NOT FOR PUBLICATION WITHOUT THE APPROVAL
OF THE TAX COURT COMMITTEE ON OPINIONS

W-2 wages $55,203.29 $50,203.66 $57,392.40 $62,224.48

CBT cost of labor $31,794.00 $28,371.00 $29,376.00
Not available

Audited Employee Wages $79,282.24 $69,609.15 $85,195.17 $70,437.75

Total Audited Wages $105,282.24 $95,609.15 $111,195.17 $96,437.75

By letter dated July 19, 2001, the auditor sent revised workpapers to the accountant, including a post audit conference report. The auditor’s covering letter directed the accountant to return the report if there were any issues in the workpapers that the accountant or Mr. Yilmaz wished to discuss. No response was received, and on August 21, 2001, the Director issued a notice of assessment related to the final audit determination.

The plaintiff timely protested the assessment to the Division of Taxation. N.J.S.A. 54:49-19. At the conference hearing, the conferee reviewed cost analyses of various menu items that had been prepared by the plaintiff, and rejected them. Although the document showed plaintiff’s computation of profit margin, which was explained to some extent at trial, there was no explanation as to how the cost components of the various menu items had been arrived at. The conferee rejected the plaintiff’s analyses because of discrepancies between the components of a menu item as analyzed by the plaintiff, and the description of those same items on the menu. The conferee re-allocated all purchases of chicken tenders to a menu item described as a chicken tender/pitcher of beer combination, and moved that item out of the appetizer category, and put it into a separate category. Because the markup on that item was relatively low, the effect of the adjustment was to increase the overall markup ratio for the appetizer category. The conferee also slightly increased the markup ratio for hamburgers, cheeseburgers and cheeseburgers deluxe, based on menu cost matched with invoice cost for the same period. Finally, the conferee allocated ten percent of food purchases (excluding produce purchases) to supplies. As recomputed by the conferee, the overall markup ratio was 2.8388, rather than the 2.9644 computed by the auditor, resulting in a reduction in the assessment of sales tax from $65,679.73 to $61,795.75 (both without interest and penalties).
The conferee additionally disallowed “truck expenses” claimed on the CBT returns that had been accepted by the auditor. According to the conferee, the plaintiff failed to present any documentation of those expenses. No documentation was presented at trial either. According to the accountant, Mr. Yilmaz would tell him the number of miles that he had put on the truck, the accountant would put that number in the spreadsheet, and the spreadsheet program would calculate the appropriate expense deduction. Mr. Yilmaz testified that he used the truck once a week and that he knew how many miles he traveled. For 1995 and 1996, the disallowed truck expenses were about $2000 and for 1997, the truck expense was about $4000. Overall, the CBT assessment was reduced from approximately $39,000 to $21,934. The reduction presumably took into account the reduction in audited gross receipts as adjusted by the conferee.

The conferee sustained the remaining findings of the auditor and issued a final determination on December 2, 2002. It is that final determination that is appealed here.

The plaintiff’s primary contention is that the Director arbitrarily assigned too low a percentage to happy hour sales. In addition to the testimony of Mr. Yilmaz and the accountant, as evidence of this contention, the plaintiff proffered at trial certain workpapers produced by another Division auditor for a period subsequent to the audit period in issue here. Plaintiff has appended these documents to its post-trial submissions and again offered them as evidence of the appropriate markup ratios, which it asserts should have been used by the auditor for the audit period in issue here.

As noted above, the documents appear to be workpapers and not a final audit determination. Moreover, the workpapers do not appear to be a complete set of workpapers, but solely the portion showing the auditor’s markup analysis. The test year of the audit appears to be 2001, but the period covered by the subsequent audit is unknown, as is whether or not the subsequent audit has been completed. The document indicates that the auditor has calculated a markup ratio of 2.32, and has attributed approximately two-thirds of the beer and liquor sales to the plaintiff’s happy hour.

The Director’s objection to this document at trial was sustained on the ground that it was not evidence of a habit, as initially contended by plaintiff, and also on the ground that it was not relevant to the audit years in issue. The Director has now moved to exclude the post-trial submission of the workpapers.

Each audit period stands on its own, and a taxpayer cannot establish that an earlier audit was erroneous by contending that a later audit was correct. Without even considering issues of hearsay, N.J.R.E. 802, and authentication, N.J.R.E. 901, the reliability of the findings of the subsequent audit (even if what had been offered was the complete and final set of work papers) could be determined only after evidence was presented as to the reliability of the records maintained by the taxpayer during the later period as well as the methodology employed by the Division. In other words, there would have to be a full trial as to both audit periods. Significantly, plaintiff’s proffer did not include testimony by the auditor who had produced the workpapers, but there was testimony by the accountant to the effect that plaintiff had begun to maintain better records of sales and cash expenditures at some point after the audit in this case had begun.

The result of a subsequent audit under unknown conditions has no bearing on the issue of whether the audit in issue here was conducted unreasonably. Only relevant evidence is admissible. N.J.R.E. 402. “Relevant evidence is ‘evidence having a tendency in reason to prove or disprove any fact of consequence to the determination of the action.’ Evid.R. 401. . . . Stated otherwise, relevant evidence has probative value, which is the tendency of the evidence to establish the proposition that it is offered to prove.” State v. Wilson, 135 N.J. 4, 13 (1994). Nothing about the document proffered by the plaintiff would have any tendency to prove anything about the audit in issue here. The auditor’s workpapers for a subsequent period are therefore excluded as irrelevant.

I find the following facts:
1. No cash register tapes for any relevant time period were offered to the auditor. I find that the auditor’s workpapers, which note that no cash register tapes were available, and his document request, which has his handwritten notation next to the item “cash register tapes” that “none” were produced, to be more credible than the accountant’s uncorroborated assertion that he had offered the 1999 tapes to the auditor and that they had been rejected. The pre-audit questionnaire completed and signed by Mr. Yilmaz in June 1999 stated that no cash register tapes were available and no tapes were produced at trial.

Significantly, it is plaintiff’s principal contention that it was unreasonable for the auditor to have used invoices from December 1998, February 1999 and March 1999 in its markup analysis, when the auditor refused to examine “current” cash register tapes. The auditor notified plaintiff in March 1999 that an audit was to commence, and based on Mr. Yilmaz’ testimony that he kept cash register tapes for two or three months and then discarded them, at that point in time he should have had tapes for at least some of the same months covered by the invoices.

It is conceivable that the accountant offered cash register tapes produced later in 1999, subsequent to the commencement of the audit. Those tapes, however, were never produced at trial. It is simply not credible that, by the end of 1999, neither plaintiff nor his accountant understood the importance of retaining those tapes, if they existed.

2. Pursuant to N.J.S.A. 54:32B-16, and N.J.A.C. 18:24-2.3(a) and -2.4(b), the plaintiff should still have had in its possession the cash register tapes or summary records for tax year 1997, the so-called “test period,” at the commencement of the audit in 1999. It is true that, based upon his past experience auditing similar businesses, the auditor had no real expectation that the plaintiff would have cash register tapes available for examination, but the auditor’s expectations are immaterial. It is clear that the relevant statutes and regulations required that plaintiff’s records be retained for three or four years, depending on the particular audit year. See Alpha I, Inc. v. Director, Div. of Taxation, 19 N.J. Tax 53, 57 (Tax 2000) (where taxpayer destroys records before expiration of four year statute of limitations, it places itself in jeopardy for additional assessments of tax).

3. Notwithstanding that the auditor could not specifically recall which documents he had requested and which documents he had received, the audit report’s lists of documents that were provided and those that were not given to him were generally accurate. The plaintiff produced the 1997 purchase invoices for the purpose of demonstrating that the audit report was inaccurate. The auditor’s report merely stated, however, that “complete” purchase invoices were not provided, which was demonstrably the case for the 1997 invoices in evidence. As conceded by the auditor, the 1997 bank statements were omitted from the list of the records that had been produced. He testified that this was probably because the set of statements was incomplete, as corroborated by his analysis of bank deposits, which also showed missing 1997 bank statements. No bank statements were produced at trial.

4. Plaintiff’s accountant’s analysis of bank deposits is unreliable and is not probative of plaintiff’s gross receipts. He testified that he did not record what he regarded as inter-account transfers, but there was no testimony or other evidence as to the amounts of those transfers or the rationale for so categorizing those amounts, other than his testimony that where there was a debit from one account and a credit to another on the same date in the same amount, he excluded it from his analysis. On cross-examination, the accountant testified that he had records of the inter-account transfers but did not bring them to trial. There was also no supporting documentation for loan monies paid into the accounts. Finally, although the accountant acknowledged the possibility that not all cash receipts made their way into the bank accounts, there was no evident adjustment made to his analysis to account for such cash.

5. Bridgeton is an economically depressed area and the plaintiff offers discounts and specials to bring in business. However, there is no record of the sales which were discounted or were sold at a special price or were given away as part of the happy hour buffet.

6. The wages subject to gross income tax withholding had been understated by the plaintiff. Although there was testimony that the hours of operation changed during the audit period, the two menus in evidence covering the years 1996 through 2000 both state that all menu items are available from 11 a.m. to 1 a.m., Monday through Sunday, or 98 hours a week. The pre-audit questionnaire indicates that Sunday hours are 12 noon to 10 p.m., and from 11 a.m. to 1 a.m., Monday through Saturday, or 94 hours a week. For 1998, when wages of $62,224 were reported for purposes of gross income tax withholding (excluding any payments to Mr. Yilmaz), and assuming that the Bridgewater Pub operated 94 hours a week, or 4888 hours a year, the wages paid per hour of operation would have amounted to $12 or $13 dollars an hour. Mr. Yilmaz conceded that, in addition to himself, he has two fulltime bartenders, one of whom is salaried, and that there is generally a waitress. When it is busy, he has several more employees. A total wage payout of $13 per hour for all employees appears very unrealistic. As noted in a California audit procedure manual relied on by the plaintiff, and discussed in more detail below, in determining the reasonableness of audit results when the markup method is used, consideration should be given to employees working “off the books.”

At issue here is the reasonableness of the methods employed by the Director for an audit period where plaintiff had virtually no records of its receipts. The Sales and Use Tax Act, N.J.S.A. 54:32B-1 to -29, squarely places on the vendor the obligation of establishing that it correctly reports its collections of tax. First, the statute presumes that all receipts from the sales of tangible personal property, of enumerated services, and of food and drink in restaurants, as set forth in N.J.S.A. 54:32B-3(a), (b) and (c), “are subject to tax until the contrary is established, and the burden of proving that any such receipt . . . is not taxable hereunder shall be upon the person required to collect tax or the customer.” N.J.S.A. 54:32B-12(b). Plaintiff here is a “person required to collect the tax.” N.J.S.A. 54:32B-2(w).

Second, as noted above, the statute mandates that persons required to collect the tax maintain records of both purchases and sales for inspection and examination by the Director. N.J.S.A. 54:32B-16. Where the sales tax return is incorrect or insufficient, the Director is given broad authority to determine the tax from any information that may be available. N.J.S.A. 54:32B-19. The Director is also authorized to “prescribe methods for determining the amount of receipt . . . and for determining which of them are taxable and which are nontaxable.” N.J.S.A. 54:32B-24(4).

That the vendor is required to demonstrate by way of adequate records that it has correctly reported the tax when called on to do so by the Director’s auditor is a sensible effectuation of a statutory scheme in which the vendor collects the tax from its customers, and holds it in trust until it is reported and turned over to the State. See N.J.S.A. 54:32B-12(a) (“The tax shall be paid to the person required to collect it as trustee for and on account of the State.”). This is not a tax imposed on the vendor but on the vendor’s customer, and as such is what is commonly called a “trust fund” tax. See footnote 5 Cooperstein v. Director, Div. of Taxation, 13 N.J. Tax 68, 78 n.4 (Tax 1993), aff’d, 14 N.J. Tax 192 (App. Div. 1994), certif. denied, 140 N.J. 329 (1995). Plainly, the Legislature did not intend that a vendor collect the tax and convert it to its own use or utilize tax monies as a loan to the business.

Moreover, it is well settled that the Director’s assessment is presumed to be correct. Atlantic City Transp. Co. v. Director, Div. of Taxation, 12 N.J. 130, 146 (1953) (quoting Aetna Life Ins. Co. v. City of Newark, 10 N.J. 99, 105 (1952)); L & L Oil Service, Inc. v. Director, Div. of Taxation, 340 N.J. Super. 173, 183 (App. Div. 2001); Meadowlands Basketball Associates v. Director, Div. of Taxation, 19 N.J. Tax 85, 90 (Tax 2000), aff’d, 340 N.J. Super. 76 (App. Div. 2001); Newman v. Director, Div. of Taxation, 14 N.J. Tax 313, 318 (Tax 1994), aff’d, 15 N.J. Tax 228 (App. Div. 1995); Ridolfi v. Director, Div. of Taxation, 1 N.J. Tax 198, 202-03 (Tax 1980). The plaintiff has the burden of proving the contrary. Atlantic City Transp. Co., supra, 12 N.J. at 146; Seventeen Thirty Corp. v. Director, Div. of Taxation, 18 N.J. Tax 108, 179 (Tax 1999); Newman, supra, 14 N.J. Tax at 318. The “naked assertions” of the taxpayer, without supporting records or documentation, are insufficient to rebut the presumption that the Director’s assessment is correct. TAS Lakewood, Inc. v. Director, Div. of Taxation, 19 N.J. Tax 131, 140 (Tax 2000); Ridolfi, supra, 1 N.J. Tax at 202-03; see also Atlantic City Transp. Co., supra, 12 N.J. at 146 (the taxpayer did not overcome the presumption that the Director’s assessment was correct where it produced no evidence to support its claim that it did not operate its lines over a public street).

In Ridolfi v. Director, Div. of Taxation, supra, 1 N.J. Tax 198, the Director had made an adjustment and a redetermination of the tax due on sales of alcoholic beverages from the taxpayer’s package store. Among other things, the taxpayer contended that a greater percentage of the package store’s volume of sales were sales of beer (which was nontaxable) than was reflected by the Division’s allocation. The court noted that:

Taxpayer relied on his long experience in the operation of this business to support his contention that 65% of the package store sales were beer. No documentary evidence or records were presented to support any of the taxpayer’s contentions. No attempt was made to introduce evidence or figures of any alternate test periods, or to show relative sales volumes of beer and liquor over the bar and in the package store for any period. None of the invoices or other business records of the taxpayer which were available at the time of the audit were relied upon by taxpayer to support his contentions.

[Id. at 201.]

The court concluded that the naked assertions of the taxpayer were not competent evidence sufficient to rebut the presumption that the Director’s assessment was correct. Id. at 203.
See also the Tax Court decision in TAS Lakewood, Inc. v. Director, Div. of Taxation, supra, 19 N.J. Tax at 132-33, where the Director’s assessment of a sales tax deficiency arose out of a discrepancy between the gross receipts reported on the taxpayer’s federal income tax return and those reported on its New Jersey sales tax return. The taxpayer contended that the disparity was due to sales it made in New York and not in New Jersey. The taxpayer’s New York State income tax return reported that the taxpayer had made about twenty percent of its sales in New York and the Director assessed sales tax on all of the taxpayer’s sales, except those sales made in New York, as reported on the New York return. At trial, the taxpayer contended that its sales made outside New Jersey were actually greater than twenty percent, but could produce no records, since it had disposed of all of them in a trash dumpster. The only proof offered in support of the claim was the uncorroborated testimony of the taxpayer’s vice president. That there was nothing presented at trial “to corroborate any claim or figure presented by [the corporate officer] makes his testimony highly suspect.” Id. at 138. The court was not persuaded by the testimony and affirmed the assessment.

That the accountant’s testimony here corroborated the testimony of Mr. Yilmaz does not overcome the presumption that the Director’s assessment was correct. The pretrial order named the accountant as a potential expert witness, but the accountant was never offered or qualified as an expert witness pursuant to N.J.R.E. 702, which requires a finding that the witness have the requisite knowledge, skill, experience, training, or education to be an expert in an area of specialized knowledge. The accountant is not a certified public accountant and his principal job function is to prepare tax returns. He testified that he does not express opinions as to whether a company is properly reporting its tax liabilities.

Although the plaintiff characterized the accountant as an unbiased, impartial witness, I conclude that his role was as an advocate for the plaintiff’s position, and by inference, his own actions. At a minimum, his competence in connection with his preparation of the CBT returns was in issue. His professional reputation was at stake. I find that his factual testimony was unsupported and not credible. Cumulative naked assertions are insufficient to overcome the presumption of the correctness of the Director’s assessments.

It is not entirely clear what proof is necessary to overcome that presumption in cases involving the Director’s methods in an audit of a cash business. Although it involves a different type of assessment, it is helpful to examine how the courts of this State have viewed the presumption of correctness in local property tax appeals. Notably, our Supreme Court looked to local property tax case law in declaring that the Director’s assessment is presumed to be correct. See Atlantic City Transp. Co, supra, 12 N.J. at 146 (quoting Aetna Life Insurance Co. v. City of Newark, 10 N.J. 99, 105 (1952)). In local property taxation, the presumption of correctness attaches to the quantum of the assessment, and the presumption can be rebutted only by cogent evidence that must be “definite, positive and certain in quality and quantity to overcome the presumption.” Pantasote Co. v. City of Passaic, 100 N.J. 408, 413 (1985) (quoting Aetna Life Ins. Co. v. City of Newark¸ supra, 10 N.J. at 105). Although neither Ridolfi nor TAS Lakewood explicitly incorporate that standard, their rejection of the testimonial evidence of owners and officers unsupported by anything else implicitly recognizes that the taxpayer cannot overcome the presumption simply by impugning the Director’s methodology. See Pantasote Co., supra, 100 N.J. at 414-15 (“[A]bsent any strong indication arising from the evidence properly before the Tax Court that the quantum of the assessment was far wide of the mark of true value, inadequacies in the municipality’s evidence or deficiencies in the assessment methodology will not impugn the presumption of validity that attaches to the original assessment.”).

Plaintiff relies upon Duncan Truck Stop, Inc. v. Director, Div. of Taxation, 4 N.J. Tax 367, 375-76 (Tax 1982), for the proposition that the Director must use the most reasonable means available to independently verify the plaintiff’s tax liability. Duncan involved an assessment of a motor fuel tax deficiency where the original records had been destroyed, but had been reconstructed by the taxpayer. The Division observed a large disparity between the sales reported on the reconstructed records and on records it had obtained from eleven out of approximately thirty of the taxpayer’s customers that had been observed by the Division. The reconstructed records reported only twenty-percent of the sales shown on the records of the eleven customers. The Division determined the deficiency by applying that ratio to the reported sales. The court held that the Director was entitled to use the reconstructed records to commence his investigation of the taxpayer, notwithstanding the testimony of the principal of the plaintiff that the reconstructed records were inaccurate. The court ultimately found, however, that there was nothing to support the proposition that the sampling of eleven out of thirty customers used by the Division to compute the deficiency was an accurate representation of the sales made by the taxpayer. The accuracy of the assessment was further called into question by additional evidence that the taxpayer’s facility could not possibly pump the amount of gas that the Director had estimated.

Contrary to the facts of the present case, there was evidence that was definite, positive and certain in quality and quantity. Notably, Duncan Truck Stop, supra¸ 4 N.J. Tax at 376, approved the sampling procedure used in Ridolfi, supra, 1 N.J. Tax 198.

I conclude that there is no merit to the assertion that the Director should be required to establish that it used the most reasonable means available to independently verify the plaintiff’s tax liability. As already noted, the Director is given wide latitude to establish the tax due from such information as may be available and if necessary the tax may be estimated from external indices. N.J.S.A. 54:32B-19. That does not mean that the Director must seek out any information that may be available anywhere. It is the taxpayer’s statutory obligation to maintain records and make them available to the Director. N.J.S.A. 54:32B-16. As noted in Ridolfi, supra, 1 N.J. Tax at 203, the absence of specific sales information from the taxpayer makes the use of external indices necessary.

In Ocean Pines, Ltd. v. Point Pleasant Bor., 112 N.J. 1 (1988), our Supreme Court held that, where a taxpayer has failed to comply with a statute that requires the taxpayer to provide financial information to a taxing authority, the taxpayer’s appeal “is limited in its scope to the reasonableness of the valuation ‘based on the data available to the assessor.’” Id. at 11. To hold otherwise would be contrary to the purpose of the statute, which is to assist the assessor in making the assessment and “’to avoid the unnecessary expense, time and effort in litigation’ ” Id. at 7 (quoting Terrace View Gardens v. Dover Tp., 5 N.J. Tax 469, 474-75 (Tax 1982), aff’d o.b., 5 N.J. Tax 475 (App. Div.), certif. denied 94 N.J. 559 (1983)). The same logic applies here: it is contrary to the purpose of N.J.S.A. 54:32B-16 to require the Director to establish that he used the best possible method to estimate the taxpayer’s receipts, where it is the taxpayer’s failure to comply with the statute that forced the Director to resort to the markup method in the first place.

Although many cases challenging determinations of the Director turn on the appropriate administrative construction given to a statute, as to which the burden of proof applicable in local property tax cases is inappropriate, I conclude that, in a case involving a challenge to a determination by the Director based on an audit of a cash business, involving only factual issues and the methods employed by the Director, the standard set forth in Pantasote Co., supra, 100 N.J. at 413, is a reasonable and practical one. That is, the presumption that the Director’s assessment is correct can be rebutted only by cogent evidence that must be “definite, positive and certain in quality and quantity to overcome the presumption.” Ibid. That evidence must focus on the reasonableness of the underlying data used by the Director and the reasonableness of the methodology used. Ocean Pines Ltd., supra, 112 N.J. at 11. An “aberrant” methodology will overcome the presumption of correctness. Id. at 12. An imperfect methodology will not.

Plaintiff has cited administrative decisions from other states in support of various points of its argument. They are not helpful because the facts of the cases disclose either that the taxpayer maintained better records or that the methodology of the taxing authority was aberrant or both.

Judicial decisions from other jurisdictions, however, hold the taxpayer to substantially the same standard as New Jersey. The courts of this state have often noted that the New Jersey Sales and Use Tax Act, N.J.S.A. 54:32B-1 to -29, is derived from the New York statute. Meadowlands Basketball Associates, supra, 340 N.J. Super. at 83; New Jersey Bell Tel. Co. v. Director, Div. of Taxation, 152 N.J. Super. 442, 450 (App. Div. 1977); Seventeen Thirty Corp., supra, 18 N.J. Tax at 182-83. Although the decisions of the New York courts are not controlling, they are instructive. Meadowlands Basketball Associates, supra, 340 N.J. Super. at 83; Seventeen Thirty Corp., supra, 18 N.J. Tax at 183,

The New York Court of Appeals, that state’s highest court, has rejected contentions that the taxing authority did not allow a sufficient margin for employee purchases, theft, waste and “loss leaders” where there was no direct proof of the losses and there was no expert testimony establishing the extent of such losses generally occurring in the industry. Licata v. Chu, 476 N.E.2d 997 (N.Y. 1985). In S.H.B. Super Markets, Inc. v. Chu, 522 N.Y.S.2d 985 (N.Y. App. Div. 1987), the taxpayer contended that the auditor’s allocation of taxable and nontaxable sales was erroneous. The cash register tapes maintained by the taxpayer in that case did not separately state taxable and nontaxable sales. “‘[W]here the taxpayer’s own failure to maintain proper records prevents exactness in determination of sales tax liability, exactness in not required.’” Id. at 987 (quoting Meyer v. State Tax Comm’n, 402 N.Y.S.2d 74, 78 (N.Y. App. Div. 1978)). Oak Beach Inn Corp. v. Wexler, 551 N.Y.S.2d 375 (N.Y. App. Div. 1990), upheld an audit assessment where the taxpayer “failed to submit concrete evidence as to what part, if any, of the unaccounted for wine inventory was purchased during the test period . . . .” Id. at 377.

Similarly, in a case challenging the outcome of an audit using the markup method, the Tennessee Supreme Court has held:
Vague allegations by the taxpayer to the effect that the Department’s method of ascertaining the taxes due from him was incorrect are not sufficient to carry the taxpayer’s burden. He must show by a preponderance of evidence that he not only has overpaid his taxes, but, also, the amount of such overpayment.

[Edmonson Mgmt Serv, Inc. v. Woods, 603 S.W.2d 716, 718 (Tenn. 1980) (citing Baker v. Bullock, 529 S.W.2d 279 (Tex. Civ. App. 1975)).]

I conclude that the plaintiff has not met its burden here. It has attacked the Director’s methodology, but has offered nothing that would demonstrate that the Director’s assessment of sales tax is incorrect. Under the circumstances of this audit, I conclude that the auditor reasonably determined to use the markup method. See N.J.S.A. 54:32B-19, which provides, in pertinent part, that:

If a [sales tax] return . . . when filed is incorrect or insufficient, the amount of tax due shall be determined by the director from such information as may be available. If necessary, the tax may be estimated on the basis of external indices, such as stock on hand, purchases, . . . number of employees or other factors.

See also N.J.A.C. 18:24-2.15, which provides that records may be deemed incorrect or insufficient where the taxpayer’s accounting system does not have adequate internal control procedures that assure the accuracy and completeness of the transactions recorded in the books and records. In this case, the disparity in the gross receipts reported on the CBT and sales tax returns was sufficient to warrant use of the markup analysis for determining the gross receipts.

I also conclude that the auditor gave reasonable consideration to plaintiff’s contentions that it gave away food and that many of its sales were discounted. In the absence of any documentation by the plaintiff as to the amounts involved, the auditor’s application of discounts in amounts less than claimed by the plaintiff was reasonable. The auditor gave the benefit of the doubt to the plaintiff in several other instances, where that indulgence went beyond what was warranted by the facts of this case. For example, he accepted the plaintiff’s estimate of cash expenditures for produce, where the plaintiff had not kept any receipts or invoices. He also accepted the plaintiff’s estimate of cover charges collected by it, as to which there were no records.

The auditor’s determination to use invoices from a period later than the audit to determine the markup percentages was also reasonable, when there was not a complete set of invoices from 1997. There was no contention that the markups for that particular period of time were not representative of the entire audit period. The only assertion was that the use of those invoices was unreasonable in view of the alleged refusal of the auditor to look at 1999 cash register tapes. As I have already found, the testimony regarding that offer was not credible.
None of plaintiff’s remaining contentions were supported by any documentation. The Director was not required to guess as to the amount of inventory maintained by the plaintiff in each of the audit years, particularly where even plaintiff’s accountant admitted that the inventory was impossible to reconstruct at this late date. In sum, there was no evidence that was definite, positive and certain in quality and quantity sufficient to overcome the presumption that the Director’s assessment of sales tax is correct. The data used by the Director was reasonable in light of what was available, as was the methology employed.
I also conclude that the adjustments to the deficiencies of corporation business tax were reasonably arrived at. The adjustments for gross receipts were made consistent with the findings of the markup analysis. Although plaintiff contends that there is no requirement that it maintain a log or other evidence of its truck expenses, the statute does in fact require retention of records used by a taxpayer to determine its liability. N.J.S.A. 54:10A-14.1.
As I found earlier in this opinion, plaintiff understated wages for the purpose of gross income tax withholding. See N.J.S.A. 54:7-1(a). In the absence of any evidence that the amount of the assessment was “far wide of the mark,” Pantasote, supra, 100 N.J. at 414-15, an attack on the Director’s methodology is insufficient to overcome the burden of the presumption that the assessment is correct. Ibid.

Finally, I must consider the Director’s motion to exclude certain other documents appended to plaintiff’s brief, which the Director has objected to and moved to exclude. The first concerns the issue of whether the Director used the correct number of ounces in a half keg of beer to compute the cost of a pitcher in the markup analysis. Plaintiff appended to its brief a document entitled “A Dictionary of Units of Measurement,” apparently taken from the Internet, but with no authentication. The Director has moved to exclude this evidence based on its hearsay nature and the lack of authentication.

During the trial, the conferee, but not the auditor, was questioned as to his determination that the plaintiff’s proposed markup for a chicken tender and pitcher of beer combo, which used a $2.20 cost for a sixty-four ounce pitcher of beer, was inaccurate. According to the conferee’s calculations, the cost of a sixty-four ounce pitcher was $1.50. The conferee stated that he believed that he used 1980 ounces in a half keg of beer to determine how many pitchers of beer could be drawn from a half keg. Plaintiff contends in its post trial brief that the auditor incorrectly doubled the number of ounces in a half keg. Based on plaintiff’s document, a keg contains 1984 ounces and a half-keg would presumably be half of that, or 992 ounces.

I note first that this issue was never raised in the pretrial order, which specifically provided that if an issue was not preserved in the pretrial order, it was waived. The issue was also not raised at trial. No evidence was presented as to the number of ounces in a half-keg, and plaintiff concedes that the authorities it has consulted are not uniform. Accordingly, this does not appear to be information of which I may take judicial notice. N.J.R.E. 201(b). This is also not a case where the pleadings and pretrial order may be amended to conform with the evidence. R. 4:9-2. “Although . . . claims of a party may be deemed amended to conform to the proofs at a trial, such amendment should be at the behest of a party and should be granted only if there is a full hearing where the evidence and arguments for and against the issue may be considered.” Essex County Adjuster v. Brookes, 198 N.J. Super. 109, 114 (App. Div. 1984). In that case, as here, the issue was not contained in the pleadings or pretrial order, and was not discussed at trial

Plaintiff is plainly trying to cast doubt upon the entire markup analysis by the auditor, but the auditor was never asked and did not testify to the number of ounces in a half-keg that he employed in his computation of costs. Plaintiff’s questions were directed solely at the conferee. Based on the plaintiff’s letter protesting the assessment and the conferee’s conference report and final determination, it appears that, if the conferee understated the cost of a sixty-four ounce pitcher of beer, he did so solely in rejecting the plaintiff’s contention that the auditor had attributed too high a markup to the chicken tender and pitcher of beer combination special.

I conclude that the effect of the cost of beer as a component of a single special on the overall markup ratio as adjusted by the conferee was negligible. Although it is true that the conferee’s adjustment to that special had the effect of increasing the markup ratio for the category of food appetizers, that was a result of allocating all of the chicken tender purchases to the chicken tender/pitcher of beer combination rather than allocating a portion of the purchased chicken tenders to the chicken tender appetizer, as the auditor had done. The conferee utilized the chicken tender/pitcher of beer special as a separate markup category rather than including it in the appetizer category. Because of the special’s relatively lower price, the reallocation had the effect of increasing the markup ratio for the remaining appetizers. The overall effect of the conferee’s adjustments was to reduce the auditor’s markup ratio. The Director’s motion to exclude post-trial evidence of the number of ounces of beer in a half-keg is granted, but I also conclude that the argument made by the plaintiff based on that document has no merit.

The Director also moves to exclude another post-trial exhibit, which is a document identified in plaintiff’s brief as a reworking by plaintiff’s counsel of the conferee’s audited gross sales calculations. The “reworking” purports to substitute for the markup used by the conferee, a markup which “comport[s] more closely with the Taxpayer’s actual experience (i.e., allocating 70% of sales to happy hour).” As noted above, as a matter of arithmetic, it is undeniable that the lower the markup that is applied to the cost of goods sold, the lower the gross sales that will be found. As such, I conclude that the calculation performed by plaintiff’s counsel is a form of legal argument. Accordingly, the Director’s motion with respect to that exhibit is denied.

Finally, the Director moves to exclude exhibits to the plaintiff’s post-trial brief that consist of audit procedure manuals purportedly issued by other states and obtained by plaintiff’s counsel from the Internet. The Director’s objection is that the documents have not been authenticated. N.J.R.E. 902(e) provides, however, that books, pamphlets or other publications purporting to be issued by a public authority do not require extrinsic evidence of authenticity. The Director’s motion to exclude these documents is, therefore, denied.
Plaintiff contends that agency guidelines are entitled to great deference, although it concedes that they are not binding on a court. The guidelines of another state’s administrative agency, however, do not constitute legal authority in New Jersey. At best, such documents may be persuasive if based on similar statutory provisions.

The more significant difficulty with those documents is that they do not help the plaintiff’s cause. Both the Texas and the California manuals relied upon by the plaintiff accept the validity of the markup method where records are inadequate. With respect to the Texas manual, plaintiff emphasizes that it calls for a determination as to inventory prices and for adjustments to be made for merchandise withdrawn from inventory. The manual does not explain how the auditor is to do that if no information as to inventory has been retained by the taxpayer. Presumably, Texas does not accept the taxpayer’s best guess.

Plaintiff relies on the California manual for the proposition that the auditor must take into account happy hour and other specials. The auditor has done so in this case. He made significant allowances for giveaways and alcoholic beverages sold at happy hour. The taxpayer simply disagrees with the degree to which those allowances were made, without any evidence that its own estimate was correct. The law in New Jersey is that the naked assertions of the taxpayer are insufficient to overcome the presumption that the Director’s assessment is correct.

The plaintiff also contends that California requires a “reasonableness” test where the markup analysis concludes that there are unreported sales during the audit period. According to plaintiff, a consideration of the reasonableness of the assessment here should have included an examination of Mr. Yilmaz’ lifestyle. First, the law of this state squarely places on the taxpayer the burden of establishing that the Director’s assessment is incorrect, and not the other way around. Second, the Director is given broad authority to determine how the tax should be determined. N.J.S.A. 54:32B-19; -24(4), (5) and (6). It is within his discretion to determine that it is not cost-effective to make a life-style investigation into the owner of every bar and restaurant in New Jersey that appears to have underreported its sales and income. In this case, Mr. Yilmaz has admitted that he used much of the underreported tax monies to expand and operate his business. Such expenditures would not affect his lifestyle.

I therefore grant in part and deny in part the Director’s motion to exclude the documents appended to plaintiff’s brief. I conclude that the plaintiff has failed to overcome the presumption that the Director’s assessment is correct, and I affirm the final determination. Pursuant to R. 8:9-3, counsel are directed to confer with respect to the computation of tax and interest that remain due after plaintiff’s payment of undisputed tax on the cover charges and the plaintiff’s amnesty payment. If the parties are unable to agree as to the amount of the remaining assessment, including accrued interest and penalties, they shall submit proposed computations to the court pursuant to R. 8:9-4 no later than thirty days from the date of this decision.

 

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Footnote: 1 Although these numbers do not add up, these are the numbers to which the parties stipulated. The difference is insignificant (less than $1).

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Footnote: 2 According to the accountant, he had prepared the CBT returns for those tax years well before the audit and had forwarded them to Mr. Yilmaz for signature and filing. As the accountant conceded, the plaintiff had no record of paying the minimum tax reported to be due on those returns and the Division had no record of receiving them until they were forwarded by the accountant to the auditor in May 1999.

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Footnote: 3 No 1998 CBT return was filed during the period that the audit was conducted, that is, from March 1999, when the auditor made his initial contact with the plaintiff, through August 21, 2001, when a notice of assessment related to the final audit determination was issued.

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Footnote: 4 The conference report is produced by a Division employee, known as a conferee, following the hearing of the administrative protest, which the Division calls a conference.

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Footnote: 5 Gross income tax, which is required to be withheld by the employer, is also a trust fund tax. N.J.S.A. 54A:7-5.