Tax Type
Retail Sales and Use Tax
Description
Printed materials; Audit sample method
Topic
Collection of Delinquent Tax
Property Subject to Tax
Date Issued
07-23-1993
July 23, 1993
Re: §58.1-1821 Application: Sales and Use Tax
Dear*********
This will reply to your letter of September 21, 1992 in which you seek correction of a sales and use tax assessment for**************(the "Taxpayer").
FACTS
The Taxpayer is a commercial manufacturer of lights and lighting fixtures and sells such items at wholesale to distributors and retail customers. The department recently audited the Taxpayer and determined that it failed to pay taxes due on its use of various items included in the audit.
The Taxpayer has enumerated several points upon which it protests the assessment. This determination will discuss the facts of each item of contention separately.
DETERMINATION
Printed Materials
The assessment includes the imposition of use tax upon certain printed materials. The Taxpayer asserts that its use of the printed materials within Virginia is exempt pursuant to Virginia Regulation (VR) 630-10-86(8). VR 630-10-86(8)(A) exempts letters, brochures, reports, and similar printed materials if such items are stored in Virginia for twelve months or less and are then mailed or distributed outside of Virginia.
Subsection (B) of the regulation specifically excludes administrative supplies from the printed materials that qualify for the exemption. The auditor determined that the printed materials primarily consisted of administrative materials which are taxable notwithstanding the fact that such items are stored in Virginia for less than 12 months.
However, my review of the sample of printed materials you provided indicates that certain printed materials are more akin to catalogs and printed advertising materials which are exempt from the tax pursuant to VR 630-10-86(B)(7) when stored in Virginia for 12 months or less. See P.D. 85-229 (December 23, 1985, copy enclosed). For example, the news releases on new product lines, newsletters for distributors, catalog inserts, and product specification reports all appear to be exempt from the tax.
Alternatively, certain printed materials in the sample you provided appear to be used by the Taxpayer's sales and office staff which would be considered administrative supplies subject to the tax. For example, dealer information reports, incentive reports, and confidential price lists appear to be taxable. Further examination of your records and printed materials is needed to determine the percentage of the printed materials used in administrative activities and the percentage used in an exempt manner prior to making a final determination of this issue.
Barter Purchase
The use tax assessment on purchases was determined using the audit sampling method. The sample period included a transaction in which the Taxpayer exchanged products for golf clubs. The Taxpayer indicated that the golf clubs were given as gifts to its customers.
While the Taxpayer believes that the transaction is taxable, due to its unusual nature, the Taxpayer maintains that the transaction should be removed from the audit sample and separately taxed. The auditor's review of the Taxpayer's records revealed that the Taxpayer regularly makes gift and promotional purchases for distribution to its customers.
Our investigation revealed that the Taxpayer does, in fact, make regular gift purchases. Since, the Taxpayer's purchase of the golf clubs is representative of a typical transaction in which it engages, the gifts were properly included in the audit sample.
Specific Purchases
The Taxpayer objects to the inclusion of two specific purchases in the audit period claiming that the purchases were for items stored in Virginia for less than six months.
The audit workpapers revealed that the purchases were for administrative materials that were shipped to salespeople located outside of Virginia. Such materials are taxable and were properly included in the audit (see the Printed Material discussion above).
Miscellaneous Inventory, Duplicated, and Manufacturing Items
Items four, five and six identified in the Taxpayer's letter were incorrectly included in the audit. These items will be removed and the assessment will be adjusted accordingly.
Audit Sampling Method
The Taxpayer objects to the audit sample used to determine the accuracy of the Taxpayer's sales tax collections. Additionally, the Taxpayer has indicated that it is in the process of either obtaining valid exemption certificates for certain drop shipment sales included in the sample period or determining whether use tax was directly paid on such sales.
Sampling is an audit technique of significant value that is widely used in both the public and private sectors in all types of audits where a detailed audit would not prove beneficial either to the auditor or the taxpayer. 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 courts have held that a tax assessment issued by the proper assessing authorities is prima facie correct and that the burden of evidence is upon the taxpayer to prove otherwise.
Before requiring that a detailed audit be conducted or a sample period be extended, a taxpayer must show that the existing sample is not a truly representative sample period. In the case at hand, the Taxpayer has not shown that the sample used by the auditor was invalid or that the sample overstated its tax liability. In addition, the auditor exhibited great care in selecting a sample period that was fair to both the Taxpayer and the department. Further, the Taxpayer agreed with the sampling method used at the time the auditor conducted the examination.
Therefore, I find no basis for revising the sales tax audit based upon the sampling period used. However, I will allow the Taxpayer 30 days from the date of this letter to present evidence that will establish that either sales tax was directly paid on drop shipment sales or that such sales were made pursuant to valid resale certificates.
Penalty
Finally, the Taxpayer requests that the penalty portion of the assessment be abated. Upon revision of the audit assessment, the application of the penalty will be reviewed. If it is found that the Taxpayer meets the appropriate compliance ratios, the penalty will be abated.
In order to obtain the additional information discussed herein, it will be necessary for the department to review the Taxpayer's records. An auditor from the local district office will be contacting the Taxpayer to set up a mutually convenient time during which the reexamination may occur.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6449O
Rulings of the Tax Commissioner