Tax Type
Retail Sales and Use Tax
Description
Sales tax was not charged/and collected on sales and purchases or use tax accrued and paid to the Department
Topic
Accounting Periods and Methods
Appropriateness of Audit Methodology
Collection of Tax
Taxable Transactions
Date Issued
08-28-2014
August 28, 2014
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer"), for the audit period July 2010
through June 2013.
FACTS
The Taxpayer operates an advertising and marketing firm creating advertising, logos and designs for its clients. The Department's audit disclosed that the Taxpayer made sales and purchases on which the sales tax was not charged and collected or use tax accrued and paid to the Department. The Taxpayer disagrees with the assessment, stating the sales at issue are nontaxable service transactions and the purchases are unusual and one-time purchases that should not be included in the Department's various purchase samples. The Taxpayer contends that the Department's assessment is overstated and should be revised.
DETERMINATION
Sample
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 detail audit would not prove beneficial to either the auditor or the client. When sampling techniques are applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detail audit. The purpose of the audit sample is to determine a factor for errors within a representative select 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 throughout the audit period on which Virginia tax has not been collected or accrued and paid.
With regard to the various sample periods used by the auditor, both the sales sample and general expense purchases sample were based on invoices available from 2012. However, the sample periods chosen for the credit card purchases were based on available statements from the Taxpayer. Because the Taxpayer's credit card statements were not available for all of calendar year 2012, the auditor used statements from March 2012 through February 2013 for one credit card and statements from July 2012 through June 2013 for the remaining credit card. I note that the Taxpayer did not secure additional credit card statements from the credit card companies that would have enabled the auditor to use calendar year 2012 for all purchases.
Sales Sample
The Taxpayer questions several areas regarding the sales and purchase samples. Regarding the sales sample, the Taxpayer disagrees with the separately stated service charge on one invoice and the printing charge on a remaining invoice. The Taxpayer contends that the service charge is an exempt service associated with the printing charges. The Taxpayer states that printing was only offered to customers twice in 2012, and should not be subject to extrapolation.
A review of these issues shows that the charges are for services rendered in connection with the sale of tangible personal property, the sale of printing. Virginia Code § 58.1-602 defines sales price, in part, as "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale". Based on the information provided, the charge at issue is for a service in connection with a sale of tangible personal property (the printing) and is taxable.
The Taxpayer contends that the printing is an isolated issue. A sample computation provides a snapshot view of a taxpayer's compliance efforts related to sales tax collection and reporting responsibilities. The types of errors found by a sample, in this case the printing, would be typical of the types of errors that could be found in an audit period if a detailed audit had been performed. There is always the possibility that isolated errors may occur that are not typical of a taxpayer's operations. However, for an item to be removed from an audit sample, a taxpayer must establish that a transaction was an isolated event and not a normal part of its operations.
With regard to an assessment based upon a sample computation, Va. Code § 58.1-205 1 deems any tax assessment issued by the Department as prima facie correct. This means that the burden of proof is upon the Taxpayer to prove that the assessment is incorrect. The Taxpayer has not met that burden, and I find no basis to revise the auditor's use of the sales sample.
Purchases Sample
The remainder of the audit results relate to purchases listed in the various purchase samples. The Taxpayer contends that certain software purchases, besides being purchased infrequently, were downloaded electronically rather than being received in a tangible format. The Taxpayer has also identified a number of other purchases made during the sample periods that were assessed and used to extrapolate an assessment for the entire audit period. The Taxpayer maintains that the sampled items are one-time, nonrecurring purchases.
With regard to the software purchases, the Taxpayer submitted an invoice providing that one software purchase was physically shipped to the Taxpayer and not electronically downloaded. There was no documentation regarding the remaining software purchases. For any of the items to be removed from the audit sample and taxed separately, the Taxpayer must be able to prove that each purchase in question is isolated in nature and not a normal part of the Taxpayer's course of business. It may well be that the purchases at issue are infrequent, but the Taxpayer has not presented any documentation to the auditor proving that such purchases are not a normal part of the Taxpayer's activity.
Based on the information provided, the Taxpayer has not proven that the purchases at issue are unusual to its operations. The auditor comments that the purchases included in the sample were purchases typical of the Taxpayer's business. Therefore, despite the Taxpayer's contentions, I find no basis for any adjustment of the audit samples.
Assets
There was no sample computation for assets. The Department's audit disclosed one asset purchase for which the Taxpayer was unable to produce an invoice. The Taxpayer, however, contends that because purchase was from an individual and not a business it is not taxable. The Taxpayer could not provide any documentation regarding the purchase; therefore, there is no basis to remove it from the audit and it is taxable.
Title 23 of the Virginia Administrative Code (VAC) 10-210-6030 addresses the Department's policy with respect to Virginia use tax and states the use tax is due from the purchaser when a sales or use tax is not paid on the property at the time of purchase. The Taxpayer is ultimately responsible for ensuring the payment of the sales and use tax on all taxable purchases. The Taxpayer does not escape this responsibility because the seller fails to charge and collect the sales or use tax.
Services
The Taxpayer states that as a service business, its main business is labor. The Taxpayer contends that as a service business, the potential for sales tax errors is minimal. Title 23 VAC 10-210-4040 E states that:
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- A service provider is the taxable user and consumer of all tangible personal property purchased for use in providing exempt services. If a supplier fails to collect the tax from a service provider, the provider shall remit use tax to the department as provided in 23 VAC 10-210-6030.
Title 23 VAC 10-210-6030 A provides that the use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased. The rates of the state and local use tax are the same as the rates of the state and local sales tax. There is no duplication of the tax. Accordingly, the Taxpayer must exercise caution in purchasing tangible personal property used in rendering its services. The Taxpayer must ensure that if tax is not charged by its vendor at the time of purchase the use tax is accrued and remitted to the Department based on the purchase price.
Lastly, the Taxpayer states that it requested an informal meeting with the Department's Northern Region Regional Manager. I note, however, that the Taxpayer did meet with the auditor and the auditor's team leader prior to the conclusion of the Department's audit. Based on that meeting it was determined that the methodology used by the auditor was proper based on long-standing Departmental audit guidelines, and a meeting with the Regional Manager was not necessary.
CONCLUSION
Based on the foregoing, there is no basis to revise the audit or the assessment. I note that the Department's assessment has been paid in full. Accordingly, no refund will be issued for the tax that has been properly assessed and paid.
The Code of Virginia section and regulations cited are available on-line in the Laws, Rules and Decisions section of the Department's website located at www.tax.virginia.gov. If you have any questions regarding this determination, please contact ***** of the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5627410068.Q
Rulings of the Tax Commissioner