Document Number
Tax Type
Retail Sales and Use Tax
Penalties, building supply and lumber stores
Collection of Delinquent Tax
Date Issued

February 19, 1997

Re: § 58.1-1821 Application: Retail Sales & Use Tax


This will reply to your letter in which you request a correction of the department's assessment issued to **************(the "Taxpayer"), for the period July 1991 through June 1994. I apologize for the delay in responding to your client's concerns.


The Taxpayer operates retail building supply and lumber stores in Virginia, as well as other states. The department's audit disclosed additional taxes due. The Taxpayer contends that certain issues either invalidate the assessment, or require a substantial adjustment.


I shall respond to the Taxpayer's concerns in the manner in which they were presented.

The notice of assessment erroneously references the use tax, and therefore, the entire underlying assessment must be abated.

The Taxpayer contends that the assessment issued by the department is erroneous to the extent that it asserts a claim for use tax, use tax penalty, and use tax interest. Since the use tax is not specifically imposed on retailers, the assessment issued references the wrong tax, wrong penalty, and wrong interest. Accordingly, the Taxpayer states that the use tax assessment as set forth is contrary to the auditor's report for sales tax, and must be abated.

Virginia Regulation (VR) 630-10-76 addresses out-of-state dealers and states the following:
    • Every person outside this state who engages in business in this state as a dealer (as defined in 630-10-29.1) is required to register and to collect and pay the tax on all tangible personal property sold or delivered for storage, use or consumption in this state. Such dealers must file returns and perform all other duties required of dealers in this state ....

Since the inception of the Retail Sales and Use Tax Act of 1966, the department has registered out-of-state retail dealers, where nexus has been established, for the State Use Tax. All assessments issued to such dealers are specifically for use tax. In reviewing the history of the Taxpayer's account, I find that the Taxpayer was initially registered for the use tax, and has consistently filed use tax returns since it began its Virginia operations.

Based on the information before me, and on the basis that the courts have previously held that an assessment issued by the department is deemed prima facie correct, I find the assessment of use tax to be correct.

The period of limitations on assessment of sales tax has passed with regard to tax periods June 1991 through September 1992

The department's audit covers the period July 1991 through June 1994. The department's ability to assess the deficiency was extended by waiver of time limitation from August 1994 to July 31, 1995. In keeping with the provisions of the waiver, the department's assessment was generated on January 26, 1995, well within the waiver deadline. The Taxpayer, however, states that it did not receive the department's assessment, which was generated on January 26, 1995, until October 30, 1995. Since the department's notice of assessment was not received by the Taxpayer within the time extended by the waiver, the Taxpayer states that the portion of the assessment related to the period July 1991 through September 1992, must be removed from the total assessment.

Based on the information before me, l am in agreement with the Taxpayer's analysis. The department's assessments were held from mailing, pending additional data to be reviewed by the department's auditors. As a result, the department's assessment was not delivered to the Taxpayer until October 30,1995. Accordingly, the department's assessment will be revised.

The evidence supports a substantial downward adjustment of the assessment.

The department's auditors reviewed sales invoices for cash and charge sales for the states of North Carolina, West Virginia, and Maryland, for the sample month of July 1993. Along with these particular invoices, the delivery log books were also provided. The log books documented the "ship to" address on the sales invoices. Upon further review of this information, it was determined that 1533 sales entries, totaling***********, did not disclose that tax was applied, or reflect the proper "ship to" information, and were subject to the application of tax. The Taxpayer's personnel disagreed with the number of invoices and the resulting measure held taxable.

In an attempt to arrive at a fair measure, the Taxpayer's personnel and the auditors concluded that the Taxpayer should contact one-half of the 1533 customers, for purposes of determining actual taxable deliveries to Virginia. Of the 766 customers sampled, 233 customers responded, stating that possession of merchandise was taken at out-of-state locations. The balance of the customers did not respond. As a result, it was determined that the 233 customers represented 51% of the sampled measure. Therefore, 51 % of the measure was treated as exempt sales. Accordingly, the balance (49%) of the measure was considered taxable sales, and used to determine extrapolated sales.

The Taxpayer contends that the application of the 49% as taxable sales against the dollar amount representing the 1533 sales invoices is unreasonable, as the Taxpayer is being held responsible for customers who failed to respond to the Taxpayer's inquiries, and for customers for whom the Taxpayer was unable to obtain a mailing address or telephone number.

Code of Virginia § 58.1-633 provides that:
    • Every dealer required to make a return and pay or collect any tax under this chapter shall keep and preserve suitable records of the sales, leases, or purchases, as the case may be, taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.

Comments by the auditors indicate that there were inconsistencies in the Taxpayer's records. The 1533 nontaxed sales invoices reviewed indicated either no taxes were applied, or that another state was indicated as the ship to location, while the shipping logbook indicated that property on the same invoice was shipped to Virginia. In cases like this where adequate records are not maintained and preserved to determine the tax liability, the auditor must employ whatever reasonable means available, in order to determine a reasonable audit deficiency. In the case at hand, the Taxpayer did not show the tax being charged on the customers' invoices, nor did the Taxpayer have adequate records to reflect the applicable state to which taxes were properly due.

In any proceeding relating to the interpretation of the tax laws of the Commonwealth, the burden of proof is on the taxpayer. As such the Taxpayer must demonstrate that the results of the sample, to which the Taxpayer participated in its development, is not representative of the audit period, or that it is flawed in some other manner which would invalidate the results. The fact that customers have not responded to certain inquiries, or that the Taxpayer was unable to provide all of the necessary information does not demonstrate that the sample results are flawed. The basic fact remains that the invoices in question did not reflect the application of tax, nor were records available to determine the proper application of tax. Accordingly, l find that the auditor made a reasonable attempt to apply the results of the sample. As a result, l find no basis to adjust the audit relating to this issue.

The penalties imposed should be waived. as the audit of the Taxpayer is a "first audit."

The Taxpayer contends that the current audit of the company is a "first audit. The Taxpayer states that it is not a corporate successor to the previous owner, who was audited in 1985. The Taxpayer further states that it is a different corporation with a different tax identification number, and requests waiver of penalty.

Based on the information before me, l find sufficient cause to regard the audit of the Taxpayer as a first audit. Accordingly, the assessments have been revised to exclude penalties. Please note, however, that, for the future, VR 630-10-80 specifically addresses the application of audit penalty and provides for the mandatory application of penalty to a second audit based on the level of compliance exhibited by the taxpayer. Penalty may be applied unless the sales compliance ratio meets or exceeds 85%, or unless the use tax ratio meets or exceeds 60%.

Based on all of the foregoing, the department's assessment will be revised. Please return your payment for the revised tax, penalty, and interest totaling******* to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880. The amount referenced does not include accrued interest, which will also be waived if payment is received within 45 days. If payment is not received within that time, accrued interest will be applied from the date the Taxpayer received its official notice of assessment, October 30, 1995. If you should have any questions regarding this matter, please contact ********** of the department's Office of Tax Policy at*************.


Danny M. Payne
Tax Commissioner


Last Updated 08/25/2014 16:46