Document Number
Tax Type
Retail Sales and Use Tax
Taxpayer does not agree with the audit methodology used to estimate the tax liability.
Appropriateness of Audit Methodology
Date Issued

March 18, 2015


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 2008 through October 2012.  I apologize for the delay in responding to your appeal.


     The Taxpayer provides fleet and private service companies with mobile maintenance and 24 hour emergency road service.  The Department's audit disclosed that the Taxpayer had not reported any sales to the Department since the prior audit. When the auditor requested records to determine sales, the Taxpayer claimed that no records are available because its computer systems were stolen as a result of a break-in. Because no records were available to determine sales, the auditor estimated the audit liability pursuant to Va. Code § 58.1-618.

     The Taxpayer does not agree with the audit methodology used to estimate the tax liability.  The Taxpayer claims that the audit assessment: (1) overstates the Taxpayer's liability; (2) includes exempt services and (3) includes taxable sales on which the Taxpayer paid the tax at the time of purchase.  The Taxpayer requested and was permitted additional time to provide documentation to support its claim that the audit liability is overstated.


     Before addressing the contested issues presented on appeal, I would like to explain the Taxpayer's responsibilities under the law and regulations as set out in the prior audit.

Prior Audit

     The Virginia retail sales and use tax is imposed on the "sales price" of tangible personal property.  Va. Code § 58.1-602 defines "sales price" as "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale . . . without deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever."  This definition makes it clear that, absent a statutory exemption in the Code of Virginia, labor or service charges are taxable when made in connection with the sale of tangible personal property.

     The prior audit showed that the Taxpayer was not in compliance with the law regarding the collection of the tax on tangible personal property purchased for resale in connection with the repair and maintenance of customer vehicles.  The Taxpayer erroneously paid the sales tax on purchases for resale rather than charging the sales tax on the customer invoice. Because no records were available in the prior audit, the auditor estimated taxable sales from the best information available, 2004 and 2005 tax returns.  An assessment was issued on untaxed sales and the Taxpayer was instructed to request a refund or credit from the vendor for tax erroneously paid on such materials.  The Taxpayer was advised that complete records must be maintained in the future in accordance with Title 23 of the Virginia Administration Code (VAC) 10-210-470.  According to the auditor, the Taxpayer had a clear understanding that it should collect the sales tax on parts purchased for resale to customers for the future.

Current Audit

     The issues in the current audit are the same issues raised and addressed in the prior audit.  The Taxpayer filed no returns for the audit period.  Instead, the Taxpayer continued to pay the sales tax on purchases for resale and did not collect the tax on the customer invoice. The Taxpayer provided no records to determine sales for the current audit period, as it claimed that all financial data was lost as a result of a break-in at the Taxpayer's business location. Because the Taxpayer did not have records to substantiate its sales, the auditor used the best information available to estimate the Taxpayer's tax liability, i.e., ticket books, bank statements, corporate returns and prior audit information.  Based on this information, the auditor estimated taxable sales and determined the audit liability.

     Although the Taxpayer claims that 55% of its total revenue is for exempt snow removal and roadway treatment services primarily to state and local jurisdictions and that the remaining revenue is repair services of which no more than 20% include the provision of parts, the Taxpayer provides no documentation to support its claims.

     Virginia Code § 58.1-633 provides 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 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 has failed to present documentation to support its claim, I find that the auditor used the best information available to estimate the audit liability.

Audit Methodology

     The auditor and Taxpayer agreed to a one-year sample in calendar year 2011.  The auditor reviewed bank statements for the sample period and compared them to the income reported on the corporate tax return.  Based on the records reviewed, the auditor determined that the Taxpayer underreported sales on the 2011 corporate tax return.  The auditor calculated the percentage of underreported sales and applied that percentage to the income reported on corporate returns filed during the audit period to estimate gross sales.  To determine taxable sales, the auditor reviewed the ticket books for 2011 and determined that 55% of the total charge was for the sale of tangible personal property.  The auditor reduced the taxable sales by 10% to account for snow removal services.

     Virginia Code § 58.1-205 sets out that any assessment of a tax by the Department is deemed prima facie correct.  This means that the burden of proving that the assessment is erroneous is upon the Taxpayer.  Based on the foregoing and absent evidence to the contrary, I find that the audit methodology applied in this case is appropriate.

     For the future, the Taxpayer is expected to fully comply with the law regarding the collection of the tax and with the Department's record keeping requirements.

Credit for Taxes Paid

     The Taxpayer requests an offset against the assessed tax for sales tax paid to vendors on untaxed tangible personal property for resale held in the audit.  The Taxpayer claims that it paid the sales tax on the purchase of parts for resale because it did not have a resale exemption certificate.

     The Department's policy with respect to refunds is addressed in Public Document 96-358 (12/06/96).  The Department prefers to refund the tax through the dealer to prevent misallocations of the 1% local sales tax.  With respect to the dealer's discount, Va. Code § 58.1-1822 limits the amount of a refund to those monies actually paid to the state.  Thus, if the dealer or customer makes application for a refund to the Department, only the net amount paid to the state can be refunded.  For this reason, refunds of this nature typically are not included as credits in audit findings.

     This same issue was addressed in the prior audit, and the Taxpayer was instructed to seek a refund or credit from the vendor for the sales tax erroneously paid on purchases for resale.  Based on the above, the auditor properly advised the Taxpayer to seek a refund or credit from its vendors for the sales tax paid on purchases for resale.

     I would point out that the Taxpayer was registered for the collection of the retail sales and use tax in the prior audit.  As such, the Department's resale certificate of exemption, Form ST-10, was available to the Taxpayer in the current audit to purchase exempt of the tax tangible personal property for resale.  Therefore, the Taxpayer's argument that it did not have an exemption certificate to purchase tangible personal property exempt of the tax for resale is unfounded.


     Based on the foregoing, it is my determination that the assessment is correct.  An updated bill, with interest accrued to date, will be sent to the Taxpayer.  The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****.  If you have any questions concerning payment of the assessment, you may contact ***** at *****.

     If the documentation to support the Taxpayer's sales is recovered, the Taxpayer may submit a request for reconsideration of this determination, along with the supporting documentation, provided such reconsideration request is submitted to the Department within 45 days of the date of this determination.  For information on reconsideration requests, see Title 23 of the VAC 10-20-165 F.

     The Code of Virginia sections, regulations and public document cited are available on-line at in the Laws, Rules and Decisions section of the Department's web site.  If you have any questions about this determination, please contact ***** in Office of Tax Policy, Appeals and Rulings, at *****. 



Craig M. Burns
Tax Commissioner




Last Updated 03/30/2015 11:34