Tax Type
Retail Sales and Use Tax
Description
Audit sampling techniques
Topic
Collection of Delinquent Tax
Date Issued
03-29-2000
March 29, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek the correction of assessments issued to (Taxpayer 1), and ***** (Taxpayer 2), for the period December 1994 through December 1997. I apologize for the delay in responding to your appeal.
FACTS
Taxpayer 1 and Taxpayer 2 are automobile dealerships that were audited by the department. Taxpayer 1 maintains that the assessment of sales tax based on an audit sample of auto parts sales is erroneous because the sample calculates an unrealistic amount of untaxed sales. Taxpayer 1 states that the assessment of use tax on shop supplies is erroneous because the department has provided inconsistent information to Taxpayer 1 concerning the proper method of paying sales and use tax on shop supplies used in repair work. Taxpayer 1 and Taxpayer 2 seek the waiver of the department's assessment of sales tax on gross receipts taxes that were billed to customers.
DETERMINATION
Sales Sample
Taxpayer 1 states that the audit sample conducted on sales of auto parts overstates its sales tax liability. Taxpayer 1 notes that one item in the sample, an automobile engine, is 56% of the total dollar value of all the items found in the sample. Taxpayer 1 suggests that engine sales were properly taxed in other transactions during the audit period. Taxpayer 1 proposes that the department remove the engine sale from the audit sample and tax it as a separate transaction. The audit sample would be recalculated to reflect the removal of the engine sale from the sample.
Sampling is an audit technique of significant value that is widely used in the public and private sectors. The department uses sampling in sales and use tax audits where a detailed audit would not prove beneficial to either the auditor or the taxpayer. When sampling techniques are properly applied, the result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit.
Based on the amount of this transaction relative to other transactions in the sample, and considering the nature of the sale, l will agree to remove the sale of the engine from the sample if Taxpayer 1 can provide a detailed listing of all engines sold during the audit period. The department will then use this information to perform a detailed audit of engine sales. This would provide an equitable solution to both parties in that the engine sales would not be included in the sample, and the department would be assured that all engine sales have been taxed properly. If Taxpayer 1 can provide the necessary information, the audit will be adjusted based on this review.
Shop Supplies
Taxpayer 1 maintains that the department has provided inconsistent information concerning the proper manner of paying sales and use tax on shop supplies used for repair work. Taxpayer 1 states that during its previous audit the department instructed it to compute sales tax on charges for shop supplies and collect the tax from customers. The department has assessed Taxpayer 1 use tax on the cost price of shop supplies used for repair work and billed to customers as a separate charge.
The enclosed copy of Public Document 87-261 (11/30/87) explains that shop supplies are used and consumed by the repair shop and subject to sales tax at the time of purchase or use tax when withdrawn from a tax exempt inventory. Public Document 87-275 (12/23/87) also reflects this policy. The department's policy was also explained to Taxpayer 1 in a letter from the department dated August 1, 1995.
Notwithstanding the above, and because the Taxpayer collected and remitted sales tax to the department on shop supply charges, l will agree to remove the shop supply exceptions from the audit. The assessment will be reduced accordingly. The Taxpayer should immediately begin paying sales tax or use tax on all purchases of shop supply items.
Gross Receipts Tax
Both Taxpayer 1 and Taxpayer 2 seek the removal of gross receipts tax amounts from the taxable sales measure on which the sales tax liability is computed. In its previous two audits, Taxpayer 1 was advised to separately state sales tax and gross receipts tax on customer invoices and to stop listing the total of both taxes as a sales tax on the invoices. Taxpayer 1 appealed the department's assessment in the last audit. The department replied to the appeal made by Taxpayer 1 in a letter dated April 3, 1996, and outlined the correct method for Taxpayer 1 to use when billing customers for gross receipts tax and sales tax on the same invoice.
The Taxpayers maintain that their software and forms vendors were unable to make complete changes to the Taxpayers' accounting software and forms based on the department's instructions until February 1998. Because this audit covered the period in which the Taxpayers were in the process of having their software and forms redesigned, they ask that the portion of the assessment related to this issue be abated.
In my letter of April 3, 1996, I indicated that Taxpayer 1 was to begin stating the sales tax as a distinct and separate charge on its sales invoices on a prospective basis. I further indicated that Taxpayer 1 should stop listing the total of the sales tax and gross receipts tax as a sales tax on its invoices. Taxpayer 1 was instructed to change the line on the invoices to read "total taxes" or "taxes."
Based on the facts presented, l do not find basis for waiving the tax and interest related to the gross receipts tax issue. The Taxpayers were instructed to change billing methods in April 1996. The audit allowed a three-month "grace period" to Taxpayer 1 and Taxpayer 2 by not including this issue in the audit prior to July 1996. This was considered a reasonable time period to implement new billing procedures. However, the Taxpayers did not comply with my determination until February 1998. This was also the third audit in which this issue had been addressed.
Taxpayer 1 may contact the department's **** at **** to make an appointment if it wishes the department to review engine sales in detail. If the ***** is not contacted within ninety days from the date of this letter, the sales sample will be considered correct. The assessment for Taxpayer 1 will be adjusted to remove the shop supply exceptions and a corrected assessment will be issued to Taxpayer 1. The assessment for Taxpayer 2 is correct and should be paid within 30 days to avoid the accrual of additional interest. The current balance of the assessment for Taxpayer 2 is $****. Payment may be mailed to ***** in the Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions, please contact **** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20161S
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek the correction of assessments issued to (Taxpayer 1), and ***** (Taxpayer 2), for the period December 1994 through December 1997. I apologize for the delay in responding to your appeal.
FACTS
Taxpayer 1 and Taxpayer 2 are automobile dealerships that were audited by the department. Taxpayer 1 maintains that the assessment of sales tax based on an audit sample of auto parts sales is erroneous because the sample calculates an unrealistic amount of untaxed sales. Taxpayer 1 states that the assessment of use tax on shop supplies is erroneous because the department has provided inconsistent information to Taxpayer 1 concerning the proper method of paying sales and use tax on shop supplies used in repair work. Taxpayer 1 and Taxpayer 2 seek the waiver of the department's assessment of sales tax on gross receipts taxes that were billed to customers.
DETERMINATION
Sales Sample
Taxpayer 1 states that the audit sample conducted on sales of auto parts overstates its sales tax liability. Taxpayer 1 notes that one item in the sample, an automobile engine, is 56% of the total dollar value of all the items found in the sample. Taxpayer 1 suggests that engine sales were properly taxed in other transactions during the audit period. Taxpayer 1 proposes that the department remove the engine sale from the audit sample and tax it as a separate transaction. The audit sample would be recalculated to reflect the removal of the engine sale from the sample.
Sampling is an audit technique of significant value that is widely used in the public and private sectors. The department uses sampling in sales and use tax audits where a detailed audit would not prove beneficial to either the auditor or the taxpayer. When sampling techniques are properly applied, the result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit.
Based on the amount of this transaction relative to other transactions in the sample, and considering the nature of the sale, l will agree to remove the sale of the engine from the sample if Taxpayer 1 can provide a detailed listing of all engines sold during the audit period. The department will then use this information to perform a detailed audit of engine sales. This would provide an equitable solution to both parties in that the engine sales would not be included in the sample, and the department would be assured that all engine sales have been taxed properly. If Taxpayer 1 can provide the necessary information, the audit will be adjusted based on this review.
Shop Supplies
Taxpayer 1 maintains that the department has provided inconsistent information concerning the proper manner of paying sales and use tax on shop supplies used for repair work. Taxpayer 1 states that during its previous audit the department instructed it to compute sales tax on charges for shop supplies and collect the tax from customers. The department has assessed Taxpayer 1 use tax on the cost price of shop supplies used for repair work and billed to customers as a separate charge.
The enclosed copy of Public Document 87-261 (11/30/87) explains that shop supplies are used and consumed by the repair shop and subject to sales tax at the time of purchase or use tax when withdrawn from a tax exempt inventory. Public Document 87-275 (12/23/87) also reflects this policy. The department's policy was also explained to Taxpayer 1 in a letter from the department dated August 1, 1995.
Notwithstanding the above, and because the Taxpayer collected and remitted sales tax to the department on shop supply charges, l will agree to remove the shop supply exceptions from the audit. The assessment will be reduced accordingly. The Taxpayer should immediately begin paying sales tax or use tax on all purchases of shop supply items.
Gross Receipts Tax
Both Taxpayer 1 and Taxpayer 2 seek the removal of gross receipts tax amounts from the taxable sales measure on which the sales tax liability is computed. In its previous two audits, Taxpayer 1 was advised to separately state sales tax and gross receipts tax on customer invoices and to stop listing the total of both taxes as a sales tax on the invoices. Taxpayer 1 appealed the department's assessment in the last audit. The department replied to the appeal made by Taxpayer 1 in a letter dated April 3, 1996, and outlined the correct method for Taxpayer 1 to use when billing customers for gross receipts tax and sales tax on the same invoice.
The Taxpayers maintain that their software and forms vendors were unable to make complete changes to the Taxpayers' accounting software and forms based on the department's instructions until February 1998. Because this audit covered the period in which the Taxpayers were in the process of having their software and forms redesigned, they ask that the portion of the assessment related to this issue be abated.
In my letter of April 3, 1996, I indicated that Taxpayer 1 was to begin stating the sales tax as a distinct and separate charge on its sales invoices on a prospective basis. I further indicated that Taxpayer 1 should stop listing the total of the sales tax and gross receipts tax as a sales tax on its invoices. Taxpayer 1 was instructed to change the line on the invoices to read "total taxes" or "taxes."
Based on the facts presented, l do not find basis for waiving the tax and interest related to the gross receipts tax issue. The Taxpayers were instructed to change billing methods in April 1996. The audit allowed a three-month "grace period" to Taxpayer 1 and Taxpayer 2 by not including this issue in the audit prior to July 1996. This was considered a reasonable time period to implement new billing procedures. However, the Taxpayers did not comply with my determination until February 1998. This was also the third audit in which this issue had been addressed.
Taxpayer 1 may contact the department's **** at **** to make an appointment if it wishes the department to review engine sales in detail. If the ***** is not contacted within ninety days from the date of this letter, the sales sample will be considered correct. The assessment for Taxpayer 1 will be adjusted to remove the shop supply exceptions and a corrected assessment will be issued to Taxpayer 1. The assessment for Taxpayer 2 is correct and should be paid within 30 days to avoid the accrual of additional interest. The current balance of the assessment for Taxpayer 2 is $****. Payment may be mailed to ***** in the Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions, please contact **** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20161S
Rulings of the Tax Commissioner