June 30, 2020
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek correction of the retail sales and use tax assessments issued to ***** (the “Taxpayer”) for the period March 2013 through February 2016. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is located in another state and is primarily engaged in the sale and installation of non-monitored security and fire alarm systems to Virginia customers. As a result of the Department’s audit, the auditor found that the Taxpayer did not charge its customers sales tax on the sale and installation of non-monitored fire alarm and security systems. Rather, the Taxpayer purchased all the materials used in the installation of the non-monitored systems exempt of the tax and remitted the use tax to the Department on the cost price of the materials. The auditor assessed the sales tax on mark-up charges and service and other fees in connection with the sale and installation of non-monitored systems.
During the audit, the auditor sampled three months of exempt sales (high, low, and average). The Taxpayer disagreed with the inclusion of September 2014 sales in the sample and claimed that those sales were not representative of the sales population. The auditor agreed to expand the sample to include an additional three months. The Taxpayer, however, continues to contest the inclusion of the September 2014 sales in the sample and argues that the sales be removed from the computation of the error factor and taxed separately.
DETERMINATION
Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial either to the auditor or the client. When sampling techniques are understood and properly applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit. The purpose of the audit sample is to determine a factor for errors within a representative selected period. Once the error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid. Every effort is made to objectively select the sample periods that are representative of the period being audited and to reach a consensus with the taxpayer concerning the validity of the sample.
After reviewing the information provided in your letter, I agree that the September 2014 sales may not be representative of the Taxpayer's normal business activity during the audit period. The Taxpayer has demonstrated that the inclusion of the September 2014 sales represents over 50% of the total sales for the remaining five sample months. Therefore, I agree that the inclusion of the September 2014 sales in the sample skews the error rate projection over the population. Accordingly, I find basis to remove the September 2014 sales from the Department’s sample computations and to tax the sales separately.
CONCLUSION
The audit will be returned to the appropriate field audit staff for revision. Once the revision is completed, the Taxpayer will receive a revised bill with interest accrued to date. The bill should be paid within 30 days of the date of the bill to avoid the accrual of additional interest. If you have any questions concerning this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1320.T