Tax Type
Retail Sales and Use Tax
Description
Validity of Audit Findings When Taxpayer Records are Incomplete
Topic
Basis of Tax
Returns/Payments/Records
Withholding of Tax
Date Issued
07-30-2001
July 30, 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 and withholding assessments issued to ***** (the "Taxpayer"), for the periods January 1996 through December 1998, and April 1993 through March 1999, respectively. I apologize for the delay in the department's response.
FACTS
The Taxpayer operates a convenience store. The department's audit disclosed that there were sales and purchases on which the tax was neither collected and paid nor accrued and paid. Additionally, the audit disclosed that the Taxpayer failed to file withholding tax returns for employees' wages.
The Taxpayer disagrees with the methods used by the auditor to determine the sales and use tax deficiency, as well as the withholding tax deficiency.
DETERMINATION
Generally
Title 23 of the Virginia Administrative Code (VAC) 10-210-470 provides, in part, that every dealer liable for the collection and remittance of sales and use tax is required to keep and preserve for at least three years adequate and complete records necessary to determine its sales and use tax liability.
When complete records are not available for inspection and examination by the department in the course of an audit, the auditor must resort to other measures to determine the actual tax liability. In such instances, the department is authorized under Code of Virginia § 58.1-618 to estimate the tax liability and assess the tax estimated to be unpaid. This statute deems such estimated assessments to be prima facie correct. Although the statute allows the department to estimate tax liabilities when complete records are not available, I would note that the statute does not allow taxpayers to estimate their tax liabilities. Instead, the statute requires every dealer to be able to prove its actual tax liability.
Similarly, regarding withholding taxes, Code of Virginia § 58.1-111 provides that
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- Whenever any taxpayer liable under the law to file a state tax return with the Department shall fail or refuse on demand to file a correct and proper return, the Department may make an estimate of the amount of taxes due the Commonwealth by such taxpayer, from any information in its possession, and assess the taxes, penalties and interest due the Commonwealth by such taxpayer.
In this instance, as well, the auditor may make an estimate of the taxes due the Commonwealth based on the best information available.
I will address each of the issues presented in your letter.
Errors in reporting sales tax
Sunday sales: The cash register used to record grocery and deli sales has a "z" tape that records specific information. From this information the auditor used a formula that took the ending balance from the current day deducting the ending balance from the prior day to equal the estimated sales, tax and voids. This result was divided by 1.045 to determine sales for the missing "z" tapes. Regarding voids, the auditor was told by the Taxpayer's owners that the voids were not reliable figures and that they generally represented mistakes in keying transactions and were not used in calculating sales. For Sunday sales (which the Taxpayer states are the only sales missing), comments by the auditor provide that while there were 52 Sundays in 1997, there were 63 tapes missing. Consequently, I do not find cause to alter the auditor's sales estimate.
Withdrawals: Comments by the auditor indicate that there were no documented figures available. As a result, the auditor estimated the retail value of the tangible personal property consumed by the owners. The auditor used 70% of that figure to determine the amount of withdrawals from inventory. The figure of $1,956.00 that you suggest is the proper amount of withdrawals from inventory for 1997 is not supported by any documentation. Based on the information before me, I do not find cause to change the auditor's estimates.
Errors made by the auditors
Overstated cost of goods sold: You state that the paid out figure on the cash register includes cash payments for loans and nontaxable items such as newspapers and deli supplies. Comments by the auditor assume that the "loan payment" is a reimbursement of movies to the Taxpayer for purchases when there is a limited amount of funds available from the business. Personal funds paid by the owners for supplies would be offset by the repayment if the Taxpayer recorded the "loan" on the "z" tape when the loan was repaid. In any instance, the reimbursement effectively represents the purchase of supplies as a part of the cost of goods sold (as do the newspapers and deli supplies). Based on this information, I find no basis to alter the auditor's computations.
Overstated purchase markup: In accordance with Code of Virginia § 58.1-618, the department is authorized to use the best information available to reconstruct a dealer's sales or purchases to determine whether a tax liability exists. In this instance, and based on the lack of detailed documentation, the auditor properly relied on the figures provided by the owners.
Taxpayer figures for withdrawals: This issue has been previously addressed.
Incorrect payroll figure: There were no established figures for the auditor to use in computing or verifying the payroll. Consequently, the auditor made an assumption regarding the average number of employees working at the minimum wage to arrive at payroll. This figure was based on the best information available.
The auditor used 1997 figures to calculate deficiencies for 1996 and 1998, as 1997 was the most complete year for which records were available. The Taxpayer has not shown that these figures were erroneous or improperly applied to the other years. Accordingly, I do not find cause for any adjustment.
Auditor assessed withholding tax based on erroneous figures: As the auditor acted in accordance with Code of Virginia § 58.1-111, and there has been no documentation presented to refute the department's computations, I find that there is no basis to adjust the auditor's findings.
CONCLUSION
The burden is on the Taxpayer to prove that the audit methodology applied is flawed in some manner so as to render the sales tax and withholding tax assessments invalid. That burden has not been met. Accordingly, there is no basis to make any adjustments to the department's audit. In addition, since the matters presented in this case are factual issues and no documentation has been provided to support the figures and positions presented in your letter, I find that a meeting would not be productive.
The Taxpayer had ample time to secure the necessary documentation to prepare and present its detailed response, as provided in your letter. Nonetheless, I will allow an additional 30 days from the date of this letter for the Taxpayer to make such information available for review. Once available, the Taxpayer should contact ***** of the department's Office of Tax Policy at *****.
***** will have the department's auditor contact the Taxpayer for purposes of arranging a time to review the documentation. If the required information is not made available within the time allowed, the balance of the department's assessments, inclusive of accrued interest to date, will become due and payable.
If you should have any additional questions regarding this response, please contact *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25678Q
Rulings of the Tax Commissioner