                       IN THE COURT OF APPEALS OF IOWA

                                      No. 15-0993
                                Filed October 12, 2016


CREAM, L.L.C., d/b/a THE UNION BAR,
    Plaintiff-Appellant,

vs.

IOWA DEPARTMENT OF REVENUE,
     Defendant-Appellee.
________________________________________________________________


          Appeal from the Iowa District Court for Polk County, Karen A. Romano,

Judge.



          Cream, L.L.C., d/b/a The Union Bar, has appealed from the district court

decision affirming an administrative ruling that it owes back sales tax as

computed by the Iowa Department of Revenue. AFFIRMED.



          David L. Charles of Crowley Fleck, P.L.L.P., Des Moines, for appellant.

          George W. Wittgraf of Wittgraf Law Firm, Cherokee, for appellant.

          Thomas J. Miller, Attorney General, Donald D. Stanley Jr., Special

Assistant Attorney General, and Adam Humes, Assistant Attorney General, for

appellee.



          Heard by Vogel, P.J., Mahan and Goodhue, S.J.*

          *Senior judges assigned by order pursuant to Iowa Code section 602.9206

(2015).
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GOODHUE, Senior Judge.

       Cream, L.L.C., d/b/a The Union Bar (Cream), has appealed from the

district court decision affirming an administrative ruling that it owes back sales tax

as computed by the Iowa Department of Revenue (IDOR).

   I. Background Facts and Proceedings

       Jeff Maynes (Maynes) and George Wittgraf III (Wittgraf III), ages twenty-

one and twenty-three years old respectively, and other members of Cream

purchased a large bar in Iowa City operated under the name The Union Bar in

August of 2004.     Maynes and Wittgraf III were in charge of the day-to-day

operations of the bar.

       A sales tax permit was obtained and returns were filed, but Maynes and

Wittgraf III were inexperienced and apparently unfamiliar with general accounting

methods and the records required by the IDOR to determine sales tax. Maynes

and Wittgraf III used available cash during the week to pay expenses.

Subsequently, entries were made on their records on the basis of their

memories. Whether entries were made to increase sales as well as expenses on

the cash items is not clear. When audited, Cream had no daily summary of

deposits or cash register receipts. They had no daily cash register tapes. They

put the cash at the end of each day in their safe and generally deposited the

accumulated cash into their bank account at the end of each week. Expenses

were paid by check if not paid by cash, the receipts and expenses were

transferred to QuickBooks, and a profit and loss statement was generated. The

sales-tax returns were computed from the profit and loss statement.
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      The IDOR initiated an audit when it noted the gross income reported on

the 2006 income tax return was $115,000.00 more than reported on their sales

tax return.    In preparation of the audit, the IDOR sent an initial interview

questionnaire, which was completed and signed by Cream’s representative,

George W. Wittgraf II (Wittgraf II). The assigned auditor visited Cream’s place of

business.     Cream’s owners, including the two managers of the bar, were all

present when the questionnaire was delivered to the auditor. Information on the

interview questionnaire and further information obtained from Cream’s managers

and agents became the basis for the audit. Included in the information was the

sale price for beer and mixed drinks, the size of shots and mixed drinks, and the

frequency of “specials.”   Specials involved reduced pricing, and the reduced

pricing and the frequency of the specials was included on the questionnaire.

      The IDOR agent examined the state and federal income tax returns, sales

tax returns, profit and loss statements, general ledger, bank deposits, and

purchase invoices provided by Cream. Because of the absence of cash register

tapes or the records of original entry and any sales tax worksheets, the auditor

concluded the information insufficient to determine the tax due and reliance on

“external indices” was required. The auditor determined it would be appropriate

to use the percentage markup method of external indices to establish Cream’s

sales, which is an accepted method of determining gross sales and has been

used previously by the IDOR.

      The percentage markup method takes the purchases made by the

taxpayer from its suppliers, computes the average markup on the items

purchased—making allowances for products not sold for various reasons—and
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multiplies the average markup by the purchases made. The result obtained is

divided by one plus the applicable sales tax rate, which assumedly was paid by

the taxpayer, to arrive at the total sales of product.    The auditor used the

purchase invoices and the amounts Cream was charging its customers as a

basis for its computation. The average markup for the calendar year 2008 was

used, but the purchase price to which it was applied was computed on a

quarterly basis for the three-year period covered by the audit. The markup ratio

was applied by quarters due to the fluctuation in sales, depending upon whether

the University of Iowa was in session. Because of the reduction in the purchases

made, this method automatically took it into consideration the approximately

$100,000 of income received on a business interruption policy that Cream

received as a result of the closure of the business due to storm damage in 2006.

         The audit also determined that Cream had not reported cover charges

received by the bar, although such charges are subject to sales tax, and

erroneously included local option taxes that resulted in a credit.    The cover

charge and local option tax issues were resolved by an agreement, and Cream

paid $39,606.65 pursuant to the agreement. The claimed underpayment of sales

tax paid on product remained unresolved.

         The use of the percentage markup method resulted in Cream’s sales

being increased $835,587.97 over what it had reported during the three-year

period under audit. The tax due was computed to be $57,616.41.

         Cream objected to the use of the markup method of calculating gross

sales.    Cream specifically asserted it involved unwarranted assumptions and

estimates, and was incorrectly applied. Cream also contended the method used
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by the IDOR involved a sampling technique that is only permitted by agreement

of the parties.

       Cream filed a protest, which was denied administratively, and the matter

was heard by an administrative law judge (ALJ). The ALJ filed a proposed order,

affirming the audit.   Cream appealed to the IDOR’s director, but the director

approved the proposed order. A petition for judicial review was filed in the district

court, and once again the audit was affirmed. Cream has appealed.

   II. Preservation of Error

       Error is preserved when an issue is raised and ruled on by the trial court.

Meier v. Senecaut, 641 N.W.2d 532, 537 (Iowa 2002). The issues of whether it

was appropriate to use the percentage markup method and whether it was

correctly applied were raised and ruled on by the trial court. Error has been

preserved on those issues.

   III. Standard of Review

       Judicial review of district court decisions concerning an administrative

agency’s decision is for correction of errors at law. Tremel v. Iowa Dep’t of

Revenue, 785 N.W.2d 690, 692-93 (Iowa 2010). The appellate court’s task is to

determine whether if it would have reached the same result as the district court.

Gits Mfg. Co. v. Trailer, 855 N.W.2d 195, 197 (Iowa 2014).

   IV. Discussion

           A. Insufficient Records

       The initial controversy is a determination of what constitutes “insufficient

records.” Iowa Code section 423.41 (2013) states that “every retailer required or

authorized to collect taxes imposed by this chapter and every person using in this
                                        6


state tangible personal property, services, or the product of services shall keep

records, receipts, invoices and other pertinent records as the director shall

require.” The director has determined the records required by a retailer must

include “all bills, receipts, invoices, cash register tapes, or other documents of

original entry” and “a daily record of the amount of all cash in time payments and

credit sales.” Iowa Admin. Code r. 701-11.4(1)(a).

      Cream was unable to provide any cash register tapes or records of the

daily receipts. Cream computed its receipts from its QuickBooks, which were

dependent on the cash available whenever it chose to deposit its receipts.

Admittedly, expenses were paid out of available cash and reported if and when

remembered. Product was available to employees when on duty at no charge,

and their consumption was not included in the sales tax report as required. See

Iowa Admin. Code rr. 701-16.12, .13.        Cream cannot seriously contend its

method of determining sales complied with the IDOR rules. Instead, it apparently

contends the quasi-direct method of accounting it used was more accurate in

determining sales than the method used by the IDOR. We agree with the IDOR

that Cream’s records were insufficient to determine sales subject to the Iowa

sales tax and did not comply with IDOR rules.

          B. Sampling and External Indices.

      Cream contends that the IDOR was not entitled to use the percentage

markup method to compute the amount of sales subject to tax because the

method involved, in part, a sampling technique and Cream did not agree to use

such a method.      Although Cream’s brief covered other issues which are

considered in this ruling, in its oral argument Cream relied almost exclusively on
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its contention the IDOR used a sampling technique to determine Cream’s tax

without any agreement from Cream permitting it to do so, in violation of the

statutory provisions.

       Section 423.37(2) provides that

       if a return when filed is incorrect or insufficient, the department shall
       determine the amount of tax due from information as the
       department may be able to obtain and, if necessary, may estimate
       the tax on the basis of external indices, such as number of
       employees of the person concerned, rentals paid by the person,
       stock on hand, or other factors.

The IDOR claims to have acted under this statutory provision.               The cited

language is followed by a second sentence in the same code section that

provides, “The determination may be made using any generally recognized valid

and reliable sampling technique . . . as mutually agreed upon by the department

and the taxpayer.” Iowa Code § 423.37(2). Cream contends that the IDOR used

the sampling technique to determine the tax due without it agreeing to allow the

IDOR to use a sampling method to determine sales. The IDOR asserts it did not

use a sampling technique as contemplated by the statute and its interpretation is

entitled to deference.

       Cream correctly asserts there was no agreement to use a sampling

technique.   Cream contends the sampling method was involved in IDOR’s

method of determining sales, because after determining the percentage markup

for the year 2008, the IDOR applied the percentage to each of the quarters under

audit to calculate the tax due.

       Implicit in Cream’s argument is the assumption the IDOR’s use of external

indices is limited by the language authorizing the use of sampling absent an
                                         8

agreement. Section 423.37 provides the IDOR “shall determine the amount of

tax due” and “may estimate the tax on the basis of external indices,” and also

that “the determination may be made by using a generally recognized valid and

reliable sampling technique . . . as mutually agreed upon between the

department and taxpayer.” (Emphasis added.) The two general methods of

determining the tax due are both permissive. The use of a sampling technique is

optional if the taxpayer and the IDOR can agree on an acceptable sampling

technique. If there is no agreement, the IDOR is mandated to determine the tax

due from the available information and may estimate the tax from external

indices.   In the absence of meaningful records, it is difficult to envision an

estimate that does not depend on averaging or “sampling” at some point in the

calculation.

       Whether the percentage markup method used utilized aspects of what

constitutes sampling is immaterial. Nothing in the statute prohibits the use of

sampling when the term is used in its broad context, whether or not it is pursuant

to an agreement. Absent complete records, if all methods of determining sales

that included some measure of sampling were prohibited unless approved by

agreement, it is difficult to see how the IDOR would be able to fulfill its mandated

mission. The IDOR is not obligated to wait for an agreement with a taxpayer as

to the method it would like to use in calculating the tax due. A statute is not to be

interpreted in such a manner as to produce absurd results. Bearinger v. Iowa

Dep’t of Transp., 844 N.W.2d 104, 108 (Iowa 2014).

       We have concluded that even if deference was not granted to IDOR in its

interpretation of the applicable statutes, its interpretation is correct.     When
                                          9


interpreting a statute, the statute is considered in its entirety, and we will not look

beyond the language of the statute when it is unambiguous. Bank of Am. v.

Schultz, 843 N.W.2d 876, 880 (Iowa 2014).

       In any event, the use of the 2008 markup over the three year period was

immaterial since the information provided by Cream indicated no change in the

price of products sold to customers over the period from 2006 to 2010. The cost

of goods sold was taken from Cream’s records and did vary from quarter to

quarter. To the extent the total sales of a particular product may have varied

from one quarter to another or the size of the shots may have varied from one

year to the next, Cream had no records substantiating a variance.

          C. Factual Dispute

       In essence, Cream’s argument is that the evidence does not support the

findings of fact on which the audit was based or, alternatively, the sales markup

method was not correctly computed. Findings of fact made by an agency are

binding on the reviewing court if supported by substantial evidence. Iowa Code

§ 17A(19)(10)(f).

       Evidence is substantial when a reasonable person could accept it
       as adequate to reach the same findings. Conversely, evidence is
       not insubstantial merely because it would have supported contrary
       inferences. Nor is evidence insubstantial because of the possibility
       of drawing two inconsistent conclusions from it. The ultimate
       question is not whether the evidence supports a different finding but
       whether the evidence supports the findings actually made.

City of Hampton v. Iowa Civil Rights Comm’n, 554 N.W.2d 532, 536 (Iowa 1996)

(quoting Gaskey v. Iowa Dep’t of Transp., 537 N.W.2d 695, 698 (Iowa 1995).

       Cream has offered no other method of computing its sales except for the

quasi-direct method that it used in the report it filed. Cream contends there is an
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error in the adjustments the auditor made in determining gross sales.         More

specifically, it contends the amount estimated for spillage, theft, oversized shots,

specials, and other losses was underestimated, and the consumption by the

managers and employees was overestimated. It also claims that under standard

procedure, the auditor should have visited the business while it was in operation

and, presumably, interviewed Maynes and Wittgraf III at that time rather than rely

on the questionnaire and the extensive statements made afterwards by Wittgraf II

as their representative.

       The auditor did view the premises, and all of the owners, including the two

managers, were present when the initial questionnaire prepared by Wittgraf II

was provided to the auditor. Wittgraf II, Wittgraf III, and Maynes all testified

before the ALJ. Wittgraf II signed the original questionnaire. Cream had an

opportunity to supplement its information, and Wittgraf II, as their agent, pointed

out deficiencies that Cream continues to point out. Adjustments were made but

apparently not enough to satisfy Cream.

       Cream states that during the audit period, it borrowed money and was

unable to reduce its preexisting indebtedness.      Further, it claims there is no

evidence that the managers or any of its owners enjoyed the receipt of excessive

amounts of income during the audit period. Cream asked, “Where did all that

extra money go?” This was not a comprehensive audit to determine net income

but an audit to determine gross sales. It is clear that the inexperience of the

managers resulted in very lax oversight.

       Cream contends that the calculation of income made by the IDOR is not

logical to the point of irrationality. Cream asserts it is unreasonable, arbitrary,
                                          11


and capricious to find that it had unreported sales of $835,587.97 during the

three-year period. The test is whether substantial evidence exists to support the

IDOR’S conclusion, and once again, evidence is not insubstantial merely

because it could support a contrary inference. See City of Hampton, 554 N.W.2d

at 536. Nor can we say the conclusion is so illogical as to render it irrational, as

required by section 17A.19(10)(i) or (n).

       Does the assessment appear to be excessive and the adjustment made

by the auditors inadequate? It may seem so. Nevertheless, Wittgraf II, Wittgraf

III, and Maynes all testified before the ALJ, and they were unable to give any

documentation or firm information that would support the adjustments the auditor

had already made, let alone the requested adjustments for thefts, spoilage,

oversized shots, reduction in income because of specials, drinks given away, or

the amount consumed by themselves or employees. It developed that not all

receipts were deposited in the bank account and transferred to QuickBooks. On

occasion, the deposits would be in even amounts and at other times, all in one

denomination of cash. The explanation was that some of the money was left in

the safe and not deposited.

       The burden is on the taxpayer challenging the assessment to prove the

assessment is erroneous and not on the IDOR to prove its validity, as Cream

seems to imply. Iowa Code § 421.60(6)(c); Clark v. Iowa Dep’t of Revenue, 644

N.W.2d 310, 316 (Iowa 2002). Cream has woefully failed to meet the burden and

only asserts the auditor made incorrect assumptions with no concrete evidence

upon which the assumptions could be modified.           Cream, not the IDOR, is

responsible for the insufficiency of its records.
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            D. The ALJ’s Failure to Allow a Late Filed Amendment.

      Finally, Cream claims the district court erred in its failure to review the

ALJ’s dismissal of its request to amend its protest to include a request for

attorney fees. The district court did not address the issue in its decision, and no

request for an enlargement of the court’s rulings was made, as permitted by Iowa

Rule of Civil Procedure 1.904. Error has not been preserved. See Rosen v. Bd.

of Med. Exam’rs, 539 N.W.2d 345, 352 (Iowa 1995).

      The decision of the administrative law judge and the district court are

affirmed.

      AFFIRMED.
