Tax Type
Retail Sales and Use Tax
Description
Audit Sampling, Burden on Taxpayer to prove incorrect
Topic
Appropriateness of Audit Methodology
Assessment
Date Issued
07-18-2005
July 18, 2005
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear **********:
This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period February 2000 through January 2003. I apologize for the delay in responding to your appeal.
FACTS
An audit by the Department resulted in the assessment of tax on sales by the Taxpayer. The Taxpayer contends that the invoices used to determine the error factor for the audit are not representative of the Taxpayer's activity. The auditor used five invoices to compute the error factor of *****. Of the five invoices, one totaled more than ***** and the remaining four ranged from ***** to *****. The Taxpayer maintains that only two customers are responsible for the five invoices, and the five invoices used to determine the error factor were the only transactions with these customers during the audit period.
The Taxpayer requests that these invoices be removed from the audit sample and the error factor be revised.
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. The purpose of the audit sample is to determine a factor for errors within a representative select 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.
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. While the Taxpayer claims that the five contested sales do not represent a typical sale, this claim does not, by itself, render the sample inaccurate. Although sales to these customers 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.
Public Documents 99-66 (4/15/99) and 04-204 (11/23/04) are on point with the facts of the Taxpayer's case. These documents explain that an item cannot be removed from the audit sample unless the transaction is isolated in nature and not a normal part of the taxpayer's operation, regardless of whether the item is a large dollar transaction or that it may constitute a large percentage of the taxable measure in the audit sample.
Upon review of the audit report and the 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.
A revised 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 this letter.
The Code of Virginia sections and regulations cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department of Taxation's website, 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
- Kenneth W. Thorson
-
-
-
-
-
AR/51819.i
Rulings of the Tax Commissioner