Tax Type
Retail Sales and Use Tax
Description
Record-keeping requirements; Estimates
Topic
Returns/Payments/Records
Date Issued
10-16-1996
October 16, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear******************
In your letter, you seek correction of the retail sales and use tax audit assessment issued to *********(the Client). I apologize for the delay in responding to your letter.
FACTS
The Client operates a restaurant and bar business. An audit for the period June 1992 through May 1995 resulted in an assessment of sales tax for understated alcoholic beverage sales. Although the Client provided the auditor with sales figures in spreadsheet form, there were no register tapes to substantiate the Client's tax liability. The auditor calculated a purchase markup for the sample period to test the validity of reported sales. The purchase markup of beer and liquor showed that the Client had substantially understated its sales to the Department of Taxation (TAX).
The Client takes exception to the auditor's methodology in calculating the Client's sales and maintains that the auditor's methodology involves assumptions that are fundamentally flawed and which result in an excessive expectation of the Client's sales tax liability. Specifically, the Client maintains that the auditor's calculations assumed an excessive number of drinks per liquor bottle, failed to apply an appropriate allowance for lost/theft/spillage, and failed to recognize the sales price of drinks during happy hour business as compared to other times. The Client further maintains that TAX should not be implementing enforcement procedures which exceed the audit guidelines and policies generally applied by the Internal Revenue Service.
DETERMINATION
Virginia Regulation 630-10-30 provides, in part, 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 TAX in the course of an audit, the auditor must resort to other measures to determine the tax liability.
One of the purposes of an audit is to determine whether the dealer has properly collected and remitted all of the sales tax due on taxable sales. In this case, it was not possible to verify that the Client had reported all of the sales tax due since the Client failed to keep complete and accurate records of the amounts of mixed beverages and other alcoholic beverages sold at regular and reduced prices. In the absence of such records, the auditor used the best information available to calculate a purchase markup for determining the client's tax liability.
To determine the cost of goods sold percentage, the auditor analyzed both unit cost and sales prices, taking into account circumstances such as breakage, spillage, different grades of liquor sold, and happy hours. The auditor also obtained purchase information from the Client's suppliers and the Department of Alcoholic Beverage Control (ABC). In addition, the auditor used information the Client had furnished to ABC on its sales. The average cost of goods sold percentage was divided into the purchases claimed by the Client for beer and liquor. The calculated sales were then compared to reported sales; the result was a substantial difference.
Based on the available records and the audit methodology applied in this case, it is clear that the Client under-reported its sales to TAX. Furthermore, I am not persuaded that IRS audit guidelines should be followed in this matter. There is no statutory or regulatory provision mandating TAX to be bound by audit methodologies and policies used by, and assumptions made by, the IRS in similar situations. Although the IRS may allow for a higher estimate for spillage or lower estimates of liquor usage, the Client has not provided any convincing evidence to show that the spillage and liquor cost factors applied in this case are unreasonable.
Furthermore, based on the lack of complete documentation in this case to support the Client's tax liability, TAX has no choice but to estimate the tax liability based on the best information available from the Client's records, suppliers records, and ABC reports. Although assumptions had to be made by the auditor due to the circumstances, I believe that the liability resulting from this audit is reasonably accurate and fairly calculated.
For these reasons, I find no basis to revise the assessment. Nevertheless, based on the circumstances of this case and under the authority of Code of Virginia § 58.1-105, I will agree to waive the interest that has accrued on the assessment since January 28, 1996, provided the Client pays the outstanding liability of*******within the next 60 days.
The Client will receive an updated bill under separate cover. The above payment should be sent to the attention of ****** at the Department of Taxation, Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within the allotted time.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10313R
Rulings of the Tax Commissioner