Tax Type
Retail Sales and Use Tax
Description
Chain restaurants; Cash on hand/days end tape receipt
Topic
Accounting Periods and Methods
Appropriateness of Audit Methodology
Date Issued
04-11-2003
April 11, 2003
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 issued to ***** (the "Taxpayer") for the period March 1997 through February 2000. I apologize for the delay in the Department's response.
FACTS
The Taxpayer operates a chain of restaurants. The primary issue in this case is cash overages and shortages. I understand this refers to the difference between cash on hand at the end of the day compared to the cash register tape. The Taxpayer also contests the assessment of a miscellaneous sale that you maintain is the sale of a motor vehicle.
The auditor sampled the Taxpayer based on a month of average sales. Included in the sample were a number of factors that the auditor reviewed, including cash overages and shortages, reduced price meals, free meals, bad debts and costs of meals sold.
The sample revealed that the Taxpayer erroneously subtracted its cash shortages from gross sales. It was also found that for the sample month each of the Taxpayer's locations had net cash shortages. The sample month net shortage was then extrapolated over the entire audit period.
It is the extrapolation of the sample month shortage that the Taxpayer protests. In this regard, the Taxpayer's records show that the sample month net shortage is the second highest shortage amount and is more than double the average shortage amount for the 36-month period. Because the sample month net shortage is so much higher than the audit period average, the Taxpayer requests that the audit sample be revised to reflect the average net shortage amount as calculated by the Taxpayer's records.
DETERMINATION
I understand a sample was used in this case because the number of transactions would make a detailed audit very impractical for either the Department or the Taxpayer. I further understand that the sample month in this case was selected because it most closely matched the Taxpayer's average gross sales throughout the audit period. Accordingly, it appears that the use of a sales sample, and the sample period selected, are reasonable.
I find no basis to revise the sample period error factor in this case. The records you submitted (detailing cash overages and shortages) affect only one part of the entire sample. The cash overages and shortages were audited as part of a sample that was comprised of a number of issues. I do not find it reasonable for the Department to adjust the assessment based on one element of the sample period while ignoring the remaining elements. This approach would allow taxpayers to pick and choose certain transactions in the sample after the audit was completed. Similarly, it would not be reasonable for the audit staff to disregard some elements of the sample in the hope of increasing an assessment. Therefore, I do not find any cause to revise the assessment of this issue.
With regard to the miscellaneous sale, this item will be removed from the assessment. As you indicate, the sale of a motor vehicle is not subject to the retail sales and use tax.
The assessment has been revised to remove the miscellaneous sale. An updated bill, with interest accrued to date, will be sent shortly to the Taxpayer. No additional interest will accrue provided the updated bill is paid within 30 days from the date of this letter. If you have any 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 *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/37143Q
Rulings of the Tax Commissioner