Tax Type
Retail Sales and Use Tax
Description
Deficiency assessments; Audit sampling; Penalties
Topic
Collection of Delinquent Tax
Date Issued
04-28-1995
April 28, 1995
Re: §58.1-1821 Application: Sales and Use Tax
Dear****************
This will reply to your letter of February 1, 1995 in which you are seeking correction of the sales and use tax audit assessment on behalf of your client, *****(the "Taxpayer"), for the period of March, 1990 through February, 1 993.
FACTS
The Taxpayer is a manufacturer of concrete and related products with sites throughout Virginia. The Taxpayer was audited and assessed tax, penalty and interest for the period of March 1, 1990 through February 31, 1993. Due to the large volume of sales made by the Taxpayer, the auditor selected a one week sales sample which was agreed to by the Taxpayer. Of the untaxed sales picked up in the audit sample, the Taxpayer is taking exception to the inclusion of four of these transactions based on the reasoning that the Taxpayer's customers either self-assessed the use tax or the tax was included in an audit by the department. In addition to the payment of the use tax on the four transactions in question, the Taxpayer claims the transactions were unusual in nature in that they were sales to customers that would normally be exempt. The Taxpayer is requesting that the transactions be removed from the audit sample for purposes of extrapolation.
The Taxpayer is also requesting waiver 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 also feels turnover in personnel, the decentralization of its purchasing function, and Taxpayer cooperation during the audit process are also factors that should be taken into account in determining the use tax compliance ratio.
DETERMINATION
Despite the Taxpayer's contentions, I find no basis for the removal of the untaxed sales from the audit sales sample. The courts have held that a tax assessment is prime 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 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 its validity.
It is also noted in your letter that you feel the four transactions in question are isolated and unusual for the Taxpayer's operation. Based on the exorbitantly high number of sales transactions conducted by the Taxpayer and the fact that the sales sample covered only a few days out of a three year period, it is difficult to ascertain what may or may not be "isolated and unusual". It is the department's position that if four such transactions occurred within such a short period, then it is certainly likely that similar transactions occurred throughout the remainder of the audit period.
For the reasons stated above, 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) 630-10-109 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.
The Taxpayer also contends that turnover in personnel and decentralization of their purchasing function also warrant the waiver of penalty. Audit penalty is addressed under VR 630-10-80, copy enclosed. It is provided in this regulation that changes in responsible partners or officers do not merit the waiver of audit penalty. The regulation also provides that a reorganization that does not affect the continuity of the business and after which the business entity maintains operations for the purpose of producing the same product or service will not be deemed "first" audits for purposes of waiving penalty.
In order for penalty to be waived on third generation 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 audit is 37%, the department is unable to waive the penalty.
If you should have any further questions, please feel free to contact*********.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/9288K
Rulings of the Tax Commissioner