Tax Type
Retail Sales and Use Tax
Description
Deficiency assessments; Purchase markup method
Topic
Collection of Delinquent Tax
Date Issued
06-27-1997
June 27, 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 your client, ********* (the Taxpayer) for the period February 1990 through September 1995. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer makes retail sales of fireworks. As a result of the department's audit, the Taxpayer was assessed tax, interest, and 50% fraud penalty for underreported sales. As complete records were not available, the auditor used a purchase markup to determine tax liability.
Although the Taxpayer provided the auditor with sales figures, no register tapes or sales journals were available to substantiate the Taxpayer's liability. Therefore, the auditor used a purchase markup method based on available information to determine tax liability. The auditor used purchase information obtained from the Taxpayer's distributors to verify the purchases reported on the Taxpayer's financial statements. Since the Taxpayer did not maintain any sales records, the auditor based the markup factor on information obtained from the Taxpayer's purchase invoices.
The markup factor was applied to actual purchases obtained from the financial statements for the period 1991 through 1994. As the Taxpayer did not provide financial statements for the years1990 and 1995, the auditor used an average of the marked up purchases for the years available. The calculated sales were then compared to reported sales; sales tax was assessed on the difference.
The Taxpayer is taking exception to the auditor's methodology in calculating the Taxpayer's sales and maintains that the purchase markup method used by the auditor overstates the sales tax liability. The Taxpayer also questions the auditor's use of the cost of goods sold figures obtained from financial statements instead of the sales figures reported on the same statements. The Taxpayer maintains that the financial statements were prepared by a competent CPA and there is no apparent reason for the department to dispute the sales figures.
DETERMINATION
Sales measure: The courts have consistently held that a tax assessment issued by the proper authorities is prima facie correct and that the burden is on the taxpayer to prove otherwise. While the Taxpayer maintains that the sales reported to the department are correct, l cannot agree.
Title 23 of the Virginia Administrative Code (VAC) 10-210-470 provides 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 in the course of an audit, the auditor must resort to other measures to determine 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, the Taxpayer could not provide the required documentation to substantiate sales reported to the department. For example, the Taxpayer did not maintain any sales records. In addition, the Taxpayer could not provide cash register tapes as the Taxpayer maintained that the cash register and register tapes were stolen. In the absence of such records, the Taxpayer's purchase of fireworks provides the only basis as to the level of sales.
Furthermore, based on the lack of complete documentation in this case to support the Taxpayer's tax liability, the department has no choice but to estimate the tax liability based on the best information available from the Taxpayer's records and suppliers records. Although assumptions had to be made by the auditor due to the circumstances, l believe that the liability resulting from this audit is reasonable.
Additional information: At the time of the audit, the Taxpayer did not provide documentation to support purchases for the years 1990 and 1995. Therefore, the auditor used an average of the marked up purchases for the years available to determine sales. The Taxpayer has now provided the department with a copy of its financial statement for 1995 which provides information regarding the total purchases for that period. This additional information will be sent to the auditor at the*********** District Office for review and possible revision. Further, based on information provided, I will agree to reduce the penalty to 30%.
Summary: Based upon the department's review as a result of the additional information provided, a revised Notice of Assessment will be mailed to the Taxpayer. This assessment should be paid within 30 days to avoid the accrual of additional interest. If you have any questions regarding this letter, please contact *********of the department's Office of Tax Policy at***** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11991T
Rulings of the Tax Commissioner