07-56 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Dealer fails to maintain adequate records; Underreported sales

Topic

Appropriateness of Audit Methodology

Exemptions

Penalties and Interest

Records/Returns/Payments

Date Issued

05-10-2007

May 10, 2007

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 Department's retail sales and use tax audit assessments issued to ***** (collectively, the "Taxpayer") for various periods beginning June 2000 through January 2005. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates a number of business locations selling tobacco products along with a small amount of candy items, carbonated drinks and some novelty gift items. During the audit periods, the Taxpayer failed to file sales tax returns for some months. For other months, returns were filed but the information on the returns raised questions. As there were non-filer periods for all locations, the audit periods were extended in accordance with Va. Code § 58.1-634.

The Taxpayer disagrees with the auditor's sample used to determine the assessments. The Taxpayer states that the auditor used current prices and receipts to determine sales that were projected for the entire audit period. The Taxpayer contends that the assessments are miscalculated and are incorrect; however, the Taxpayer does not possess any verifiable records that are available for review. The Taxpayer seeks a waiver of all assessments.

DETERMINATION

Records

Virginia Code § 58.1-633 states that every dealer required to make a return and collect sales tax "shall keep and preserve suitable records of the sales, leases, or purchases . . . taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner." The record-keeping requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-470.

When a dealer fails to maintain adequate records, the Department is authorized by Va. Code § 58.1-618 to use the best information available to reconstruct a dealer's sales or purchases to determine whether a tax liability exists. Because the Taxpayer's records were incomplete, the auditor used the best information available to determine the tax liability.

Audit Methodology

One of the purposes of an audit is to determine whether the dealer has properly collected and remitted all of the sales tax due on taxable sales. In this case, the Taxpayer provided the auditor with several purchase invoices reflecting products that were purchased for resale. The Taxpayer told the Department's auditor that the invoices represented normal purchases for the two business locations that were open at the beginning of the audit. Based on the minimal sales information available to the auditor, a purchase mark-up was calculated for the sample period to test the validity of reported sales. The resulting daily sales figure was used for seven of the Taxpayer's eight locations and was multiplied by the number of days in the month for each month in the audit period for each audit. For the eighth audit, the auditor used gross sales reported on the Taxpayer's submitted returns to calculate the average sales for returns that were filed. An average sales figure was then used as a monthly measure to arrive at the measure of deficiency for the months where no returns were filed.

Based on the records reviewed and the audit methodology applied in this case, it was determined that the Taxpayer underreported its sales to the Department. While the Taxpayer claims that the audit method is erroneous, the Taxpayer has not provided any documentation or evidence to show that the method applied in this case is unreasonable. Based on the foregoing, and absent evidence to the contrary, I find that the audit methodology and the resulting mark-up figures were properly applied. Accordingly, there is no basis to revise the audits for underreported sales.

Exempt Sales

For the sales tax returns that have been filed with the Department, the Taxpayer was asked to provide documentation to support the exempt sales reported. The Taxpayer indicated that it could not provide any documentation to support the exempt sales. Therefore, all exempt sales deducted on the returns were disallowed. Consequently, I do not find cause to adjust the assessments for these sales.

Penalty

Virginia Code § 58.1-635 B states, "It shall be prima facie evidence of intent to defraud the Commonwealth of any tax due under this chapter when any dealer reports his gross sales, gross proceeds or cost price, as the case may be, at fifty percent or less of the actual amount."

Based on the dollar amount of the calculated gross sales, using the information supplied by the Taxpayer, the sales reported to the Department were less than fifty percent of the gross sales calculated by the auditor. As a result, the fraud penalty was properly applied, and I find no cause to remove the penalty from the assessments.

Limitation of Time to Present Records

The Taxpayers indicate that the federal government has seized its records. While this may be true, the Department cannot hold its assessments in abeyance based on an unknown release date of such records. Once the records are released, however, the Taxpayer may contact the Department's auditor and request a review of those records. Please note, however, that a review of such records is limited in the same manner as the Taxpayer's right to petition the courts for correction of the assessment is limited under Va. Code § 58.1-1825, which states:

- Any person assessed with any tax administered by the Department of Taxation and aggrieved by any such assessment may, unless otherwise specifically provided by law, within (i) three years from the date such assessment is made or (ii) one year from the date of the Tax Commissioner's determination under § 58.1-1822, whichever is later, apply to a circuit court for relief.

Burden of Proof

Despite the Taxpayer's contentions, I can find no basis to adjust the assessments. The courts have held that a tax assessment issued by the proper taxing authority is deemed prima facie correct, and the burden is upon the taxpayer to prove that the assessment is incorrect. Chesapeake Hospital Authority v. Commonwealth,262 Va. 551, 554 S.E.2d 55 (2001). Based on the information available, the Taxpayer has not met this burden.

CONCLUSION

The assessments are upheld as issued. Updated bills, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding balances are paid within 30 days from the dates on the bill notices. Payments should be remitted to: *****, Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230. If you have any questions concerning payment of the assessments, you may contact ***** at *****.

The Code of Virginia and regulation sections cited are available online 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 ***** of the Office of Policy and Administration, Appeals and Rulings at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/55042Q

Rulings of the Tax Commissioner