Rulings of the Tax Commissioner

June 19, 2025

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

Dear *****:

This will respond to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the “Taxpayer”) for the periods October 2018 through September 2021.

FACTS

An audit was conducted on the books and records of the Taxpayer, an engineering firm. As a result of the audit, sales tax was assessed for the untaxed sales of the Taxpayer’s products. The auditor discovered that the sales were erroneously sourced to localities where the products were shipped by the Taxpayer, not where the products were sold. Accordingly, an assessment of sales tax was issued in an amount for the difference for the locality tax rates outside the extended limitations period. 

The Taxpayer paid the assessment and filed an application for correction contending that the audit period was erroneously extended beyond the three-year audit period indicated on the signed waiver. In addition, the Taxpayer also asserts that an untaxed sale in which a customer (the “Customer”) ultimately paid the tax should be removed from the sample exceptions list. 

ANALYSIS

Time Limitation Agreement

Virginia Code § 58.1-634 states that sales and use taxes “shall be assessed within three years from the date on which such taxes became due and payable.” Virginia Code § 58.1-220 provides for the waiver of time limitation on the assessment of omitted or additional state taxes and provides:

Where before the expiration of the time prescribed for the assessment of an omitted or additional state tax, both the Tax Commissioner and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.

Title 23 of the Virginia Administrative Code (VAC) 10-20-80 further provides that “[s]uch agreements shall be in writing, on forms prescribed by the Tax Commissioner, and shall extend the period for assessing a tax for all issues relevant to the tax and taxable period for which the agreement is executed ... .“ The Taxpayer signed an agreement extending the time for an assessment to July 31, 2022. The original assessment was issued on May 13, 2022, within the allowed extended time period. 

Title 23 VAC 10-210-2070 B provides that sales by dealers located in Virginia are generally subject to the sales tax and sourced to the locality of the place of business of the dealer collecting the tax. Upon review of the audit, the audit staff discovered that the contested sales were sourced to localities with rates lower than ***** (County A), the locality in which the Taxpayer was located. Accordingly, a revised audit report and an assessment was issued on August 10, 2022 based on the higher local sales tax rate of County A. 

Title 23 VAC 10-20-160 D 6 provides that the Department will not, with the exception of interest, correct an assessment by increasing the amount of liability. Rather, the Department will make a second assessment unless the period for assessing additional tax has expired. In this case, the Department had until July 31, 2022 to issue a second assessment for any additional tax liability not assessed by the first assessment. As such, the August 10, 2022 assessment was not timely issued.

Sampling

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 properly applied, the final results are usually within a narrow percentage range of the actual amount that would have been 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 Taxpayer requests the removal of the sale to the Customer from the sample, because the Customer paid the sales tax due and the sale represented a majority of the exception. For an item to be removed from the audit sample, the Taxpayer must show that the transaction was isolated in nature and not a normal part of the Taxpayer's operation. See P.D. 00-164 (8/31/2000) and P.D. 05-82 (6/8/2005). 

In order for a transaction to be removed from an audit sample and the extrapolation, taxpayers must establish that the transaction is an isolated event and not a part of its normal operations. See P.D. 10-263 (12/15/2010) and P.D. 18-63 (5/2/2018). In this case, it appears that the transaction at issue was a normal part of the Taxpayer’s operations because the Taxpayer typically makes sales of this nature.

Further, while the tax on the sale may have been paid by the Customer, the sale should remain in the calculation of the error factor. See P.D. 06-122 (10/17/2006). Therefore, to remove the sales in question from the sample base would skew the sample and nullify its validity. A customer remitting use tax to the Department as a result of an audit assessment or through its own efforts is not sufficient to relieve the Taxpayer from its obligation to collect the tax at the time of the sales transaction. See P.D. 14-56 (4/25/2014). 

DETERMINATION 

Accordingly, because the August 10, 2022 assessment was issued outside the extended limitations period, and was paid in full, a refund of the tax paid for this assessment will be issued. However, because the transaction at issue with the Customer will remain in the error factor calculation, the assessment issued on May 13, 2022 is upheld. Because this assessment was paid in full, no further action is required. 

The Code of Virginia sections and regulations 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 determination, you may contact ***** in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at ***** or *****@tax.virginia.gov.

Sincerely,

James J. Alex
Tax Commissioner
Commonwealth of Virginia

AR/4316.B