Tax Type
Retail Sales and Use Tax
Description
Record-keeping requirements; Audit procedures
Topic
Returns/Payments/Records
Date Issued
07-07-1994
July 7, 1994
Re: §58.1-1821 Application: Sales and Use Tax
Dear****************
This will reply to your letter of June 17, 1993 in which YOU seek correction of the sales and use tax audit of your client,******************(the Taxpayer), for the period of October, 1988 through September, 1991.
FACTS
The Taxpayer is in the restaurant business. A large portion of the Taxpayer's sales consist of an all-you-can-eat buffet. During the course of the audit it was discovered that the Taxpayer did not maintain sufficient sales records and in some cases the records were nonexistent. An examination of the Taxpayer's income tax return revealed an inconsistency between gross sales reported on their income tax returns and gross sales reported on their monthly sales and use tax returns, Form ST-9. Additionally, both figures differed from sales listed in reports to the Department of Alcoholic Beverage Control.
In an attempt to establish reasonable monthly gross sales figures, it was necessary for the auditor to apply a mark-up to the cost of goods sold. The mark-up on cost of goods sold for the entire restaurant industry (including buffet-style restaurants) ranges from a low of 30% to a high of 45% (according to the National Cash Register Expenses in Retail Businesses).
Based on the large volume of buffet meals sold by the Taxpayer, the auditor used the high end (45%) cost of goods sold mark-up factor in determining the Taxpayers gross sales measure. The Taxpayer is taking exception to the 45% mark-up factor. The Taxpayer feels that since the majority of their business is the result of buffet meals, and traditionally the portions are larger and the waste is greater for buffet customers, the mark-up factor used in the audit should be increased.
DETERMINATION
Va. Code §58.1-633 addresses record retention by registered dealers and states, in part, that "every dealer required to make a return and pay or collect any tax under this chapter shall keep and preserve suitable records of the sales, leases, or purchases, as the case may be, taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due." Virginia Regulation (VR) 630-10-30 also addresses dealer's records and provides the following:
Every person who is liable for collection of sales tax and/or remittance of use tax is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Such records must include... a daily record of all cash and credit sales, including sales under any type of financing or installment plan in use.
In cases where a taxpayer does not maintain and preserve adequate records to determine tax liability, an auditor must employ whatever reasonable means available in order to determine a reasonable audit deficiency. In the instant case, based on the Taxpayer's records, the auditor was able to calculate the actual cost of goods sold during the audit period.
Based on the nature of the Taxpayer's business, and in fairness to the Taxpayer, the auditor used the highest industry mark-up factor (45%) to the cost of goods sold in order to determine gross sales.
In view of the lack of adequate sales records, the discrepancies between sales reported for income tax, sales tax, and alcoholic beverage license purposes, and the downward adjustments already made to reflect the Taxpayer's amended (but unaudited) federal income tax returns for the period, the auditor's method appears to have produced a more than reasonable result for the Taxpayer. Thus, absent more complete accounting records, further adjustments to reflect a higher mark-up are not in order.
In order to avoid the accrual of additional interest, the outstanding balance of*****should be paid within 30 days from the date of this letter. Payment should be directed to ***********, Office of Tax Policy, Department of Taxation, P.O. Box 1880, Richmond, Virginia 23282-1880.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7112K
Rulings of the Tax Commissioner