October 17, 2018
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letters in which you seek correction of the retail sales tax assessments issued to ***** (the “Taxpayer”) for the period September 2011 through December 2012 and August 2013 through May 2014. I apologize for the delay in the Department’s response.
FACTS
The Taxpayer is a convenience store. The Department utilizes a compliance program that verifies retail sales and use tax compliance regarding cigarettes purchased for resale and sales of cigarettes by a retail or wholesale dealer. As a result of the compliance program, the Taxpayer was issued assessments for tax, penalty and interest on untaxed cigarettes purchased from ***** (the “Distributor”). The assessments are based on sales information provided by the Distributor identifying the Taxpayer’s purchases of cigarettes exempt of the tax for resale.
It is the Department’s position that the cigarettes purchased by the Taxpayer for resale would have been sold to the Taxpayer’s customers and, therefore, the sales tax should have been collected and remitted to the Department on such sales. Based on the sales information provided by the Distributor, it was determined that the Taxpayer underreported sales of cigarettes, by the amount of the cigarettes purchased from the Distributor for resale, when compared to sales of cigarettes reported by the Taxpayer to the Department. On August 26, 2014 and October 2, 2014, the Department sent the Taxpayer summaries of the findings and the proposed tax liability. The Taxpayer was allowed 14 days to provide documentation to substantiate whether the Taxpayer’s purchases from the Distributor qualified for the resale exemption or whether the Taxpayer collected and remitted the sales tax on the sale of those purchases. The Taxpayer failed to respond to the Department’s request for documentation within the allotted time and the assessments were issued.
The Taxpayer contests the sales tax assessments and claims that it collected and remitted all sales tax on all cigarettes sold on its monthly retail sales and use tax returns and has no knowledge of the contested cigarettes purchases. As such, the Taxpayer requests an abatement of the tax, penalty and interest assessed on the contested cigarette purchases.
DETERMINATION
Purchases/Sales
The resale exemption provided under the Virginia retail sales and use tax is found in Virginia Code § 58.1-602. This code section excludes a sale for resale from the definition of a “retail sale,” which is defined as “a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter.”
Virginia Code § 58.1-623 sets forth the requirements for the proper use of exemption certificates and, in section A, provides that “[a]ll sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.”
Title 23 of the Virginia Administrative Code (VAC) 10-210-280 provides further explanation of the proper use of exemption certificates. Subsection A states that a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.
Virginia Code § 58.1-633 A 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 as follows:
Every person who is liable for collection of sales tax or remittance of use tax or both is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Such records must include… A daily record of all cash and credit sales, including sales under any type of financing or installment plan in use. A record of the amount of all merchandise purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase. . .A record of all deductions and exemptions claimed in filing sales or use tax returns., including exemption and resale certificates, returned or repossessed goods, and bad debts. . .A record of all tangible property used or consumed in the conduct of the business. . .A true and complete inventory of the stock on hand and its value, taken at least once each year. Records must be open for inspection and examination at all reasonable hours of the business day by the Department of Taxation.
When a dealer fails to maintain adequate records, the Department is authorized by Virginia 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.
Sales for September 2011 through December 2012
The documentation provided by the Distributor shows that the Taxpayer purchased cigarettes exempt of the tax for resale. The cigarette sales provided by the Distributor show that the Taxpayer made cigarette purchases totaling ***** exempt of the tax that are not supported by any resale exemption or tax reporting documentation.
The tax liability was calculated on the purchase price of the cigarettes because the Taxpayer failed to maintain sales records. The assessment is calculated based on the sales documentation provided by the Distributor, as this was the best information available. It is noted that the Taxpayer was given a credit of ***** against the tax liability for sales tax collected and remitted to the Department during the months covered by the assessment.
Sales for August 2013 through May 2014
The documentation provided by the Distributor shows that the Taxpayer purchased cigarettes exempt of the tax for resale. The cigarette sales provided by the Distributor show that the Taxpayer made cigarette purchases totaling ***** exempt of the tax that are not supported by any resale exemption or tax reporting documentation.
The tax liability was calculated for both periods on the purchase price of the cigarettes because the Taxpayer failed to maintain sales records. The assessment is calculated based on the sales documentation provided by the Distributor, as this was the best information available. It is noted that the Taxpayer was given a credit of ***** against the tax liability for sales tax collected and remitted to the Department during the months covered by the assessment.
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, the Taxpayer has not met this burden.
The Distributor had on file the Taxpayer’s resale certificate of exemption to purchase tangible personal property exempt of the tax for resale. Based on sales information provided by the Distributor, the Taxpayer purchased cigarettes exempt of the tax for resale. The Taxpayer has provided no evidence that the tax was collected on the sale of such cigarettes or that the cigarettes qualified for exemption. Further, while the Taxpayer claims that it has filed and reported the tax on all cigarettes, the cigarette purchases compared to the gross sales reported to the Department for the respective periods show that gross sales were underreported. Lacking supporting documentation to prove otherwise, the Taxpayer has not met the burden of proof that the assessments are erroneous. Based on the foregoing, I find that the assessments are correct.
Penalty
Virginia Code § 58.1-635 mandates the application of penalty to tax deficiencies and provides that:
When any dealer fails to make any return and pay the full amount of the tax required by this chapter, there shall be imposed, in addition to other penalties provided herein, a specific penalty to be added to the tax in the amount of six percent if the failure is for not more than one month, with an additional six percent for each additional month, or fraction thereof, during which the failure continues, not to exceed thirty percent in the aggregate. . .If such failure is due to providential or other good cause shown to the satisfaction of the Tax Commissioner, such return with or without remittance may be accepted exclusive of penalties. [Emphasis added.]
As the Taxpayer has not shown good cause for its failure to properly comply with its tax compliance responsibilities as a retailer of cigarettes, I find no basis to remove the assessed 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. Therefore, I find no basis to waive the interest assessed as a result of the Department's audit.
CONCLUSION
In accordance with this determination, the assessments are correct as assessed. The Department's records indicate the Taxpayer has paid the audit assessments issued as Bill ***** and Bill ***** in full.
The Code of Virginia sections and regulations cited are available on-line 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 response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/567.T