Tax Type
Retail Sales and Use Tax
Description
Inclusion of large taxable sales in an audit sample collected in error.
Topic
Accounting Periods and Methods
Appropriateness of Audit Methodology
Date Issued
04-26-2005
April 26, 2005
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ********:
This will reply to the letter submitted by your firm, in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period February 2001 through July 2004. I apologize for the delay in the Department's response.
FACTS
The Taxpayer is a retailer of electrical products and lighting. As a result of the Department's audit, an assessment was issued for untaxed sales and purchases. The Taxpayer questions the validity of the Department's audit sample with respect to the inclusion of large taxable sales for which the Taxpayer collected another state's tax in error. The Taxpayer maintains that these sales are not representative of the audit period. The Taxpayer requests a review of additional sample months, claiming the expanded sample would more accurately reflect the tax liability. In addition, the Taxpayer seeks waiver of the assessed penalty.
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 applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit. Before requiring that a detailed audit be conducted or a sample period be adjusted or extended, the taxpayer must demonstrate that the sample is not representative of the audit period or that it is flawed in a manner that would invalidate the sample.
In Public Document (P.D.) 96-235 (9/16/96), which the Taxpayer cites to support its request to adjust the sample, the issue presented was one unusually large sale included in the sample for which the taxpayer collected another state's sales tax in error. The Taxpayer's situation is distinguishable from that in P.D. 96-235 as the auditor found recurring errors in the sample in which another state's sales tax was collected in error.
I find that P.D. 99-66 (4/15/99) and P.D. 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 if the item is a large dollar transaction or that it may constitute a large percentage of the taxable measure in the audit sample.
In this case, both the auditor and the Taxpayer mutually agreed upon the selection of the one-month sample period because of the volume of the Taxpayer's records. The auditor found recurring errors within the sample in which the Taxpayer charged another state's sales tax in error. Further, the sale of electrical materials and supplies is an integral part of the Taxpayer's business activity sold on a consistent and recurring basis. As the contested transactions involve the sale of electrical materials, these sales are a normal part of the Taxpayer's business operations.
Based on the information presented, I find that the audit sampling technique has been properly applied in this case. Therefore, 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 that the burden is on the taxpayer to prove otherwise. The Taxpayer has not met the burden of proving that the sample period chosen is not representative of the entire audit period. Accordingly, there is no basis to extend the audit sample or accept your request to examine taxable sales in the audit exceeding a certain dollar value.
Penalty
Penalty was assessed on untaxed sales and purchases of tangible personal property. An additional 20 percent amnesty penalty was also assessed. The Taxpayer contests the assessed penalties on the basis that this is a first generation audit. The Taxpayer claims that the auditor indicated that the current audit is a continuation of the Department's audit of another Taxpayer location.
According to the auditor's comments, the current audit is considered a continuation of a first generation audit of another Taxpayer location. In addition, the Taxpayer's compliance ratios are within the acceptable levels to avoid the application of the penalty. Thus, I find that the penalties were improperly assessed. Accordingly, the assessed penalties will be abated.
Audit Adjustments
It is my understanding that the Taxpayer previously provided information that would result in adjustments to the audit. According to the auditor, these adjustments were being held because the Taxpayer claimed it had more information to provide. According to the auditor, the Taxpayer never provided the additional information. As such, the audit will be revised based on the information provided.
CONCLUSION
Based on the foregoing, the audit will be revised to remove the assessed penalties. Upon completion of the audit adjustments based on the information previously provided, the Taxpayer will receive a revised audit report. A revised bill will be sent to the Taxpayer shortly thereafter. No additional interest will accrue provided the outstanding assessment is paid within 30 days of the bill date. You should note that failure to remit full payment within this 30-day period might also result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's recent Amnesty. See the enclosure entitled "Important Payment Information."
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 public documents 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.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/53191T
COMMONWEALTH Of VIRGINIA
Department of Taxation
Department of Taxation
TO WHOM IT MAY CONCERN:
Under the authority of §§ 58.1-1 and 58.1-110 of the Code of Virginia, I hereby delegate to Gerald Gwaltney, Deputy Tax Commissioner, the authority to sign for me, in my absence, any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and Treasury Board.
This authority shall become effective January 10, 2003, and shall remain in effect until revoked.
Done at Richmond, Virginia, this 13th day of January 2003.
Kenneth W. Thorson
Tax Commissioner
Acknowledgement: Gerald H. Gwaltney Date:
Done this 13th day of January 2003 in the City of Richmond, State of Virginia. My Commission expires 9-30-2003.
Sylvia J. Wesson
Notary Public Notary Seal
Rulings of the Tax Commissioner