August 24, 2017
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This replies to your letter in which you seek correction of the retail sales and use tax assessments issued to ***** (the “Taxpayer”) for the period April 2010 through February 2016. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates a restaurant. The Department's audit disclosed that the Taxpayer had no records available for review. Accordingly, the Department's assessment was calculated using the Taxpayer's gross sales projection from its local business license application. The Taxpayer disagrees with the Department's assessment contending that it is overstated. The Taxpayer seeks a revision and reduction of the assessment.
DETERMINATION
Dealer Records
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 requirements are set out in Title 23 Virginia Administrative Code (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 and purchases to determine whether a tax liability exists. The Taxpayer failed to maintain, or failed to furnish, adequate records to determine the actual sales during the audit period. However, the Taxpayer's local business application contained an estimate of $50,000.00 in annual sales. Because this was the best available information, the auditor properly relied on this information to estimate the Taxpayer's sales tax liability. Accordingly, the audit methodology used is proper in this instance and I find no basis for an adjustment of the tax assessment.
The auditor's methodology is consistent with prior determinations issued by the Department in which estimated assessments were upheld because the taxpayers' records were incomplete. In Public Documents 97-35 (1/27/97), 97-215 (5/12/97) and 98-87 (5/8/98), the taxpayers lacked complete records at the time the audits were conducted. As a result, the Department's auditors used the best information available at the time the audits were being conducted to estimate the taxpayer's sales and use tax liability.
Burden of Proof
Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed to be prima facie correct and that the burden is on the taxpayer to prove the assessment is erroneous or incorrect. In this instance, the Taxpayer has not provided documentation to support its contention that the assessment of tax is incorrect. Therefore, the Taxpayer has not met the burden of proof requirement.
Compliance Penalty
Virginia Code § 58.1-635 mandates the application of penalty to tax deficiencies. Title 23 VAC 10-210-2032 generally provides that a penalty will not be assessed in first generation audits. However, the regulation sets out an exception to this rule that when an audit by the Department discloses that the sales tax has been collected but not remitted, the penalty will apply.
In this first audit of the Taxpayer, the auditor's computation of the compliance penalty for tax collected but not remitted was based on an estimation of the Taxpayer's sales rather than actual sales reflecting taxes collected but not remitted. An estimate, while authorized to determine a tax liability, does not provide a basis of proof that the Taxpayer actually collected the sales tax and failed to remit such tax to the Department. Accordingly, I find cause for a waiver of the assessed compliance penalty.
Interest
Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it simply represents a fee for the use of money over a period of time. In this case, the Taxpayer had the use of the money that was properly due the Commonwealth. Accordingly, there is no basis for a waiver of the assessed interest.
Financial Hardship
The Taxpayer indicates that as a small business it is in need of help in addressing the assessment. The Taxpayer may wish to request an offer in compromise based on doubtful collectability. The Taxpayer must present evidence of doubtful collectability to support a claim of financial hardship.
If the Taxpayer wishes to pursue a settlement based on doubtful collectability, please complete and return the enclosed Offer in Compromise Business Request For Settlement and Financial Information Statement For Businesses forms. These forms will allow the Department to review and analyze the Taxpayer's financial situation. Upon completion of the Department's review, a response will be issued based upon the information provided. The completed forms should be sent to: Tax Commissioner, Virginia Department of Taxation, Attn: CICT, P.O. Box 2475, Richmond, Virginia 23218-2475. You may also fax the forms to (804) 786-2645. If the Department does not receive the completed forms within 30 days of the date of this letter, it will be presumed that the Taxpayer will not submit an offer in compromise based upon doubtful collectability. In such an instance, collection action on the remaining balance of the assessment will be initiated.
The Code of Virginia sections, regulations, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If there are any questions regarding this matter, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1045.Q