Tax Type
Retail Sales and Use Tax
Description
Audit Sampling Technique
Topic
Collection of Delinquent Tax
Date Issued
10-18-1996
October 18, 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. Copies of all references are enclosed.
FACTS
The Client operates a restaurant and bar. Because of incomplete records, an audit for the period August 1992 through July 1995 resulted in an assessment of sales tax on untaxed sales of alcoholic beverages. Although unable to substantiate alcoholic beverage sales reported by the Client, the auditor tested these sales using a sampling technique and found that reported sales appeared extremely low when compared to the cost of goods sold.
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, happy hour prices and other reduced pricing. Purchase information was obtained from the Client's distributors and the Client's daily sheets. Sales price information was obtained from the Client. Sales information was obtained from reports filed with Department of Alcoholic Beverage Control (ABC). Since there was no way to determine the number of drinks sold at each selling price, weighted average prices were computed based on the percentage of time allocated to each selling price, adjusting for spillage and menu price fluctuations. ABC guidelines were used to establish the number of drinks per bottle. The markup factor was applied to actual cost of goods sold obtained from financial statements. The calculated sales were then compared to reported sales; sales tax was assessed on the difference.
The Client concedes that its sales are not adequately reported but maintains that the assessment of sales tax in this case is overstated. Accordingly, you have computed the Client's tax liability based on an analysis of the Client's purchases and sales for the audit period and have proposed an alternate method of computing the Client's sales tax liabilities. If acceptable, you request that the audit be revised accordingly.
DETERMINATION
Virginia Regulation 630-10-30 (copy enclosed) 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 the Department of Taxation (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 to use for determining the Client's tax liability. 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 by the Client's proposed calculation of its under-reported sales tax liability for the reasons stated below.
The Client maintains that TAX had assumed the number of bottles sold. Under the authority of Code of Virginia § 58.1-618, TAX is allowed to make an estimate of the sales tax liability based on the best available information. Accordingly, the assessment of tax as determined by the audit methodology used in this case need only be reasonably accurate. I would note, however, that TAX obtained the actual amount of purchases from the Client's suppliers and used such information to calculate a purchase markup. Since the Client's records were incomplete and inaccurate, it is impossible to know the actual amount of bottles sold to consumers.
The Client claims that TAX used a random percentage for profit per drink. I respectfully disagree. Actual menu prices were obtained from the Client and used in the auditor's calculations. For periods preceding these listed prices, appropriate discounts were made to these prices. Accordingly, the pricing information and the purchase markup were based on definite, not haphazard, information.
Although the Client failed to keep records of regular hour and happy hour sales, the Client maintains that its purchase records are adequate for determining its volume of sales and that most of its sales were from happy hour sales. Although the Client may now be able to account for approximately ninety percent of its purchases, it has clearly failed to substantiate the total amount of sales made during the audit period as required under the above cited regulation. Without maintaining required records of all of its sales, the Client is unable to establish its correct sales tax liabilities. It is also my understanding that ABC requires separate records be kept for happy hour sales or else all alcoholic drinks would be deemed sold at regular prices. In TAX's audit, happy hour sales are taken into consideration.
In addition, the Client maintains that TAX only examined mixed drink pricing and not the total cost of sales for the audit period. I would note that the auditor did examine beer and wine pricing. The auditor did not expand his examination into food sales because the cost of food sold compared reasonably to its sales price.
The Client further maintains that TAX's audit makes no economic sense and is flawed. Based on a review of the audit report, I believe that the audit findings are well documented and reasonable. All of the auditor's test work is based on actual purchase information from vendors and pricing information from the Client. Although the Client's circumstances are unfortunate, and the Client has attempted to verify all of its purchases of alcohol, beer and wine during the audit period, I must recognize that the Client failed to produce, maintain and preserve records to substantiate all of its alcoholic beverage sales during the audit period. Because of the lack of complete documentation to support the Client's sales 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, ABC reports and purchase markup analysis. 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 May 12, 1996, provided the Client pays ****** within the next 60 days.
The Client will receive an updated bill under separate cover. The above payment should be sent to the Department of Taxation, ATTN: ********Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within the allotted time.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10789R
Rulings of the Tax Commissioner