Tax Type
Retail Sales and Use Tax
Description
Audit procedures; Estimate of sales due to incomplete records
Topic
Collection of Delinquent Tax
Date Issued
12-15-1995
December 15, 1995
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****************:
This will reply to your letter of April 1995, seeking correction of a sales and use tax assessment to ***********(the "Taxpayer") for the period July 1993 through January 1995.
FACTS
The Taxpayer, a restaurant and bar business, was audited by the department and assessed tax, interest, and 50% fraud penalty for tax collected from customers but not remitted to the department. At the time the audit was conducted, the Taxpayer was registered for both withholding and corporate income tax, but had failed to register for sales tax. In an effort to arrive at the taxable sales, the auditor used a purchase markup method based on available information provided by the Taxpayer. The Taxpayer is taking exception to the method used by the auditor in calculating unreported sales and feels that the auditor based his calculations on retail food industry standards.
The Taxpayer also contests the application of penalty and maintains that it was unaware the sales tax account was closed prior to its purchase of the business. Furthermore, the Taxpayer maintains that it was uninformed by the department of any delinquent taxes. I will address each issue separately below.
DETERMINATION
Sales Measure: Code of Virginia § 58.1-625 provides that "all sums collected by a dealer...shall be deemed to be held in trust for the Commonwealth." (Emphasis added). Virginia Regulation (VR) 630-10-30 provides that every dealer liable for the collection and remittance of sales and use tax is required to keep and preserve for three years adequate and complete records necessary to determine sales and use tax liability. When records are not available for inspection and examination by the department in the course of an audit, the auditor must resort to other measures to determine tax liability.
It is my understanding that the Taxpayer's records were incomplete; therefore, the auditor used a purchase mark-up method for food and alcoholic beverages to determine the tax liability. To derive the cost-of-goods sold percentage, the auditor analyzed both unit cost and sales prices, taking into account circumstances such as employee theft, food giveaways, and spillage. The auditor also used information the Taxpayer itself furnished to the Department of Alcoholic Beverage Control on its sales.
It is clear in this case, based upon the records available, that taxes collected "in trust" were unreported to the department. As complete records were not available, the department worked with the Taxpayer to develop reasonable estimates and based on this work, I believe that the liability resulting from this audit has been accurately and fairly calculated.
Penalty: The facts presented show that the penalty assessed is attributable to tax collected from customers but not remitted to the department. VR 630-10-80 (A), which reflects well established department policy, provides that penalty will not be waived in situations where the taxpayer has collected sales tax but failed to remit it to the department.
While I sympathize with the circumstances outlined in your letter, the tax in this case (which was collected in trust for the Commonwealth) was held for a period of years and was not reported to the department until the audit commenced.
In addressing the issue of being unaware and uninformed in regards to sales tax, Code of Virginia § 58.1-204 states that the department is required to publish regulations and written rulings or other interpretations of Virginia law which are of interest to taxpayers and practitioners. The department published regulations in 1966, 1969, 1979 and 1985 which were widely distributed and made freely available to the general public. The regulations provide guidance in the registration of dealers and the application of the tax to sales and purchases of tangible personal property.
While you indicate that you were unaware and uninformed about the sales tax, the foregoing demonstrates that the department has disseminated information on the sales tax and was readily available to the Taxpayer. Furthermore, as the law is very clear, the department has no choice but to uphold the penalty assessed.
However, I do find basis for establishing a payment plan to pay the outstanding assessment in installments. Therefore, I will refer this case to the department's ****** District Office and a representative will be in contact with the Taxpayer. If you have any questions regarding this determination, you may contact ********* of the department's Office of Tax Policy at*************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9836T
Rulings of the Tax Commissioner