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Recordkeeping, `Z Tapes,'
and the Regulation
Taxpayers are required to maintain
records to support deductions taken
against their sales. Many retail shops,
bars, and restaurants have modern
cash registers that generate cash reg-
ister receipts at the end of the business
day that show each transaction.
In addition, the registers generate a
summary tape of the day's activity,
referred to as a "Z tape." Business own-
ers as well as their accountants gener-
ally believed, until now, that the Z tapes
were sufficient to meet the recordkeep-
ing requirement of the state regulation.
The trial court, however, decided that Z
tapes are not sufficient to meet
the records requirement set by
Connecticut regulations, and that with-
out the actual cash register tapes
showing the individual transactions,
the DRS may use its own method for
determining the taxpayer's income.
The Supreme Court upheld this ruling.
Regarding the required records to be
Regulation 12-2-12(b)(1) states that:
A taxpayer shall maintain all
records that are necessary to a
determination of correct tax liabili-
ty under the affected tax law pro-
visions. All required records shall
be made available upon request
by the commissioner or his
authorized representatives as
provided for in the affected tax law
provisions. Such records include,
but are not limited to: books of
account, invoices, sales receipts,
cash register tapes, purchase
orders, exemption certificates,
returns, and schedules and work-
ing papers used in connection
with the preparation of returns.
[Emphasis added]
Based upon the Supreme Court's deci-
sion, practitioners need to be aware of
the DRS position that Z tapes, despite
being generated by the register, are
not sufficient documentation to meet
the recordkeeping requirements of the
state regulations. In the absence of
such required records, the DRS will
use its own method for determining the
taxpayer's income, typically the indus-
try standard mark-up, to calculate
gross receipts. Such determination
may bear little resemblance to the tax-
payer's sales, but nevertheless shall
be presumed correct unless the tax-
payer can clearly show the commis-
sioner's assessment to be erroneous,
a nearly impossible burden.
It is unknown if the DRS will use this
final ruling to expand its use of other
methods of computing sales tax adjust-
ments where other records listed in the
regulation, such as invoices, are not
kept by the taxpayer. Also, those tax-
records should verify that the software
can generate records of each sale and
the time that it occurred. By maintain-
ing complete records of each sale, tax-
payers will be able to rebut efforts of
the DRS to change their mark-up if the
mark-up is less than industry standard.
Practitioners need to be diligent in
looking at both the gross profit percent-
age as well as assuring that the report-
ed sales agree with the federal gross
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