Tax Type
Retail Sales and Use Tax
Description
Erroneous assessment on taxes paid to another state; improper exemptions
Topic
Appropriateness of Audit Methodology
Exemptions
Date Issued
02-28-2006
February 28, 2006
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 of January 1998 through December 2000. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a manufacturer and retailer of a variety of products. The Taxpayer was assessed tax on sales that were made exempt from the tax but not supported by valid, completed exemption certificates or direct pay permits. In some instances, the Taxpayer’s customers provided use tax accrual letters after1 the date of sale in lieu of certificates of exemption or direct pay permits. The Taxpayer’s customers provided the Taxpayer with use tax accrual letters as evidence that the appropriate use tax amount had been self accrued and reported directly to the Department. The Taxpayer contends these sales should be removed from the audit sample because the tax is the legal debt of the purchaser. The auditor disallowed the tax accrual letters and would not remove the sales from the sample based on Public Document (P.D.) 95-93 (4/28/95).
In addition, the Taxpayer contests the assessment of tax on sales to Virginia customers upon which the tax was collected and erroneously remitted to the District of Columbia.
DETERMINATION
Collection of Tax
Virginia Code § 58.1-625 states:
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- The tax levied by this chapter shall be paid by the dealer; but the dealer shall separately state the amount of the tax and add such tax to the sales price or charge. Thereafter, such tax shall be a debt from the purchaser . . . to the dealer until paid and shall be recoverable at law in the same manner as other
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Notwithstanding any exemption from taxes which any dealer now or hereafter may enjoy under the Constitution or laws of this or any other state, or of the United States, such dealer shall collect such tax from the purchaser . . . and shall pay the same over to the Tax Commissioner as herein provided. . . .
Any dealer who neglects, fails, or refuses to collect the tax on every taxable sale of tangible personal property made by him, his agents, or employees shall be liable for and pay the tax himself. . . .
The statute imposes the responsibility for payment of the tax upon either the purchaser or the dealer. In this instance, the Taxpayer, as a dealer, is responsible to collect the tax on all taxable sales and to remit such tax to the Department. As such, the auditor was correct in assessing the Taxpayer for the tax on certain untaxed sales.
Sample Method
After reviewing the audit report, I find that the sampling technique was properly applied in this instance. The purpose of the audit sample is to determine an error factor for the entire audit period. While the tax on the transactions in question may have been paid by the Taxpayer’s customers, there are likely similar transactions outside the sample period on which the Virginia tax has not been paid. Therefore, to remove the sales in question from the sample base would skew the sample and nullify its validity. See P.D. 95-93.
The use of the sampling technique to examine sales provides a snapshot of the Taxpayer’s compliance with its sales tax collection and reporting responsibilities. The Department’s sales sample determines the error rate at which the Taxpayer failed to charge sales tax on untaxed sales without a valid, supporting exemption certificate or direct pay permit held by the purchaser. The sample is not intended to determine the combined compliance of the Taxpayer and its customers.
The Taxpayer made a number of untaxed sales during the sample period that were not supported by exemption certificates or direct pay permits. Although some of the Taxpayer’s customers reported and paid use tax to the Department, this is not a reflection of the Taxpayer’s sales tax collection compliance. The inclusion of customers’ self-assessed use tax payments to offset untaxed sales in the sales sample distorts the Taxpayer’s sales compliance. The Taxpayer’s obligation to collect sales tax on all Virginia sales is not dependent on whether customers self-assess and pay use tax directly to the Department. The only exception to this general rule is when the purchaser provides the seller with a valid exemption certificate or a valid direct pay permit. See P.D. 04-99 (9/8/04). A letter from a customer obtained after the date of sale stating that it paid use tax on the transaction is not sufficient to relieve the seller from its obligation to collect tax at the time of the transaction. Accordingly, I find that the auditor was correct in including such sales in the audit sample.
The Taxpayer maintains that to disallow the use tax accrual letters is an attempt to tax the same transactions twice. The Taxpayer’s argument is based on the fact that the Taxpayer’s customers paid use tax directly to the Department on the transactions found in the audit sample. I will allow a separate one-time credit for use tax paid by the Taxpayer’s customers.
Sales Tax Erroneously Collected
The Taxpayer’s accounting system applied an erroneous District of Columbia (DC) ZIP Code to certain Virginia sales. As a result, the Taxpayer collected and remitted the DC tax on the sales that were subject to the Virginia sales tax. Upon audit by the Department, the Taxpayer was assessed the erroneously collected DC tax.
Virginia Code § 58.1-603 imposes the state sales tax on every person who engages in the business of selling tangible personal property in the Commonwealth. During the period of the audit, the tax was imposed at the rate of the 3½%. In addition, Va. Code § 58.1-605 provides for the imposition of the sales tax by localities. The local sales tax is imposed at the rate of 1% and is added to the state tax imposed in § 58.1-603. As a seller of tangible personal property in Virginia, the Taxpayer has a duty and responsibility to ensure that all Virginia sales of tangible personal property are properly taxed. Had the Taxpayer put in place controls to properly apply the Virginia tax rates (state and local) to Virginia taxable sales, the erroneous payment of tax to another state would have been avoided.
In this instance the auditor assessed the DC tax rate, 5.75%, in the audit when the Virginia tax rate, 4.5%, should have been assessed. Therefore, the audit will be revised accordingly.
CONCLUSION
Based on the foregoing, the audit will be returned to the audit staff to adjust the assessment as noted above. After the auditor makes the appropriate adjustments, the Taxpayer will receive a revised bill. The Taxpayer should remit its payment for the outstanding balance as shown on the revised bill within 30 days from the date of the bill to avoid the accrual of additional interest.
The Code of Virginia sections and public documents cited, along with other reference documents, 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 about this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
Kenneth W. Thorson
Tax Commissioner
- Sincerely,
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1A “use tax accrual letter” is merely a written statement of a purchaser that it will accrue and pay to the Department the use tax liability it may incur on any purchases it makes on which no Virginia Retail Sales and Use Tax was charged. It is not a direct pay permit and its use is neither recognized nor sanctioned by the Department as a valid reason for excusing the dealer from collecting the tax on a sale.
Rulings of the Tax Commissioner