Rulings of the Tax Commissioner

September 1, 2020

Re: § 58.1-1821 Application:  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 June 2012 through December 2018. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates as a general contractor. The Department’s auditor assessed consumer use tax on purchases made exempt of the sales tax during the audit period. The Taxpayer maintains that the audit period reflected in the audit includes months that were not identified at the onset of the performance of the audit. The Taxpayer requests that the audit be voided. The Taxpayer also contends the sample period used to calculate the audit assessment is not representative of the entire audit period and requests that the assessment be recalculated based upon a review of all the documentation provided for the entire audit period. 

DETERMINATION

Audit Period

Virginia Code § 58.1-634 provides that:

The taxes imposed by this chapter shall be assessed within three years from the date on which such taxes became due and payable. In the case of a false or fraudulent return with intent to evade payment of the taxes imposed by this chapter, or a failure to file a return, the taxes may be assessed, or a proceeding in court for the collection of such taxes may be begun without assessment, at any time within six years from such date. The Tax Commissioner shall not examine any person's records beyond the three-year period of limitations unless he has reasonable evidence of fraud, or reasonable cause to believe that such person was required by law to file a return and failed to do so.

The Taxpayer provides a letter issued by the Department’s audit staff that informed the Taxpayer of the pending audit review. The letter states that the Department would review the Taxpayer’s records for the period June 1, 2012 through May 31, 2018. The audit report and the Notice of Assessment issued to the Taxpayer at the conclusion of the audit state that the audit period is June 2012 through December 2018.

It is my understanding that the Taxpayer was not registered for the consumer use tax and no returns had been filed. Because use tax liability was found in the initial three-year period reviewed, the audit period was extended to include an additional three years. In accordance with Virginia Code § 58.1-634, an audit period of six years is proper in this instance. The extension of the audit period to include more recent periods (the months June 2018 through December 2018) and bring it up to date is not prohibited by statute. I find no error in this instance.

Sample

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.

The Department conducted an audit of the Taxpayer using the sample period of January 2016 through December 2016. The sample period was chosen by the audit staff because it was the closest to the average year for gross receipts based on the Taxpayer’s trial balances. The documentation provided to the Taxpayer at the start of the audit indicated that a one-year sample would be used, and any transactions found during the review without proper taxation would be extrapolated over the other years in the audit period based on gross sales.

After reviewing the audit report and the information presented, I find that the auditor’s use of the one-year sample period was proper. Although the Taxpayer contends that the audit sample is not representative of the entire audit period, the Taxpayer has not proven that the sampling methodology is flawed or unrepresentative of the audit period. Therefore, I find no basis to invalidate the sample and the extrapolation. I further find no basis to review records from all of the months within the audit period. Accordingly, the sampling methodology was properly applied.

Financial Hardship

During a conference call with the Department’s analyst, the Taxpayer indicated that paying the full amount of the assessment will cause a financial burden. As such, 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 OIC - Fee and OIC B - 3 forms to:  Tax Commissioner, Virginia Department of Taxation, Post Office Box 2475, Richmond, Virginia 23218-2475. 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. If the Department does not receive the completed forms within 60 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.

The Code of Virginia 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 concerning payment of the assessments, you may contact ***** at *****. If you have 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/2104P