Opinion
Case No. 2019-00847JD
12-14-2020
THORBAHN ENTERPRISES, LLC. Plaintiff v. OHIO DEPARTMENT OF TAXATION Defendant
DECISION
I. Introduction
{¶1} Before the Court are a summary-judgment motion and a cross-motion for summary judgment filed by Plaintiff Thorbahn Enterprises, LLC (Thorbahn Enterprises), and Defendant Ohio Department of Taxation (Department), respectively, that ask the Court to apply R.C. 5703.54 (a statute that allows an aggrieved taxpayer to seek redress from a tax audit or tax assessment under certain circumstances). The motions have been fully briefed. For reasons set forth below, the Court determines that Thorbahn Enterprises's summary-judgment motion should be denied and that the Department's cross-motion for summary judgment should be granted.
The typical channel for a taxpayer to challenge a final tax assessment is the administrative appeal process set forth in the Revised Code. Basic Distrib. Corp. v. Ohio Dept. of Taxation, 94 Ohio St.3d 287, 290, 762 N.E.2d 979 (2002). See R.C. 5717.02 and 5717.03. But, as noted in Basic Distribution Corporation, in 1989 the General Assembly "enacted R.C. 5703.54, which * * * allows redress for actions by a Department of Taxation employee that serve merely to harass or are clearly unsupportable by current law." Id.
II. Background and Procedural History
{¶2} Thorbahn Enterprises (which is owned by Tina Thorbahn) operates Tina's Country Market in Elmore, Ohio. In November 2016, April Hackett (who at that time was employed as a Tax Auditor Agent by the Department) informed Thorbahn Enterprises that the Department was commencing a sales and use tax audit of Thorbahn Enterprises for the period of July 1, 2013, through September 30, 2016. The Department ultimately issued a tax assessment against Thorbahn Enterprises in the amount of $98,301.41 in December 2018.
Tax auditors are now referred to as tax examiners by the Department. (Hackett Deposition, 11.) Hackett is now employed in the Department's Computer Audit Assistance Group where Hackett assists auditors, instead of performing audits. (Hackett Deposition, 10.)
{¶3} On July 29, 2019, pursuant to R.C. 5703.54 Thorbahn Enterprises brought a complaint against the Department that stems from Tax Auditor Hackett's audit of Thorbahn Enterprises. Later, on October 7, 2020, Thorbahn Enterprises moved for a summary judgment in its favor, which Thorbahn Enterprises has supported with exhibits. Thorbahn Enterprises asserts that it is entitled to a summary judgment because Tax Auditor Hackett frivolously determined that cash register tapes, also known as Z-Tapes, were insufficient to use in the sales tax audit. Thorbahn Enterprises maintains that, while Tax Auditor Hackett's report listed an issue with a handful of Z-Tapes out of three years' worth of tax records, Tax Auditor Hackett provided a different explanation during her deposition. According to Thorbahn Enterprises, Tax Auditor Hackett stated in her deposition that, as a blanket policy, Z-Tapes are not sufficient records for a sales tax audit. But, according to Thorbahn Enterprises, Tax Auditor Hackett also testified that she was able to examine the Z-Tapes to determine that she believed Thorbahn did not remit all sales tax collected. Thorbahn Enterprises asserts: "This position is both contradictory in logic and contradictory to the statutes governing the adequacy of records. While the auditor decided not to use the Z-Tapes for the actual audit, she did use them to support a 50% penalty to the taxpayer." Thorbahn Enterprises further maintains that Tax Auditor Hackett contravened a policy of the Department (Audit Procedure No. AUD-118) because Tax Auditor Hackett prepared the audit results before she presented a Memorandum of Agreement to Tina Thorbahn and before she issued a Ten-Day Letter to Tina Thorbahn.
Pursuant to Audit Procedure No. AUD-118 (which applies to a "Liquor Markup (LMU) Carryout Audit Process"), a signed Memorandum of Agreement "must be obtained from the taxpayer or a Ten-Day Letter will be issued with the agreement prior to the auditor compiling and issuing preliminary results to the taxpayer." (Exhibit G, Hackett Deposition.)
A Memorandum of Agreement, which is drafted by a tax auditor, "outlin[es] markup percentages, sampling methodology, and calculation of the sales tax due for the audit." (Exhibit G, Hackett Deposition.) A "Ten Day Letter" is "[c]orrespondence requesting that the taxpayer sign the Memorandum of Agreement or suggest alternative methodology supported in detail and submitted in writing to calculate any outstanding audit liability within ten days of receipt of correspondence." (Exhibit G, Hackett Deposition.)
{¶4} On October 8, 2020, the Department moved for a summary judgment in its favor, which the Department has supported with copies of depositions of April Hackett and Tina Thorbahn. The Department disputes Thorbahn Enterprises's claim that the Department's tax examiner "frivolously disregarded" any relevant statute or rule. The Department contends that Thorbahn Enterprises seeks to attribute its failure to collect and remit the proper amount of sales tax to the actions of the Department's tax examiner—not to Thorbahn Enterprises's own failure to maintain complete and accurate records, as required by R.C. 5739.11 and Ohio Adm.Code 5703-9-02. The Department further contends that to establish liability under R.C. 5703.54 requires an officer or employee of the Department to frivolously disregard a statute or a rule—not an internal policy—as is alleged to have occurred in this case.
III. Law and Analysis
{¶5} A summary judgment terminates litigation to avoid a formal trial in a case where there is nothing to try. Norris v. Ohio Std. Oil Co., 70 Ohio St.2d 1, 2, 433 N.E.2d 615 (1982); Schroeder v. Nationwide Mut. Ins. Co., 10th Dist. Franklin No. 92AP-1728, 1993 Ohio App. LEXIS 2319, *3 (Apr. 27, 1993). Civ.R. 56(C) "provides that before summary judgment may be granted, it must be determined that (1) no genuine issue as to any material fact remains to be litigated, (2) the moving party is entitled to judgment as a matter of law, and (3) it appears from the evidence that reasonable minds can come to but one conclusion, and viewing such evidence most strongly in favor of the nonmoving party, that conclusion is adverse to the party against whom the motion for summary judgment is made." State ex rel. Grady v. State Emp. Rels. Bd., 78 Ohio St.3d 181, 183, 677 N.E.2d 343 (1997).
{¶6} Under Civ.R. 56 a party who moves for summary judgment "bears the initial responsibility of informing the trial court of the basis for the motion, and identifying those portions of the record before the trial court which demonstrate the absence of a genuine issue of fact on a material element of the nonmoving party's claim." Dresher v. Burt, 75 Ohio St.3d 280, 292, 662 N.E.2d 264 (1996). A party who moves for summary judgment "must be able to point to evidentiary materials of the type listed in Civ.R. 56(C) that a court is to consider in rendering summary judgment." Dresher at 292-293. See Civ.R. 56(C). If a party who moves for summary judgment has satisfied its initial burden, then a nonmoving party "has a reciprocal burden outlined in the last sentence of Civ.R. 56(E)." Dresher at 293. See Civ.R. 56(E) ("[w]hen a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the party's pleadings, but the party's response, by affidavit or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If the party does not so respond, summary judgment, if appropriate, shall be entered against the party").
Pursuant to Civ.R. 56(C), summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, written admissions, affidavits, transcripts of evidence, and written stipulations of fact, if any, timely filed in the action, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. No evidence or stipulation may be considered except as stated in this rule."
Any evidence that is not specifically listed in Civ.R. 56(C) "is only proper if it is incorporated into an appropriate affidavit under Civ.R. 56(E). "Pollard v. Elber, 2018Ohio4538, 123 N.E.3d 359, ¶ 22 (6th Dist.) However, courts "may consider other evidence if there is no objection on this basis." State ex rel. Gilmour Realty, Inc. v. City of Mayfield Hts., 122 Ohio St.3d 260, 2009Ohio2871, 910 N.E.2d 455, ¶ 17; Pollard at ¶ 22.
{¶7} Pursuant to R.C. 5703.54 a taxpayer who is aggrieved by an action or omission of an officer or employee of the Ohio Department of Taxation relating to a tax audit or tax assessment may bring an action for damages in this court if certain conditions apply. R.C. 5703.54 provides:
(A) A taxpayer aggrieved by an action or omission of an officer or employee of the department of taxation may bring an action for damages in the court of claims pursuant to Chapter 2743. of the Revised Code, if all of the following apply:
(1) In the action or omission the officer or employee frivolously disregards a provision of Chapter 5711., 5733., 5739., 5741., or 5747. of the Revised Code or a rule of the tax commissioner adopted under authority of one of those chapters;
(2) The action or omission occurred with respect to an audit or assessment and the review and collection proceedings connected with the audit or assessment;
(3) The officer or employee did not act manifestly outside the scope of the officer's or employee's office or employment and did not act with malicious purpose, in bad faith, or in a wanton or reckless manner.
* * *
(F) As used in this section, "frivolous" means that the conduct of the commissioner * * * satisfies either of the following:
(1) It obviously serves merely * * * to harass or maliciously injure the taxpayer if referring to the conduct of the tax commissioner;
(2) It is not warranted under existing law and cannot be supported by a good faith argument for an extension, modification, or reversal of existing law.(Emphasis added.)
Effective March 27, 2020, (2019) Am.Sub.H.B. No. 197 substituted "Chapter 2743" for "Chapter 2734" in the introductory language of division (A) of R.C. 5703.54.
{¶8} Here, the parties do not dispute that this action occurred with respect to an audit authorized under the Ohio Revised Code and the review and collection proceedings connected with the audit. The parties further do not dispute that Tax Auditor Hackett was engaged in an activity that was logically related to the business of the Department and, consequently, Tax Auditor Hackett did not act manifestly outside the scope of her employment with the Department. See Theobald v. Univ. of Cincinnati, 111 Ohio St.3d 541, 2006-Ohio-6208, 857 N.E.2d 573, ¶ 15 (observing that the concept of scope of employment "generally denotes an agency relationship in which the agent or employee is engaged in an activity that is logically related to the business of the principal or employer").
{¶9} At issue is whether Tax Auditor Hackett frivolously disregarded a provision of R.C. Chapter 5711, 5733, 5739, 5741, or 5747 or rule of the tax commissioner adopted under one of those chapters when she conducted the sales and use tax audit of Thorbahn Enterprises. For Tax Auditor Hackett's conduct to be deemed frivolous under R.C. 5703.54(F), Auditor Hackett's conduct is required to have obviously served merely to harass or maliciously injure Thorbahn Enterprises or Hackett's conduct was not warranted under existing law and could not be supported by a good faith argument for an extension, modification, or reversal of existing law. See 5703.54(F).
{¶10} In Basic Distrib. Corp. v. Ohio Dept. of Taxation, 94 Ohio St.3d 287, 762 N.E.2d 979 (2002)—a case of first impression that required the Ohio Supreme Court to interpret R.C. 5703.54—the Ohio Supreme Court examined the issue of determining liability under R.C. 5703.54. The Ohio Supreme Court stated that "in order for a taxpayer's claim to be actionable under R.C. 5703.54, the department must 'pay no attention to' a statute or rule, and its disregard must be unsupportable in good faith under existing law or must maliciously injure or serve merely to harass the taxpayer." Basic Distribution Corporation at 292. The Ohio Supreme Court further stated:
Notably, this definition excludes a merely erroneous interpretation of a statute or rule by the department. Accordingly, if the complaint is in reality against the department's interpretation of a statute, then it is not actionable under R.C. 5703.54. To define the phrase "frivolously disregards" in a more liberal manner would muddle the difference between an erroneous interpretation or application of a statute, which is properly reviewed in an administrative appeal, and the frivolous disregard of a statute or rule, which is properly addressed under R.C. 5703.54. Further, a more liberal interpretation would conflict with the spirit of R.C. 5703.54, which is meant to provide a remedy separate from the administrative appeal process, but only where the action taken by the department frivolously disregards a statute or rule.Id.
{¶11} Tax Auditor Hackett testified in her deposition that Tina Thorbahn had provided Z-tapes (i.e., cash register tapes), but Hackett also testified that, although Z-tapes were a form of sales records, the Z-tapes were not accurate enough to use in a sales tax audit. (Hackett Deposition, 29.) Hackett further testified that with Z-tapes the Department could not verify whether a purchase was correctly recorded. (Hackett Deposition, 30.) Hackett stated: "So if something that rang under a dairy category, you couldn't verify that maybe a pop got accidentally recorded as a dairy product. And so in order to accurately determine if sales tax was appropriately charged on taxable items, you can't use those because you can't determine what was actually purchased. * * * That was the UPC. So if you scan an item in with a UPC and you can provide a UPC listing of all of the UPCs that you sell and how they're coded in your system as taxable or exempt. If you can't provide something like that, there's as far as I know, there's no other way to determine the -- you know, if sales tax has been correctly charged." (Hackett Deposition, 30.)
{¶12} Hackett's testimony does not support Thorbahn Enterprises's claim that Tax Auditor Hackett determined that Z-tapes were insufficient to use in a sales tax audit. Rather, Hackett testified that the Z-tapes may be used, but Z-tapes by themselves may be inadequate to determine that the proper amount of sales tax had been collected. See Ohio Adm.Code 5703-9-02(B) (providing that records are adequate if the records demonstrate to the tax commissioner that the vendor collected the proper amount of sales tax due on the vendor's taxable sales). Thorbahn Enterprises's claim that Tax Auditor Hackett's position concerning the Z-tapes "is both contradictory in logic and contradictory to the statutes governing the adequacy of records" is not tantamount to a claim that Tax Auditor Hackett's conduct served merely to harass or maliciously injure Thorbahn Enterprises or that Tax Auditor Hackett's position is not warranted under existing law and cannot be supported by a good faith argument for an extension, modification, or reversal of existing law.
{¶13} Moreover, construing the evidence in favor of Thorbahn Enterprises, Tax Auditor Hackett's use of a sample method in the audit is insufficient to give rise to a cause of action under R.C. 5703.54. See Basic Distrib. Corp. v. Ohio Dept. of Taxation, 94 Ohio St.3d at 294, 762 N.E.2d 979; see also R.C. 5739.13(A) (expressly authorizing the sample method for an audit). And under the Department's policy Tax Auditor Hackett was expressly permitted to determine "appropriate markup percentages." (Exhibit G, Plaintiff's Summary-Judgment Motion.) Tax Auditor Hackett's use of a markup percentage therefore is insufficient to give rise to a cause of action under R.C. 5703.54. See Basic Distrib. Corp. v. Ohio Dept. of Taxation, 94 Ohio St.3d at 292 ("if the complaint is in reality against the department's interpretation of a statute, then it is not actionable under R.C. 5703.54").
{¶14} Additionally, Thorbahn Enterpises's claim that Tax Auditor Hackett's erroneous interpretation of Audit Procedure No. AUD-118 entitles it to a summary judgment is unavailing because, even if Audit Procedure No. AUD-118 is construed to be a duly adopted rule of the tax commissioner, "a merely erroneous interpretation of a statute or rule by the department" is, as a matter of law, insufficient to impute liability under R.C. 5703.54. Basic Distrib. Corp. v. Ohio Dept. of Taxation, 94 Ohio St.3d at 292.
{¶15} Finally, when the evidence is construed in favor of Thorbahn Enterprises, reasonable minds can only conclude that no genuine issue of material fact exists that under R.C. 5703.54 Tax Auditor Hackett did not act with malicious purpose, in bad faith, or in a wanton or reckless manner. See generally Caruso v. State, 136 Ohio App.3d 616, 620-621, 737 N.E.2d 563 (10th Dist.2000) (defining "malicious purpose," "bad faith," and "wanton or reckless" in the context of a state employee's personal immunity). Indeed, after the evidence is construed in favor of Thorbahn Enterprises, reasonable minds can only conclude that there is an absence of evidence that Tax Auditor Hackett acted with a malicious purpose, in bad faith, or in a wanton or reckless manner, when she conducted the sales and use tax audit.
In Caruso, the Tenth District Court of Appeals noted that (1) malicious purpose "encompasses exercising 'malice,' which can be defined as the willful and intentional design to do injury, or the intention or desire to harm another, usually seriously, through conduct that is unlawful or unjustified;" (2) bad faith "has been defined as the opposite of good faith, generally implying or involving actual or constructive fraud or a design to mislead or deceive another;" and (3) reckless conduct "refers to an act done with knowledge or reason to know of facts that would lead a reasonable person to believe that the conduct creates an unnecessary risk of physical harm and that such risk is greater than that necessary to make the conduct negligent. * * * The term 'reckless' is often used interchangeably with the word 'wanton' and has also been held to be a perverse disregard of a known risk." Caruso at 620-621. --------
{¶16} In sum, when the evidence is construed in favor of Thorbahn Enterprises, reasonable minds can only conclude that Thorbahn Enterprises has failed to demonstrate an actionable claim pursuant to R.C. 5703.54(A), notwithstanding Thorbahn Enterprises's claim that it has been aggrieved. Because under R.C. 5703.54 there is no material fact that might affect the outcome of Thorbahn Enterprises's suit against the Department, it follows that the Department is entitled to a judgment in its favor, as a matter of law.
III. Conclusion
{¶17} The Court holds that the Thorbahn Enterprises's summary-judgment motion should be denied and that the Department's cross-motion for summary judgment should be granted for reasons set forth above.
/s/_________
DALE A. CRAWFORD
Judge
JUDGMENT ENTRY
{¶18} For reasons set forth in the decision filed concurrently herewith, the Court DENIES Plaintiff's motion for summary judgment filed on October 7, 2020, and GRANTS Defendant's cross-motion for summary judgment filed on October 8, 2020. Judgment is rendered in favor of Defendant. Court costs are assessed against Plaintiff. The clerk shall serve upon all parties notice of this judgment and its date of entry upon the journal.
/s/_________
DALE A. CRAWFORD
Judge Filed December 14, 2020
Sent to S.C. Reporter 2/24/21