BASIC DISTRIBUTION CORPORATION, APPELLEE, v. OHIO DEPARTMENT OF TAXATION, APPELLANT.
No. 00-1911
SUPREME COURT OF OHIO
February 27, 2002
94 Ohio St.3d 287 | 2002-Ohio-794
Submitted October 16, 2001—Decided February 27, 2002. APPEAL from the Court of Appeals for Franklin County, No. 99AP-1309.
Taxation—Tax audit—Taxpayer rights—Exhaustion of administrative remedies in
LUNDBERG STRATTON, J.
{¶ 1} Appellee Basic Distribution Corporation sells and distributes electrical supplies to construction contractors, manufacturers, and maintenance firms, for resale or for incorporation into real property. In April 1994, Ohio Department of Taxation agent Jenny Gleich telephoned Basic‘s vice president of finance, Aurel Balcarcel, to inform him that appellant, the Ohio Department of Taxation, was going to conduct a tax audit1 of Basic‘s sales and purchases for the period from October 1, 1990 to March 31, 1994. Due to the large number of potentially exempt sales, Gleich told Balcarcel that she believed that a sample method should be used in auditing Basic‘s sales.2 However, Balcarcel objected to the months that Gleich chose for the sample because Basic‘s recent conversion to a new computer system would make it more difficult for Basic to retrieve records for those months. Gleich agreed to change the sample months. In contrast to the sample audit of Basic‘s sales, the audit of Basic‘s purchases was comprehensive.
{¶ 2} In a letter dated April 18, 1994, the department confirmed that Basic would be the subject of an audit and confirmed a May 9, 1994 appointment for Gleich to meet with Balcarcel to begin the audit. Enclosed with the April letter was a brochure entitled “Taxpayers’ Bill of Rights.” The Taxpayers’ Bill of Rights
{¶ 3} At the May 9, 1994 meeting, Basic, through Balcarcel, agreed that the department would use September 1992 and March 1993 as representative sample months for the audit period. After the meeting, Gleich began reviewing the certificates of exemption that Basic had on file.3 Gleich testified that pursuant to department policy, she examined each certificate to determine whether it was the correct type of certificate and whether it contained (1) the name of the vendor, (2) a signature date, (3) the statutory reason for the exemption, and (4) a signature. Depending upon whether the certificate contained the proper information, Gleich would then stamp the certificate either “allowed” or “disallowed.” If the certificate was allowed, then the sale was exempt from tax. Conversely, if the certificate was stamped disallowed, then the sale, without subsequent proof to the contrary, would be subject to tax.
{¶ 4} Gleich took approximately ten days to review the certificates. She then compared them to Basic‘s sales records for the sample months and prepared a “challenge list” of sales for which the tax-exempt status was in question. Gleich presented the challenge list and the department‘s “Notice of Intention to Levy a Sales and Use Tax Assessment” to Balcarcel on June 21, 1994. The letter accompanying the notice explained that Basic had sixty days to establish that the sales were exempt from taxation.
{¶ 5} Gleich told Basic that it would need a “letter of usage” from the customer for each sale on the challenge list. Gleich explained what information needed to be included in the letter of usage. Gleich provided Balcarcel sample letters requesting letters of usage to assist Basic but informed Basic that it would have to tailor its letter to its own business. Using the samples, Basic drafted a letter to its customers seeking letters of usage for the sales listed on the challenge list. The first of these letters went out on June 24, 1994. Shortly thereafter, Basic began receiving letters of usage in return, which Gleich examined. Gleich advised Balcarcel that the letters of usage were not providing the proper information. Pursuant to advice from Gleich, Basic composed a new letter, which was sent out on June 30, 1994.
{¶ 7} Subsequently, Gleich notified Balcarcel by telephone that an assessment would be levied against Basic and set up a meeting for a final review. Gleich testified that at the final review, she (1) explained her calculations, (2) informed Basic that it could appeal any disputes regarding the tax-exempt status of any sales, and (3) notified Balcarcel that Basic would receive a letter that would be a “precursor” to the formal notice of assessment. Gleich testified that she told Balcarcel that subsequently Basic would receive a formal notice of the assessment by certified mail and that Basic would have thirty days after the receipt of the assessment to pay or appeal.
{¶ 8} Basic received a letter dated November 14, 1994, entitled “Summary for Recommending Assessment.” The letter read:
“Please note, this does not constitute a formal notice of assessment. No appeal can be made as a result of receipt of this information.
“The Assessment Division will send you a formal notice of assessment. The formal notice of assessment will be delivered by certified mail. * * * No appeal can be made until you receive the formal notice of assessment.” (Emphasis added.)
{¶ 9} On November 17, 1994, Basic received a computer-generated form entitled “Sales/Use Tax Assessment.” This notice of assessment informed Basic that it owed $189,730.34 in taxes and that it could file a petition for reassessment.
{¶ 10} Basic never filed a petition for reassessment, and paid the assessment. However, in a letter dated September 13, 1995, Basic requested a refund. Gleich processed the refund claim. The Department issued a refund to Basic in the amount of $23,181.42.
{¶ 11} Basic sought a hearing to contest the amount of the refund. Basic hired the firm of Deloitte & Touche, L.L.P., to represent Basic at the hearing, which was held on February 12, 1997. On July 28, 1997, the department issued its final determination, granting Basic an additional refund of $4,055.27, reducing the final assessment against Basic to $162,493.65.
{¶ 12} On April 13, 1998, Basic filed a complaint against the department in the Court of Claims pursuant to
{¶ 13} Basic
{¶ 14} This matter is before the court pursuant to a discretionary appeal.
{¶ 15} The only issue raised by the department in its appeal to this court is whether its actions give rise to a cause of action for which relief can be granted pursuant to
Exhaustion of Administrative Remedies
{¶ 16} We agree with the court of appeals that an action pursuant to
{¶ 17} Exhaustion of administrative remedies requires a person to exhaust the statutory administrative remedies before seeking redress from the judicial system. Noernberg v. Brook Park (1980), 63 Ohio St.2d 26, 17 O.O.3d 16, 406 N.E.2d 1095. The purpose of the doctrine of exhaustion of administrative remedies is to prevent premature interference with the administrative processes. Nemazee v. Mt. Sinai Med. Ctr. (1990), 56 Ohio St.3d 109, 111, 564 N.E.2d 477, 480. However, where there is a judicial remedy that is intended to be separate from the administrative remedy, the requirement of exhaustion of administrative remedies does not apply. See, e.g., Larkins v. G.D. Searle & Co. (1991), 68 Ohio App.3d 746, 589 N.E.2d 488.
{¶ 18} Clearly, the typical avenue to challenge a final assessment is the administrative appeal process set forth in the Revised Code. See
{¶ 19} In comparing the harm that
{¶ 20} However, that is not to say that a taxpayer will always have a cause of action under
R.C. 5703.54
{¶ 21} In construing a statute, courts have an obligation to give effect to the intention of the General Assembly. Christe v. GMS Mgt. Co. (2000), 88 Ohio St.3d 376, 726 N.E.2d 497. In determining legislative intent, courts must first look to the language of the statute. In re Civ. Serv. Charges & Specs. Against Piper (2000), 88 Ohio St.3d 308, 725 N.E.2d 659. If the language conveys a meaning that is clear and unequivocal, interpretation is at an end, and the statute must be applied accordingly. In re Guardianship of Lombardo (1999), 86 Ohio St.3d 600, 605, 716 N.E.2d 189, 193-194.
{¶ 22}
“(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 * * * if all 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 the 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 his 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 * * *;
“(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.)
{¶ 23} Thus,
{¶ 24} 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
The Appellate Decision
{¶ 25} The appellate court held that “the department ‘frivolously disregarded’ standard procedures by mandating use of a sample, failing to offer a full audit, unreasonably disallowing exemption certificates without identifying those disallowed or the reason for their disallowance, projecting a sample result over the entire audit period contrary to
{¶ 26} The plain language of
Using a Sample Method/Failing to Offer Full Audit
{¶ 27}
Disallowing Certificates Without Giving Reasons
{¶ 28} There is no statute or rule that expressly requires the department to inform the taxpayer which certificates are disallowed or why. Furthermore, this information was provided in the challenge list given to Basic. The challenge list listed sales that the department determined were not tax exempt because there was no valid certificate of exemption for the period in which the sale occurred. The challenge list included Basic‘s customers, invoice dates, the sale amount, and the type of product sold. Agent Gleich explained to Balcarcel the need to obtain letters of usage from customers regarding the sales on the challenge list in order to prove the sales’ exempt status.4 Thus, the department provided Basic with all the information that it needed to attempt to attain tax-exempt status for the challenged sales.
{¶ 29} Accordingly, the court of appeals erred in holding that these actions gave rise to a cause of action under
{¶ 30}
Failing to Assist Basic in Drafting an Acceptable Letter to Request Additional Information from Customers and Refusing to Review Responses During the Statutory Period
{¶ 31} Again the appellate court failed to cite any statute or rule that requires the department to assist the taxpayer in drafting letters to its customers, requesting letters of usage, and reviewing the letters of usage it receives in return. Further, despite the lack of any such legal obligation, Gleich did provide sample letters to Basic to assist Basic in acquiring letters of usage from its customers. She also reviewed the letters of usage that Basic received from its customers and made suggestions to Basic on how to modify its letter so that Basic would receive the proper information in return. The department went beyond what it was required to do, and consequently we fail to understand how the appellate court found frivolous conduct in this respect. Further, in addition to the sixty-day period, Basic had another opportunity to submit documentation after it petitioned for reassessment, but failed to use it. See
{¶ 32} Accordingly, the court of appeals erred in holding that these actions gave rise to a cause of action under
Providing Misinformation Regarding Taxpayer‘s Right to Appeal
{¶ 33} The finding by the court of appeals that the department misinformed Basic appears to be based upon the court‘s determination that the document that informed Basic of its right to challenge the assessment was inadequate to achieve that purpose.5
{¶ 34} The law requires the department to notify a taxpayer of the right to challenge an assessment, as well as the method for administrative review.
“IMPORTANT INFORMATION-ACT PROMPTLY “If this assessment is not paid or contested by filing a petition for Reassessment in the manner prescribed by law within 30 days after receipt it will be certified to the Attorney General for collection * * *
“* * *
“WHAT TO DO IF YOU THINK THIS ASSESSMENT IS IN ERROR
“Failure to follow these instructions may result in dismissal of your petition.
“You wish to protest amounts assessed as tax * * *: If you disagree with this assessment you may file a Petition for Reassessment. The petition must be in writing, specify the items objected to and the reasons for those objections, and must be filed within thirty days of the receipt of the assessment.”
{¶ 35} The third page of this assessment form is entitled “Petition for Reassessment.” It is a form that requires the taxpayer to explain the reasons for its objection to the assessment, provides an opportunity for the taxpayer to seek a hearing, and provides the address where the petition for reassessment must be sent. This language was more than adequate for the task of informing Basic of its right to challenge the assessment.
{¶ 36} Moreover, the mere fact that this document notified Basic that it was being assessed more than $180,000 ought to have demanded scrutiny of the entire document by Basic. Yet Balcarcel admitted that he had failed to read beyond the first page of this document. Had he done so, he would have read the instructions regarding the filing of a petition for reassessment.
{¶ 37} Accordingly, the court of appeals erred in holding that the notice of assessment gave rise to a cause of action under
Failing to Advise Basic that It Had Additional Time to Prove Exemptions
{¶ 38} The appellate court is correct that Ohio law allows a taxpayer who files a petition for reassessment additional time to document exemptions beyond the sixty-day period. See
Having the Same Agent Review Her Own Work When Basic Applied for a Refund and Reducing the Assessment Without Stating any Reasons
{¶ 39} Again the appellate court failed to cite any statutory authority that would prevent an agent who conducts an audit from reviewing a refund claim on that audit or that a refund must be accompanied by the department‘s reasoning.
Basic‘s Allegations
{¶ 40} In its brief, Basic makes additional arguments that the department frivolously disregarded certain statutes and or rules. We will address each of these arguments below.
Adequacy of Exemption Certificate Information
{¶ 41} Basic argues that a “certificate need not meet overly-technical requirements, but is sufficient so long as the stated basis ‘reasonably apprise[s] the tax commissioner’ of the exemption claimed.” Basic cites numerous instances in which it claims that the department was overly technical in rejecting certificates. While these allegations may or may not be valid, they do not set forth a claim for which relief can be granted under
{¶ 42} Determining whether the department erred in rejecting certificates due to technicalities is a matter of interpretation of statutes or rules, which is properly addressed in an appeal, not in an action for frivolous disregard of a statute or rule under
Direct Pay Permits
{¶ 43} Basic claims that the department frivolously ignored
{¶ 44} There is nothing in
Proof of Exemption
{¶ 45} Basic asserts that Gleich indicated that only a letter of usage could be used to prove tax-exempt status. Citing Union Metal Mfg. Co. v. Kosydar (1974), 38 Ohio St.2d 53, 56, 67 O.O.2d 72, 73, 310 N.E.2d 249, 251, fn. 3, Basic claims that
{¶ 46} The suggestion that the department might accept other evidence to prove exemption is found in a footnote in Union Metal. However, the court did not affirmatively hold that other evidence could be submitted as a matter of law. Thus, Union Metal does not require that other evidence must be considered in determining exempt status.
{¶ 47} Further, in a letter dated September 15, 1994, the department notified Basic that it could submit any additional records that would be pertinent to the audit. Basic indicated that it had no additional records to submit. Thus, there is no basis for an action under
Method of Calculating the Sample
{¶ 48} Basic alleges that nothing allows the department to unilaterally dictate the manner of calculating a sample. Basic is referring to its attempt to supplement documentation of exempt cash sales. However, Gleich did examine the submitted documentation but determined that it could not substitute for letters of usage. Further, Basic fails to indicate what statute or rule the department ignored when it determined that it would not accept Basic‘s proposal. Thus, this issue could have been raised only in an appeal.
Construction Contracts
{¶ 49} Basic alleges that the department frivolously disregarded the construction contract provisions set out in
{¶ 50} Failure to furnish a certificate of exemption results in a presumption that the tax applies.
{¶ 51} There was no frivolous disregard of
Bad-Debt Provisions
{¶ 52} Basic alleges that Gleich frivolously disregarded the bad-debt write-off provisions of
{¶ 53} Gleich testified
Conclusion
{¶ 54} In essence, Basic fails to prove that the Department of Taxation engaged in any frivolous conduct for which
Judgment reversed.
MOYER, C.J., RESNICK, F.E. SWEENEY and PFEIFER, JJ., concur.
DOUGLAS and COOK, JJ., concur in judgment.
Bricker & Eckler, L.L.P., Mark A. Engel and Luther L. Liggett, Jr., for appellee.
Betty D. Montgomery, Attorney General, Michael J. Valentine, Richard C. Farrin and James P. Dinsmore, Assistant Attorneys General, for appellant.
Blaugrund, Herbert & Martin, Inc., Steven A. Martin and Teri G. Rasmussen, urging affirmance for amicus curiae, Ohio Society of Certified Public Accountants.