Tax Type
Retail Sales and Use Tax
Description
Cash discount must be allocated between sales price and sales tax
Topic
Collection of Tax
Computation of Tax
Date Issued
11-24-1987
November 24, 1987
Re: §58.1-1821 Application/ Sales and Use Tax
Dear **********************
This will reply to your letter of September 3, 1987 on behalf of ************* (taxpayer), seeking correction of an audit assessment of sales tax for the period April 1984 through March 1987.
FACTS
The taxpayer is engaged in the manufacture and sale of concrete construction blocks. To certain preferred customers the taxpayer gives discounts, (stated in specific dollar amounts), on sales of block, which vary according to the customer and the volume of blocks sold. When recording discount sales on its books the taxpayer entered the sales tax due based on the gross sales price without any discount. However, in filing its monthly sales tax returns, the taxpayer reduced its gross taxable sales by the full amount of the cash discounts allowed to customers. Thus, the taxpayer's accrued sales tax liability shown on its books exceeded the sales tax shown due on its returns. The department's auditor indicated that the taxpayer credited the excess of sales tax in its sales tax accrual account to its "other income" account. The auditor then held these amounts to represent tax collected but unremitted, and computed the audit assessment on the total amount credited by the taxpayer to its "other income" account.
The taxpayer admits that in reporting its sales tax to the department, it erred by reducing its taxable sales by the entire amount of the cash discount rather than by 96.2%, for periods prior to January 1987, or by 95.7% for periods thereafter, as required by Virginia Retail Sales and Use Tax Regulation 630-10-18.B. However the taxpayer contends that the auditor erroneously held that it owed additional sales tax on 100% of the cash discounts allowed to its customers. Furthermore, the taxpayer contends that it owes no additional sales tax for periods prior to January 1985 since the department's regulations did not require the allocation of discounts between sales price and sales tax prior to that time. Lastly, the waiver of all penalties assessed is requested since this was the taxpayer's first audit.
DETERMINATION
Subsection B of Virginia Regulation 630-10-18 provides that "[i]n computing the amount of a discount which may be subtracted from gross sales, the discount must be allocated between sales price and sales tax." When the discount is stated as a specific dollar amount and not as a percentage of sales price, the regulation provides the following example for allocating the discount between sales price and sales tax:
-
- Dealer B sells an item to a customer for $100 and bills the customer $100 for the item and $4 for the tax. The terms of the sale provide for a $10.00 discount if the bill is paid within 30 days. The customer pays within 20 days and is therefore entitled to the discount, which is computed as follows:
- Dealer B sells an item to a customer for $100 and bills the customer $100 for the item and $4 for the tax. The terms of the sale provide for a $10.00 discount if the bill is paid within 30 days. The customer pays within 20 days and is therefore entitled to the discount, which is computed as follows:
Sales Price 100.00
Tax 4.00
Less $10.00 Discount
$10.00 / 1.04 = 9.62 sales price discount
.38 tax discount
Therefore, customer remits $94.00 which includes $90.38 in sales price and $3.62 in sales tax. Dealer B may deduct $9.62 from gross sales, and will accordingly remit only $3.62 in tax.
The taxpayer in this case underreported the tax to the department by failing to properly allocate the discounts between sales price and sales tax in accordance with the above referenced regulation. However, the audit in this case is overstated to the extent that it held the taxpayer liable for additional tax based on the full amount of the discounts. Accordingly, for periods prior to January 1987, the assessment will be adjusted in this case to reflect additional sales tax due by the taxpayer on 3.8% of the discounts allowed to its customers, and not on 100% of such discounts as claimed in the audit. For periods on and after January 1, 1987, the additional tax due should be computed on 4.3% of such discounts.
In addition, I cannot agree with the taxpayer's contention that it owes no additional sales tax for periods prior to 1985. The 1985 regulations merely clarified the department's policies governing cash and trade discounts which existed prior to that time. (See, for example a copy of a January 11, 1983 ruling of the department enclosed.) Furthermore, Virginia Code §58.1-16 provides in pertinent part that "[a]ny person responsible for collecting any tax administered by the Department...who overcollects such tax and fails to account for and pay such overcollection...by the time his regular...return is due shall be liable for the amount of such overcollection, and in addition a penalty of twenty-five percent of such overcollection. The Commissioner...may waive such penalty for good cause shown."
Lastly, I find basis for the waiver of all penalties imposed in this case. Accordingly, the assessment will be adjusted in a manner consistent with the foregoing.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner