Tax Type
General Provisions
Retail Sales and Use Tax
Description
Recordkeeping and Audit Sampling
Topic
Accounting Periods and Methods
Appropriateness of Audit Methodology
Date Issued
08-17-2001
August 17, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ******
This is in reply to your letter in which you seek correction of the department's retail sales and use tax audit assessment issued to ***** (the "Taxpayer"), for the period May 1995 through April 2000. I apologize for the delay in our response.
FACTS
The Taxpayer is a remodeling contractor and a dealer selling kitchen appliances. The department's audit disclosed that the Taxpayer had not filed sales tax returns since April 1995. Based on figures provided by the Taxpayer and the best information available, the department's auditor used a sample to calculate untaxed purchases and sales for 1999. The sampling results were extrapolated over the entire audit period. The Taxpayer disagrees with the auditor's methodology, contending that purchases in the earlier years of its business were not as great as in 1999 (the sample year). The Taxpayer submits that its liability is not as high as represented by the audit and that there is cause for an adjustment of the deficiency.
DETERMINATION
Records 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." Emphasis added. 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, copy enclosed, to use the best information available to reconstruct a dealer's sales or purchases to determine whether a tax liability exists.
Sample
Sampling 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. The purpose of the audit sample is to determine a factor for errors within a representative selected period. Once the error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid.
The courts have held that a tax assessment is prima facie correct, and the burden is upon the taxpayer to prove the assessment is incorrect. Based on the information presented, the Taxpayer has not met this burden. Furthermore, the Taxpayer has not provided documentation to support its claim that the volume of taxable purchases should be reduced. Accordingly, I find no basis to invalidate the sample calculations, and the assessment is correct as issued.
Penalty
Code of Virginia § 58.1-635 mandates the application of penalty to tax deficiencies. Title 23 VAC 10-210-2032, copy enclosed, supports the Code of Virginia and provides for the application of penalty to audit deficiencies stating that "Generally penalty cannot be waived if ... the taxpayer has collected the sales tax, but failed to remit it to the Department of Taxation." This same section also states that "The application of penalty to audit deficiencies will not be waived ... for other than exceptional mitigating circumstances." It is clear in this case, that taxes collected "in trust" were underreported to the department. Due to the fact that the Taxpayer collected the sales tax, held the tax "in trust" for the state, and did not remit that tax to the state, there is no cause to allow for a waiver of the penalty.
Based on the information before me, there is insufficient reason to allow for any adjustment to the department's audit. Consequently, the balance of the department's assessment remains due and payable. The Taxpayer should return its payment for tax, penalty, interest and accrued interest totaling ***** to the department's Office of Appeals and Rulings, Post Office Box 1880, Richmond, Virginia 23218-1880, within 45 days from the date of this letter. If payment is not received within that time, interest will continue to accrue on the balance due from the original date of assessment.
If you should have any questions regarding this matter, please contact ***** of the department's Office of Appeals and Rulings at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/30625Q
Rulings of the Tax Commissioner