May 26, 2016
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letters, submitted on behalf of ***** (the “Taxpayer”), requesting correction of the retail sales and use tax assessments issued as a result of an audit for the period January 2011 through December 2013.
FACTS
The Taxpayer operates retail department stores in Virginia and elsewhere. An audit resulted in the assessment of sales and use tax for a Virginia location and in the assessment of use tax for one of its out-of-state locations.
The Taxpayer contests a number of sales transactions and charges held in the audit, as well as, an asset purchase. The Taxpayer contends that sales charges should be removed from the audit on the basis that some sales transactions are for returned goods, deliveries made outside Virginia, and alteration charges. There is also an issue with two sales transactions involving sales tax collected. In addition, the Taxpayer contends that consumer use tax was partially accrued on a purchase of a fixed asset. The Taxpayer requests the appropriate adjustments be made to the audit.
DETERMINATION
Burden of Proof
Virginia Code § 58.1-205 deems any assessment of a tax by the Virginia Department of Taxation to be prima facie correct. This means that the burden of proof is upon the Taxpayer to establish a correction to an assessment that it appeals. For applications to court, Virginia Code § 58.1-1825 (D) provides that “[I]t shall be the burden of the applicant in any suchproceeding to show that the assessment or collection or action on a transferred credit or other tax attribute complained of is erroneous or otherwise improper.”
Dealer Records
To establish a correction to an assessment, the Taxpayer must have documentary evidence to support its position. In this regard, Va. Code § 58.1-633 is the statute that addresses dealer records. Subsection A of this statute sets out 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. [Emphasis added.]
Because the Taxpayer is a registered dealer for sales and use tax purposes, it is legally obligated to abide by the above statutory records requirements for both locations audited by the Department. In addition, the Taxpayer is legally obligated to abide by the dealer's records regulation as promulgated under Title 23 of the Virginia Administrative Code (VAC) 10-210-470. I would note that such regulation specifically requires the Taxpayer to maintain and make available to the Department adequate and complete records necessary to determine the amount of tax liability, including a record of all deductions and exemptions claimed. Of additional importance, this regulation provides:
If an assessment has been made and an appeal to the Commissioner or to court is pending, all records relating to the period covered by such assessment must be preserved until the final disposition of the appeal.
With these documentary requirements in mind, I will now address the issues presented in this case.
Virginia Location
Asset
The Taxpayer contends that it accrued a 3.5% use tax on an asset held in the audit. A copy of a journal entry was submitted to show that consumer use tax was partially accrued. Based on this documentation, the audit will be revised to remove an amount equal to the consumer use tax paid on this purchase, plus the associated interest assessed on such tax. The Taxpayer, however, remains liable for the unpaid 1.5% portion of use tax plus interest.
Sales — Sales Tax Collected
The Taxpayer maintains that line items 26 and 27 of the non-contested sales exceptions list should be removed from the audit on the contention that the auditor included sales tax collected as a taxable exception. [NOTE: A review of the exceptions list indicates that the correct line items at issue are 26 and 28.] According to the auditor, these transactions represent items that were originally taxed but subsequently reversed. In other words, the tax charge was canceled. Absent an exemption certificate to validate the reversal of the sales tax, the transaction is taxable. While sales tax may have been collected, I understand that no evidence has been presented that such tax was remitted to the Department or refunded to the customer. Because the Taxpayer has not met its burden of proof, such items must remain in the audit.
Sales — Returned Goods
The Taxpayer contends that several items held in the contested and non-contested sales exception lists are for returned goods as coded on the auditor's test selection list. Based on Va. Code § 58.1-619, returned goods may be excluded from taxation. Based on the information presented, those line items representing returned goods will be removed from the audit.
Sales — Deliveries Outside Virginia
Virginia Code § 58.1-609.10 (4) provides an exemption from the retail sales and use tax for “[d]elivery of tangible personal property outside the Commonwealth for use or consumption outside of the Commonwealth.” In Bloomingdale's, Inc. v. Department, Law No. CL05T00891-00-1/07-3860 (2007) [see Public Document 07-134 (8/9/07)], the Circuit Court for the City of Richmond held that “no Virginia sales or use tax is due related to goods (i) never entering the Commonwealth of Virginia or (ii) delivered to out of state recipients, whether the recipient is the purchaser of the goods or another person.” Thus, this court case overrules the regulatory requirement of Title 23 VAC 10-210-780 that delivery must be to the purchaser in order for the exemption to apply.
I would note that the courts have long held that exemptions from the retail sales and use tax must be strictly construed against the taxpayer claiming the exemption. Doubts as to whether the exemption applies are resolved against the taxpayer. See Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973).
Based on the test selection list presented, the Taxpayer contends that several transactions constitute sales of merchandise delivered out of state. The auditor indicates that the list presented with the headings “Dest Zip” and “Dest St” was not the original document that the auditor reviewed but was created by the Taxpayer. I also understand that the Taxpayer has provided no supporting documents to validate the zip code and delivery locations, such as invoices or shipping records. Although the Taxpayer has a policy of supplying a customer with merchandise from any store where the inventory is available, no transactional proof has been furnished that any of these sales involved out-of-state inventories and/or shipments to out-of-state destinations. As such, the Taxpayer has not met its burden of proof. Accordingly, these sales will remain in the audit.
Alteration Charges
The Taxpayer contests the separately stated alteration charges included in the audit. Virginia Code § 58.1-609.5 (4) exempts from the retail sales and use tax “[s]eparately stated charges for alterations to apparel, clothing and garments.” Accordingly, the separately stated alteration charges will be removed from the audit.
Out-of-State Location
Sales
The Taxpayer contends that the 31 sales included in the audit sample were sales originating out of state but were not for ultimate destination within Virginia. Two sales orders were submitted for line items 30 and 31 of the non-contested sales exception list. These orders indicate that merchandise was shipped to addresses outside Virginia. Based on this documentation, I will agree to remove line items 30 and 31 from the audit.
As for the remaining sales at issue, the Taxpayer has furnished no documentation in support of its contentions and thus has not met its burden of proof in accordance with Va. Code § 58.1-205. Accordingly, these unsupported items will remain in the audit.
CONCLUSION
The assessments will be revised in accordance with this determination. For the remaining amount due, 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, 15th Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessments, you may contact ***** at *****.
Notwithstanding this determination and the 30-day deadline for payment of the revised amount due, the Taxpayer may present further documentation to support its contentions. Such additional documentation must be submitted directly to the Department's auditor, *****, within 30 days of the date of this letter or by any extension deadline approved by the auditor. If such documentation is not submitted to the auditor within the allotted time or any extension deadline, we will assume that it is not forthcoming. In such an event, the Taxpayer will become immediately liable for the outstanding revised balance due on the assessments. If you have any questions about the audit revision or the submission of records to the auditor, you may contact ***** at ***** or at *****. Her facsimile number is *****.
The Code of Virginia sections, regulations and public document cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-6066910200 and 1-6072284381.R