Tax Type
Retail Sales and Use Tax
Description
Extrapolation of an error factor derived from a sampling of fixed asset purchases
Topic
Appropriateness of Audit Methodology
Assessment
Date Issued
09-17-2004
September 17, 2004
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 assessment issued to ***** (the "Taxpayer"), for the audit period July 1997 through July 2002. The Taxpayer has paid the portion of the audit assessment related to expensed purchases. I apologize for the delay in the Department's response.
FACTS
As a result of the Department's audit, the Taxpayer was assessed use tax on untaxed expensed purchases and fixed assets. In this case, the auditor extended the audit period beyond the standard three years provided in Virginia Code § 58.1-634 because the Taxpayer failed to file returns and pay the use tax on untaxed purchases of tangible personal property since the prior audit.
The auditor performed a detailed audit on fixed assets and assessed use tax on items for which the Taxpayer was unable to provide documentation that tax was charged on the invoice or self-accrued and remitted directly to the Department. The Taxpayer contests the detailed audit of fixed asset purchases and claims the assessment overstates its liability. The Taxpayer states that based on its sampling the total fixed assets included in the Department's compliance computations, only 4.7 percent are exceptions. Based on this low error rate, the Taxpayer claims that the extrapolation of an error factor derived from a sampling of fixed asset purchases provides a more accurate tax liability. The Taxpayer requests that its tax liability on fixed asset purchases be based on the extrapolated amount.
DETERMINATION
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. The purpose of the audit sample is to determine an error factor for the entire audit period. The sample selected in an audit situation must be representative of the audit period and include transactions that are recurring in nature and made in the normal course of business.
Fixed assets are not purchases that have recurred during the audit period. Instead, fixed assets are depreciable property used in operating a business that will not be consumed or converted into cash or its equivalent during the current accounting period. For this reason, an audit of fixed assets does not normally involve sample testing as commonly used by the Department when auditing expensed purchases.
In this case, the detailed audit provides the exact liability on the Taxpayer's untaxed fixed asset purchases. Using the Taxpayer's proposed method of an error factor in its calculations would inaccurately portray the Taxpayer's tax liability. Based on the above, I find that the audit techniques in this case were properly applied.
Accordingly, the outstanding balance of the assessment as shown on the enclosed schedule is due and payable. The Taxpayer should return its payment in the amount of ***** to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, Post Office Box 1880, Richmond, Virginia, 23218-1880, Attn: *****. Payment must be received within 30 days from the date of this letter to avoid the accrual of additional interest. In addition, please see the enclosed "Important Payment Information" addressing the potential 20% penalty mandated by Va. Code § 58.1-1840.1(F).
The Code of Virginia sections cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions regarding this determination, please contact ***** at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/45278T
Rulings of the Tax Commissioner