Jackson Land Food Mart Inc., Abdo Fadel, Sultan Naji and Seena Naji v. Herb Frierson, in his Official Capacity as the Commissioner of Revenue of the Mississippi Department of Revenue

• Court: Court of Appeals of Mississippi
• Decided: March 23, 2021
• Docket: 2019-SA-01837-COA
• Status: Published

Opinion

IN THE COURT OF APPEALS OF THE STATE OF MISSISSIPPI

NO. 2019-SA-01837-COA

JACKSON LAND FOOD MART INC., ABDO APPELLANTS FADEL, SULTAN NAJI AND SEENA NAJI

v.

HERB FRIERSON, IN HIS OFFICIAL APPELLEE CAPACITY AS THE COMMISSIONER OF REVENUE OF THE MISSISSIPPI DEPARTMENT OF REVENUE

DATE OF JUDGMENT: 11/15/2019 TRIAL JUDGE: HON. DENISE OWENS COURT FROM WHICH APPEALED: HINDS COUNTY CHANCERY COURT, FIRST JUDICIAL DISTRICT ATTORNEY FOR APPELLANTS: JAMES GARY McGEE JR. ATTORNEY FOR APPELLEE: MORTON WARD SMITH NATURE OF THE CASE: CIVIL - STATE BOARDS AND AGENCIES DISPOSITION: AFFIRMED - 03/23/2021 MOTION FOR REHEARING FILED: MANDATE ISSUED:

BEFORE WILSON, P.J., GREENLEE AND McCARTY, JJ.

McCARTY, J., FOR THE COURT:

¶1. A convenience store and its owners were audited by the Department of Revenue and

found to owe thousands of dollars for taxes they had never paid. The taxpayers argued that

the audit was unreliable but admitted they did not have records for their sales and sales tax

markups.

¶2. Finding that the taxpayers failed to rebut the presumption that the findings of the audit

were correct, we affirm.

FACTS ¶3. The underlying facts giving rise to this appeal are not in dispute. Jackson Land Food

Mart Inc. is a company in Picayune, Mississippi. It is owned equally by Abdo Fadel and

Sultan Naji, both of Pearl River County. The company operates a convenience store and gas

station off Jackson Landing Road in Picayune. The company filed taxes, as did Fadel, and

Naji with his wife Seena.

¶4. In 2017 the Department of Revenue (DOR) signaled it would audit Jackson Land

Food Mart regarding taxes on prepaid wireless cards, corporate income tax, and sales tax.

The audits spanned from 2013 to 2016 for the prepaid wireless cards, 2013 to 2015 for

corporate income tax, and 2013 to 2016 for sales tax. The DOR informed Fadel and the

Najis that their individual income tax returns would also be audited based on income they

had received from Jackson Land Food Mart. These periods spanned from 2013 to 2016.

¶5. Stores generally purchase items at a certain cost and then mark up the price for sale

so they can make a profit. The difference between the cost and the final sale price reveals

the profit on the sold item. The amount of “markup” can vary from item to item. When it

came time for the various audits, the taxpayers admitted they did not have “any documents

showing the markup percentage of specific items sold in the store during the audit period.”

Nor did they have any records showing the average markup on items sold in the store. The

taxpayers also admitted they did not have any “z-tapes, register tapes[,] or point of sales

receipts for sales made during the audit period.”1

1 As the United States Tax Court has explained, the “‘Z’ tape is a tape produced by a cash register which reflects the amount of all sales transactions entered into the machine.” Edgmon v. Comm’r of Internal Revenue, 66 T.C.M. (CCH) 1093 (T.C. 1993).

2 ¶6. Despite the lack of z-tapes or other detailed records, Jackson Land Food Mart and its

owners argued that they kept a handwritten ledger reflecting their sales. However, they

admittedly did not have records of daily sales. In fact, the company conceded its cash

registers did not even generate sales reports. The taxpayers also admitted that—while they

on average sold items for a profit—their own records showed they actually sold items for a

negative markup, losing money on certain sales. The only records they had of daily sales

were the handwritten ledgers. The owners also clarified some of their inventory might not

have been sold, but stolen—or in the lingo of the industry, subject to “shrinkage.” However,

they admitted that they did not have any actual records showing if items were stolen or lost.

¶7. Jessie Armstrong from the DOR was assigned the task of auditing Jackson Land Food

Mart. The auditor immediately ran into issues, because while the company “provided

purchase invoices, . . . [it] did not have any point of sales records from registers.” From what

information there was, the auditor determined that “if the inventory purchased for sale were

actually sold totaling the gross sales reported . . . then inventory must have been marked

down, or sold at a loss, otherwise known as a negative markup.”

¶8. The auditor did have the benefit of the company’s “federal and state tax returns,

purchase invoices, a general ledger, a daily sales notebook,” bank statements, and other tax

information provided to third parties. The DOR had the cooperation of the taxpayers and

actually performed the work at the office of the certified public accountants who worked for

the business.

¶9. To determine how the store paid taxes on sales, the auditor “performed a 10-day

3 purchase cycle analysis, in which [the auditor] recorded the purchase price of items from the

invoices, then examined the retail price of items on the shelf in the Jackson Land Food Mart

store.” “By comparing the purchase cost against the retail sales price,” the auditor “could

calculate the average markup to see whether the markup was negative (as reported by [the

taxpayers]) or a positive number.”

¶10. Over the 10-day period, the auditor determined the store was not running at a loss.

To the contrary, “[t]he average markup for items sold in the [store] was 44%, which

contradicted the sales totals on [the] sales tax returns.” This was the average markup on

items, not the highest or lowest, and when it “was applied to the inventory purchases over

the course of the audit” it “yield[ed] an increase[] in estimated annual sales.”

¶11. After a visit to the store, the auditor noted that “[m]any items were not labeled for

price and had to be priced by the register.” The business also did not have a petty cash fund

and would sometimes pay vendors or employees straight out of the cash in the register.

There were other issues. Notably, “[t]he method of reporting sales tax used by [the CPA]

was found to be unreliable and had a few mathematical errors.” These errors led to

additional taxes regarding beer sales. Likewise, as to the individual returns of Fadel and the

Najis, “[t]he method of reporting income tax used by [the CPA] was found to be unreliable.”

¶12. As a result of the increase in estimated annual sales, the auditor found that Jackson

Land Food Mart had underestimated their “franchise tax and individual income tax liability,

since the income projected flows to increased income for the business and owners.”

Including penalties and interest, the DOR determined the business owed $8,559 in taxes on

4 prepaid wireless cards, $4,699 for corporate income tax, and most notably, $145,722 for sales

tax.2 Fadel was informed he owed a further $31,866 for his individual income taxes, and the

Najis likewise owed $31,866.

COURSE OF PROCEEDINGS

¶13. Jackson Land Food Mart as a company and Fadel and the Najis individually appealed

the respective assessment of taxes—first to the Board of Review, and then to the Board of

Tax Appeals. The former affirmed the assessments. The Board of Tax Appeals set a hearing

date for the appeals, but “[t]he Taxpayer[s’] representative was unable to attend . . . and

requested that he be allowed to rest upon the Taxpayer[s’] written submissions[.]”

¶14. The argument presented by the various taxpayers before the Board was the same they

now present to this Court—that the Department’s audit findings should be discounted and

deference given to the records from the company. However, there was compelling evidence

that the store’s records were simply unreliable. Critically, there were no contemporaneous

records of substance detailing the store’s actual sales. The Department’s analysis showed

the company claimed it was suffering losses of 13%, 21%, and 52% over the three years of

the audit, respectively. The Department argued this was not plausible, as the business would

have simply run itself into the ground if it had lost that much money every year.

¶15. Ultimately, in upholding the sales tax assessments the Board ruled that it “was not

provided with any evidence to rebut the Department’s assessments.” (Emphasis in original).

Lacking any actual rebuttal from the taxpayers, the Board presumed the audit figures were

2 After an initial objection, the company later withdrew its protest over the assessment of tax on the prepaid wireless cards.

5 correct.

¶16. The Board also explained how it had been thwarted even as it attempted to give the

taxpayers the benefit of the doubt. “Although we understand that the Taxpayer believes that

its records were adequate and that the records were provided to the Department . . . the

Taxpayer did not substantiate any of its claims with source documentation nor did the

Taxpayer or the Taxpayer’s representative appear at the hearing to allow this Board to inquire

further about the Taxpayer’s assertions.” (Emphasis in original).

¶17. The Board also affirmed the individual assessments regarding Fadel and the Najis.

Just as it had concluded with the company, “the Taxpayer did not substantiate any of its

claims in the corresponding sales tax appeal with any source documentation or other rebuttal

evidence, and because neither the Taxpayer nor the Taxpayer’s representative appeared at the

hearing to allow this Board to inquire further about the Taxpayer’s assertions,” the Board of

Tax Appeals held it was “unable to grant any relief to the Taxpayer.” (Emphasis in original).

¶18. Jackson Land Food Mart and the various taxpayers then appealed to chancery court.

Their argument was similar to the one before the Board of Tax Appeals—that they did have

records and that they had a CPA who prepared their financial statements, but the Department

allegedly ignored this information. The taxpayers argued that “[t]he auditor’s determination

that [their] records were ‘inadequate’ is arbitrary and capricious,” and they disputed the

method used by the auditor to ascertain the markup on items sold in the store.

¶19. In response, the DOR leaned on the failure to provide any rebuttal proof at

all—arguing the “Petitioners cannot challenge the accuracy of the Department’s numbers,

6 when they have admitted they don’t know what their own numbers should be.”

¶20. After a hearing, the chancery court found that the “Petitioners have not set forth any

evidence through testimony, affidavit[,] or otherwise that rebuts the Court’s assumption that

the Department’s assessment is prima facie correct.” The chancery court emphasized the

lack of proof presented by the taxpayers, who “do not have daily sales records from registers,

nor . . . records showing the markup of specific inventory items,” and “did not know the

purchase price or sales price of items in their store during the audit period, and did not

provide an amount for their gross sales each month.” Nor did the taxpayers show any flaw

in the auditor’s method of estimating markup.

¶21. Absent any proof at all from the taxpayers, they “fail[ed] to present a genuine issue

of material fact before the Court.” “The fact that the Petitioners question the efficacy of the

auditor is not enough to withstand the motion,” the chancery court ruled, and therefore

granted summary judgment in favor of the Department.

¶22. In the end, Jackson Land Food Mart, Fadel, and the Najis all appealed, and the matter

was assigned to the Court of Appeals for review.

STANDARD OF REVIEW

¶23. We review the grant of summary judgment de novo. Bennett v. Hill-Boren P.C., 52

So. 3d 364, 368 (¶12) (Miss. 2011). “When reviewing the evidence on summary judgment,

the Court should view the evidence in the light most favorable to the nonmovant.” Id.

DISCUSSION

¶24. This appeal is about the sales tax paid by a business. In Mississippi, sales tax is a

7 privilege tax—one that grants the payor “the privilege of engaging or continuing in business

or doing business within this state[.]” Miss. Code Ann. § 27-65-13 (Rev. 2017). “[T]he

dominant purpose of the privilege tax law is the collection of revenue[.]” City of Bay St.

Louis v. Milner, 140 Miss. 592, 105 So. 480, 481 (1925). This revenue is then distributed

as seen fit by the Legislature, which “holds the State’s purse strings.” Pickering v. Langston

Law Firm P.A., 88 So. 3d 1269, 1282 (¶59) (Miss. 2012).

¶25. A crucial part of the sales tax system is that taxpayers are required to keep records.

“It shall be the duty of every person taxable under this chapter to keep and preserve for a

period of three (3) years adequate records of the gross income, gross receipts or gross

proceeds of sales of the business, including all invoices of merchandise purchased, all bank

statements and cancelled checks, and all other books or accounts as may be necessary to

determine the amount of tax for which he is liable.” Miss. Code Ann. § 27-65-43 (Rev.

2017) (emphasis added). The “records shall be adequate in substance” to meet the

requirements of the law, and “[a]ll records shall be open for examination, at any time, by the

commissioner [of revenue] or his duly authorized agent.” Id.

¶26. The law also allows the State to check whether taxpayers are providing the correct

amount of tax. “Taxpayers’ records may be sampled for audit purposes at the discretion of

the commissioner and any assessment rendered as a result of same shall be considered prima

facie correct.” Id. (emphasis added).

¶27. Recently we analyzed the requirements of record keeping in another case about

disputed sales taxes. “Taxpayers are required to keep adequate records of gross income and

8 sales.” U. Roofing & Constr. of MS Inc. v. Dep’t of Revenue, No. 2019-CA-00570-COA,

2020 WL 7221730, at *7 (¶25) (Miss. Ct. App. Dec. 8, 2020) (motion for reh’g pending).

“When they do not, a presumption that the Commission’s assessments are prima facie correct

arises.” Id.

¶28. The auditor is not required to use “the best information available” to make an

assessment; “in order for the assessments to be prima facie correct, the auditor must make

them from any information available.” Id. (emphasis added) (quotation marks omitted).

Once the auditor’s assessment is made and the presumption of prima facie correctness

attaches, “the taxpayer bears the burden of proof showing that a genuine dispute exists

regarding the correctness of the assessment.” Id.

¶29. So it is well established that the auditor’s “assessment of taxes invokes a statutory

presumption of correctness.” Id. The question in this case, as in other tax cases, is what data

it takes to rebut that burden. The presumption of correctness has been compared “with

Mississippi Rule of Evidence 301 on presumptions in civil cases.” Id. In civil cases, “the

party against whom a presumption is directed has the burden of producing evidence to rebut

the presumption.” MRE 301. The “burden of persuasion . . . remains on the party who had

it originally.” MRE 301; see U. Roofing, 2020 WL 7221730, at *7 (¶25); see also Marx v.

Bounds, 528 So. 2d 822, 825 (Miss. 1988) (establishing the taxpayer’s burden under the

statute “comports” with Mississippi Rule of Evidence 301).

¶30. The Marx decision remains key to unlocking disputes over the taxpayer’s burden of

proof. Like this case, it involved the calculation of sales tax owed by convenience stores.

9 Id. at 823. There was also a field audit performed because of a concern the businesses were

underreporting sales and therefore not paying sufficient sales tax. Id.

¶31. The auditor “found that [the owner] determined the amount of sales taxes due by

utilizing bank statements of each business.” Id. Just as here, the convenience stores did not

keep detailed records. Instead, “the only records kept by [the owner] were purchase invoices

and bank records.” Id. at 824. “There were no records reflecting actual sales . . . , no sales

invoices, no record of cash withdrawals, and no record of actual markups on the store’s

inventories.” Id. The owner protested “that he had kept records showing gross receipts, but

that by reason of their inadequacy, he had not produced them for the Commission.” Id.

¶32. Ultimately, the owner of the convenience stores claimed he “computed total sales by

adding total monthly deposits, estimated cash payouts to employees and vendors, and

estimated owner cash withdrawals.” Id. at 823 (emphases added). Because this was

unreliable, the auditor calculated from “any information available” the quantity of items sold

by the store and the markup from cost. Id.

¶33. In Marx, there was the “absence of any records reflecting actual cash payouts, actual

cash withdrawals[,] or daily sales[.]” Id. at 824. So “the auditor took [the owner’s] purchase

invoices and applied a markup using as a basis the markups at the store at the time of the

audit.” Id. at 824-25. The owner had “admitted that he was not sure exactly how much his

markups were” on the items he sold. Id. at 825. At one store, “he testified that he had no

markups at all . . . but was selling goods at cost or below” cost, since he was trying to attract

new customers. Id.

10 ¶34. Once the auditor dug into the business, he “concluded [the owner] had underreported

gross sales from all his businesses” and in turn made a “deficiency assessment” that the

businesses owed taxes. Id. at 823. The owner appealed, claiming he should not have had to

pay the allegedly deficient taxes. Id. at 825-26.

¶35. The Supreme Court focused heavily on the taxpayer’s lack of records. Id. at 825.

“The lack of adequate records alone gives rise to the presumption that the Commissioner’s

assessments are prima facie correct.” Id. “The record undisputedly supports the fact that

adequate records of gross sales were not maintained by [the owner].” Id. “Sales invoices

were not maintained, and cash payouts were only estimated,” and so “any calculation of gross

sales was necessarily an estimate only.” Id.

¶36. In further exploring the burden a taxpayer faces after a deficiency assessment, the

Court concluded a taxpayer must do something more than merely disputing the auditor’s

conclusions. Id. at 826. “A taxpayer’s uncorroborated testimony that he sold goods at or

below costs, coupled with a failure to maintain adequate records reflecting true sales, does

not overcome the Commission’s prima facie correct assessment and, without other proof,

does not suffice.” Id. at 827. For “the plaintiff may not prevail by merely saying his own

return was correct or by merely submitting the applicable forms.” Id. at 826. These general

allegations or denials are not enough to shift the burden. Id. at 827.

¶37. Nor did it shift the burden simply because the taxpayer had his accountant testify

“because the accountant based his testimony on [the owner’s] representations and

recollections of his markups during the audit period.” Id. This account was simply not

11 reliable. Id. In the end, the Court “conclude[d] that the taxpayer’s proof was so inconsistent

or improbable as to be unworthy of belief, and that the taxpayer did not overcome by

competent evidence the State Tax Commission’s prima facie case.” Id. at 828.

¶38. The case at hand is significantly similar to Marx. Like the taxpayer there, Jackson

Land Food Mart failed in nearly every possible way to abide by the statutory duty to “keep

and preserve . . . adequate records of the gross income, gross receipts or gross proceeds of

sales of the business, including all invoices of merchandise purchased, all bank statements

and cancelled checks, and all other books or accounts as may be necessary to determine the

amount of tax for which he is liable.” Miss. Code Ann. § 27-65-43.

¶39. The taxpayers admitted they did not have point of sales receipts for what was sold at

Jackson Land Food Mart; that they did not have any documents showing an average markup

on items in the store; no documents showing the markup on specific items in the store; no

records of daily sales; and no records of whether items were stolen or lost. The auditor

reported that the store would sometimes even pay vendors or employees straight out of the

cash in the register.

¶40. In fact, the taxpayers further admitted that their own records showed they would have

been losing massive amounts of money at the store for three years running, but the DOR

found this to be implausible. The taxpayer in Marx had a plausible reason one store was

selling items at a negative markup—because he was trying to attract business to a new store.

Marx, 528 So. 2d at 825. The company here made no such argument and was not in the same

factual situation.

12 ¶41. This failure to keep and maintain records according to state law dooms any attempt

the taxpayers make at combating summary judgment. Both Marx and the statute are clear

that an audit by the DOR is presumptively correct, and it is then the duty of the taxpayer to

rebut it.

¶42. The fact that the taxpayers used a CPA to handle some of their financial affairs also

does not shield them from the consequences of the audit’s finding. The same issue was

addressed in Marx but did not provide relief because the CPA was relying on faulty

information from the taxpayer. Here the auditor concluded the CPA was miscalculating taxes

on beer and likewise miscalculating the individual income tax owed by Fadel and the Najis.

In any event, the CPA was still only relying on the data provided by the taxpayers, which, as

set out above, did not contain the most basic information about the Jackson Land Food Mart

sales.

¶43. There are different ways to keep financial records, and there could be situations where

a taxpayer complies with the statute without digital spreadsheets or register Z-tapes. Even

then, precedent and statute create a presumption that the findings of the auditor are prima

facie correct. The only response by the taxpayers here was to insist they had enough to move

forward. But as we have held before, “bare allegations cannot defeat a motion for summary

judgment.” Jacox v. Circus Circus Miss. Inc., 908 So. 2d 181, 184 (¶6) (Miss. Ct. App.

2005). “The ritualized combat of the courtroom demands that favorable outcomes may be

obtained only after meeting clearly established legal and procedural standards.” Id.

¶44. Given that there were not adequate records to rebut the findings of the auditor, and

13 in many instances no records at all, the chancery court was correct to grant summary

judgment in favor of the Department of Revenue.

CONCLUSION

¶45. State law requires maintaining “adequate records” that detail “gross income, gross

receipts or gross proceeds of sales of the business, including all invoices of merchandise

purchased, all bank statements and cancelled checks[.]” Miss. Code Ann. § 27-65-43. The

taxpayers here did not have adequate records, and indeed in many instances had no records

whatsoever of these required types.

¶46. In order to administer its services, the State must have revenue; in order to gain

revenue, it requires payment of tax for the privilege of operating a business. We presume the

calculations by the auditor to be correct unless rebutted, and as the taxpayers did not keep

adequate records, they could not rebut the findings. As a result, they must pay the taxes,

penalties, and interest assessed to them. Accordingly, we affirm the chancery court ruling.

¶47. AFFIRMED.

BARNES, C.J., CARLTON AND WILSON, P.JJ., GREENLEE, WESTBROOKS, LAWRENCE AND SMITH, JJ., CONCUR. McDONALD AND EMFINGER, JJ., NOT PARTICIPATING.