Tax Type
Retail Sales and Use Tax
Description
Audit procedures; Sample periods
Topic
Collection of Delinquent Tax
Date Issued
11-21-1996
November 21, 1996
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear***********
This will reply to your letter in which you seek correction of a sales and use tax assessment issued to ************* (the Taxpayer) for the period October 1992 through June 1995. 1 apologize for the delay in responding to your correspondence.
FACTS
The Taxpayer is engaged in retail sales of automobile paint and supplies. As a result of the department's audit, an assessment was made for certain untaxed sales. The Taxpayer takes exception to the following issues: good faith acceptance of exemption certificates, audit sample and percentage of error calculation. In addition, the Taxpayer points out that a credit invoice was incorrectly included in the audit.
DETERMINATION
I will address each of the above issues separately below:
Exemption Certificates
In Virginia, all sales, leases and rentals of tangible personal property are subject to the tax unless the contrary is established. Virginia Regulation (VR) 630-10-20(B) explains that the burden of proving that the tax does not apply rests with a dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. A certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable.
The regulation further provides that "[a]n exemption certificate cannot be used to make a tax-free purchase of any item of tangible personal property not covered by the exact wording of the certificate." Therefore, the seller must use reasonable care and judgement in selling tangible personal property exclusive of the tax, even when an exemption certificate from the purchaser is in his file. Furthermore, certificates of exemption obtained during or after an audit situation will be accepted only if the department can confirm that the customer's use of the certificate was valid and proper for the specific transaction. [See P.D. 90-16 (1/11/90)]
It is my understanding that the Taxpayer provided the department with three exemption certificates with respect to sales held in the audit. Based upon the information provided, I will agree to remove the tax from line items 10, 25, 27, and 28 of the sales exceptions list. The remaining contested items will continue to be taxable as the exemption certificates with respect to these sales were not valid at the time of acceptance. One certificate was incorrectly filed using another state's resale exemption form while the other certificate is incomplete on its face as the customer did not specify the exemption claimed.
Credit Invoice
Based on the information provided, the item in question was incorrectly treated as a sale and included in the sales exceptions. Accordingly, the audit will be adjusted to remove this item from the assessment
Sample Period/Computation of Error Factor in Sample
The Taxpayer contends that the sample period selected in the audit was not a random sample, but was predetermined by the auditor. The Taxpayer asserts that the sample was selected based on the department's prior audit of one of its customers. It is also noted in your letter that you feel the sales invoices with respect to this customer are incorrectly included in the audit sample as the customer paid the use tax on these items. You also disagree with the inclusion of these transactions in the computation of the error factor.
Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial either to the auditor or the client. When sampling techniques are 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 purpose of the audit sample is to determine an error factor for the entire audit Period.
The auditor used a two month sample to identify sales made during the audit period. The auditor found errors in which the Taxpayer failed to collect the tax on sales that were taxable. The fact that certain transactions in the sample involve a customer that the department previously audited does not constitute a nonrepresentative sample because recurring errors were also found in other transactions. Further, while the tax on the transactions in question may have been paid by this customer, there are likely similar transactions outside the sample period on which the Virginia tax has not been paid. To remove the items in question from the sample base would skew the sample and nullify the validity of the sample. I would note that the Taxpayer was given credit against the audit liability for the tax paid by the customer on these transactions.
Despite the Taxpayer's contentions, I can find no basis for the removal of the protested items from the audit sample. The courts have held that a tax assessment issued by the proper assessing authorities is prima facie correct and that the burden is upon the taxpayer to prove otherwise. Based on the information before me, the Taxpayer has not met this burden. For an item to be removed from the audit sample, the Taxpayer must show that the transaction was isolated in nature and not a normal part of the Taxpayer's operation. The contested transactions in this case appear to be an integral part of the Taxpayer's business activity.
Summary
The assessment will be adjusted in accordance with the determination in this letter. The Taxpayer will receive a revised notice of assessment with interest accrued through the date of the letter of protest. If you have questions regarding this letter, please contact*******in my Office of Tax Policy at****************
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/1 0845T
Rulings of the Tax Commissioner