04-149 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Failed to collect tax on charges that were separately listed

Topic

Appropriateness of Audit Methodology

Assessment

Computation of Tax

Date Issued

09-17-2004

September 17, 2004

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 November 1999 through October 2002. I apologize for the delay in the Department's response.

FACTS

The Taxpayer is a manufacturer of metal and wood building materials. During the audit period, the Taxpayer failed to collect tax on engineering charges that were separately listed on its sales invoices for building materials. The Taxpayer states that it was not advised during a prior audit that it was required to collect tax on charges for engineering services rendered in connection with the sale of tangible personal property. The Taxpayer contends that assessing tax on such charges retroactively to the beginning of the audit period is unfair. The Taxpayer also contests the estimated sales figure used for a three-month period for which no sales data was available. Finally, the Taxpayer disputes the sample computation on expense purchases, maintaining that actual figures were available.

DETERMINATION

Engineering charges

Virginia Code § 58.1-603 imposes the sales tax upon the "sales price" of tangible personal property sold in the Commonwealth. "Sales price" is defined in Va. Code § 58.1-602 as "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale ...." In the Taxpayer's case, the charges for engineering services are in connection with the sale of tangible personal property (i.e., the metal and wood building materials). The auditor properly included the engineering charges in the sales price subject to the retail sales tax.

You believe it is unfair to assess tax on the engineering charges for periods from 1999 through 2002 (when you represent the Taxpayer was first notified to charge tax on engineering charges). I would note, however, that the law and policy regarding the application of sales tax to services rendered in connection with the sale of tangible personal property is long-standing. It is incumbent upon the Taxpayer to charge the proper amount of tax on its sales.

Estimated sales

Virginia Code § 58.1-633 requires every dealer "to keep and preserve suitable records of the sales, leases, or purchases ... and such other books of account as may be necessary to determine the amount of tax due ... and such other pertinent information as may be required by the Tax Commissioner." This requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-470.

When a dealer fails to maintain adequate records, the Department is authorized by Va. Code § 58.1-618 to use the best information available to reconstruct a dealer's sales or purchases to determine whether a tax liability exists. When an assessment is issued under these circumstances, the above-cited statute deems such assessment to be prima facie correct. The burden is upon the Taxpayer to prove that the audit methodology applied in this case is flawed in some manner as to render the assessment invalid. The Taxpayer has not furnished any documentation to prove the estimated sales figure is erroneous. Accordingly, there is no basis to revise the audit with respect to the assessment of unreported sales.

Expense purchases sample

Sampling is an audit technique of significant value that is used in the public and private sectors in all types of audits where a detailed audit would not prove beneficial to either the auditor or the client. The courts have consistently held that a tax assessment issued by the proper authorities is prima facie correct and valid and that the burden of proof is upon the Taxpayer to prove otherwise. As such, the Taxpayer must demonstrate that the sample used is not representative of the audit period or that it is flawed in some other manner to invalidate the sample.

The auditor's comments note that the Taxpayer was in agreement with the sample results at the close of the audit. The Taxpayer's appeal does not provide any detailed explanation as to the reasons it believes the sample is flawed. The auditor has conducted a second review of the sample and has determined there is no error in the computations. The Taxpayer has not submitted any documentation proving that the sample or the methodology is erroneous. Accordingly, the assessment based on the sample computed by the auditor is correct as issued.

Conclusion

Based on the foregoing, the assessment is correct as issued. The Taxpayer will receive an updated bill, including accrued interest. The outstanding balance should be paid within 30 days of the date of the updated bill to avoid the accrual of additional interest.

The Code of Virginia sections and regulation cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us. If you have any questions regarding this determination, 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/46699Q

Rulings of the Tax Commissioner