02-163 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Government contractor, untaxed purchases

Topic

Accounting Periods and Methods

Exemptions

Date Issued

12-18-2002

December 18, 2002

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 January 1998 through October 2000. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a government contractor. As a result of the department's audit, an assessment was issued for untaxed purchases. In this case, the auditor conducted a one-year purchase sample. The auditor divided the use tax deficiency by the total purchases for the sample period to arrive at the percentage of error factor. The error factor was then extrapolated over gross purchases for the entire audit period to arrive at the taxable measure and the audit liability.

The Taxpayer contests the method used by the auditor to determine the audit liability. The Taxpayer indicates that it generally provides services to the federal government and is, therefore, liable for the tax on its purchases of tangible personal property used to provide those services. During the audit period, however, the Taxpayer entered into a specific contract whereby it agreed to sell a large quantity of tangible personal property to the federal government. The terms of this specific contract are such that the Taxpayer could (and in fact did) purchase tangible personal property exempt of the tax for resale.

You indicate that a relatively small amount of the items associated with this exempt government contract were purchased in 1999 (the sample year), but that most of the exempt purchases occurred in 1998. Accordingly, you request that these exempt purchases be entirely removed from the audit calculation. This action would have the following results: First, removing the 1999 exempt purchases from the 1999 total purchases would result in a lower denominator but in a higher error factor. Second, by removing the 1998 exempt purchases from the 1998 total purchases, the resulting total audit deficiency would be considerably lower than currently assessed. In effect, even though the error factor would increase under your proposal, the total assessment would decrease (because so many exempt purchases were made in 1998).

DETERMINATION

I cannot agree with your request to remove the exempt contract purchases from total purchases used to calculate the audit assessment. Sampling is an audit technique of significant value and is widely used in all types of audits where a detailed 100% audit would not prove beneficial to either the auditor or the Taxpayer. In this case, the auditor and the Taxpayer selected 1999 as the sample period for expensed purchases. The auditor determined an error factor for the representative sample period selected, and the error factor was extrapolated over total purchases for the entire audit period. This procedure assumes that there will be a similar error rate in the remainder of the months for the entire audit period.

I understand that the 1999 exempt contract purchases were initially (and erroneously) included in the 1999 taxable purchases used to calculate the error factor. Once this oversight was corrected, there is no indication in this case that the error factor is erroneous. Therefore, applying this error factor from the sample period to total purchases for the entire audit period is reasonable.

Your suggestion to remove a select group of exempt purchases from 1998 total purchases is not warranted. This action is analogous to manipulating data once the sample calculations have been concluded. It would not be reasonable if the auditors attempted, once the sample calculations had been completed, to pick and choose additional transactions outside the sample period in an effort to increase the assessment. Further, it would not be warranted for the auditors to increase the error factor by removing select items from the denominator (total purchases). For example, if 1998 had been used as the sample period, it would not be reasonable for the auditors to remove from total purchases the purchases associated with the exempt contract. Such an action would greatly (and unfairly) increase the error factor and the final assessment.

Based on the foregoing, I find no basis to revise the assessment, and the unpaid balance of the assessment remains due. The Taxpayer will receive an updated bill including accrued interest. No additional interest will accrue provided the outstanding balance is paid in full within 30 days from the date of the updated bill.

Please send your payment to the department's Office of Policy and Administration, Appeals and Rulings, Post Office Box 1880, Richmond, Virginia 23218-1880, Attention: *****. If you have questions regarding this determination, you may contact ***** at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/37137T

Rulings of the Tax Commissioner