06-146 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Taxpayer assessed tax on purchases of fixed assets and untaxed purchases

Topic

Appropriateness of Audit Methodology

Assessment

Date Issued

12-08-2006

December 8, 2006

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This is in reply to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period June 2003 through September 2005.

FACTS

The Taxpayer owns and operates a hotel. As a result of the Department's audit, the Taxpayer was assessed tax on purchases of fixed assets and untaxed purchases.

The Taxpayer disagrees with the Department's assessment, contending that the auditor's measure for purchases of untaxed assets is unsubstantiated and arbitrary. The Taxpayer submits a copy of its depreciation schedule for 2004 and states that the 2005 schedule is unavailable because its 2005 return has not yet been filed.

The Taxpayer also disagrees with the untaxed purchases measure, stating that its volume of purchases is not great enough to substantiate such an amount. The Taxpayer contends that the majority of its purchases are food purchases for the restaurant and that the remainder of purchases is made from local vendors who automatically charge the tax on their invoices.

Accordingly, the Taxpayer requests revisions to the audit for these measures and a reduction in the assessment.

DETERMINATION

Virginia Code § 58.1-205 provides that a tax assessment issued by the Department is prima facie correct, and that the burden is upon the taxpayer to prove that the assessment is incorrect. With this in mind, I will address the contested issues as set out in the Taxpayer's letter.

Fixed Assets

The auditor has reviewed the Taxpayer's depreciation schedule and has informed my staff that the Taxpayer has not provided any invoices to substantiate the payment of the tax on the asset purchases at issue. Because the Taxpayer has failed to provide the necessary information to the auditor, I find no justification to allow for any adjustment to the Department's assessment.

Untaxed Purchases

The auditor used a one-year sample to identify untaxed purchases made during the audit period. The auditor found that out of 19 transactions, purchase invoices did not support nine of the transactions and the remaining ten invoices that were available for review did not reflect a charge for the sales tax. The majority of these transactions were from out-of-state vendors. Based on the sample results, the auditor computed an error factor and assessed tax on taxable items for which the vendor failed to collect.

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 taxpayer. When sampling techniques are applied, the final result should be 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 an error factor within a select representative period. Once the error factor is determined, the factor is then applied to the entire audit period. The purpose of such a projection is to account for likely similar transactions on which the Virginia tax has not been paid.

For an item to be removed from the audit sample, the Taxpayer must show that a transaction was isolated in nature and not a normal part of the Taxpayer's operation. To remove the items in question from the sample base would skew the sample and nullify the validity of the sample. In this case, the Taxpayer has not shown that any of the purchases at issue were especially unique as to justify their removal from the sample. Therefore, I find that the sampling audit technique has been properly applied in this case and there is no basis to allow for adjustment.

CONCLUSION

For the reasons outlined above and because the Taxpayer has not provided documentation to support its position, the assessment is upheld. A consolidated bill, with interest accrued to date, will be mailed to the Taxpayer shortly. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. 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 the payment of the assessment, you may contact ***** at *****.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this determination, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at ****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-618496313Q

Rulings of the Tax Commissioner