Tax Type
Retail Sales and Use Tax
Description
Audit procedures; Representative samples
Topic
Collection of Delinquent Tax
Date Issued
03-27-1995
March 27, 1995
Re: §58.1-1821 Application: Sales and Use Tax
Dear*************
This will reply to your letter of March 25, 1994 in which you are seeking correction of the sales and use tax audit assessment of *****************(the "Taxpayer") for the period on March, 1993 through February, 1993.
FACTS
The Taxpayer is in the printing and graphics business. The Taxpayer was audited and assessed sales tax on untaxed sales to customers who did not qualify for tax exemption, or who did not have a sales tax exemption certificate on file with the Taxpayer. The Taxpayer is taking exception to the department's method of computing the sales sample error factor by including untaxed sales on which the purchaser either self-assessed the tax or the tax was included in an audit by the department. The Taxpayer feels that to include such invoices in the error factor calculations unfairly taxes the Taxpayer and results in double taxation.
The Taxpayer is also taking exception to the assessment of penalty on the use tax portion of the audit. The Taxpayer feels that in computing use tax compliance, the department should include taxes paid to the supplier in its calculations. The Taxpayer is requesting the audit penalty to be abated in full.
DETERMINATION
Despite the Taxpayer's contentions, l find no basis for the removal of the untaxed sales from the audit sample. The courts have held that a tax assessment is prima facie correct and the burden is upon the taxpayer to prove that the assessment is incorrect.
Sampling is an audit technique of significant value that is widely used in both the public and private sector 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 purpose of the audit sample is to determine an error factor for the representative sample period selected, and not to detail all transactions within the selected sample. Once the error factor is calculated, the factor is extrapolated over the entire audit period. While the Virginia tax on the transactions in question may have been paid by the customer, there are likely similar transactions outside the sample period on which the Virginia tax has not been paid. Therefore, to remove the sales in question from the sample base, would skew the sample and nullify the validity of the sample. For this reason, the department finds no basis for recalculating the error factor. However, in fairness to the Taxpayer, the sales in question which were included in the calculation of the sales error factor have been detailed out of the total sales liability.
Finally, the Taxpayer is taking exception to the department's method of computing the use tax compliance ratio for purposes of assessing audit penalty. Specifically, the Taxpayer feels that in computing the use tax compliance ratio, the department should include the sales tax paid to vendors in the "Use Measure Reported" figure used in the numerator and the denominator. Virginia Regulation (VR) 630-10109 addresses use tax and states, in part, the following:
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- The use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased. The rate of the state and local use tax are the same as the rates of the state and local sales tax. There is no duplication of the tax. (Emphasis added).
Therefore, the tax paid to vendors at the time of purchase is "sales" tax, not "use" tax. The purpose of the "use" tax compliance ratio is to determine how well the taxpayer has complied with Virginia tax laws in accruing and remitting use tax on untaxed purchases,. To include sales tax paid to vendors in computing the use tax compliance ratio would inaccurately portray the taxpayer's compliance with the Virginia use tax laws.
In order for penalty to be waived on second and subsequent audits, use tax compliance ratios must be a minimum of 85%. Based on the above, and the fact that the Taxpayer's use tax compliance on this second generation audit is 34%, the department is unable to waive the penalty.
If you should have any further questions, please feel free to contact the department.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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Rulings of the Tax Commissioner