December 14, 2021
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 July 2015 through December 2019. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer provides various utility inspection services in and outside of Virginia. An audit by the Department resulted in an assessment for untaxed general expense and fixed asset purchases. During the audit, the Taxpayer did not provide to the auditor documentation showing that taxes were paid on its expense and fixed asset purchases. Penalty was assessed because this was a second generation audit and the Taxpayer failed to meet the use tax compliance ratio.
The Taxpayer appeals the assessment contending the sales tax was paid on a number of the furniture and fixture purchases. Documentation was provided with the appeal, including an asset listing from its personal property tax return and invoices showing taxes paid. The Taxpayer also requests the abatement of the assessed penalty based on high employee turnover during the audit period.
DETERMINATION
Documentation
Virginia Code § 58.1-633 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 requirements are set out in Title 23 of the Virginia Administrative Code 10-210-470. 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 and purchases to determine whether a tax liability exists.
When a taxpayer files an appeal, which includes additional information, the auditor is provided with the opportunity to review and comment on the new documents. After reviewing the additional documentation, the auditor was able to confirm the information was related to items on the exceptions list and will make adjustments, as appropriate.
Penalty Waiver
Title 23 VAC 10-210-2032 provides that the application of penalty to audit deficiencies is mandatory and its application is generally based on the percentage of compliance determined by computing the dealer’s compliance ratio. In second generation audits, the penalty will generally be applied unless the taxpayer’s compliance ratios meet or exceed 85% for sales tax and 60% for use tax. In this second generation audit, the Taxpayer’s use tax compliance ratio was 0%.
In Public Document (P.D.) 00-115 (6/23/2000), the taxpayer sought a waiver of penalty assessed in a retail sales and use tax audit. The Department ruled that corporate restructuring and employee turnover are considered normal business conditions, which are generally within a taxpayer’s control and a consequence of a taxpayer’s efforts and actions. The circumstances cited by the taxpayer in that instance were not considered unusual. Rather, the Department ruled that they reflected common business conditions. Accordingly, the Department did not find a basis to waive the penalty. See also P.D. 97-31 (1/31/1997).
Pursuant to the authorities cited above, the Taxpayer’s employee turnover is considered a normal business condition and does not constitute exceptional mitigating circumstances to waive the penalty. In addition, this is a second generation audit and the Taxpayer’s use tax compliance ratio is 0%. Accordingly, there is no basis to waive the penalty.
CONCLUSION
In accordance with this determination, the audit will be returned to the appropriate field audit staff for revision. The audit staff will adjust the audit assessment based on the documentation provided with the Taxpayer's appeal. A revised copy of the audit report and an updated bill will be sent to the Taxpayer. The bill should be paid within 60 days to avoid the accrual of additional interest.
The Code of Virginia section, regulation, and public documents 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 response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3597.G