September 4, 2019
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter on behalf of ***** (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessment for the period April 2013 through May 2014. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is wholesale dealer. As a result of the Department’s compliance program to verify retail sales tax compliance on purchases of cigarettes by retail and wholesale dealers, the Taxpayer was issued an assessment for consumer use tax, penalty and interest on untaxed cigarettes purchased from ***** and *****, collectively (the “Distributors”) pursuant to Virginia Code § 58.1-623 A.
The assessment is based on sales information provided by the Distributors identifying the Taxpayer’s purchase of cigarettes exempt of the tax for resale. A notice was sent to the Taxpayer on July 9, 2014 of the Department’s findings regarding the Taxpayer’s exempt purchases of cigarettes and a request for documentation to substantiate the exempt resale of such cigarettes. Because the Taxpayer failed to respond to the Department’s request for documentation within the allotted time, an assessment was issued for the tax, interest and penalty on the untaxed cigarette purchases. The Taxpayer contacted the auditor and provided sales invoices and customer resale exemption certificates.
The Taxpayer contests the sales tax assessment and claims that, as a wholesaler, it is not required to collect the sales tax on cigarettes sold to retail dealers for resale. The Taxpayer further maintains that all exempt sales are supported by customer resale exemption certificates. In addition, the Taxpayer argues that the audit was conducted as a desk audit and no contact was made with the Taxpayer. Therefore, the Taxpayer was not given a fair opportunity to challenge the audit findings. Lastly, the Taxpayer claims that the audit liability will cause a severe financial burden on the Taxpayer.
DETERMINATION
Records
Virginia Code § 58.1-633 B provides that:
All wholesalers and jobbers in this Commonwealth shall keep a record of all sales of tangible personal property, whether such sales be for cash or on terms of credit. Such records shall include the name and address of the purchaser, the number of the certificate of registration issued to the purchaser, the date of the purchase, the article purchased, and the price at which the article is sold to the purchaser. . . Any person who is both a retailer and a wholesaler or jobber and who fails to keep proper records showing wholesale sales and retail sales separately shall pay the tax as a retailer on both classes of his business.
The record keeping requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-470 as following:
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. The dealer may maintain such records on microfilm.
The above authorities state that the Taxpayer clearly has an obligation to maintain sufficient records of all sales of tangible personal property and substantiate sales of tangible personal property that are made exempt from the tax. This is a responsibility shared by all dealers who sell tangible personal property.
It is my understanding that the auditor’s attempt to contact the Taxpayer to perform a retail inspection was unsuccessful. It was only after the assessment was issued that the Taxpayer contacted the Department about the documentation required by the auditor to support exempt sales. As a result, a meeting was scheduled and the Taxpayer provided the auditor sales invoices and customer exemption certificates. The auditor reviewed the invoices and deemed them invalid because they had no customer signature on the invoice. Therefore, the auditor made no adjustment to the assessment based on the documentation provided by the Taxpayer.
Based on the above cited authorities and a review of the documentation provided by the Taxpayer, I find that the Taxpayer fulfilled its statutory obligations and the sales invoices are valid.
Certificates of Exemption
Title 23 VAC 10-210-280 A provides that:
All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. The certificate will remain in effect except upon notice from the Department of Taxation that it is no longer acceptable. However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.
Subsection B of the regulation states that:
Legitimate use of exemption certificates is vital. Reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax free purchase of any item of tangible personal property not covered by the exact wording of the certificate.
Based on a review of the exemption certificates provided, the audit will be adjusted to remove the sales supported by valid exemption certificates. However, the auditor found exemption certificates presented by the Taxpayer bearing the name of another supplier (*****). These exemption certificates are not valid because the Taxpayer cannot accept another supplier’s exemption certificate to sell cigarettes exempt of the tax. In addition, some certificates presented by the Taxpayer lack the name of the supplier, complete tax registration numbers, or descriptions of the type and use of the property being purchased. These certificates presented by the Taxpayer during the appeal are incomplete and, therefore, invalid. As properly completed exemption certificates have not been provided by the Taxpayer to substantiate these protested sales, I find these sales were correctly assessed.
Undocumented Sales
A comparison of the sales provided by the Taxpayer to the cigarette purchases from the Distributors show that the Taxpayer purchased ***** in tax exempt cigarettes not supported by resale documentation. Lacking documentation to support the exempt sale of such cigarettes, the auditor held the purchases in the audit.
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. Because the Taxpayer provided no records, the sales information provided by the Distributors was the best information available to assess the audit liability. As such, the tax liability was calculated based on purchase price of the cigarettes. Accordingly, the assessment is correct with respect to these purchases.
Penalty
Virginia Code § 58.1-635 mandates the application of penalty to sales and use tax deficiencies. Title 23 VAC 10-210-2032 B 3 generally provides that penalty will not be assessed in first generation audits. Because this is a first generation audit and there are no indications of fraud, I find 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.
Financial Hardship
The Taxpayer indicates that the assessment will cause a financial burden. The Taxpayer, however, has not submitted the required financial statements that reflect or verify an inability to pay the assessment. The Taxpayer must present evidence of doubtful collectability to support a claim of financial hardship. Without such information, the Department is unable to consider an offer in compromise based on doubtful collectability.
Virginia Code § 58.1-105 B authorizes the Tax Commissioner to compromise and settle a tax liability of doubtful collectibility. It is my understanding that the Taxpayer’s business is closed, and there continues to remain an issue of financial hardship if the Taxpayer be required to pay the assessment. As such, the Taxpayer may wish to request an offer in compromise based on doubtful collectibility. The Taxpayer must present evidence of doubtful collectibility to support a claim of financial hardship. If the Taxpayer wishes to pursue a settlement based on doubtful collectibility, please complete and return the Business Offer in Compromise.
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, P. O. Box 2475, Richmond, VA 23218-2475. 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 collectibility. In that case, the assessment as issued will become immediately due and payable.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. The Business Offer in Compromise: Doubtful Collectibility Package can also be found, completed and printed on the website in the Miscellaneous Forms section.
If you have any questions about this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/569.T