Document Number
09-118
Tax Type
Retail Sales and Use Tax
Description
Use of repealed public service corporation exemption while selling communications equipment.
Topic
Appropriateness of Audit Methodology
Exemptions
Date Issued
07-31-2009


July 31, 2009




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

Dear *****:

This is in response to your letter submitted on behalf of ***** (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment issued for the period December 2003 through November 2006. I apologize for the delay in responding to your appeal.

                        • FACTS


The Taxpayer is in the business of selling communications equipment. The Taxpayer contends that the sampling methodology used in the audit resulted in an inaccurate liability. The Taxpayer further states that the transactions included in the sample are related to the repealed public service corporation exemption. The Taxpayer contends that it was not notified by its customers that the exemption had been repealed and that the exemption certificates provided by its customers were no longer valid.

                    • DETERMINATION


Sample

The Taxpayer contends that the sample methodology used in the audit is flawed and resulted in an inaccurate liability. Additionally, the Taxpayer asserts that the customers whose accounts are at issue have accrued significant amounts of Virginia use tax on their purchases from the Taxpayer that previously qualified for the public utility exemption. Further, the Taxpayer contends that Public Document (P.D.) 06-122 (10/17/06), issued by the Department to support the use of the sample, is not applicable in this instance. Based on these contentions, the Taxpayer has provided a detailed audit and requests that the detailed audit be used by the Department for the audit period at issue.

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 properly applied, the final results are usually 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 a factor for errors within a representative selected 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. Likewise, this same methodology is used when considering transactions on which Virginia tax has been overpaid.

Pursuant to P.D. 06-122, the use of the sampling technique to examine sales provides a snapshot of the Taxpayer's compliance regarding 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 its customers. The sample is not intended to determine the combined compliance of the Taxpayer and its customers. To remove the sales in question from the sample base would skew the sample and nullify its validity. See, P.D. 95-93 (4/28/95). Pursuant to P.D. 97-51 (2/10/97) and P.D. 95-59 (3/27/95), credit was given in detail against the assessment for the taxes paid by the Taxpayer's customers for the sales in question. Accordingly, I find that the sample methodology used in the audit is proper.

Detailed Audit

In this instance, the Taxpayer performed a detailed audit on its sales transactions for the audit period. As a result of this audit, the Taxpayer contends the assessment with respect to its sales transactions is lower than that computed in the Department's audit based on the sample period. The Taxpayer contends that there were no other disallowed tax-free sales in the sample other than those that related to the repealed public utility exemption. The Taxpayer asserts that its detailed audit proves there are not similar transactions of similar magnitude outside the sample period on which Virginia has not been paid, and the assessment is grossly overstated.

The Taxpayer has provided a spreadsheet that includes sales transactions to its customers during the audit period. There are ***** separate customers with sales during the audit period. A member of the Department's audit staff reviewed this document and determined that after removing all accounts with exemption certificates, there remained ***** customers for which no exemption certificates were provided.

In order for the Department to verify the validity and correctness of the Taxpayer's detailed audit, the Department's audit staff would need to examine all of the exemption certificates for all of the customers that provided exemption certificates for transactions that occurred outside of the original sample period. For the remaining ***** customers, the Department's audit staff would need to examine all of the invoices that relate to sales to these customers during the audit period. Additionally, the Taxpayer would have to provide documentation from its customers to support its contention that those customers remitted use tax to the Department for the transactions at issue.

During the performance of the audit, the Taxpayer was given the opportunity to use the Department's Invoice Capture Tool sample procedure. The Taxpayer chose not to use this procedure and opted instead to use the block sample that was determined by the Department's audit software selection of random high, low and average sale months throughout the entire audit period. The three-month sample resulted in the examination of 19.3% of the Taxpayer's total ***** Virginia accounts. The three-month sample audit took approximately a year to complete. Based on the number of accounts, invoices, and exemption certificates that would need to be reviewed, a detailed audit conducted by the Department would take a considerable amount of time to complete for both the Department and the Taxpayer. It is for this exact reason that a sample audit was conducted with respect to the Taxpayer's retail sales and use tax compliance. Accordingly, conducting a detailed audit is not warranted with respect to the audit period at issue.

Public Service Corporation Exemption

The Taxpayer also contends that the assessed liability is inaccurate because the error factor is based on transactions that relate to the repealed public service corporation exemption. Relying on P.D. 04-122 (8/30/04), the Taxpayer states it was not made aware by its customers that the exemption certificates presented by its customers were no longer valid. The Taxpayer further contends that it has a diverse customer base and that it is an unfair burden for the Taxpayer to be required to scrutinize the exemption status for all of its customers who may have lost their tax exemption as a result of a law change.

The Department's website located at www.tax.virginia.gov serves as the Department's principal means of notifying the public of law and regulation changes. There were two notifications about the law change repealing the public service corporation exemption for certain public service corporations. The Department published the 2004 Legislative Summary, P.D. 04-40 (8/1/04), 30 days prior to the effective date of the exemption repeal. This summary also served as the general public notification of the law change for telecommunications companies and telephone companies.

In addition, the Department timely published P.D. 04-122 entitled "Public Service Corporation Exemption Repeal Guidelines". These guidelines provide that tangible personal property (i.e. items that qualified for the public service corporation exemption) ordered and delivered prior to September 1, 2004, and paid for on or after, or before September 1, 2004 is exempt, pursuant to the former public service corporation exemption.

Furthermore, the Department distributed information on the law change to tax practitioners, certain associations and the news media. These steps were taken to reach as wide an audience as possible.

P.D. 04-122 states, "It is the responsibility of the public service corporation losing the sales tax exemption to notify all vendors that any exemption certificate or direct payment permit previously submitted is invalid on and after September 1, 2004. Effective September 1, 2004, the vendor making sales to a public service corporation should begin charging the tax on all tangible personal property sold to the public service corporation." [Emphasis added.]

Pursuant to P.D. 04-122, public service corporations were charged with informing vendors that the exemption certificates were no longer valid. Additionally, P.D. 04-122 instructed vendors making sales to public service corporations to begin charging the tax effective September 1, 2004. It is the responsibility of every taxpayer to be aware of the law and any changes in the law that affect that taxpayer's business operation. Accordingly, the Taxpayer's contention that its customers did not make it aware of the repeal or that the Taxpayer has a diverse customer base does not warrant waiving any portion of the audit assessment.


Offer in Compromise

The Taxpayer offers to remit ***** plus applicable interest in settlement of the outstanding liability. Based on the foregoing, I find no basis to compromise the Department's assessment. Accordingly, the Taxpayer's settlement offer is denied.

CONCLUSION


Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of this letter. Please remit your 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 legislative summary 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 web site. If you have any questions about this response, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,



Janie E. Bowen
                • Tax Commissioner



AR/1-2880719183P


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46