04-33 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

General building contractor; fixed assets and untaxed expensed purchases.

Topic

Accounting Periods and Methods

Date Issued

07-15-2004

July 15, 2004

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

Dear **************:

This will reply to your letter in which you seek correction of a retail sales and use tax audit assessment issued to ************ (the "Taxpayer") for the period August 1996 through March 2002. I apologize for the delay in the Department's response.

FACTS

The Taxpayer is a general building contractor. As a result of the Department's audit, the Taxpayer was assessed tax on the purchase of fixed assets and untaxed expensed purchases.

DETERMINATION

Virginia Code § 58.1-205 deems a tax assessment issued by the Department to be prima facie correct, and the burden is upon the taxpayer to prove that the assessment is incorrect. With this in mind, I will address the contested issues set out in your letter.

Fixed Assets

The auditor reviewed the Taxpayer's fixed asset depreciation schedule and assessed the tax on those assets for which the Taxpayer was unable to provide documentation that the tax was charged on the invoice or self-accrued and remitted directly to the Department.

Excavator. The Taxpayer claims that the excavator was purchased for use by an affiliate company and used in exempt mining activities. The Taxpayer contends that the equipment is owned by the affiliate company and was erroneously reported on the Taxpayer's depreciation schedule.

I cannot agree to remove this asset from the assessment. The Taxpayer has been depreciating this asset for federal and state income tax purposes. If the Taxpayer can show that it has amended its federal and state income tax returns to conform to its claim that the depreciation schedule is erroneous, I will certainly review that documentation. Failing that, I find that this asset is correctly assessed.

Welders: The Taxpayer presents documentation to show that tax was properly charged on items #2 and #5. Accordingly, these items will be removed from the audit. The Taxpayer has not submitted copies of the invoices and associated invoice payments to establish that the sales tax was charged and paid in connection with item #4. Your argument that the vendor has consistently collected the tax on other invoices is not sufficient evidence that the tax was paid on the contested item. Lacking the documentation to show that the tax was paid, I find that the auditor was correct in holding this transaction taxable in the audit. However, if the Taxpayer can provide documentation that the tax was paid on the contested item, it will be removed from the audit.

Expensed Purchases

The auditor assessed the tax on taxable items for which the vendor failed to charge sales tax on the invoice. Subsequent to the audit, the Taxpayer contacted the vendor and paid the sales tax on the contested items. The vendor filed amended sales tax returns and reported the tax to the Department. The Taxpayer protests the tax assessed on these purchases, contending that the tax has already been paid to the vendor.

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. When sampling techniques are 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 an error factor for the entire audit period.

The auditor used a four-month sample to identify purchases made during the audit period. The auditor found errors in which the vendor failed to charge sales tax on items that were taxable. Further, while the tax on the transactions in question was subsequently paid by the Taxpayer, there are likely similar transactions outside the sample period on which the Virginia tax has not been paid. To remove the items in question from the sample base would skew the sample and nullify the validity of the sample. Therefore, the contested items will remain in the sample, and the Taxpayer will be given credit against the audit liability for the tax paid to its vendors.

Conclusion

The Department's audit has been revised as noted above. The assessment as shown on the enclosed schedule is due and payable. However, I will certainly review additional information with respect to the excavator provided such information is provided within 30 days from the date of this letter.

The Taxpayer should return its payment in the amount of *********** to the Virginia Department of Taxation, Post Office Box 1880, Richmond, Virginia, 23218-1880 Attn:********* within 30 days from the date of this letter. If payment or additional documentation is not received within that time, interest will accrue on the outstanding balance, calculated from the date of assessment. 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 letter, please contact ************ at *******************.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/44004T

Rulings of the Tax Commissioner