Tax Type
Retail Sales and Use Tax
Description
Penalties and Interest; Failure to comply with prior audit
Topic
Collection of Delinquent Tax
Date Issued
02-26-1997
February 26, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This is in reply to your letter of September 23, 1996, in which you seek correction of sales and use tax assessed to ****** (the "Taxpayer"), for the period May 1990 through December 1995.
FACTS
The Taxpayer is engaged in placing advertisements for national companies. The Taxpayer was audited and assessed tax on untaxed purchases used in the business operations. The initial audit period, January 1993 through December 1995, was extended due to the Taxpayer's failure to file consumer use tax returns since its prior audit.
Among the purchases assessed was a software maintenance contract purchased in January 1995. The Taxpayer does not dispute the taxability of the software maintenance contract, but believes its inclusion in the sample and extrapolated for years prior to its purchase is not representative of expenditures by the Taxpayer for those prior years. The Taxpayer provides an alternative method for extrapolating the audit sample and submits payment of the recomputed amount of tax and interest. The Taxpayer requests waiver of penalty.
DETERMINATION
Sample extrapolation: 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.
In this case the auditor chose calendar year 1995 as the sample period, which included the purchase of the software maintenance contract. The auditor computed the error factor and extrapolated the factor over the entire period of the audit. The Taxpayer proposes a method that removes the purchase of the maintenance contract from the sample extrapolation for the audit periods prior to its purchase.
There have been instances in which the department has removed transactions which distort an audit sample. I find that this situation falls into that category. The maintenance contract was purchased in conjunction with the acquisition of a computer software system that automated the Taxpayer's manual process for placing ads.
The purchase of the maintenance contract constitutes an extraordinary purchase of a nonrecurring nature as there is no evidence of the purchase of other maintenance contracts during the audit period. The inclusion of the maintenance contract, in this instance, is not representative of recurring purchases made in the normal course of business. The maintenance contract will be removed from the audit sample and the tax will be assessed on a detailed basis.
Penalty waiver: The application of penalty charges to audits is addressed in Virginia Regulation (VR) 630-10-80 and indicates that penalty will be applied to second audits unless the compliance ratio for purchases meets or exceeds 60%. In this second generation audit, the Taxpayer failed to comply with the use tax requirements established in the prior audit. As such, I find no basis for relief of the penalty. As required under the regulation, the Taxpayer will be expected to meet or exceed a use tax compliance ratio of 85% in subsequent audits in order to avoid the application of the penalty.
The audit will be revised as set forth herein and the Taxpayer will receive an adjusted bill within 30 days from the date of this letter. If you have questions concerning the policy set forth in this letter, please contact *************at*******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11727J
Rulings of the Tax Commissioner