Travia's Inc. and Robert and Jill Mellion
State of Vermont, Department of Taxes
Motion for Reargument Denied September 19, 2013.
On appeal from Superior Court, Chittenden Unit, Civil Division. Geoffrey W. Crawford, J.
Erin Miller Heins of Langrock Sperry & Wool, LLP, Burlington, for Plaintiffs-Appellants.
William H. Sorrell, Attorney General, and Danforth Cardozo, III, Assistant Attorney General, Montpelier, for Defendant-Appellee.
Present: Reiber, C.J., Dooley, Skoglund and Burgess, JJ. and Toor, Supr. J., Specially Assigned
[¶ 1] Taxpayers are owners and operators of an S-corporation known as Travia's Inc., a small bar and grill in Hinesburg, Vermont. They appealed the Department of Taxes' (DOT) assessment of meals tax and alcoholic beverage tax for the audit years 2006, 2007, and 2008, and corporate income and personal income tax for the audit years 2005, 2006, and 2007. Following a hearing at the Department, the Commissioner of Taxes affirmed the Department's assessments. Pursuant to 32 V.S.A. § 9275, taxpayers appealed the Commissioner's determination to the civil division, which affirmed the assessment against Travia's of additional alcohol, meals, and income tax. Taxpayers now challenge the assessment before this Court. We affirm.
[¶ 2] As found by the trial court, Travia's Inc., is an S-corporation, so the bulk of its income and losses pass through to its shareholders for reporting on their personal income tax returns. Mr. Mellion owns 100 percent of Travia's shares and asserts that he is the sole operator of the business, preparing and serving all meals and alcohol. Mrs. Mellion, the secretary of the corporation, maintains the books for the business. Travia's has no other employees. In early 2009, DOT initiated an audit of Travia's corporate income tax records for tax years 2005, 2006, 2007, and 2008. An experienced DOT auditor conducted the audit.
[¶ 3] The auditor discovered several issues that required further investigation. First, Travia's cost-of-goods (COG) to gross receipts ratio was approximately fifty-six percent, an abnormally high percentage, more than double the industry average for the bar and restaurant business. Typically, the COG ratio for restaurants is between twenty-eight and thirty-two percent, and the COG ratio for bars is sixteen to twenty-four percent. According to the Department, a high cost-of-goods ratio sometimes indicates overstated costs or understated income. Also of concern, Travia's listed $500 worth of inventory each year, suggesting that the business
[¶ 4] had no inventory accounting controls in place.
[¶ 5] As a result of the preliminary examination, the Department had the auditor conduct an on-site audit of Travia's. Travia's has a single cash register, which produces two types of paper tapes. One is a " running tape," which records each sale as it is rung in, and the other is a " Z tape," which can be produced at the end of the day and shows a summary of that day's sales. Travia's Z tapes summarize total sales of liquor including tax, and food not including tax. Mr. Mellion testified that he produces a Z tape showing the daily totals and puts it in an envelope at the end of each day and writes the daily totals of food and alcohol sales on the envelope. Mrs. Mellion then transfers the amounts written on the envelope to a weekly summary of sales, one page per week.
[¶ 6] The auditor testified that he looked at three running tapes. The running tapes were in large rolls, not dated or labeled, and the ink was too faded to read on the three he examined. He also looked at a sample of seven weekly envelopes and the forty-two Z tapes inside those envelopes. The auditor found that the totals on the Z tapes did not always match the totals recorded on the envelopes. There were handwritten adjustments on the Z tapes where some numbers were crossed out and others written in. Of the forty-two Z tapes examined, fourteen of them showed different totals than the corresponding totals noted on the envelopes. On eight of the fourteen tapes with discrepancies, the Z tape total and the envelope total differed by multiples of $100. When asked about these discrepancies, Mr. Mellion told the auditor that the cash register had problems throughout the three-year audit period and did not produce accurate Z tapes, that he would put down his recollection of the day's total rather than what the tapes said, and that what he wrote on ...