Tax Type
Retail Sales and Use Tax
Description
Deficiency Assessments; Audit Techniques
Topic
Collection of Delinquent Tax
Date Issued
10-29-1991
October 29, 1991
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear******************
This will reply to your letter of July 5, 1991 in which you seek correction of sales and use tax assessments for ********* and ******************** (the Taxpayer) for the period October 1989 through July 1990.
FACTS
The Taxpayer operates a restaurant in**********Virginia (Restaurant 1). The Taxpayer operates additional restaurants in **************** Virginia (Restaurant 2) and North Carolina (Restaurant 3). The audit of Restaurant 1 produced assessments for its failure to remit retail sales and use tax on its sales and on purchases of various tangible personal property.
The Taxpayer appeals the assessments for Restaurant 1 on the basis that the sample method used to arrive at the liability is not reflective of the whole audit period and that the auditor wrongly used bank deposits to arrive at the liability amount.
DETERMINATION
Sampling is an audit technique of significant value that is widely used in the public and private sectors in all types of audits where a detailed audit would not prove beneficial to either the auditor or the client. When sampling techniques are understood and properly applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit.
The audit techniques in this case were properly applied. The Taxpayer was unable to locate and provide the auditor all of the customer receipts or cash register tapes. Lacking any other source information, the use of bank deposits, backing out all unrelated deposits, is an acceptable audit technique to arrive at an extrapolation figure. The auditor backed out the total receipts from Restaurant 3 and a loan proceeds deposit. The auditor only deducted credit card receipts from Restaurant 2, as cash sales were deposited in a separate account. Additionally, the auditor credited the sales already reported in determining the final figure.
The Taxpayer contends that the sales figure used by the auditor includes 20.5% in sales and local meals taxes (5% for Restaurant 3, and 8.5% and 7% for Restaurants 1 and 2 respectively.) The auditor removed the 5% tax when the receipts for Restaurant 3 were removed and the 8.5% tax attributable to Restaurant 2 when the credit card receipts were removed. Because there is no indication that the 7% tax applied to Restaurant 1 was subtracted from the final figure, the audit will be revised accordingly. Additionally, based on the facts presented, and because this is a first generation audit, the penalty will be abated.
The courts have held that a tax assessment by proper assessing authorities is prima facie correct and the burden is upon the taxpayer to prove that the assessment is incorrect. Based on the facts presented, there is insufficient proof by the Taxpayer to prove the entire assessment incorrect. I would also like to note that while a sample period was used to compute taxable sales, the auditor performed a detailed audit of purchases, which accounts for over 60% of the total assessment. However, the audit will be revised as stated above and a revised Notice of Assessment will be issued to the Taxpayer under separate cover.
Additionally, Virginia Regulation (VR) 630-10-30 requires that taxpayers must retain suitable records and documents substantiating all information contained on any tax administered by the Department. Inappropriate recordkeeping could result in a penalty in future audits.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/5377I
Rulings of the Tax Commissioner