The Nebraska Department of Revenue says four now-closed beer stores in Whiteclay together owe more than $600,000 in state taxes after an audit determined they underreported sales by nearly $1.7 million in a three-year period.

But the owners of Arrowhead Inn, State Line Liquor, D&S Pioneer Service and Jumping Eagle Inn have mounted a legal challenge, asking a Lincoln judge to review Tax Commissioner Tony Fulton's Nov. 22 findings, which they say were based on flawed estimates.

It's just the latest setback for the controversy-plagued stores forced to close in April after decades of serving millions of cans of beer each year to the Oglala Lakota people of South Dakota’s nearby Pine Ridge Indian Reservation, where alcohol is banned.

This spring, the Nebraska Liquor Control Commission voted 3-0 to deny the renewal of the stores' licenses following a hearing at the Capitol on whether law enforcement in Whiteclay was adequate to let beer sales continue.

That decision, hailed by activists, led to a court fight which ended in September with the Nebraska Supreme Court rejecting the store owners' bid to reopen, citing a technical flaw in their appeal.

Now to reopen, they would need to reapply for liquor licenses.

But as the issue over their licenses raged, a second, behind-the-scenes fight was brewing over taxes.

On Friday, attorney Benjamin Moore, of Rembolt Ludtke LLP, filed nine petitions for review for the individual store owners after each was issued a notice of deficiency determination earlier this year. The notices reflected they owed additional income taxes, sales and consumer use taxes, as well as a litter fee (a tax assessed to those making gross proceeds of $100,000 or more in retail sales).

In the petitions, Moore said the Department of Revenue's decisions were not supported by evidence, were contrary to law and were "arbitrary, capricious and/or unreasonable."

The dispute boils down to how the state's auditors recalculated each of the businesses' gross receipts — and therefore taxes due — for the period from August 2013 to August 2016.

According to court records, department auditors first audited the books of the individual stores, then did on-site audits in September 2016 after the owners asked for re-determinations.

In the on-site visits, they were looking for documentation to support the stores' reported sales and use tax returns. But the Liquor Control Commission had taken their z-tapes, records from their cash registers, so the owners of Arrowhead Inn, D&S Pioneer Service and Jumping Eagle Inn couldn't provide them. State Line did not use a register, according to the state's order.

Instead, auditors subpoenaed the alcohol suppliers' records of all sales to the businesses for the audit period.

Department auditors reconstructed total sales with the help of price lists from the owners. But auditors had no way of knowing how many of the six-packs, 18-packs and cases delivered to the stores had been sold as singles, and made calculations assuming the largest packs were broken down and sold by the can.

The owners took issue with the new calculations, which they said didn't reflect wholesale price increases or an accurate number of individual can sales. They argued the Department of Revenue should have gotten their z-tapes from the Liquor Control Commission.

But Fulton, the tax commissioner, said that was the petitioners' job. Last month, he affirmed the numbers, saying the owners hadn't retained the records they were required to under Nebraska law, "which made it necessary to look beyond petitioner's records to calculate total sales."

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In his order, Fulton said there may have been a more precise method of determining how much was sold as single cans, "but the taxpayer did not provide information that would allow the department to formulate that more precise methodology."

In the end, he upheld the department's findings that:

* Arrowhead Inn's taxes were deficient by $244,168, including $109,639 in sales and use tax, income taxes of $101,888, plus penalties, fees and interest.

* State Line Liquor's taxes were deficient by $142,908, including income taxes of $69,615, $59,930 in sales and use tax, plus penalties and interest.

* D&S Pioneer Service's taxes were deficient by $122,260, including income taxes of $56,008, $54,580 in sales and use tax, plus penalties, fees and interest.

* Jumping Eagle Inn's taxes were deficient by $92,449, including income taxes of $41,362, $40,150 in sales and use tax, plus penalties and interest.

Together, it adds up to $607,926.

Now, a Lancaster County District Judge will review the record to see if he or she agrees.

Reach the writer at 402-473-7237 or lpilger@journalstar.com.

On Twitter @LJSpilger.

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