February 21, 2024
Re: § 58.1-1821 Appeal: Retail Sales and Use Tax
Dear *****:
This will reply to your letter submitted on behalf of *****, Inc. (the “Taxpayer”) in which you dispute the denial of a retail sales and use tax refund for the period January 2018 through December 2018. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer, a regional provider of telecommunication services in Virginia and wholly owned subsidiary of ***** (the “Parent”), filed a refund claim for the taxable period at issue asserting it erroneously accrued and paid tax on exempt internet equipment. Along with its claim, a spreadsheet was submitted with purchase orders and transaction data associated with each transaction. A use tax reconciliation was also provided to show that use tax was remitted on each transaction. The Taxpayer also purchased equipment from the Parent and invoices were not issued because the transactions were between related entities.
As a result of an audit of the claim, the Department issued a portion of the requested refund and denied the balance on the basis that the Taxpayer had not provided invoices to substantiate the purchases. The Taxpayer filed an application for correction for the denial of the refund claim, contending that the information it submitted on the spreadsheets validated the full amount of the claim.
DETERMINATION
Virginia Code § 58.1-602 defines “sale” as “any transfer of title or possession, or both, exchange, barter, lease or rental, in any manner or by any means whatsoever, of tangible personal property for a consideration ”. The Department has previously ruled in several public documents that intercompany accounting entries to record transactions between related but separate entities constitute a consideration for sales and use tax purposes. As such, an exchange of tangible personal property for a consideration between two related entities is a sale. See Public Document (P.D.) 04-134 (9/16/2004), P.D. 12-159 (10/12/2012), and P.D. 16-84 (5/17/2016).
Virginia Code § 58.1-633 A states that every dealer required to file a retail sales and use tax return and pay or collect such tax must keep and preserve suitable records of the sales, leases, or purchases, as the case may be, subject to the retail sales and use tax. The dealer must also maintain such other books of account as may be necessary to determine the amount of tax due and “such other pertinent information as may be required by the Tax Commissioner.” This record keeping requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-470:
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) A daily record of all cash and credit sales, including sales under any type of financing or installment plan in use;
b) A record of the amount of all merchandise purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase;
c) 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;
d) A record of all tangible property used or consumed in the conduct of the business;
e) A true and complete inventory of the stock on hand and its value, taken at least once each year.
The Department reviews transactions based on the documentation presented for each transaction. This is consistent with longstanding and established policy that the retail sales and use tax is a transactional tax and that the determination as to the taxation of a specific transaction is based on the underlying documents that support the transaction. Thus, documentation must be provided to prove the tax was paid on each transaction with a vendor.
The Taxpayer contends that the purchase order it provided in the spreadsheet was similar to an invoice in that it provided a description of the goods, quantity purchased, and shipping information. As such, it asserts that the documentation it provided was the “other evidence to substantiate each purchase” as required by Title 23 VAC 10-210-470 b.
The spreadsheet provided with the refund claim purportedly included hyperlinks to the purchase invoices. The Taxpayer provided invoices to the auditor to substantiate some of the transactions. The Department’s auditor allowed a refund credit for those transactions for which invoices were provided or linked. The auditor disallowed the refund credit for transactions in which an invoice could not be linked to an accrual.
Pursuant to Virginia Code § 58.1-205, any assessment of tax by the Department is prima facie correct, meaning the burden of proof is upon the Taxpayer to show that the assessment is in error. The Department’s Guidelines for Retail Sales and Use Tax Refund Claim Procedures (the “Guidelines”), issued as P.D. 17-98 (6/12/2017), provides that:
The purchaser also must submit copies of all invoices and other documentation demonstrating that the transactions qualify for an exemption, embedded into the spreadsheet by line item. Examples of documentation the purchaser should provide include, but are not limited to, exemption certificates, contracts, purchase orders, credit memos, and agreements. Documentation provided by the purchaser must establish the validity of the claim and is subject to verification by audit of the purchaser’s accounting books and records for the period involved. The purchaser also should have cancelled checks available to document proof of payment upon request.
The burden is on the Taxpayer to provide adequate documentation to substantiate the transactions at issue. In this case, the Taxpayer did not provide the necessary records during the audit or with its appeal.
However, the Taxpayer continues to insist that such records are available and show that the assessment is erroneous. The Taxpayer will be given one final opportunity to provide the necessary records and information to the Department’s audit staff. This could include printed copies of purchase order documents, transaction data, and proof of payments for all transactions still at issue. The Taxpayer will be given 30 days from the date of this letter to contact the Senior Auditor, *****, who may be contacted at *****@tax.virginia.gov or (804) ***** in order to set up a mutually agreeable time to review the additional documentation.
Once reviewed, the Department’s auditor may request additional information, adjust the audit, and issue a refund, if warranted, based on the information provided. The auditor will send the Taxpayer a written explanation of any adjustments.
The Code of Virginia sections, regulation, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at (804) *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/4057.B