Document Number
02-139
Tax Type
Retail Sales and Use Tax
Description
Manufactures and sells products used by other industries and for resale
Topic
Appropriateness of Audit Methodology
Exemptions
Date Issued
10-30-2002
October 30, 2002


Re: § 58.1-1821 Application: Retail Sales and Use Tax


Dear *****:

This replies to your letter in which you seek a reconsideration of the Tax Commissioner's determination regarding the department's retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period March 1997 through February 2000. I apologize for the delay in responding.
                          • FACTS

The Taxpayer manufactures and sells products used by other industries and for resale. The Taxpayer contends that the audit sample was inaccurate and that the department's auditors included limited sales to customers, did not consider exemption certificates presented by customers and disallowed exempt sales to customers purchasing under direct pay permits. The Taxpayer also seeks to include credits in the sample computations for taxes paid to the department by customers as opposed to detailed credits for the sample months.
                      • DETERMINATION

Credits

The use of a sampling technique examining sales provides a view of the Taxpayer's compliance related to sales tax collection and reporting responsibilities. In general, the types of errors found by a sample would be typical of the types of errors that could be found in an audit period if a detailed audit had been performed. Due to the size and scope of the Taxpayer's operations and the volume of transactions, a sample audit was performed with concurrence by the Taxpayer.

There is always the possibility that isolated errors may occur that are not typical of a taxpayer's operations. However, for an item to be removed from an audit sample, a taxpayer must establish that a transaction was an isolated event and not a normal part of its operations. With regard to an assessment based upon a sample computation, the courts have held that a tax assessment is prima facie correct, and that the burden is upon the taxpayer to prove that an assessment is incorrect.

While some of the Taxpayer's customers have paid the Virginia tax on certain transactions included in the sample computations, there are likely similar transactions outside of the sample period on which the Virginia tax has not been paid. The sample's purpose is to address the taxes not charged to the Taxpayer's customers. Therefore, to include as credits those transactions where the taxpayer's customer has paid the tax or to remove the sales transactions altogether from the sample calculations would distort the sample and nullify its statistical validity. This same issue of accounting for taxes that have been self-accrued and paid by customers was previously addressed in Public Document 95-59 (03/27/95), copy enclosed. As was provided in the department's previous response, I continue to find no basis for recalculating the sample.

Exemption Certificates

Upon reconsideration, assessed sales for which the Taxpayer had fully completed exemption certificates on file will be removed from the assessment.

Additionally, the Taxpayer was given the opportunity to submit exemption certificates at the conclusion of the audit in the event that there were other sales that may have been eligible for exemption. As stated in the department's prior response, however, exemption certificates secured by a taxpayer at the conclusion of an audit are more closely evaluated because a taxpayer did not rely on such a certificate at the time of sale. Public Document 98-29 (2/20/98) sets out the department's policy with regard to this issue.

Direct Pay Permits

There were certain sales in which the Taxpayer's customers represented themselves as holders of direct payment permits. However, as the Taxpayer did not possess any evidence of such permits or have any verifiable reference to direct pay permit registration numbers, those sales were included in the sample. The department's prior response allowed the Taxpayer the opportunity to retrieve direct pay permits from customers or a registration number that would verify the customer's ability to purchase exempt of the tax. In either instance, the information was not submitted and the sales were properly included.

Based on this determination, the audit will be returned to the ***** District Office to revise the exemption certificate issue. A revised assessment will then be issued and sent to the Taxpayer.

If you have any additional questions regarding this matter, please contact ***** of the department's Office of Policy and Administration, Appeals and Rulings, at *****@tax.state.va.us or at *****.


Sincerely,


Kenneth W. Thorson
Tax Commissioner




AR/34882Q

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46