July 7, 2020
Re: § 58.1-1821: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessment issued for the period January 2016 through March 2017. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a retailer of cigarettes and other tobacco products. 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 this compliance program, the Taxpayer was issued an assessment for tax, penalty, and interest on untaxed cigarettes. The assessment is based on sales information provided by wholesale distributors identifying the Taxpayer’s purchase of cigarettes exempt of the tax for resale.
The Taxpayer contests the assessment and argues the auditor did not take into account the Taxpayer’s inventory on hand, or extenuating circumstances such as loss due to a flood, damaged stock, and employee and customer theft. The Taxpayer argues these factors greatly reduce the assessment when taken into account and requests the Department adjust the assessment accordingly. The Taxpayer has sold the business since the audit.
DETERMINATION
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. Before the assessment was issued, the Department sent the Taxpayer a summary of the audit findings and the proposed tax liability. The Taxpayer was allowed 14 days to provide documentation to substantiate whether the Taxpayer’s purchases from wholesale distributors 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 assessment was issued.
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 of the Virginia Administrative Code 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. In this case, the Taxpayer provided no documentation to support the exempt purchase of the cigarettes at issue. Therefore, the sales information provided by the Distributors was the best information available to assess the tax liability. As such, the tax liability was calculated based on the purchase price of the cigarettes. Notwithstanding, the auditor has reviewed the audit findings in light of the Taxpayer’s claims and will adjust the audit accordingly.
CONCLUSION
Based on this determination, the audit will be returned to the appropriate field audit staff for revision. A revised bill, reflecting the adjustments and with interest accrued to date, will be mailed to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 60 days of the date of the bill. Please remit payment within 60 days from the date of the bill to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *****, Post Office Box 27203, Richmond, Virginia 23261-7203.
The Code of Virginia and regulation sections cited, along with other reference documents, 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 determination, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1455L