Tax Type
Retail Sales and Use Tax
Description
Deficiency assessments; Audit method for estimating sales upheld
Topic
Collection of Delinquent Tax
Date Issued
07-16-1997
July 16, 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 July 1994 through September 1996.
FACTS
The Taxpayer operates a coffee shop. The Taxpayer produces specialty coffee, espresso, cappuccino, teas, and deli sandwiches. In addition, the Taxpayer purchases pre-made baked goods for resale to its customers. As a result of the department's audit an assessment was made for unreported sales and fixed assets. At issue is the tax assessed on unreported sales.
The auditor was unable to verify sales as the Taxpayer did not maintain a sales journal nor cash register tapes to support sales. To determine the audit liability, the auditor used a cost of goods sold markup method to determine gross sales for the 1995 sample period. Once the markup sales figures were calculated for 1995, the auditor compared the calculated sales to reported sales and picked up the difference as unreported sales.
The Taxpayer is taking exception to the auditor's method of calculating unreported sales. The Taxpayer raises several issues which I will address separately below.
DETERMINATION
Title 23 of the Virginia Administrative Code (VAC) 10-210-470 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 auditor 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 a 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 Taxpayer had reported all of the sales tax due since the Taxpayer failed to keep cash register tapes and sales journals. In the absence of such records, the auditor used the best information available to determine the Taxpayer's tax liability.
Kitchen Equipment and Supplies
According to the information provided in your letter, items such as dishes, serving scoops, cup and paper towel dispensers, equipment, etc., were included in the cost of goods figure used to determine gross sales.
Upon verification of this information by the auditor, these items will be removed from the cost of goods calculation. However, the Taxpayer must show that the tax was paid on such items before they can be removed from the audit entirely.
Free Food Giveaways
The Taxpayer contends that free coffee drinks given to customers redeeming promotional flyers and espresso "freebie" cards for the period July 1994 through December 1995 were not taken into consideration in calculating cost of goods sold.
Upon verification by the auditor, an adjustment will be made for those costs that can be verified as free coffee sales within the sample period. Those costs related to free coffee giveaways outside the sample period will not be considered as tax was assessed on the sampled and projected deficiencies.
Productlnventory
The Taxpayer asserts that the auditor did not take into consideration factors such as food spoilage, returns for unacceptable baked goods, free drinks provided to employees, and spillage in deriving the cost of goods sold. The Taxpayer indicates in its letter that records were maintained itemizing product/inventory shrinkage cost.
It is my understanding that this information was not made available to the auditor during the audit. However, upon verification of this information, an adjustment will be made to remove these items from the cost of goods sold figure used to determine gross sales.
Cost of Goods Sold Markup Percentage
The Taxpayer believes the cost of goods markup percentage used by the auditor to determine gross sales does not accurately relate to its operation and maintains that the cost of goods sold percentage for new businesses is usually 8 to 10 percent higher than the standard industry averages.
The Taxpayer provided the auditor with a copy of the national operating ratios from the Specialty Coffee Association of America. From this report, the auditor used a markup factor of 44.88 percent based on national operating ratios for specialty coffee shops. The estimated sales of****computed at by using the cost of goods sold to sales ratio of 44.88 percent is reasonably approximate to the Taxpayer's reported deposits of ********taking into consideration a reasonable allowance for cash disbursements.
While the Taxpayer maintains that the reported sales of **** are correct, this does not explain reported deposits of ****. According to the auditor's comments, the Taxpayer did not provide requested information regarding personal contributions deposited to bank accounts, records supporting cash disbursements, or personal and corporate income tax returns in order to verify reported sales. The Taxpayer did not maintain cash register tapes or sales journals. Without supporting documentation, I cannot agree that the Taxpayer's sales figures are a more accurate representation of the Taxpayer's liability. As complete records were not available, the auditor used the information available to develop reasonable estimates and, based on this work, I believe that the liability resulting from this audit has been accurately and fairly calculated.
Summary
The audit will be returned immediately to the auditor so that further examination of the contested issues can be made. Any adjustments will depend upon the provision of documentation as previously stated. Upon review and possible revisions to the audit, a revised notice of assessment will be mailed to the Taxpayer. If you have any questions in regard to this determination, please contact************* Office of Tax Policy, at *********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12490T
Rulings of the Tax Commissioner