Tax Type
Retail Sales and Use Tax
Description
Contested sales transactions outside the sample period
Topic
Allocation and Apportionment
Appropriateness of Audit Methodology
Date Issued
09-08-2004
September 8, 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 January 2000 through December 2002. I note that the Taxpayer has paid the assessment in full. I apologize for the delay in the Department's response.
FACTS
The Taxpayer is a retailer of electrical supplies. As a result of the Department's audit, an assessment was issued for untaxed sales. The Taxpayer takes exception to the inclusion of two sales transactions in the audit sample and claims that such sales are not representative of the sample. For this reason, the Taxpayer contends that the contested sales should not be part of the sales sample used to extrapolate the tax deficiency.
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. When sampling techniques are applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit.
Because of the large volume of sales, both the auditor and the Taxpayer agreed to a one-month sample that represented average sales. The auditor found recurring errors in which the Taxpayer failed to charge the sales tax on various electrical supplies sold to customers. The auditor calculated an error factor for the representative sample period selected. The error factor was then extrapolated over gross sales for the audit period.
For an item to be removed from the audit sample, the Taxpayer must show that the transaction is isolated in nature and not a normal part of the Taxpayer's business activity. In this case, the Taxpayer sold electrical supplies to a church. While the Taxpayer claims that the two contested sales to this church do not represent a typical sale to a church because the sales are for new construction materials, this claim does not, by itself, render the sample inaccurate. For example, the sale of electrical supplies is an integral part of the Taxpayer's business activity sold on a consistent and recurring basis. Although sales to this particular customer may not be typical, there are likely similar transactions outside the sample period in which other customers have not paid the sales tax. Therefore, to remove the sales in question from the sample base would skew the sample and nullify its validity.
Upon review of the audit report and information presented, I find no basis to invalidate the sample. The courts have held that a tax assessment issued by the proper assessing authorities is prima facie correct, and the burden is upon the taxpayer to prove otherwise. The Taxpayer has not met this burden. Accordingly, the assessment is correct.
If you should have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/46332T
Rulings of the Tax Commissioner