Rulings of the Tax Commissioner

March 1, 2023

Re:    § 58.1-1821 Application:  Retail Sales and Use Tax
    
Dear *****:

This is in response to your letter submitted on behalf of ***** (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessment issued for the period January 2018 through June 2020. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, an operator of gas stations in Virginia, was audited for the period at issue. The Department utilizes a compliance program that verifies retail sales and use tax compliance regarding cigarettes purchased for resale and sales of cigarettes by a retail or wholesale dealer. As a result of this compliance program, the Taxpayer was issued an assessment for tax and interest on untaxed cigarettes. During the audit, the Taxpayer did not respond to the auditor’s request for sales records, so the assessment was estimated based on sales information provided by wholesale distributors identifying the Taxpayer’s purchase of cigarettes exempt of the tax for resale.  

The Taxpayer appeals, contending that the assessment is overstated. Specifically, the Taxpayer includes documentation with its appeal to show that purchases from ***** (the “Vendor”) were less than the amount included on the audit report. Further, the Taxpayer maintains the purchase amount from the Vendor included non-cigarette items, such as candy and beverages. In addition, the Taxpayer requests a credit for tax reported and paid in July 2020 and August 2020. The Taxpayer also submitted a separate letter to the Department to request the waiver of penalty and interest. This determination will respond to both the appeal and the request for the waiver of penalty and interest.  

DETERMINATION

Cigarette Purchases

It is the Department’s position that the cigarettes purchased by the Taxpayer for resale would have been sold to the Taxpayer’s customers and, therefore, the sales tax should have been collected and remitted to the Department on such sales. Before the assessment was issued, the Department sent the Taxpayer a summary of the audit findings and the proposed tax liability. The Taxpayer was allowed 14 days to provide documentation to substantiate whether the Taxpayer’s purchases from wholesale distributors qualified for the resale exemption or whether the Taxpayer collected and remitted the sales tax on the sale of those purchases. The Taxpayer failed to respond to the Department’s request for documentation within the allotted time and the assessment was issued.

Virginia Code § 58.1-633 A provides that every dealer required to make a return and collect sales tax "shall keep and preserve suitable records of the sales, leases, or purchases... taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner."

The record keeping requirement is further explained in Title 23 of the Virginia Administrative Code 10-210-470 as follows:

Every person who is liable for collection of sales tax or remittance of use tax or both is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Such records must include... A daily record of all cash and credit sales, including sales under any type of financing or installment plan in use… A record of the amount of all merchandise purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase… A record of all deductions and exemptions claimed in filing sales or use tax returns, including exemption and resale certificates, returned or repossessed goods, and bad debts… A record of all tangible property used or consumed in the conduct of the business... A true and complete inventory of the stock on hand and its value, taken at least once each year. Records must be open for inspection and examination at all reasonable hours of the business day by the Department of Taxation.

With its appeal, the Taxpayer provided additional documentation to show that the purchases from the Vendor are overstated in the audit report and should be reduced to *****. A review of the documentation provided indicates the purchase exceptions may have been overstated in the audit. While the Taxpayer claims that this amount also includes purchases of candy and beverages, the audit findings indicate that only cigarette purchases were included on the exceptions list.  

Credit for Tax Paid

In addition, the Taxpayer submitted documentation to show that it paid and reported sales tax to the Department in July 2020 and August 2020 for some of its inventory purchased during the audit period. The auditor has reviewed the documentation and agrees to provide a credit for the tax paid.  

Penalty and Interest

The Taxpayer requests the removal of penalty and interest from the assessment due to financial hardship. After a review of the audit report, I find that penalty was not assessed in this first audit. Interest was assessed in accordance with Virginia Code § 58.1-1812 and cannot be waived unless the associated tax is waived. In this instance, interest will be adjusted according to the revision of the assessed tax.  

CONCLUSION

Based on this determination, the audit will be returned to the appropriate field audit staff for revision. A revised bill, reflecting the adjustments and with interest accrued to date, will be mailed to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 60 days of the date of the bill.  

The Code of Virginia and regulation sections cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions about this determination, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at ***** or via email at *****.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/3768.G