Opinion
No. 40938.
May 9, 1949. Opinion Modified on Court's own Motion and Motion for Rehearing or to Transfer to Banc Overruled, June 13, 1949.
An additional sales tax assessment made by the Director of Revenue is set aside because it was based upon incompetent hearsay evidence, speculation and conjecture, and not upon competent and substantial evidence upon the whole record as required by the 1945 Constitution and the Administrative Review Act.
1. TAXATION: Sales Tax: 1943 Act Continued in Effect. The 1945 Sales Tax Act continued in effect the 1943 Sales Tax Act until the final collection of all taxes due and payable thereunder.
2. TAXATION: Sales Tax: Additional Tax and Penalty. The Sales Tax Act contains provisions for the assessment of an additional tax and penalties in the case of fraud or evasion.
3. TAXATION: Administrative Law: Scope of Review. Under the 1945 Constitution and the Administrative Review Act the decisions of an administrative officer or body are subject to review by the courts, which shall include the determination whether such decisions are supported by competent and substantial evidence upon the whole record.
4. TAXATION: Officers: Administrative Law: Evidence: No Presumption of Right Action. The presumption of right action on the part of a public official disappears when the court has before it the facts upon which the action was taken.
5. EVIDENCE: Taxation: Administrative Law: Sales Tax Hearing: Evidence Inadmissible. Evidence which is incompetent, hearsay, or based upon speculation or conjecture is inadmissible in a sales tax hearing. Any provisions of the Sales Tax Act which might be construed as authorizing such evidence must yield to the constitutional requirement that the decision upon such a hearing must be supported by competent and substantial evidence upon the whole record.
6. TAXATION: Administrative Law: Evidence: Sales Tax Hearing: Additional Assessment Based on Hearsay Evidence. The additional assessment of sales tax made by the Director of Revenue was entirely based on hearsay evidence, which did not comply with the requirement of the 1945 Constitution and the Administrative Review Act. The fact that technical rules of evidence do not control does not abrogate the fundamental rules of evidence.
7. APPEAL AND ERROR: Constitutional Law: Constitutional Issues Not Ruled. Since the case may be disposed of on other points, the constitutional issues will not be ruled.
Appeal from Scott Circuit Court: Hon. J.C. McDowell, Judge.
REVERSED AND REMANDED ( with directions).
Haw Haw for relator.
(1) Both the original additional assessment and that made on the basis of the hearing of July 15th, 1947, are void because there is no "competent and substantial evidence to support the finding" of the Commissioner, as required by both the Constitution and the laws of Missouri and the Commissioner erred in making such assessments and the circuit court in failing to hold them void and to quash them. Sec. 22, Art. V, Missouri Constitution of 1945; Laws 1945, p. 1865, Sec. 1, 22 R.S.A., Pkt. Pts., p. 218, Sec. 11445; Laws 1945, p. 1504, Sec. 10. 5 R.S.A., Pkt. Pts., p. 11, Sec. 1140.11; Wood v. Wagner Electric Corp., 197 S.W.2d 647, 355 Mo. 670; Goetz v. J.D. Carson Co., 206 S.W.2d 530; Seabaugh's Dependents v. Garver Lumber Mfg. Co., 200 S.W.2d 55; Novicki v. Department of Finance, 373 Ill. 343, 26 N.E.2d 130. (2) Since relator had made returns and remittances for the whole period covered by the additional assessment, the Director of Revenue had no authority to make the assessment of April 24, 1947, without an investigation and hearing and the taking of testimony and requiring proof for his information, after notice to relator. Laws 1945, Sec. 11422, p. 1873, 22 Mo. R.S.A. 1939, Pkt. Pts., p. 213. (3) It is only when the taxpayer fails to make returns that the Director of Revenue has authority to make an assessment on information, without first giving notice to the taxpayer. Laws 1945. Sec. 11.426. p. 1874, 22 Mo. R.S.A. 1939. Pkt. Pts., p. 213. (4) "Information" as used in the above statute means knowledge communicated by others or obtained by others or obtained by investigation. 43 C.J.S., pp. 383-384. (5) Or, "communication of facts for the purpose of accusation". Webster's Universal Unabridged Dictionary, p. 869, definition 4. (6) The Commissioner erred in overruling relator's objections to the making of any assessment in this proceeding because the original assessment was unwarranted, to the objection to the hearsay evidence of witness Johns, both as to what others told him as to relator's restaurant and as to what the records of relator's predecessor and successor in business showed. The records were the best evidence. The commissioner had the power to have them produced and to cause witness to attend and testify. And the court erred in not quashing the findings and assessment made by respondent. Laws 1945. sec. 11,422, p. 1873; Keissa v. Blackburn, 280 S.W. 1046. (7) The Director of Revenue, respondent, had no authority to make any assessment, under any condition, for sales occurring prior to July 1, 1946, the operative date of the Sales Tax Act of 1945, such assessment being retroactive and contrary both to the provisions of the act itself and to the Constitution of Missouri. Laws 1945, Sec. 11.451, p. 1880, 22 Mo. R.S.A. 1939, Pkt. Pts., p. 219, Sec. 11,451; Missouri Constitution (1945), Art. 1. Sec. 13. (8) Under the express provisions of the Sales Tax Act the amount assessed by the Director of Revenue, tax and penalty, had it been legal, could not have become due from relator until fifteen days after he was notified of the assessment, which was April 28, 1947 as to original assessment. The final assessment by which the penalty was increased was August 12, 1947. Laws 1945, Sec. 11,427, p. 1874, 22 Mo. R.R.A. 1939, Sec. 11,427, Pkts. Pts., p. 214. (9) The first notice of additional assessment received by relator was on April 28, 1947, which was more than two years after the returns for January, February and March, 1945 were filed or required to be filed and such assessment, as to those months, was illegal by express provision of statute, there being no evidence of fraud or failure to make return. Laws 1945. Sec. 11,429, p. 1875, 22 Mo. R.S.A. 1939, Sec. 11,429, Pkt. Pts., p. 214.
J.E. Taylor, Attorney General, Tyre W. Burton and Harry J. Salsbury, Assistant Attorneys General, for respondent.
(1) The assessment was legally made and the trial court did not err in sustaining the said assessment. Sections 11408, 11411, 11413, 11416, 11420, 11421, 11422, 11426, and 11433 of the Sales Tax Act. Laws of Mo. 1945, starting at page 1868, provide for the levying of the tax, manner of assessing and collecting same. Sections 11426 and 11433 supra provides for the giving of a notice of the assessment by the Director of Revenue to the person assessed by registered mail. Wymore v. Markway, 338 Mo. 46, 89 S.W.2d 9; State ex rel. v. State Highway Commission. 349 Mo. 865, 163 S.W.2d 948: State v. Player, 6 N.E.2d 124; State v. Levey, 29 So.2d 129. (2) This assessment was legally made, and the delinquent duty notified. The Director of Revenue acts judicially in making assessments. Sections 11420, 11422, 11426 and 11427, Laws of Missouri 1945, pp. 1872, 1873 and 1874, respectively. State ex rel. Dungan, 265 Mo. 353; J.T. Moss Tie Co. v. Allen, 8 S.W.2d 1038; State ex rel. v. Woolworth Co., 348 Mo. 1180, 159 S.W.2d 297; Uiator v. State Tax Commission, 5 So.2d 478. (3) The Director of Revenue had authority and was empowered to make this assessment, the one complained of, under the provisions of the Sales Tax Act, Laws of Mo. 1943, pp. 1012-1029 inclusive. Sec. 11455A, Laws 1945, p. 1881. (4) In making the assessment the Director of Revenue found that the delinquent had fraudulently and evasively failed to make returns and remit the sales tax in the sum of $416 for the period of January 1, 1945 to September 24, 1946. Notice was given on April 24, 1947. The notice was given immediately following the additional assessment, under Sections 11426 and 11433, supra. Laws 1945, p. 1876.
R.O. DeWeese instituted certiorari proceedings to review the propriety of an "additional assessment" of $729.66 under the Sales Tax act, a State revenue law, by the Director of Revenue of the State of Missouri, and he also attacks the validity of said law. (Statutory references are to the Sales Tax act of 1945, viz.: Laws 1945, pp. 1865-1881, §§ 11407-11455A, and correspondingly numbered sections in Mo. R.S.A.) He appeals from a judgment sustaining said "additional assessment." Appellate jurisdiction is here. Orr v. Hoehn, 353 Mo. 426, 182 S.W.2d 596; State ex rel. Martin v. Childress, 345 Mo. 495, 134 S.W.2d 136, 138[2] and authorities cited; Mo. Const. 1945, Art. IV, §§ 12, 22.
Relator was in the restaurant business from January 1, 1945, to September 24, 1946, operating the Farmers Cafe, at Charleston, Missouri, daily, except Sunday.
On April 24, 1947, relator was notified of an additional sales tax assessment of $669.76 ($416 additional tax, $41.60 penalty, and $212.16 interest), which was based upon estimated unreported gross receipts at the rate of $1,000 a month for the time he was in business.
Relator filed "a petition for reassessment" (§ 11428) and the hearing thereon resulted in an order assessing an additional sales tax of $729.66 (the aforesaid $416 additional tax, plus a penalty — we understand — under § 11433, and three percent monthly interest on the tax, § 11430).
Relator timely filed his petition for a writ of certiorari (§ 11445); and the proceedings certified by the Director of Revenue pursuant thereto, in addition to the matters mentioned hereinabove, show the following:
Norman Johns, Field Representative of the Director of Revenue, notified relator on August 16, 1945, to keep records of his daily gross sales as required by § 11421.
The additional sales tax assessment of April 24, 1947, and the notice to relator thereof is to the effect relator "failed to collect, make proper return and remit" the correct sales tax, that his gross taxable receipts (we understand unreported) aggregated $20,800, that is, accrued at the estimated rate of $1.000 a month, and that relator "fraudulently and evasively failed to make return and remit sales tax on said sum in the amount of $416.00."
Relator testified that the made proper sales tax returns and paid all sales taxes due: that the returns were correct "to the best of my knowledge. They were taken off my daily reports": that he did not owe the $416 additional sales tax: that he kept a record of his daily gross sales after being requested to do so but had lost his record book in Wichita, Kansas, or Kentucky. Relator bought the business from Mr. White and sold it to Mr. E.B. Walker and another person.
Mr. Johns, the sole witness for the Director of Revenue, testified that following his notifying relator to keep a daily record of sales, he again contacted relator March 21 and 22, 1947; that relator did not have any records showing the business done; and that witness asked the Director of Revenue to assess an additional tax: that he based his conclusions upon what relator's predecessor and successor did; that he secured figures from Mr. White and copies of his reports and figures from Mr. Walker; that, over the objection this evidence was incompetent, hearsay and guess, the following figures were given for Mr. White's sales: "July, 1943, $1,868.52: October, 1943, $2,075.20, September, 1943, $2,125.58, October, 1943, $2,728.92"; "July, 1944, $1,744"; and for relator's successor in the business: "Five days of September, 1945, to February, 1947. September, $275.00: October, $801.00; November, $974.00; December, $1,049.00; January, $1,675.00; and February, $1,529.60."
Mr. Johns based the "reassessment" on this information and the fact that relator [208] had no records. "Q. You had no information directly about Mr. DeWeese's business? A. I did not think I needed it."
Witness also stated, over objection that the answer was a mere conclusion, that his "idea" was relator did as much business as either Mr. White or Mr. Walker. He stated he was in Charleston every week or two; that he did not patronize relator's cafe, never had eaten there, and never stood around or counted the customers; that his conclusion was based on information "given to me by George Marable and other persons as the best place in town to eat."
This hearing resulted in findings that relator made monthly tax remittances aggregating $212.41, representing $10,620.50 of sales subject to tax; that relator's predecessor and successor did a larger business than relator reported doing: that relator's successor reported $270 "for the last six days of September, 1947." for one-fifth of the month, whereas relator reported only $540 in sales for the first twentythree days of said month; that witness Johns' estimate of sales averaging "at least $1,000.00 per month is not at unreasonable estimate," being probably less than the actual business of a retsaurant having the reputation of being the best place to eat in Charleston.
The Sales Tax act of 1945 became effective July 1, 1946 (Laws 1945, p. 1881, § 2), and, so far as here involved, continued (Id., § 11455A) the provisions of the Sales Tax act of 1943 (see Laws 1943, pp. 1012-1029) in force and effect until the final collection of all taxes due and payable thereunder. No change of the provisions of said laws materially affecting the instant situation has been pointed out by counsel and our search has revealed none.
The Director of Revenue, if not satisfied with the return and payment of the tax by any person, is authorized "to make an additional assessment of tax due from such person, based upon the facts contained in the return or upon any information within his possession or that shall come into his possession." § 11420.
The Director of Revenue is directed to "make an estimate based upon any information in his possession or that may come into his possession, of the amount of the gross receipts" for the period involved and assess the tax, together with a penalty of ten percent, thereon, if any person subject to the act neglects or refuses to make a return and payment of the tax as required by the act. § 11426. If the Director of Revenue discover "fraud or evasion on the part of a person" subject to the act, he is directed to add a penalty of twenty-five percent to the tax assessed. § 11433.
One subject to the Sales Tax act is required to keep records "of his gross daily sales" et cetera, which records et cetera are to be preserved for two years and are subject to inspection by the Director of Revenue or his authorized employees. § 11421.
The Director of Revenue or any employee of that department, when authorized in writing by said Director, "may hold investigations and hearings" concerning any matter within the act, "may require . . . the attendance" of any person having knowledge of sales subject to the act by the person under investigation, may administer oaths, "and may take testimony and require proof for his information." The conduct of such investigations or hearings is not "bound by the technical rules of evidence." § 11422.
The 1945 Missouri constitution, Art. V, § 22, provides that all decisions "of any administrative officer or body existing under the Constitution or by law, which are judicial or quasi-judicial and affect private rights," are subject to review by the courts," and such review shall include the determination . . . in cases in which a hearing is required by law, whether the same are supported by competent and substantial evidence upon the whole record." (Laws 1945, p. 33, Mo. Const. Art. V, § 22.) Legislation implementing this constitutional provision was enacted in 1945 and embraces like provisions. Laws 1945, p. 1509, § 10(f) (3); Mo. R.S.A., § 1140.110(f) (3), which act also implements Mo. Const. 1945, Art. IV, § 16.
The Director of Revenue mentions the rebuttable presumption of right action on the part of public officials. Consult Wymore v. Markway, 338 Mo. 46, 89 S.W.2d 9, 14[12]. However, the instant writ of certiorari called for the certification of the [209] record upon which the Director of Revenue based his action. From it we have before us the facts upon which he acted and the presumption takes flight. State ex rel. United Mut. Ins. Ass'n v. Shain, 349 Mo. 460, 162 S.W.2d 255, 263[11]; Brannock v. Jaynes, 197 Mo. App. 150. 193 S.W. 51, 55[7].
Relator's objections to the evidence offered by witness Johns to the effect its material portions were incompetent, hearsay, speculation and conjecture were well taken. The provisions of the Sales Tax act relaxing the technical rules of evidence yield to the constitutional provisions, and statutory enactments implementing the same, that determinations of administrative officers and bodies of contested issues are to be "supported by competent and substantial evidence upon the whole record," if the provisions of the Sales Tax act ever authorized the imposition of the tax on evidence that was not competent and substantial.
We shall not analyze the figures hereinbefore set out and stated into the record by Field Representative Johns. There is nothing in this record to establish that they are true and correct. Any determination of issues involving a comparison of sales of relator with his predecessor or successor should take into consideration relator's failure to operate on Sunday. Whether his predecessor or successor operated seven days a week is not disclosed of record. There is no evidence of probative value that relator's sales approximated those of his predecessor or successor.
Witness Johns, upon whose testimony the reassessment depends, thought he did not need any direct information about relator's business. He disclosed his lack of testimonial qualifications upon which to base his "idea" relator did as much business as his predecessor or successor. He had never eaten at relator's cafe, and he never undertook to observe and count relator's customers. No one ever told him how much business relator did and he did not know the testimonial qualifications, if any, of the persons upon whose statements he based his testimony. Unsworn statements of "George Marble and other persons" as to the best place in town to eat do not establish the constitutive elements involved in a sales tax assessment. Compare this with the testimonial qualifications of the witness and the competency and substantiveness of the testimony upon which the holding is based in Van Hoose v. Smith, 355 Mo. 799, 198 S.W.2d 23, 25, 26.
It stands adjudged that hearsay evidence and conclusions based upon hearsay do not qualify as "competent and substantial evidence upon the whole record" essential to the validity of a final decision, finding, rule or order of an administrative officer or body under § 22, Art. V of the Missouri constitution of 1945. The practically identical provision (Laws 1945, p. 1509, § 10(f) (3); Mo. R.S.A., § 1140.110 (f) (3)) of the Administrative Review act, which implements said § 22 of the Constitution, calls for like reasoning and a like holding. The rule against hearsay evidence is based on the propriety of the confrontation and the cross-examination of the witness having personal knowledge of the facts adduced, and his veracity alone. Goetz v. J.D. Carson Co. 357 Mo. 125, 206 S.W.2d 530, 532[1-5]; Seabaugh v. Garver Lumber Mfg. Co., 355 Mo. 1153, 200 S.W.2d 55, 62[1, 2]; Wood v. Wagner El. Corp., 355 Mo. 670, 197 S.W.2d 647, 649[1-5, 12]; State ex rel. Dail v. Public Serv. Comm. (Mo. App.), 203 S.W.2d 491, 499[4-6]. Consult Laws 1943, p. 388, § 114(d); Mo. R.S.A., § 847.114(d). The fact that technical rules of evidence do not control has been considered to permit of leading questions and other informalities but not to abrogate the fundamental rules of evidence. Novicki v. Department of Finance, 373 Ill. 342, 26 N.E.2d 130, 131 [1-4].
Probative circumstantial evidence is sufficient to establish facts, but mere hearsay is insufficient to impose taxes and penalties.
What we have said disposes of this review and incidentally eliminates some of the constitutional issues mentioned by relator. Courts generally do not pass upon constitutional issues if the case may be disposed of properly on other points. Skinner v. St. Louis, I.M. So. Ry. Co., 254 Mo. 228, 230, 162 S.W. 237: State ex rel. Volker v. Kirby, 345 Mo. 801, 808, 136 S.W.2d 319, 322, and authorities cited.
[210] Accordingly, the judgment is reversed and the cause is remanded with directions to quash the record made and to remand the cause to the Director of Revenue for such further action as he may be advised to take in conformity herewith. Westhues and Barrett, CC., concur.
The foregoing opinion by BOHLING, C., is adopted as the opinion of the court. Leedy, J., and Tipton, PJ., concur; Ellison, J., dissents.