Tax Type
Retail Sales and Use Tax
Description
Audit sample, Tax paid in error to another state
Topic
Collection of Delinquent Tax
Taxability of Persons and Transactions
Date Issued
03-28-2000
March 28, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you seek a correction of the department's sales and use tax audit assessment issued to ***** (the "Taxpayer"), for the period November 1995 through August 1998.
FACTS
The Taxpayer, a real property contractor, disagrees with the results of the sampling method used in the department's audit. Specifically, the Taxpayer identifies purchase transactions in the sample in which the Taxpayer paid another state's taxes in error. The Taxpayer contends that including these particular purchases in the sample distorts the deficiency by assuming that other similar purchases were subjected to another state's tax. The Taxpayer seeks a detailed reexamination and revision of the audit.
DETERMINATION
Generally
With regard to taxes paid to another state, Title 23 of the Virginia Administrative Code (VAC) 10-210-450, copy enclosed, allows a credit for taxes paid elsewhere. However, such a credit is intended only to apply to taxes owed in the state from which the property was purchased, if legitimately imposed because of a taxable use made in the vendor's state, and prior to the delivery of the property in Virginia. This section provides that:
Any person who purchases tangible personal property in another state and who, has paid a sales or use tax to such state or its political subdivision or both on the property, is granted a credit against the use tax imposed by Virginia on its use within this state for the amount of tax paid in the state of purchase .... This credit does not apply to tax erroneously charged or incorrectly paid to another state. For example, if a person purchases and takes delivery in Virginia of tangible personal property purchased from an out-of-state dealer who incorrectly charges out-of-state tax, no credit is available. The purchaser must apply to the out-of-state seller for refund. (Emphasis added).
Sample
An audit sample 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 results are usually within a narrow percentage range of the actual amount that would have been determined by a detailed audit. It should be noted that the courts have held that a tax assessment issued by the proper assessing authorities is prima facie correct and that the burden is upon the taxpayer to prove otherwise.
In this case, the auditor reviewed purchases for the sample period, January through December 1997 and determined an error factor for the representative sample period selected. The error factor was extrapolated over gross purchases for the audit period. In this case, the audit reveals only two purchases on which the Taxpayer erroneously paid another state's sales tax. The fact that the Taxpayer has erroneously paid such taxes does not render the sample unrepresentative.
The removal of the transactions in question, therefore, would nullify the purpose and validity of the sample in that other purchases throughout the audit period may have been similarly taxed in error. Despite the Taxpayer's contentions, l do not find any basis to invalidate the auditor's sample calculations.
Before requiring that a detailed audit be conducted or that the sample period be reevaluated, the Taxpayer must demonstrate that the sample is not representative of the audit period or that it is flawed in a manner which invalidates the sample. If the Taxpayer can show that the transactions related to the out-of-state supplier were isolated and not a normal part of the Taxpayer's operations, l will consider a revision of the department's error factor calculations. Accordingly, l will allow the Taxpayer an additional thirty days from the date of this letter to make this information available to the department's auditor. If such information is not presented within the time allowed, the department's audit assessment will be considered correct, and an updated bill inclusive of accrued interest will be issued.
If you have any additional questions regarding this matter, please contact **** of the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/22065Q
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you seek a correction of the department's sales and use tax audit assessment issued to ***** (the "Taxpayer"), for the period November 1995 through August 1998.
FACTS
The Taxpayer, a real property contractor, disagrees with the results of the sampling method used in the department's audit. Specifically, the Taxpayer identifies purchase transactions in the sample in which the Taxpayer paid another state's taxes in error. The Taxpayer contends that including these particular purchases in the sample distorts the deficiency by assuming that other similar purchases were subjected to another state's tax. The Taxpayer seeks a detailed reexamination and revision of the audit.
DETERMINATION
Generally
With regard to taxes paid to another state, Title 23 of the Virginia Administrative Code (VAC) 10-210-450, copy enclosed, allows a credit for taxes paid elsewhere. However, such a credit is intended only to apply to taxes owed in the state from which the property was purchased, if legitimately imposed because of a taxable use made in the vendor's state, and prior to the delivery of the property in Virginia. This section provides that:
Any person who purchases tangible personal property in another state and who, has paid a sales or use tax to such state or its political subdivision or both on the property, is granted a credit against the use tax imposed by Virginia on its use within this state for the amount of tax paid in the state of purchase .... This credit does not apply to tax erroneously charged or incorrectly paid to another state. For example, if a person purchases and takes delivery in Virginia of tangible personal property purchased from an out-of-state dealer who incorrectly charges out-of-state tax, no credit is available. The purchaser must apply to the out-of-state seller for refund. (Emphasis added).
Sample
An audit sample 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 results are usually within a narrow percentage range of the actual amount that would have been determined by a detailed audit. It should be noted that the courts have held that a tax assessment issued by the proper assessing authorities is prima facie correct and that the burden is upon the taxpayer to prove otherwise.
In this case, the auditor reviewed purchases for the sample period, January through December 1997 and determined an error factor for the representative sample period selected. The error factor was extrapolated over gross purchases for the audit period. In this case, the audit reveals only two purchases on which the Taxpayer erroneously paid another state's sales tax. The fact that the Taxpayer has erroneously paid such taxes does not render the sample unrepresentative.
The removal of the transactions in question, therefore, would nullify the purpose and validity of the sample in that other purchases throughout the audit period may have been similarly taxed in error. Despite the Taxpayer's contentions, l do not find any basis to invalidate the auditor's sample calculations.
Before requiring that a detailed audit be conducted or that the sample period be reevaluated, the Taxpayer must demonstrate that the sample is not representative of the audit period or that it is flawed in a manner which invalidates the sample. If the Taxpayer can show that the transactions related to the out-of-state supplier were isolated and not a normal part of the Taxpayer's operations, l will consider a revision of the department's error factor calculations. Accordingly, l will allow the Taxpayer an additional thirty days from the date of this letter to make this information available to the department's auditor. If such information is not presented within the time allowed, the department's audit assessment will be considered correct, and an updated bill inclusive of accrued interest will be issued.
If you have any additional questions regarding this matter, please contact **** of the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/22065Q
Rulings of the Tax Commissioner