Tax Type
Retail Sales and Use Tax
Description
Audit - purchase mark-up method; Incomplete dealer records
Topic
Collection of Delinquent Tax
Date Issued
07-07-2000
July 7, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter in which you request correction of the sales and use tax assessment issued to **** (the "Taxpayer") for the period April 1995 through March 1998. I apologize for the delay in responding to your letter.
The Taxpayer operates as a restaurant. As a result of the department's audit, an assessment was made for untaxed purchases and underreported sales. The Taxpayer protests the entire assessment and claims that the audit liability is arbitrary and based on inaccurate and incomplete information.
Sales Tax Liability
Code of Virginia § 58.1-633 requires every dealer "to keep and preserve suitable records of the sales, leases, or purchases .... 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." This record keeping requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-470, copy enclosed.
When a dealer fails to maintain adequate records, the department is authorized by Code of Virginia § 58.1-618 to use the best information available to reconstruct a dealer's sales or purchases to determine whether a tax liability exists. When an assessment is issued under these circumstances, the above cited statute deems such assessment to be prima facie correct. The burden is upon the Taxpayer to prove that the audit methodology applied in this case is flawed in some manner as to render the assessment invalid.
In this case, the Taxpayer did not keep complete and adequate records to substantiate the Taxpayer's reported sales. For example, it is my understanding that sales records available and bank statement deposits were not consistent with reported sales. As the sales and purchase records were incomplete, the auditor used a comparison of a similar business to estimate the audit liability.
After the close of the audit, the Taxpayer provided additional information which included bank statements, cash register tapes and purchase information for three months not included in the audit period. The auditor used this information to determine a mark-up factor. This mark-up factor was multiplied by cost of goods sold reported on the Taxpayer's federal income tax returns to determine sales. Because the cost of goods sold was not available for years 1997 and 1998, the auditor determined a mark-up factor using a comparison of the 1996 sales reported to underreported sales derived from the cost of goods mark-up. This mark-up factor was then applied to years 1997 and 1998 reported sales.
The-audit has been revised based on the mark-up of purchases established from the three current months of the Taxpayer's records. I am mindful that the assessment in this case is an estimate; however, based on the information before me, that estimate is reasonable. Accordingly, I find no basis to revise the audit with respect to the assessment of unreported sales.
Lease of Fixed Assets
In this case, the auditor determined that tangible personal property comprises 50% of the total lease. This percentage was applied to the Taxpayer's monthly lease payments to determine use tax liability. Based on a review of the audit, there is not convincing evidence to substantiate the holding of leased equipment in this case. For this reason, I find basis to remove leased equipment from the audit.
Summary
The assessment has been revised according to the determination herein. Attached is a schedule of the tax liability, penalty, and interest accrued to the date of protest. The Taxpayer should return its payment in the amount of ******* to the attention of **** in the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 30 days from the date of this letter. If payment is not received within the allotted time, interest will accrue on the outstanding balance. If you have any questions regarding this matter, please contact *** at ***.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25449T
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter in which you request correction of the sales and use tax assessment issued to **** (the "Taxpayer") for the period April 1995 through March 1998. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates as a restaurant. As a result of the department's audit, an assessment was made for untaxed purchases and underreported sales. The Taxpayer protests the entire assessment and claims that the audit liability is arbitrary and based on inaccurate and incomplete information.
DETERMINATION
Sales Tax Liability
Code of Virginia § 58.1-633 requires every dealer "to keep and preserve suitable records of the sales, leases, or purchases .... 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." This record keeping requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-470, copy enclosed.
When a dealer fails to maintain adequate records, the department is authorized by Code of Virginia § 58.1-618 to use the best information available to reconstruct a dealer's sales or purchases to determine whether a tax liability exists. When an assessment is issued under these circumstances, the above cited statute deems such assessment to be prima facie correct. The burden is upon the Taxpayer to prove that the audit methodology applied in this case is flawed in some manner as to render the assessment invalid.
In this case, the Taxpayer did not keep complete and adequate records to substantiate the Taxpayer's reported sales. For example, it is my understanding that sales records available and bank statement deposits were not consistent with reported sales. As the sales and purchase records were incomplete, the auditor used a comparison of a similar business to estimate the audit liability.
After the close of the audit, the Taxpayer provided additional information which included bank statements, cash register tapes and purchase information for three months not included in the audit period. The auditor used this information to determine a mark-up factor. This mark-up factor was multiplied by cost of goods sold reported on the Taxpayer's federal income tax returns to determine sales. Because the cost of goods sold was not available for years 1997 and 1998, the auditor determined a mark-up factor using a comparison of the 1996 sales reported to underreported sales derived from the cost of goods mark-up. This mark-up factor was then applied to years 1997 and 1998 reported sales.
The-audit has been revised based on the mark-up of purchases established from the three current months of the Taxpayer's records. I am mindful that the assessment in this case is an estimate; however, based on the information before me, that estimate is reasonable. Accordingly, I find no basis to revise the audit with respect to the assessment of unreported sales.
Lease of Fixed Assets
In this case, the auditor determined that tangible personal property comprises 50% of the total lease. This percentage was applied to the Taxpayer's monthly lease payments to determine use tax liability. Based on a review of the audit, there is not convincing evidence to substantiate the holding of leased equipment in this case. For this reason, I find basis to remove leased equipment from the audit.
Summary
The assessment has been revised according to the determination herein. Attached is a schedule of the tax liability, penalty, and interest accrued to the date of protest. The Taxpayer should return its payment in the amount of ******* to the attention of **** in the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 30 days from the date of this letter. If payment is not received within the allotted time, interest will accrue on the outstanding balance. If you have any questions regarding this matter, please contact *** at ***.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25449T
Rulings of the Tax Commissioner