Document Number
21-41
Tax Type
Retail Sales and Use Tax
Description
Cigarettes: Underreported, Assessment Based on Purchases Mark-up
Topic
Appeals
Date Issued
03-16-2021

March 16, 2021

Re: § 58.1-1821 Application:  Retail Sales and Use Tax

Dear *****:

This is in response to your letter in which you seek correction of the retail sales tax assessment issued to ***** (the “Taxpayer”) for the period February 2016 through January 2017. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a convenience store. 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 and interest on untaxed cigarettes purchased from ***** (the “Distributors”). The assessment is based on sales information provided by the Distributors identifying the Taxpayer’s purchases of cigarettes exempt of the tax for resale. 

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. Based on the sales information provided by the Distributors, it was determined that the Taxpayer underreported sales of cigarettes, by the amount of the cigarettes purchased from the Distributors for resale, when compared to sales of cigarettes reported by the Taxpayer to the Department. 

On September 4, 2020, the Department sent the Taxpayer a summary of the findings and the proposed tax liability. The Taxpayer was allowed 14 days to provide documentation to substantiate that the Taxpayer’s purchases from the Distributors qualified for the resale exemption or that the Taxpayer collected and remitted the sales tax on the sale of those purchases. 

The Taxpayer filed amended sales tax returns and paid the additional tax liability reported on the returns. Because no interest or penalty was paid by the Taxpayer when the amended returns were filed, the Department assessed additional sales tax, a late payment penalty and interest based on the amended returns. The Taxpayer then paid the balance of the additional sales tax, late penalty and interest. 

The Taxpayer contests the sales tax assessment and contends that the sales tax collected and remitted on the over reported food sales would cover the sales tax collected and remitted on the under reported cigarette sales. 

DETERMINATION

Purchases/Sales

The resale exemption provided under the Virginia retail sales and use tax is found in the definition of “retail sale” in Virginia Code § 58.1-602. This code section excludes a sale for resale from the definition of a “retail sale,” which is defined as “a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter.”

Virginia Code § 58.1-623 sets forth the requirements for the proper use of exemption certificates and, in section A, provides that “[a]ll sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.”

Title 23 of the Virginia Administrative Code (VAC) 10-210-280 provides further explanation of the proper use of exemption certificates. Subsection A states that a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.

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 VAC 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.

The documentation provided by the Distributor shows that the Taxpayer purchased cigarettes exempt of the tax for resale. A comparison of the cigarette sales provided by the Distributor to the Taxpayer’s sales reported to the Department shows that the Taxpayer made cigarette purchases totaling $***** exempt of the tax that are not supported by any resale exemption or tax reporting documentation.

The assessment is calculated based on the sales documentation provided by the Distributors, as this was the best information available. The auditor multiplied the cartons of cigarettes by the purchase price to estimate the tax liability. A notice was sent to the Taxpayer on September 4, 2020 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. The auditor also contacted the Taxpayer and the Taxpayer’s bookkeeper on November 16th and November 17th 2020 and was told that no sales records existed. The Taxpayer has not provided evidence that the Distributors’ sales documentation is incorrect. Nor has the Taxpayer provided supporting documentation that the tax paid in regard to the amended returns for over reported food sales offsets the tax due for the under reported cigarette sales. Therefore, the Taxpayer has not met the burden of proof that the assessment is erroneous.

CONCLUSION

Based on this determination, the assessment is upheld. An updated bill, 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 from the date of the bill.

The Code of Virginia sections and regulations cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

 

Craig M. Burns
Tax Commissioner

AR/3582.B
 

Rulings of the Tax Commissioner

Last Updated 06/04/2021 10:09