10-233 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Taxpayer failed to file sales tax returns.

Topic

Appropriateness of Audit Methodology

Penalties and Interest

Records/Returns/Payments

Returns and Payments

Date Issued

09-29-2010

September 29, 2010

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 January 2006 through December 2008. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates a restaurant. As a result of the Department's audit, the Taxpayer was assessed tax, penalty and interest for underreported sales. The Department's assessment is based on sales information provided by the Department of Alcoholic Beverage Control ("ABC") as a result of their investigation of the Taxpayer's business. Based on the Taxpayer's sales records for the period January 2006 through June 2008, ABC determined they Taxpayer had underreported sales.

In this instance, the auditor compared sales provided by ABC to sales reported on sales tax returns filed by the Taxpayer for the period January 2006 through June 2008. For thirteen months in the audit in which the Taxpayer failed to file sales tax returns, the auditor compared the ABC sales to the sales reported by the Taxpayer to the ***** ("the City"). In addition, the auditor projected sales for the periods in the audit beyond the ABC audit. The projected sales were derived by dividing total sales for the period January 2006 through June 2008, as calculated by ABC, to the sales reported by the Taxpayer for the same period. The resulting factor was multiplied by the sales reported on the sales tax returns for the months beyond the ABC audit to arrive at the projected sales. The results were compared to the sales reported by the Taxpayer to the Department. As a result of the comparisons, the auditor determined that the Taxpayer consistently underreported sales to the Department.

The Taxpayer disagrees with the methodology used by ABC in determining the Taxpayer's sales and believes a purchase markup based on actual cost of goods sold and pricing information would show a more accurate reflection of its sales. As such, the Taxpayer contests the audit assessment issued by the Department based on sales information obtained from ABC. The Taxpayer states ABC seized its records during the investigation and requests that the Department allow the Taxpayer time to respond to the contested assessment once ABC releases the Taxpayer's records.

DETERMINATION

Virginia Code § 58.1-618 provides, in part, "if any dealer fails to make a return as provided by this chapter, or a return that is false or fraudulent, it shall be the duty of the Tax Commissioner to make an estimate for the taxable period of the retail sales or distributions of such dealer . . . ."

When complete records are not available for inspection and examination by the Department in the course of an audit, the auditor must resort to other measures to determine the actual tax liability. In such instances, the Department is authorized under Va. Code § 58.1-618 to estimate a tax liability. One method used by the Department to recreate sales when complete records are not available is a purchase markup procedure. The purchase markup procedure allows the auditor to estimate taxable sales by marking up purchases with ratios derived from known cost and selling prices or industry standards.

In this instance, the Department's assessment is based on sales provided by ABC as a result of their investigation. It is my understanding that ABC calculated the Taxpayer's sales using actual cash register receipts and worksheets. Because ABC used the Taxpayer sales records to determine sales, I cannot agree that a purchase markup method will reveal a more accurate reflection of the Taxpayer's sales.

Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed prima facie correct. The burden is on the taxpayer to prove the assessment is erroneous. The Taxpayer has not provided sufficient evidence to refute the validity of the sales figures computed by the ABC audit. Therefore, I find no basis for adjusting the Department's assessment. Should ABC make any adjustments to its sales calculations, the Department will revise its audit accordingly.

CONCLUSION

Based on the foregoing, the assessment is upheld. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days from the bill date to avoid additional interest charges.

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 web site. If you have any questions about this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Linda D. Foster
        Deputy Tax Commissioner

AR/1-3438037040.T

Rulings of the Tax Commissioner