Tax Type
Retail Sales and Use Tax
Description
Audit sample techniques
Topic
Collection of Delinquent Tax
Date Issued
04-26-2000
April 26, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to **** (the "Taxpayer") for the audit period July 1995 through May 1998. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is an out-of-state manufacturer who sells textile products, custom rollers, and steel shafts. As a result of the department's audit, an assessment was made for untaxed sales to Virginia customers. An assessment was also made for the purchase of samples, brochures, and other advertising for use and consumption in Virginia. The assessment was based on a percentage of the Taxpayer's Virginia sales.
The Taxpayer takes exception to the use tax error factor used to extrapolate the sampled deficiency and claims that it erroneously includes nontaxable services. The Taxpayer further claims that the auditor did not take into consideration sales tax paid to Georgia on such purchases in determining the use tax deficiency. The Taxpayer also takes exception to the sales tax assessed in this audit, and maintains that the error factor used to determine the Taxpayer's sales liability is not representative of its Virginia sales activity.
DETERMINATION
Purchase Sample
In this case, it is my understanding that the auditor and Taxpayer both agreed that, due to the fact that the purchase records were maintained off-site, a sample of expensed purchases relating to advertising, samples, and other similar accounts would be examined. A sample of such purchases revealed that the Taxpayer paid Georgia's 6 percent sales tax on its purchases; however, in some cases only 4 percent sales tax was being paid. The auditor also found purchases in which no sales tax was paid or accrued on taxable purchases.
To determine the use tax deficiency, the auditor used Virginia sales divided by total sales for the year 1997. The resulting error ratio was then applied to applicable expense accounts totals for the same period. This amount was then multiplied by three to represent the total use tax deficiency for the audit period.
The auditor applied the sampling method using the limited information provided during the audit, and the assessment was estimated based on such information. I would point out that the auditor did not include any amounts relating to prepaid accounts for samples, advertising, and similar accounts in the sample. While the use tax error factor may not reveal the actual percentage of samples, brochures, and other advertising expenses used in Virginia, the best information available at the time of audit was used to estimate the Taxpayer's use tax liability. In order to make any adjustments to the audit assessment, the Taxpayer must make available detailed records of expensed purchases necessary to conduct a proper examination.
Sales Sample
A review of the audit reveals that the auditor included in the sample one invoice for the sale of a warranty agreement. The Taxpayer indicates that the warranty agreement is an isolated transaction and not recurring in nature. The Taxpayer indicates that a search of all Virginia sales for the entire audit period reveals no other sales of warranty agreements to Virginia customers.
If the Taxpayer can provide documentation showing that the warranty agreement included in the sample was the only such sale made to Virginia during the audit period, the sale will be removed from the audit sample and taxed separately.
Summary
Based on the information currently before me, it appears that the assessment is correct based on the information available at the time of audit. I will, however, allow the Taxpayer an opportunity to provide additional documentation to establish the taxable amount of samples, brochures, and other advertising used and consumed in Virginia. In addition, if the Taxpayer can show that the sale of the warranty agreement is isolated, and not a part of the Taxpayer normal business activity, this item will be removed from the sample and taxed separately. The requested information should be made available for review by the auditor within 45 days of the date of this letter. The auditor will determine whether any new documentation to be furnished is sufficient to warrant a revision of the audit. If the requested information is not received within the allotted time, the audit and assessment will be correct as issued.
If you have any questions regarding this letter, please contact **** in the Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/22301T
TO WHOM IT MAY CONCERN
Under the authority of Section 58.1-1 of the Code of Virginia, I hereby delegate to Janie E. Bowen, Assistant Tax Commissioner, the authority to sign for me any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and the Treasury Board.
This authority will continue until revoked. The delegation of authority dated June 3, 1994, is hereby revoked and replaced.
Done at Richmond, Virginia this tenth day of September, 1999.
Danny M. Payne
Tax Commissioner
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to **** (the "Taxpayer") for the audit period July 1995 through May 1998. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is an out-of-state manufacturer who sells textile products, custom rollers, and steel shafts. As a result of the department's audit, an assessment was made for untaxed sales to Virginia customers. An assessment was also made for the purchase of samples, brochures, and other advertising for use and consumption in Virginia. The assessment was based on a percentage of the Taxpayer's Virginia sales.
The Taxpayer takes exception to the use tax error factor used to extrapolate the sampled deficiency and claims that it erroneously includes nontaxable services. The Taxpayer further claims that the auditor did not take into consideration sales tax paid to Georgia on such purchases in determining the use tax deficiency. The Taxpayer also takes exception to the sales tax assessed in this audit, and maintains that the error factor used to determine the Taxpayer's sales liability is not representative of its Virginia sales activity.
DETERMINATION
Purchase Sample
In this case, it is my understanding that the auditor and Taxpayer both agreed that, due to the fact that the purchase records were maintained off-site, a sample of expensed purchases relating to advertising, samples, and other similar accounts would be examined. A sample of such purchases revealed that the Taxpayer paid Georgia's 6 percent sales tax on its purchases; however, in some cases only 4 percent sales tax was being paid. The auditor also found purchases in which no sales tax was paid or accrued on taxable purchases.
To determine the use tax deficiency, the auditor used Virginia sales divided by total sales for the year 1997. The resulting error ratio was then applied to applicable expense accounts totals for the same period. This amount was then multiplied by three to represent the total use tax deficiency for the audit period.
The auditor applied the sampling method using the limited information provided during the audit, and the assessment was estimated based on such information. I would point out that the auditor did not include any amounts relating to prepaid accounts for samples, advertising, and similar accounts in the sample. While the use tax error factor may not reveal the actual percentage of samples, brochures, and other advertising expenses used in Virginia, the best information available at the time of audit was used to estimate the Taxpayer's use tax liability. In order to make any adjustments to the audit assessment, the Taxpayer must make available detailed records of expensed purchases necessary to conduct a proper examination.
Sales Sample
A review of the audit reveals that the auditor included in the sample one invoice for the sale of a warranty agreement. The Taxpayer indicates that the warranty agreement is an isolated transaction and not recurring in nature. The Taxpayer indicates that a search of all Virginia sales for the entire audit period reveals no other sales of warranty agreements to Virginia customers.
If the Taxpayer can provide documentation showing that the warranty agreement included in the sample was the only such sale made to Virginia during the audit period, the sale will be removed from the audit sample and taxed separately.
Summary
Based on the information currently before me, it appears that the assessment is correct based on the information available at the time of audit. I will, however, allow the Taxpayer an opportunity to provide additional documentation to establish the taxable amount of samples, brochures, and other advertising used and consumed in Virginia. In addition, if the Taxpayer can show that the sale of the warranty agreement is isolated, and not a part of the Taxpayer normal business activity, this item will be removed from the sample and taxed separately. The requested information should be made available for review by the auditor within 45 days of the date of this letter. The auditor will determine whether any new documentation to be furnished is sufficient to warrant a revision of the audit. If the requested information is not received within the allotted time, the audit and assessment will be correct as issued.
If you have any questions regarding this letter, please contact **** in the Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/22301T
TO WHOM IT MAY CONCERN
Under the authority of Section 58.1-1 of the Code of Virginia, I hereby delegate to Janie E. Bowen, Assistant Tax Commissioner, the authority to sign for me any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and the Treasury Board.
This authority will continue until revoked. The delegation of authority dated June 3, 1994, is hereby revoked and replaced.
Done at Richmond, Virginia this tenth day of September, 1999.
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner