reasoned that the PINless
top-up and EPIN transactions fall within this definition because the underlying transactions
involve “the purchasing of prepaid calling services or, more specifically, the purchasing of
minutes to allow further use of the prepaid cellular telephone utilized to complete the
transaction[.]” The ALJ also held that the transactions resulted in the reauthorization of calling
services, stating:

                                                -3-
               Notwithstanding the recognition of these transactions as resulting in the
       issuance of paper prepaid telephone calling cards, it is also arguable that the
       transactions result in the reauthorization of a prepaid authorization number. More
       specifically, the customers are required to have a prepaid cellular telephone to
       complete each transaction, as the number assigned to or otherwise authorizing the
       use of that telephone must be inputted to effectuate the sale of additional minutes
       to that telephone. As such, the telephone number is a prepaid authorization
       number that is utilized for the purpose of reauthorizing the further use of that
       prepaid authorization number. [Footnotes omitted.]

       With respect to Garfield Mart’s claim that the Department’s audit was inaccurate, the
ALJ stated:

       [Garfield Mart] did not submit to [the Department] all of the records it requested
       and the records submitted were incomplete and unreliable, particularly ·in light of
       [Garfield Mart’s] failure to retain required source documentation (i.e., Z-tapes or,
       more specifically, daily sales receipts). As a result, [the Department] lacked
       necessary information to verify if [Garfield Mart] had collected the amount of
       required sales tax and the lack of such information justifies [the Department’s]
       use of [Garfield Mart’s] purchase invoices and the markups provided by [Garfield
       Mart’s] representative (i.e., “the best information available”) to determine the
       amount of [Garfield Mart’s] liability. Although [Garfield Mart] could have
       offered the requested records, other business records, or test samples for
       admission to demonstrate that the audit or sampling was inaccurate, [Garfield
       Mart] did not offer such information or [Garfield Mart’s] representative as a
       witness to explain why the requested records were not provided or, more
       importantly, how the records submitted were prepared and the basis of the
       discrepancy, if any, between the markups purportedly provided by [Garfield Mart]
       to its representative and the markups provided by the representative to [the
       Department], as [Garfield Mart’s] representative was responsible for the
       preparation of those records and the providing of the information utilized in the
       audit. Rather, [Garfield Mart] offered as its sole witness its store manager and
       Mr. Ahmad’s testimony and the few invoices submitted were insufficient for the
       Tribunal to determine what modifications, if any, should have been made to the
       assessment, particularly given the prima facie correctness of the audit.

        Garfield Mart filed exceptions to the Proposed Opinion and Judgment arguing that the
ALJ misconstrued the statutory language by characterizing the PINless top-up and EPIN
transactions as the “‘new’ version of the phone card.” Garfield Mart explained that the statute
only applies to certain methods of delivering telephone services, mainly arrangements that
require the user to input a code to access the purchased services.

       The Tribunal, however, rejected this argument in its Final Opinion and Judgment, stating:

       [T]he ALJ did not err in characterizing the receipts [Garfield Mart’s] customers
       receive when they purchase cardless and PINless calling arrangements as the new
       version of the phone card, or in describing the scope of the statute to cover

                                               -4-
       “prepaid calling services” as [Garfield Mart] contends. MCL 205.52(2) imposes a
       tax upon the sale of prepaid telephone calling cards, reauthorization of prepaid
       telephone calling cards, prepaid authorization numbers for telephone use, and
       reauthorization of prepaid authorization numbers for telephone use. The
       Legislature’s inclusion of “authorization numbers” evidences its intent to tax
       more than just the sale of tangible property, i.e., the cards. It clearly intended to
       tax the calling services associated with those cards, and with the referenced
       authorization numbers. Moreover, the receipts, as they stand with respect to the
       EPIN transactions, contain a PIN number that the customer inputs into his or her
       phone to obtain the add-on minutes purchased at [Garfield Mart’s] store.
       Consequently, the only difference between these receipts and a standard prepaid
       calling card is that the latter is preprinted and held in a physical inventory. As
       noted in the admitted Marceco brochure, “Prepaid transactions started out in the
       1990’s with preprinted scratch-off cards with PIN numbers. Marceco jumped to
       the forefront of electronic PIN delivery in 2003 . . . .” Even assuming, however,
       that said receipts cannot be construed as prepaid telephone calling cards within
       the meaning of MCL 205.52(2), the PINs themselves clearly constitute prepaid
       authorization numbers for telephone use. Similarly, even assuming that the
       PINless transactions cannot be construed as prepaid telephone calling cards or
       prepaid authorization numbers due to their PINless nature, such transactions are
       properly considered reauthorizations of a prepaid authorization number. As noted
       in the Proposed Opinion and Judgment, customers are required to have a prepaid
       telephone to complete each top-up transaction, as the number assigned to or
       otherwise authorizing use of that telephone must be inputted into the MARCECO
       terminal to effectuate the sale of additional minutes to the telephone.

The Tribunal also rejected Garfield Mart’s assertions that the audit was inaccurate, stating:

       Because [Garfield Mart] failed to maintain complete daily sales records, [the
       Department] had authority to conduct an indirect audit to test the accuracy of its
       books and records. [Garfield Mart] had no right to choose the audit method
       employed by [the Department] and the assessment is prima facie correct;
       [Garfield Mart] bears the burden of proving by a preponderance of the evidence
       that it is incorrect in whole or in part, and it failed to submit adequate affirmative
       evidence establishing that [the Department’s] audit was inaccurate. The few
       invoices submitted were insufficient to determine what, if any, modifications
       should have been made to the sample, and on the issue of markups, [Garfield
       Mart] did not offer its accountant as a witness to explain how the records were
       prepared or the basis of the discrepancy, if any between the markups provided by
       [Garfield Mart] to the accountant and those provided by the accountant to [the
       Department]. [Footnotes omitted.]

The Tribunal adopted the ALJ’s findings of fact and conclusions of law in its Final Opinion and
Judgment.

       This appeal follows.

                                                -5-
                                  II. GENERAL SALES TAX

                                 A. STANDARD OF REVIEW

        Garfield Mart argues that the Tribunal erred by interpreting MCL 205.52(2)(b) to include
PINless top-up minutes and EPIN transactions. It also argues that the Department’s audit was
inaccurate and should not have been used, and that the Tribunal erred by assessing the
negligence penalty to the tax deficiency assessed for the PINless top-up minutes. “Review of a
decision by the MTT is very limited.” Drew v Cass Co, 299 Mich. App. 495, 498; 830 NW2d 832
(2013). Unless fraud is alleged, this Court reviews the tribunal’s decision for a “misapplication
of the law or adoption of a wrong principle.” Liberty Hill Housing Corp v City of Livonia, 480
Mich. 44, 49; 746 NW2d 282 (2008) (citation and quotation marks omitted). “The tribunal’s
factual findings will not be disturbed as long as they are supported by competent, material, and
substantial evidence on the whole record.” Drew, 299 Mich. App. at 499 (citation and quotation
marks omitted). “Substantial evidence” is “more than a scintilla of evidence, although it may be
substantially less than a preponderance of the evidence.” Leahy v Orion Twp, 269 Mich. App.
527, 529-530; 711 NW2d 438 (2006) (citation and quotation marks omitted). This Court reviews
de novo issues of statutory construction. Drew, 299 Mich. App. at 499.

                                         B. ANALYSIS

                         1. INTERPRETATION OF MCL 205.52(2)(B)

       Under the GSTA, MCL 205.52(2)(b) provides:

               (1) Except as provided in section 2a, there is levied upon and there shall
       be collected from all persons engaged in the business of making sales at retail, by
       which ownership of tangible personal property is transferred for consideration, an
       annual tax for the privilege of engaging in that business equal to 6% of the gross
       proceeds of the business, plus the penalty and interest if applicable as provided by
       law, less deductions allowed by this act.

               (2) The tax under subsection (1) also applies to the following:

                                             * * *

              (b) The sale of a prepaid telephone calling card or a prepaid authorization
       number for telephone use, rather than for resale, including the reauthorization of a
       prepaid telephone calling card or a prepaid authorization number.

        No Michigan caselaw has interpreted the meaning of this provision. When interpreting
statutory language, this Court’s goal is to discern the Legislature’s intent. One’s Travel, Ltd v
Mich Dep’t of Treasury, 288 Mich. App. 48, 54; 791 NW2d 521 (2010). The best indicator of that
intent is the plain and ordinary language used. Id. In construing a statute, the Court must read
the language as a whole, giving meaning to each word in the context of the statute. Green v
Ziegelman, 282 Mich. App. 292, 301-302; 767 NW2d 660 (2009). If the language is
unambiguous, then the language must be applied as written. One’s Travel, Ltd, 288 Mich. App. at
54. Further, tax statutes are not to be extended by implication and are to be construed against the

                                                -6-
taxing authority if an ambiguity exists. Mich Bell Tel Co v Dep’t of Treasury, 445 Mich. 470,
477; 518 NW2d 808 (1994).

        The language of MCL 205.52(2)(b) is unambiguous. Under this provision, only the sale
of a “prepaid telephone calling card” or a “prepaid authorization number for telephone use,” or
the “reauthorization” of either of the foregoing is subject to sales tax. Therefore, to be subject to
the sales tax, the EPIN and PINless top-up transactions must fall within the meaning of any of
these statutory terms.

        The statute does not define “prepaid telephone calling card” or “prepaid authorization
number for telephone use.” This Court may rely on dictionary definitions to discern the ordinary
meaning of language used. Ford Motor Co v Dep’t of Treasury, 496 Mich. 382, 394; 852 NW2d
786 (2014). “Calling card” is defined as “a card displaying a number that can be used to charge
telephone calls to a single account regardless of where the calls are placed.” Meriam Webster’s
Collegiate Dictionary (11th ed) (emphasis added). The statute specifies that the calling card is
“prepaid,” indicating that the access number on the card contains a certain amount of minutes
that have already been paid for, as opposed to a pay-as-you-go system. See Meriam Webster’s
Collegiate Dictionary (11th ed) (defining “prepay” as “to pay or pay the charge on in advance”).
And, as commonly understood in the retail and telecommunications industry, such calling cards
traditionally contain the information pertinent to the telecommunications services on a small
rectangular scratch-off card (typically made of some stiff material that is the size of a credit
card), where a PIN for accessing the service is revealed by scratching the back of the card. See
generally Meriam Webster’s Collegiate Dictionary (11th ed) (defining “card,” such as credit
cards, as “a flat stiff usu. small and rectangular piece of material (as paper, cardboard, or plastic)
usu. bearing information”). Indeed, Garfield Mart presented testimony supporting this industry
understanding of the term “telephone calling card” as a plastic scratch-off card containing a PIN
necessary to access the prepaid minutes. The Department presented no contrary evidence and
fails to point to any statutory language indicating that a “prepaid telephone calling card” is
anything other than a credit-card-sized-stiff card with a PIN.

        The statute also does not define “prepaid authorization number for telephone use.”
However, like a calling card, this mechanism for accessing phone services uses a number, i.e., an
authorization number. This number, as indicated by the Legislature’s use of the preposition
“for,” is used for the purpose of accessing telephone services. See Meriam Webster’s Collegiate
Dictionary (11th ed) (defining “for” as “a function word to indicate purpose”). And, the term
“authorization,” evokes the act of authorizing or of giving the power or authority to do
something—which in the context of the statutory language here—is the power to access the
prepaid telephone account. See Meriam Webster’s Collegiate Dictionary (11th ed) (defining
“authorization”). Taking these terms together, a “prepaid authorization number for telephone
use” is a number representing a prepaid account used by the owner to access the purchased
telephone services. Given the foregoing, it is clear that the Legislature, when MCL 205.52(2)(b)
is read as a whole, intended to tax the sale of both prepaid tangible (calling cards) and intangible
authorization numbers for telephone services, as well as the reauthorization of those numbers.

        Here, neither the PINless top-up nor the EPIN calling arrangements are “telephone
calling cards” as that term is used in the statute. Neither of these prepaid calling arrangements
involves the sale of scratch-off plastic or credit-card-type calling cards that contain a pre-printed

                                                 -7-
authorization number that represents the minutes purchased. The Tribunal’s conclusion that
these calling arrangements constitute such calling cards was error and contrary to the plain and
ordinary meaning of the term “prepaid telephone calling card.” Indeed, by holding that the
instant transactions are the “new” calling card, the Tribunal extended the tax statute by
implication, running afoul of the principle that tax statutes are to be given a practical
construction because taxing is a practical matter. See Mich Bell Tel Co, 445 Mich. at 478.

       This conclusion does not end our analysis because these wireless calling arrangements
may be subject to sales tax if they constitute the sale of a “prepaid authorization number for
telephone use” or, alternatively, the “reauthorization” of a prepaid authorization number. We
conclude that an EPIN transaction is the sale of a prepaid authorization number for telephone
use. When a customer purchases an EPIN, he or she receives a PIN on the receipt that must be
entered on the customer’s cellphone in order to access the telephone services associated with the
PIN. Because the EPIN represents a prepaid account used by the owner to access the purchased
telephone services associated with the EPIN, it falls within the definition of prepaid authorization
number. It follows that the sale of an EPIN is taxable under MCL 205.52(2)(b).

        However, the sale of a PINless top-up is not subject to sales tax under MCL 205.52(2)(b).
When Garfield Mart sells a PINless top-up, its customer does not purchase any number
representative of the account purchased that is used to access the purchased telephone service.
Instead, the additional minutes are downloaded instantly to the customer’s cellphone upon
purchase; no authorization number or PIN is necessary to access the purchased telephone
services. Stated differently, a purchaser of a PINless top-up purchases additional prepaid
telephone services without any concomitant purchase of an authorization number necessary to
access the purchased service. Because no sale of a prepaid authorization number occurs when a
customer purchases a PINless top-up, the sale is not taxable under MCL 205.52(2)(b).

        The Department’s and the Tribunal’s contrary interpretation of the statute is
unpersuasive. First, the Tribunal’s characterization of the reference number on the PINless top-
up receipt as a PIN is not supported by the record. There is no dispute that the reference number
is not used to access the prepaid telephone services, and that it is instead only relevant in the
event there is a technical problem with the service. As such, the reference number is not a
prepaid authorization number as that term is used in the statute, and is more akin to a
confirmation number that a customer receives to evidence an electronic sale.

       Likewise, the Tribunal’s conclusion that a PINless top-up transaction is a reauthorization
of a prepaid authorization number strains credulity. In support, the Tribunal reasoned that a
customer’s prepaid cell phone number is an authorization number and entering it into the
terminal to complete the top-up transaction constitutes a reauthorization. A prepaid cellphone
number, however, is not and cannot reasonably be characterized as a prepaid authorization
number for telephone use. Rather, a prepaid cellphone number is a number assigned to that
phone to call that phone. Simply because that number is used in the top-up transaction to add
minutes does not transform it into a prepaid authorization number.

       Certainly the Legislature, in enacting MCL 205.52(2)(b), intended to tax the sale of
telephone services affiliated with the sale of authorization numbers, whether contained on a
physical card or not. Yet, the instant sales of PINless top-up are not accompanied by any

                                                -8-
authorization number necessary to access the service. If the Legislature wants to tax the sale of
these PINless services, then it must amend the statute to do so. Under the present language of
MCL 205.52(2)(b), PINless top-up sales are not subject to sales tax because they do not involve
the sale of a telephone calling card or authorization number for telephone use, nor do they
involve the reauthorization of a telephone calling card or authorization number. Accordingly, we
affirm the Tribunal with respect to the EPIN transactions, but reverse with respect to the PINless
top-up transactions.

                                    2. AUDIT ACCURACY

        Garfield Mart also asserts that the audit conducted by the Department was inaccuracte.
Under MCL 205.68(1), “[a] person liable for any tax imposed under this act shall keep in a
paper, electronic, or digital format an accurate and complete beginning and annual inventory and
purchase records of additions to inventory, complete daily sales records, receipts, invoices, bills
of lading, and all pertinent documents in a form the department requires.” In the event the
taxpayer fails to preserve or maintain these records as prescribed in MCL 205.68(1) and the
Department believes outstanding tax is due, “the department may assess the amount of the tax
due from the taxpayer based on an indirect audit procedure or any other information that is
available or that may become available to the department.” MCL 205.68(4). MCL 205.68(4)
further provides:

       That assessment is considered prima facie correct for the purpose of this act and
       the burden of proof of refuting the assessment is upon the taxpayer. An indirect
       audit of a taxpayer under this subsection shall be conducted in accordance with
       1941 PA 122, MCL 205.1 to 205.31, and the standards published by the
       department under section 21 of 1941 PA 122, MCL 205.21, and shall include all
       of the following elements:

               (a) A review of the taxpayer’s books and records. The department may
       use an indirect method to test the accuracy of the taxpayer’s books and records.

              (b) Both the credibility of the evidence and the reasonableness of the
       conclusion shall be evaluated before any determination of tax liability is made.

              (c) The department may use any method to reconstruct income,
       deductions, or expenses that is reasonable under the circumstances. The
       department may use third-party records in the reconstruction.

               (d) The department shall investigate all reasonable evidence presented by
       the taxpayer refuting the computation.

        On appeal, Garfield Mart argues that the Tribunal erred by approving respondent’s
indirect sampling method because respondent failed to follow its audit guidelines. Garfield
Mart, however, cites no law indicting that the failure to strictly adhere to respondent’s internal
audit guidelines constitutes error requiring reversal. Moreover, Garfield Mart even concedes that
it has no right to demand a particular audit method due to its failure to provide respondent with
adquate records of its sales. See By Lo Oil Co v Dep’t of Treasury, 267 Mich. App. 19, 42-43;
703 NW2d 822 (2005). Additionally, Garfield Mart points to no affimative evidence
                                               -9-
demonsrtrating that the audit was, in fact, actually inaccurate so as to rebut its presumptive
validity.

        Even assuming that failure to follow internal audit guidelines could constitute evidence of
an inaccurate audit, Garfield Mart’s arguments fail. First, with respect to the adjustment to the
non-prepared food deduction, Garfield Mart contends that the Department did not use the same
methodology as that used for “calculating the sales tax deficiencey for non-exempt products” as
required by the audit manual. Johnson, the Department’s auditor, however, testified that the
method used for the non-prepared food deduction was consistent with respondent’s published
guidance. Second, Garfield Mart contends that the Department should not have subtracted
rebates received from the projected purchases of cigarettes; however, inclusion of those rebates
in the projected sales price would increase Garfield Mart’s sales tax liability, and Garfield Mart
does not otherwise explain why subtraction of the rebates results in an innacurate assessment for
cigarette sales. Next, Garfield Mart argues that the audit is innacurate because Johnson failed to
account for breakage and theft of merchandise, which would have reduced its tax liability.
Johnson, however, testified that there was no evidence of theft during the sampling period.
Finally, Garfield Mart claims that the Department should have accounted for increases in
inventory during the sampling period, given that not all merchandise was sold during that time
frame. While Johnson testified that no such adjustments were made, the audit manual does not
require such adjustments and Garfield Mart did not provide the Department with evidence that
would have supported such an adjustment because Garfield Mart failed to provide its inventory
logs.

       In sum, given Garfield Mart’s failure to maintain adequate sales records and to provide
those records to the Department, it had no right to insist upon a particular audit methodology,
and Garfield Mart has otherwise failed to rebut the presumption that the audit was accurate.

                                 3. NEGLIGENCE PENALTY

       Finally, Garfield Mart argues that the negligence penalty should not apply to the PINless
top-up minutes. In the Final Assessment, the Department imposed a ten percent negligence
penalty for Garfield Mart’s failure to remit the sales taxes for the tax years at issue. In the
Proposed Opinion and Judgment, the ALJ affirmed the imposition of the penalty, stating:

       As for the levied penalty, Petitioner’s claim that it was not responsible for the
       payment of sales taxes on the top-up or EPlN transactions or that it was not aware
       that it was required to maintain complete daily sales records is neither supported
       by the record nor justifies a waiver of the levied penalty.

In the Final Opinion and Judgment, the Tribunal affirmed the penalty without comment.

       MCL 205.23(3) requires the imposition of a penalty in the event that a tax deficiency is
due to the taxpayer’s negligence. Negligence, for purposes of imposing such a penalty, “is the
lack of due care in failing to do what a reasonable and ordinarily prudent person would have
done under the particular circumstances.” Mich Admin Code R 205.1012. Whether a taxapyer
was negligenct is determined on a case-by-case basis, but the “standard for determing negligence
is whether the taxpayer exercised ordinary care and prudence in preparing and filing a return and

                                               -10-
paying the applicable tax in accordance with the statute.” Rule 205.1012. As such, if the
taxpayer “demonstrates to the satisfaction of the department that the deficiency . . . was due to
reasonable cause, the department shall waive the penalty.” MCL 205.23(3). Here, because the
PINless top-up sales were not taxable under MCL 205.52(2)(b), the negligence penalty must be
adjusted to reflect that fact on remand.

        We affirm in part, reverse in part, and remanded for further proceedings consistent with
this opinion. We do not retain jurisdiction.

                                                           /s/ Mark J. Cavanagh
                                                           /s/ Patrick M. Meter
                                                           /s/ Michael J. Kelly

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