10-48 | Virginia Tax

Tax Type

Withholding Taxes

Description

Sales and use tax and withholding tax compliance issues

Topic

Penalties and Interest

Records/Returns/Payments

Withholding of Tax

Date Issued

05-07-2010

May 7, 2010

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

Dear *****:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment for the period May 2002 through April 2008 and the withholding audit tax assessments for the periods April 2002 through December 2008, issued to ***** (the "Taxpayer"). I apologize for the delay in responding to your letters.

The Taxpayer provides interior design services. The Taxpayer also has a retail location in which it sells tangible personal property. The Department audited the Taxpayer for sales and use tax and withholding tax compliance and issued assessments. The Taxpayer appeals the assessments on various grounds. Each assessment will be addressed separately below.

Sales and Use Tax

During the audit period, the Taxpayer made sales of tangible personal property, charged and collected the sales tax, but was not registered for the collection and reporting of the retail sales tax. Because the Taxpayer had not filed any sales tax returns for the most recent three years, the Department's auditor expanded the audit period to six years as provided by Virginia Code § 58.1-634.

The Department's auditor found that there were no sales or accounting records available for review, and the only type of records available were bank statements and cancelled checks. Based on the available information, the auditor assessed tax and interest as well as fraud penalty on the basis that the Taxpayer did not report any of its sales or taxes that were collected. he audit also covered an amnesty eligible period for which the Taxpayer failed to remit any of the tax it collected. As a result, amnesty penalty was also assessed.

The Taxpayer previously appealed the assessment. In its response, the Department upheld the assessment. The Taxpayer disagrees with the Department's decision. The Taxpayer contends that the Department's inability to provide any assistance in registering for sales tax prevented the Taxpayer from paying its back taxes, which would have avoided the audit assessment of taxes, penalties and interest. The Taxpayer seeks abatement of the assessment.

While the Taxpayer claims it was prepared to file sales tax returns for the periods at issue, information provided by the Department's auditor indicates there were no verifiable records from which an established business operation could reasonably prepare and file any tax returns. Furthermore, the fact remains that the Taxpayer collected tax on its sales and failed to properly report and remit the monies. As noted in the Department's prior determination, taxes collected by the Taxpayer were held in trust for the Commonwealth. The Taxpayer chose to retain those funds for its own use. It was not until the Taxpayer was contacted by the Department's audit staff did it attempt to file the appropriate returns. At that point, the auditor offered to register the Taxpayer and bring it into compliance. The auditor's actions were appropriate, particularly in light of the lack of records made available by the Taxpayer.

Virginia Code § 58.1-633 addresses dealer's records and provides, in part, the following:

- Every dealer required to make a return and pay or collect any tax under this chapter shall keep and preserve suitable records of the sales, leases, or purchases, as the case may be, 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.

Title 23 of the Virginia Administrative Code 10-210-470 provides that every dealer liable for the collection and remittance of sales and use tax is required to keep and preserve for three years adequate and complete records necessary to determine sales and use tax liability.

When a dealer fails to maintain such 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 if a tax liability exists. Because of the lack of sufficient documentation, the auditor relied upon the best available information to determine the tax liability, the Taxpayer's bank deposits and cancelled checks. It is noted that the auditor was provided a limited amount of time to review these documents and when the auditor requested a second review of the bank statements and cancelled checks, the Taxpayer stated that the documents could not be found. Based on the foregoing statute and the supporting regulation, I find that the auditor's method of deriving the sales tax liability was reasonable and is upheld.

Withholding Tax

Virginia Code § 58.1-461 requires that every employer who pays wages to employees must withhold Virginia income tax from such employees' wages. Virginia Code § 58.1-460 defines "wages" for Virginia purposes as wages as defined in Internal Revenue Code (IRC) §§ 3401(a), 3402 and 3405.

Virginia Code § 58.1-460 defines "employee" as "an individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages . . . ." For purposes of defining "wages", the Code of Virginia relies on IRC § 3401(a), which encompasses any and all remuneration for services provided, including non-cash remuneration.

Virginia Code § 58.1-102 requires taxpayers to maintain suitable records that substantiate information required by the Department. In conducting an audit, the Department may examine a taxpayer's accounting records, when possible, to determine the nature of income and expense items. See Va. Code § 58.1-103.

Because the Taxpayer failed to provide the requisite records, the Department estimated the Taxpayer's withholding tax liability based on the best available information. The Taxpayer contends the work at issue was performed by outside contractors or interns, rather than by employees. In addition, the Taxpayer has provided a listing of the contractors and interns she paid for the taxable periods at issue. The listing shows that the contractors are businesses operating in the same general industry as the Taxpayer. In addition, the payments to the interns were not sufficient to require withholding.

For purposes of examining the books and records of a business, I would generally find this listing insufficient to document the payroll activities of a taxpayer. However, given the size and type of the business in which the Taxpayer is engaged, I will agree to abate the withholding assessment for the period April 2002 through December 2008.

Conclusion

The sales and use tax assessment is correct as issued. An updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding balance is paid within 30 days from the date of this letter. Please remit payment to the: Virginia Department of Taxation, 600 E. Main Street, 15th Floor, Richmond, Virginia 23219, Attention: *****.

The withholding assessment has been abated. However, the Taxpayer is put on notice that sufficient records must be maintained in order to show the amount of payroll and withholding, if any, that is incurred.

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

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-3783652269.QE

Rulings of the Tax Commissioner