04-217 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Sales of tangible personal property in interstate or foreign commerce; Audit sample

Topic

Appropriateness of Audit Methodology

Assessment

Date Issued

12-10-2004

December 10, 2004

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This is in reply to your letter submitted on behalf of ***** (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment issued by the Department for the period November 1999 through October 2002.

FACTS

The Taxpayer is a securities and brokerage firm specializing in brokerage, insurance, trust, 401(k), wealth and asset management services. An audit was conducted by the Department and resulted in the assessment of tax on various elements of the Taxpayer's operations.

The Taxpayer takes exception to the tax on items shipped outside Virginia. The Taxpayer contends these transactions should be exempt from the retail sales and use tax pursuant to the interstate commerce exemption found in Va. Code § 58.1-609.10 4. Additionally, the Taxpayer contests specific items included in the audit sample. The Taxpayer maintains that these items are not representative of daily expense purchases. The Taxpayer also contests the extrapolated amount included in the audit report, claiming the amount was not properly explained by the Department.

DETERMINATION

Out of State Shipments

Title 23 of the Virginia Administrative Code (VAC) 10-210-780 states, "The tax does not apply to sales of tangible personal property in interstate or foreign commerce. A sale in interstate and foreign commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia."

Based on the information provided with your correspondence, I find a basis for removing from the audit the contested purchases from: *****, *****, ***** and *****.

Audit Sample

Sampling is an audit technique 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 to the client. When sampling techniques are understood and properly applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit. The purpose of the audit sample is to determine a factor for errors within a representative selected period. Once the error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid. Every effort is made to select objectively the sample periods that are representative of the period being audited and to reach a consensus with the taxpayer concerning the validity of the sample.

After reviewing the information provided in your letter and the manner in which the sample was conducted, I find no basis to invalidate the sample and the error factor extrapolated over the audit period. The sample and extrapolation factor were applied in accordance with established audit procedures. While you contend that the high dollar amount of one item included in the sample is not representative of the Taxpayer's activity, the audit report includes several transactions with similar dollar amounts.

The courts have held that a tax assessment issued by the proper taxing authorities is prima facie correct and the burden is on the taxpayer to prove otherwise. For an item to be removed from the audit sample, the Taxpayer must show that the transaction was isolated in nature and not a normal part of the Taxpayer's operation. It is my determination that the Taxpayer has not met this burden. Accordingly, there is no basis to revise the assessment.

Extrapolation Amount

Your letter indicates that detailed information regarding the extrapolation amount was not provided to the Taxpayer or the Taxpayer's representative. According to the auditor, detailed information relating to the extrapolation amount was provided to the Taxpayer's representative on September 28, 2004 and additional information, in the form of a spreadsheet, was provided on October 1, 2004. I believe this material adequately explains the detail behind the extrapolation amount. If you or the Taxpayer requires further explanation, you may contact the auditor.

Conclusion

Based on this determination, the items shipped outside Virginia will be removed from the assessment. The other contested items will remain in the assessment, and an updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within thirty days from the date of the updated bill. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.

The Code of Virginia sections cited, along with other reference documents, are available on-line in the Department's Tax Policy Library, located at www.policylibrary.tax.virginia.gov. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/52640i

Rulings of the Tax Commissioner