Tax Type
Retail Sales and Use Tax
Description
Audit sample period; shipping and handling" charges
Topic
Accounting Periods and Methods
Appropriateness of Audit Methodology
Computation of Tax
Date Issued
04-19-2002
April 19, 2002
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to your client, ***** (the "Taxpayer"), for the period September 1994 through August 2000. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer contests two areas that were assessed as a result of the department's audit. First, the auditor assessed tax on "shipping and handling" charges and on which the vendor did not charge sales tax. The Taxpayer believes these charges constitute "shipping" only and are not subject to the tax. Because this was the first audit of the Taxpayer, the auditor advised the Taxpayer that if it could furnish affidavits from its vendors stating that such charges constituted shipping only, those charges would be removed from the audit.
The second area appealed by the Taxpayer involves the purchases audit sample the auditor used to extrapolate the use tax liability. The auditor sampled a one-year period of 1999 and extrapolated the liability over the six-year audit period. The Taxpayer believes the sample period is not representative of the entire audit period, as the company's growth rate was much greater during the sample period than during the other five years of the audit. The Taxpayer is requesting a detailed examination of its purchases during the entire audit period in order to assess its actual use tax liability accurately.
DETERMINATION
It has been the longstanding policy of the department that "handling" charges are taxable as a service in connection with the sale of tangible property. In addition, it is also the policy of the department that when handling charges are billed with exempt shipping charges in a single "lump sum" charge, the total amount is taxable. It is noted in your appeal that you have provided an affidavit from one of the Taxpayer's suppliers testifying to the fact that the shipping and handling charge is actually shipping cost only. Based on the information furnished, I will agree to remove this invoice from the sample.
In regard to the audit sample, sampling is an audit technique of significant value that is widely used in the public and private sectors. The department uses sampling in sales and use tax audits where a detailed audit would not prove beneficial to either the auditor or the taxpayer. When sampling techniques are properly applied, the result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit.
The Taxpayer believes that the audit sample used for purchases is not representative of the entire audit period. More specifically, the Taxpayer's business growth was greater during the sample period than other periods of the audit. While this may be case, this does not necessarily render the sample period invalid. In extrapolating the error factor derived using the sampling technique, the department uses base figures, i.e., purchases, to accurately reflect business trends during the remainder of the period. In other words, purchases during the audit period should accurately reflect business trends such as business growth and, likewise, business slowdowns.
Notwithstanding the above, if the Taxpayer can provide documentation that clearly establishes that the sample period used does not accurately reflect the projected liability, I will request that the auditor expand the sample period.
An auditor from the ***** will contact the Taxpayer to make the revisions set forth above and review any documentation relating to the sample. If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Policy Development, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
PD/33115K
Rulings of the Tax Commissioner