Tax Type
Retail Sales and Use Tax
Description
Audit procedures; Sample period rejected
Topic
Collection of Delinquent Tax
Date Issued
04-28-1997
April 28, 1997
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 May 1993 through April 1996.
FACTS
The Taxpayer was audited by the department and sales tax was assessed on exempt sales for which the Taxpayer either had no valid exemption certificate on file or had not obtained exemption certificates from its customers. The auditor conducted a one-month sample of the Taxpayer's sales and assessed sales tax on the extrapolated sales measure.
The Taxpayer maintains that the auditor's sample method is erroneous. The Taxpayer also states that the department should accept any exemption certificates that were accepted in good faith by the Taxpayer since the department did not notify the Taxpayer that the certificates were invalid.
DETERMINATION
Sampling is an audit technique of significant value that is widely used in the public and private sectors. The department uses sampling in sales and use tax audits where a detailed audit would not prove beneficial to either the auditor or the taxpayer. 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.
My review of the audit workpapers reveals that the sales measure determined in the audit sample is more than twice the total amount of exempt sales reported by the Taxpayer during the audit period. The auditor's sample period consists of a month in which gross sales are much less than the Taxpayer's average monthly gross sales during the audit period. In addition, exempt sales for the sample period are much higher than average exempt sales for the audit period. The above factors resulted in a skewed error factor that produced an excessive amount of extrapolated sales measure. For this reason, l will have the department's auditor contact the Taxpayer to arrange a mutually agreeable time to conduct a detail audit or expanded sample of the Taxpayer's sales records.
Title 23 of the Virginia Administrative Code (VAC) 10-210-280(A) (copy enclosed), provides that all sales of tangible personal property are subject to the tax unless the dealer takes a certificate of exemption in good faith from the purchaser. The Taxpayer is correct that the good faith acceptance of an exemption certificate relieves the person who takes the certificate from the collection and payment of the tax. The department's longstanding policy is that certificates that are incomplete, invalid, infirm, or inconsistent on their face are never acceptable. The certificates the Taxpayer had on file for some of its exempt sales were not acceptable on their face and the auditor disallowed the exempt sales made under those certificates. Title 23 VAC 10-210-280(B) expands on this issue by stating that "[I]egitimate use of exemption certificates is vital. Reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates."
The auditor has indicated in a conversation with a member of my staff that the Taxpayer did not have certificates on file for many of the sales held taxable in the audit sample. I understand that some of the exempt sales held in the audit were made to public and private school systems. Because such sales may be exempt under Code of Virginia § 58.1-609.4, I will allow the Taxpayer to provide certificates to the auditor for review when the auditor meets with the Taxpayer to resolve the sample issue discussed above. An auditor from the department's interstate audit staff will contact you shortly to set up an appointment. If you have any questions concerning this matter, you may contact*** in the Office of Tax Policy at **** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11432S
Rulings of the Tax Commissioner