Tax Type
Retail Sales and Use Tax
Description
Paper manufacturer that produces various types of paperboard products for sale.
Topic
Amnesty
Appropriateness of Audit Methodology
Computation of Income
Date Issued
08-27-2004
August 27, 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 March 1999 through February 2002. I apologize for the delay in the Department's response.
FACTS
The Taxpayer is a paper manufacturer that produces various types of paperboard products for sale. The Taxpayer was assessed use tax based on a one- year sample of the Taxpayer's purchases. The Taxpayer contests the assessment and claims that credit for erroneously accrued tax on expensed purchases was detailed and not credited as part of the sample extrapolation. The Taxpayer states that the inclusion of the credits in the sample extrapolation results in an overpayment of sales and use tax for the audit period. The Taxpayer also contests the penalty assessed in the audit on untaxed sales. Based on the above, the Taxpayer believes it is entitled to a refund of tax plus interest for the erroneous accrued taxes.
DETERMINATION
Audit Sample
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 results are usually within a narrow percentage range of the actual amount that would have been 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. Likewise, this same methodology is used when considering transactions on which Virginia tax has been overpaid.
According to the auditor's comments, several of the vendors that were included in the detailed review of the Taxpayer's fixed asset records were the same vendors for which the tax was accrued in error on expensed items. The auditor also observed that the frequency of accruing the tax in error on these types of transactions (high dollar real property and services contracts) was inconsistent during the audit period. Therefore, the auditor detailed the credit for the erroneous accrued tax on purchases from these vendors.
The Department ruled in Public Document (P.D.) 96-232 (9/17/96) that use tax accrued and paid in error to the Department may be included in an audit sample as a credit. There have been instances, however, in which the Department has removed transactions that distort an audit sample. I find that this situation falls into that category and the ruling in P.D. 96-232 is not applicable in the Taxpayer's case. The Taxpayer's claim that the contested transactions are a part of the Taxpayer's normal business was never an issue. The auditor detailed the contested transactions because the Taxpayer's tax treatment of the vendors in question was not consistent throughout the entire audit period. For example, the auditor observed that the frequency of accruing the tax in error on exempt service transactions was greater in the second half of the audit period. As a result, the Taxpayer was accruing the tax in error on many of these exempt services during the sample period. Because the treatment of these vendors was not consistent during the entire audit period, the auditor concluded that including these credits in the sample base would skew the sample and nullify its validity.
After reviewing the information provided in your letter and the manner in which the sample was conducted, I find no basis to invalidate the auditor's methodology. The sample and the error factor extrapolated over the audit period were computed properly, and the credits at issue were properly detailed. I would note that 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. It is my determination that the Taxpayer has not met this burden.
Penalty
You acknowledge that the Taxpayer received notification of the Virginia Tax Amnesty Program, offering a reduced interest payment and abatement of the penalty on the bill subject to the administrative appeal. The Taxpayer chose to pursue its appeal and not take advantage of the Amnesty Program. The Taxpayer seeks abatement of the assessed penalty based on a sales compliance ratio of 92 percent.
In this case, the Department's auditor reviewed the Taxpayer's records and issued an assessment for unremitted sales tax on tools and computers sold to employees. The auditor applied penalty because sales tax was collected but not remitted to the Department.
Virginia Code § 58.1-635 states, "[w]hen any dealer fails to make any return and pay the full amount of the tax . . . there shall be imposed, in addition to other penalties . . . a specific penalty to be added to the tax in the amount of six percent if the failure is for not more than one month, with an additional six percent for each additional month, or fraction thereof, during which the failure continues, not to exceed thirty percent . . . ." Title 23 of the Virginia Administrative Code 10-210-2032 provides that penalty will not be waived in situations where a taxpayer has collected sales tax but failed to remit the tax to the Department. Under the applicable law and regulation, the penalty was properly assessed and there is no basis to allow for waiver of the penalty.
Conclusion
Based on the foregoing, the Department's audit was properly assessed, and there is no cause for any adjustment. Accordingly, the outstanding balance for bill number ***** totaling ***** (tax: *****; interest: *****; penalty: *****) remains due and payable.
I would note that Va. Code § 58.1-1840.1(F)(1) mandates an additional 20% penalty (in addition to all other penalties) be imposed on unpaid tax assessments that were eligible for amnesty. In this case, the additional 20% penalty, plus additional accrued interest, will be imposed unless the Taxpayer pays the outstanding balance within 30 days from the date of this letter. Please remit your payment to the Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 1880, Richmond, Virginia 23218-1880, Attention *****.
The Code of Virginia sections, regulations and public documents cited 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/44411T
Rulings of the Tax Commissioner