IOWA Tobacco Tax Litigation Update - Taxpayer Loses SOL Case

It is critical to file a return in order to take advantage of statute of limitations protections. In most states, the government cannot come after you for tax due for a period outside of the statute of limitations. However, the 3 to 4-year SOL does not start to run until a return is filed. Unfortunately for the taxpayer in Plymat v. Iowa Department of Revenue, no return was file and it had to learn about this principal the hard way.

Under the Jenkins Act, cigarette vendors must report sales of tobacco made online to the government. Such a disclosure assists the government in collecting proper cigarette, tobacco and other taxes. In a recent case Iowa was provided a spreadsheet disclosing cigarette purchases made by the taxpayer and shipped to an address in Iowa. Based on the spreadsheet, the Iowa Department of Revenue assessed $3,000 in tax.

The Taxpayer disputed the assessment and argued that the assessment was for periods outside of the three-year statute of limitations. He also argued that the spreadsheet was unreliable and that he did not purchase the cigarettes at issue. Ultimately, the case ended up in the Iowa Division of Administrative Hearings.

Pursuant to Iowa law cigarette tax is due a 6.8 cents per cigarette. If tax is not paid on the cigarettes sold, the person that buys cigarettes is on the hook for the tax. Iowa also has a three-year statute of limitations that is triggered by the later of the due date of the report or when the report is filed.

The administrative law judge determined that no report or return was filed, therefore, the taxpayer could not take advantage of the statute of limitations defense. Turning to the reliability of the spreadsheet and whether the taxpayer purchased the tax, the ALJ concluded that the evidence came from the federal government and was reliable. Although the taxpayer’s “testimony and demeanor [had] a certain draw,” it did not overcome the determination that the taxpayer must prove the information supplied by the government lacked credibility. Therefore, the assessment was upheld subject to some mathematical adjustments.

As highlight above, the assessment was upheld because the taxpayer did not file a return and, thus, could not assert a statute of limitations defense. Further, in the guilt until proven innocent standard that so often applies to tax cases, the government need not show it has reliable data, but rather the taxpayer must prove the negative and show it is faulty. It is critical to have the assistance of a tobacco tax professional to adequately present cases against the government if the taxpayer wants a fighting chance.

About the Author: In his law practice Mr. Donnini's primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini obtained his LL.M. in Taxation at NYU. Mr. Donnini is licensed to practice law in Florida. If you have any questions please do not hesitate to contact him via email [email protected] or phone at 954-639-4496