Tax Type
Retail Sales and Use Tax
Description
Validity of Audit Sampling; Extrapolation
Topic
Accounting Periods and Methods
Computation of Tax
Date Issued
08-06-2001
August 6, 2001
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 period March 1992 through January 1995. I apologize for the delay in the department's response.
FACTS
The Taxpayer manufactures, markets and supports network systems and personal computers. The department conducted an audit of the Taxpayer and assessed tax on sales for which tax was not collected. The Taxpayer disputes the sampling method used to determine its sales tax liability and believes that the error factor computed by the auditor should be limited to the year in which the errors were made. Furthermore, the Taxpayer states that its sales increased dramatically during 1994, and extrapolating the error factor to 1994 overstates the sales tax liability. Finally, the Taxpayer states that the errors related to tax not charged on service contracts, and it sold fewer service contracts in the latter years of the audit period.
DETERMINATION
Sampling
The department conducted an audit of the Taxpayer using three months (July 1992, September 1993 and June 1994) as a sample period. The auditor determined that three sales made in July 1992 were subject to sales tax, but the Taxpayer failed to collect the tax. In accordance with audit procedures, the auditor computed an error factor and extrapolated it over the entire audit period. The Taxpayer contends that the errors found in July 1992 should be limited to 1992 and not be applied to 1993 and 1994, because no similar errors were found in the sample periods reviewed for those years (September 1993 and June 1994).
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 understood and properly applied, the final result should be within a narrow percentage range of the actual amount that would be 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 audit techniques in this case were properly applied. The purpose of the audit sample is to determine an error factor for the entire audit period, not for a single year. The Taxpayer acknowledges similar contracts were sold in 1993 and 1994; therefore, it is likely that similar errors were made in the collection of the sales tax during those years.
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 fewer service contracts were sold during the latter years of the audit period. Accordingly, I find no basis to invalidate the sample calculations, and the assessment as issued is correct.
Taxpayer Bill of Rights
You state in your letter that the Taxpayer was not provided a copy of the Virginia Taxpayer Bill of Rights when the audit for the period at issue was completed. You imply that the Taxpayer was not aware of its right to appeal the audit results through the administrative appeals process.
The current Virginia Taxpayer Bill of Rights did not exist at the time the audit at issue was conducted. However, it is my understanding the Taxpayer received a document explaining the Virginia Department of Taxation administrative audit appeal process. At the time the current audit was conducted, this document was routinely provided to taxpayers at the conclusion of an audit.
Conclusion
Based on the foregoing, a revision to the audit assessment is not warranted. The audit assessment is correct as issued. If you have any questions regarding this matter, you may contact
***** of the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/17292
Rulings of the Tax Commissioner