April 10, 2025
Re: 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 2014 through April 2017.
FACTS
An audit was conducted on the books and records of the Taxpayer for the period at issue. The auditor found that the Taxpayer made untaxed general expense and fixed asset purchases resulting in an assessment. The Taxpayer filed an application for correction requesting a credit for sales taxes erroneously collected from its related entities. In addition, the Taxpayer also seeks the abatement of penalties.
ANALYSIS
Application for Correction
Virginia Code § 58.1-1821 states that "[a]ny person assessed with any tax administered by the Department of Taxation may, within ninety days from the date of such assessment, apply for relief to the Tax Commissioner." Title 23 of the Virginia Administrative Code (VAC) 10-20-165 interprets Virginia Code § 58.1-1821 and sets out guidelines for the filing of administrative appeals. Subsection D 4 of this regulation states: "An incomplete appeal or notice of intent to appeal does not satisfy or extend the 90-day limitation period."
Title 23 VAC 10-20-165 A defines a "complete appeal" as "an administrative appeal containing sufficient information, as prescribed in subsection D of this section, so that the grounds upon which the taxpayer relies in contesting an assessment are fully set forth to allow the Tax Commissioner to make an informed final determination." Subsection D provides a list of the information required for a complete appeal. The required information includes alleged errors in the assessment, the grounds upon which the taxpayer relies and all facts relevant to the taxpayer's contention. In addition, taxpayers must provide the legal authority (statutes, regulations, rulings of the Tax Commissioner, court decisions, etc.) which is the basis for the taxpayer's position in the appeal.
In this instance, the correspondence submitted by the Taxpayer does not constitute a complete appeal. The correspondence requests a credit for overpayment but does not allege any errors in the assessment. Because the Taxpayer has not alleged any error with the assessment, the Taxpayer’s correspondence cannot be considered to be an application under Virginia Code § 58.1-1821.
Protective Claim
Because the Taxpayer seeks a credit for sales taxes erroneously collected, the Department has considered whether the request can be a protective claim for refund. Virginia Code § 58.1-1824 provides that “[a]ny person who has paid an assessment of taxes administered by the Department of Taxation may preserve his judicial remedies by filing a claim for refund with the Tax Commissioner. . . within three years of the date such tax was assessed.” Virginia Code § 58.1-1824, therefore, expressly limits the right to file a protective claim to cases in which both the filing of the claim and the payment of the assessment occurred within three years of the assessment. See Public Document (P.D.) 86-224 (11/3/1986). In addition, all assessed taxes, penalties, and accrued interest for the year or years subject to the request must be paid in full before a taxpayer may file a protective claim. See 23 VAC 10-20-190 A 1.
Under Virginia Code § 58.1-625 C, any dealer that collects sales or use tax on an exempt or non-taxable transaction is required to remit the erroneously or illegally collected tax to the Department unless the tax has been refunded to the consumer or credited to their account. To assist dealers and consumers seeking refunds or credits, the Department issued retail sales and use tax refund claim procedures (the “Procedures”). In accordance with the Procedures, a dealer must refund sales or use tax erroneously collected on transactions exempt or not subject to the tax directly to the consumer when requested to do so by such customer unless one of the limited circumstances applies:
1. The dealer believes the transaction was properly subject to the tax.
2. The dealer is no longer in business.
3. Refunding the tax would cause an undue financial hardship to the dealer.
The Taxpayer has given no indication that the sales tax on the transactions in question have been refunded to the customers. In addition, the facts of this case do not fall within one of the circumstances that would impact the Taxpayer’s ability to issue refunds to the related entities.
In addition, the Procedures permit a dealer to recover the amount of sales tax refunded or credited to a customer that was previously reported and remitted to the Department on their return for the month in which a refund or credit is made. In order to claim this credit or refund, the dealer would report the sales price of the transaction(s) on the exempt sales line on the applicable return reducing the dealer’s sales tax liability for the month the sales tax amount was refunded. Virginia Code § 58.1-633 requires the dealer to maintain supporting documentation regarding refunds and credits along with the return worksheet in their records.
Compliance Penalty
Virginia Code § 58.1-635 mandates the application of penalty to tax deficiencies. Title 23 VAC 10-210-2032 B 4 provides that penalty is always applied to second-generation audits unless a taxpayer’s compliance ratio meets or exceeds 85% for sales tax and 60% for use tax. The current audit, which was the Taxpayer’s second, reflects a use tax compliance ratio of 14%. Based on this measurement, the compliance penalty was properly applied in the audit.
Post-Amnesty Penalty
The 2017 General Assembly enacted legislation establishing a Tax Amnesty program administered by the Department that spanned a 60-to 75-day period. The Guidelines for the Virginia Tax Amnesty Program (the “Guidelines”), issued as Public Document (P.D.) 17-156 (9/5/2017), permitted taxpayers with delinquent returns for amnesty-eligible periods to qualify for certain tax payment benefits. Any tax liability that was eligible for amnesty benefits but remained unpaid is subject to a 20% amnesty penalty in addition to all other penalties.
The amnesty-eligible periods for ongoing field audits are the month of April 2017 and prior. The penalty, however, will not be applied to any assessment generated from a field audit of a business for an amnesty eligible period provided that any uncontested liability, or any contested liability remaining upon resolution of an application for correction under Virginia Code § 58.1-1821 or Virginia Code § 58.1-1825, is paid within 30 days from the date of the conclusion of the proceedings, whichever is latest. The Taxpayer failed to take any of the necessary actions under the Guidelines to either avoid or delay the assessment of the penalty.
DETERMINATION
Because the Taxpayer has not contested the audit liability and the penalties were properly applied by the Department, the assessment is upheld. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of this letter.
In addition, the Taxpayer has not shown by the facts or evidence provided that it has met the statutory or procedural requirements for requesting a refund or credit for taxes erroneously collected from the related entities. Accordingly, the Department is unable to grant the Taxpayer’s request.
The Code of Virginia sections cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this response, you may contact ***** in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at ***** or *****.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/3435.F