Tax Type
Retail Sales and Use Tax
Description
Request separate audit samples; Audit compliance ratio
Topic
Taxability of Persons and Transactions
Date Issued
05-28-1996
May 28, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear****************
This will reply to your letter of February 29, 1996 in which you seek correction of the sales and use tax audit assessment of your client, ***********(the "Taxpayer") for the period of April 1992 through March 1995.
FACTS
The Taxpayer is in the business of selling and servicing telecommunications systems. During the course of a recent sales and use tax audit, the auditor performed a one year sample on expense purchases. The Taxpayer is taking exception to purchases from one supplier (the "Supplier") being extrapolated over the entire audit period. According to the Taxpayer, the Supplier in question was very rarely used outside the audit sample period and purchases from the Supplier comprised over 50% of the deficiency found during the audit sample. The Taxpayer is requesting that purchases from the Supplier be removed from the audit sample for extrapolation purposes and the audit be divided into two segments, one sample of the Supplier and a separate sample for the remaining audit expense Purchase PoPulation.
The Taxpayer is also requesting waiver of audit penalty on the use tax portion of this audit. The Taxpayer bases this request on the fact that the total number of purchases subject to use tax was insignificant when compared to the total purchases made by the Taxpayer, and also the fact that the Taxpayer achieved 100% compliance in the sales portion of the audit.
DETERMINATION
Based on the information provided in your letter regarding the audit sample, and the fact that the transactions in question comprise a disproportionate amount of the total audit sample liability, I will agree to the two segment audit sample approach set forth in your letter. Upon verification of your figures by the auditor, the audit will be revised and a revised assessment will be forwarded to the Taxpayer.
In regard to the audit penalty issue, the Taxpayer feels that tax paid.to suppliers at the time of purchase should be considered in determining use tax compliance. Virginia Regulation (VR) 630-01-109 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 the 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.
Virginia Regulation (VR) 630-10-80 provides that the application of audit penalty is mandatory but may be waived by the Tax Commissioner based upon the extent of a dealer's compliance with collection and payment requirements or good cause. Generally, penalty is waived on first generation audits; however, penalty is not waived on second or subsequent audits for other than exceptional mitigating circumstances. Use tax compliance on third generation and all subsequent audits must meet or exceed 85%. The use tax compliance on this audit, the third generation audit of the Taxpayer, is 61%. The department therefore finds no basis for waiving audit penalty.
While the department finds no basis for waiving the audit penalty in its entirety, it will adjust the penalty based on the audit liability computed under the two segment audit sample approach.
If you should have any questions, please contact *********, Office of Tax Policy, at ********* .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10999K
Rulings of the Tax Commissioner