Tax Type
Retail Sales and Use Tax
Description
Audit sample; Bad debt credit
Topic
Collection of Delinquent Tax
Taxability of Persons and Transactions
Date Issued
05-17-2000
May 17, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you seek correction of a sales and use tax assessment issued to ***** (the "Taxpayer") for the period April 1996 through March 1999. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer fabricates steel products for sale and also for its own use in real property contracts. The Taxpayer takes exception to the audit sample used to determine the Taxpayer's audit liability. The Taxpayer alleges that a certain sale included in the audit sample is an uncollectible debt and should be removed from the sample.
DETERMINATION
Audit Sample
Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial either to the auditor or the client. When sampling techniques are applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit. The audit techniques in this case were properly applied. The purpose of the audit sample is to determine an error factor for the representative sample period selected, and not to detail all transactions within the selected sample. Once the error factor is calculated, the factor is extrapolated over the entire audit period.
In this case the auditor chose a two-month sample period to identify sales made during the audit period. The auditor found errors in which the Taxpayer failed to charge the tax on sales that were taxable. Among the sales assessed was an untaxed sale in which the Taxpayer was unable to collect payment from the customer. The fact that the Taxpayer can show that this sale was worthless does not invalidate the sample. While the sale may be deemed worthless, the fact is that the Taxpayer failed to charge tax on this taxable sale. Therefore, there are likely similar transactions outside the sample period on which the Virginia tax was not charged. To remove the sale in question from the sample base would skew the sample and nullify the validity of the sample.
Based on the foregoing, I can find no basis for the removal of the protested item from the audit sample. For an item to be removed from the audit sample, the Taxpayer must show that the transaction was isolated in nature and not a normal part of the Taxpayer's operation. The contested transaction in this case is an integral part of the Taxpayer's business activity.
Bad Debt Credit
Code of Virginia § 58.1-621, copy enclosed, addresses bad debt as it applies to the retail sales and use tax and states, in part, "the dealer may credit, against the tax shown to be due on the return, the amount of sales or use tax previously returned and paid on accounts which are owed to the dealer and which have been found to be worthless within the period covered by the return." Virginia Administrative Code (VAC) 10-210-160 sets forth the department's interpretation of this code section and provides that "any dealer may obtain a credit for the amount of any sales or use tax previously reported and paid on a return for accounts found to be worthless. Such credit must be claimed on the return filed for the period in which the account is determined to be worthless." I would like to point out that the Taxpayer is only entitled to a credit for the sales tax paid on the sale determined to be worthless.
In a conversation with a member of my staff, the Taxpayer indicates that the sale will be written off as worthless on its income tax return for the fiscal year ending June 30, 2000. At such time, the Taxpayer is entitled to a credit of the sales tax deemed uncollectible on this sale. I would note that since the auditor assessed the tax on the cost price of the materials sold, the credit taken on the return must reflect the cost price of the materials sold and not the retail sales price of the write-off.
Summary
The Taxpayer will receive an updated bill with interest accrued to the date of protest. The bill should be paid within 30 days to avoid accrual of additional interest. If you have any questions regarding this determination, please contact ***** in the Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you seek correction of a sales and use tax assessment issued to ***** (the "Taxpayer") for the period April 1996 through March 1999. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer fabricates steel products for sale and also for its own use in real property contracts. The Taxpayer takes exception to the audit sample used to determine the Taxpayer's audit liability. The Taxpayer alleges that a certain sale included in the audit sample is an uncollectible debt and should be removed from the sample.
DETERMINATION
Audit Sample
Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial either to the auditor or the client. When sampling techniques are applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit. The audit techniques in this case were properly applied. The purpose of the audit sample is to determine an error factor for the representative sample period selected, and not to detail all transactions within the selected sample. Once the error factor is calculated, the factor is extrapolated over the entire audit period.
In this case the auditor chose a two-month sample period to identify sales made during the audit period. The auditor found errors in which the Taxpayer failed to charge the tax on sales that were taxable. Among the sales assessed was an untaxed sale in which the Taxpayer was unable to collect payment from the customer. The fact that the Taxpayer can show that this sale was worthless does not invalidate the sample. While the sale may be deemed worthless, the fact is that the Taxpayer failed to charge tax on this taxable sale. Therefore, there are likely similar transactions outside the sample period on which the Virginia tax was not charged. To remove the sale in question from the sample base would skew the sample and nullify the validity of the sample.
Based on the foregoing, I can find no basis for the removal of the protested item from the audit sample. For an item to be removed from the audit sample, the Taxpayer must show that the transaction was isolated in nature and not a normal part of the Taxpayer's operation. The contested transaction in this case is an integral part of the Taxpayer's business activity.
Bad Debt Credit
Code of Virginia § 58.1-621, copy enclosed, addresses bad debt as it applies to the retail sales and use tax and states, in part, "the dealer may credit, against the tax shown to be due on the return, the amount of sales or use tax previously returned and paid on accounts which are owed to the dealer and which have been found to be worthless within the period covered by the return." Virginia Administrative Code (VAC) 10-210-160 sets forth the department's interpretation of this code section and provides that "any dealer may obtain a credit for the amount of any sales or use tax previously reported and paid on a return for accounts found to be worthless. Such credit must be claimed on the return filed for the period in which the account is determined to be worthless." I would like to point out that the Taxpayer is only entitled to a credit for the sales tax paid on the sale determined to be worthless.
In a conversation with a member of my staff, the Taxpayer indicates that the sale will be written off as worthless on its income tax return for the fiscal year ending June 30, 2000. At such time, the Taxpayer is entitled to a credit of the sales tax deemed uncollectible on this sale. I would note that since the auditor assessed the tax on the cost price of the materials sold, the credit taken on the return must reflect the cost price of the materials sold and not the retail sales price of the write-off.
Summary
The Taxpayer will receive an updated bill with interest accrued to the date of protest. The bill should be paid within 30 days to avoid accrual of additional interest. If you have any questions regarding this determination, please contact ***** in the Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner