Tax Type
Retail Sales and Use Tax
Description
Audit sample and extrapolation.
Topic
Appropriateness of Audit Methodology
Date Issued
05-09-2005
May 9, 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 March 2001 through February 2004. I apologize for the delay in responding to your letter.
FACTS
The Department audited the Taxpayer for the period March 2001 through February 2004. The auditor chose the year 2002 as the sample period and extrapolated the error factor for this period over the entire audit. The Taxpayer agrees with extrapolating the error factor into 2001, but disagrees with extrapolating the results to periods in 2003 and after. The Taxpayer states that it initiated changes in its accounting department during 2002 in order to improve tax compliance. The Taxpayer contends that a separate error factor should be computed and applied to periods in 2003 and after to account for the improved tax compliance.
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 understood and 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 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. Every effort is made to select objectively the sample periods that are representative of the period being audited.
Upon review of the audit report and the information presented, I find no basis to invalidate the sample and extrapolation. While the Taxpayer claims the error factor used by the auditor does not take into account improved compliance, the sample and error factor were applied in accordance with established audit procedures. The sample included periods both before and after the time the Taxpayer made the accounting changes, and the resulting error factor was consistently applied to the entire audit period. The error factor, which included the months of higher compliance, was applied to the months of lower compliance and vice versa. Therefore, partitioning the audit period for purposes of applying two separate error factors is not warranted.
Accordingly, the assessment is correct and remains due and payable. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding balance is paid within thirty days from the date of this letter. If you have any questions about 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
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AR/51791i
Rulings of the Tax Commissioner