Tax Type
Retail Sales and Use Tax
Description
Sample adjustment denied; Integral part of business activity
Topic
Collection of Delinquent Tax
Date Issued
10-21-1998
October 21, 1998
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in reply to your letter and subsequent phone conversation with a member of my staff in which you seek correction of a sales and use tax assessment issued to ***** (the Taxpayer) for the period January 1993 through December 1995. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a manufacturer of various supplies and operates four businesses in Virginia. As a result of the department's audit, four separate assessments were issued for untaxed sales and purchases. The auditor selected a one year sales sample for each company being audited. Of the untaxed sales picked up in the audit sample, the Taxpayer takes exception to the inclusion of certain sales made to customers based on the reasoning that the Taxpayer's customers self-assessed the use tax on such transactions. The Taxpayer contests the inclusion of these sales in the computation of the error factor and requests that the transactions be removed from the audit sample for purposes of extrapolation.
DETERMINATION
Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial either to the auditor or the client. 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. The purpose of the audit sample is to determine an error factor for the entire audit period.
The auditor used a twelve month sample to identify sales made during the audit period. The auditor found errors in which the Taxpayer failed to collect the tax on sales that were taxable or where no certificate of exemption was on file. While the tax on the transactions in question may have been paid by the customers, there are likely similar transactions outside the sample period on which the Virginia tax has not been paid. To remove the items in question from the sample base would skew the sample and nullify the validity of the sample. I would note that the Taxpayer was given credit against the audit liability for the tax paid by the customers on these transactions.
Despite the Taxpayer's contentions, I can find no basis for the removal of the protested items from the audit sample. The courts have held that a tax assessment issued by the proper assessing authorities is prima facie correct and that the burden is upon the taxpayer to prove otherwise. Based on the information before me, the Taxpayer has not met this burden. For an item to be removed from the audit sample, the Taxpayer must show that the transaction was isolated in nature and not a normal part of the Taxpayer's operation. The contested transactions in this case appear to be an integral part of the Taxpayer's business activity.
The department addressed this issue in its response to the Taxpayer's appeal regarding the audit assessment issued to another related business. In that audit, the Taxpayer contested a sale held taxable in the audit in which the customer self-assessed the use tax. In Public Document 97-51 (2/10/97), copy enclosed, the sales audit techniques were upheld, and the department found no basis for recalculating the error factor on the sale. However, credit was given against the assessment for the tax paid by the customer.
Based on the foregoing, I find that the sampling techniques have been properly applied in this case. Accordingly, the assessment as issued is proper. The Taxpayer will receive an updated bill with interest accrued to the date of the Taxpayer's letter of appeal. The Taxpayer should pay the bill within 30 days to avoid the accrual of additional interest charges. If you have any questions, please contact ***** of the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13636T
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This is in reply to your letter and subsequent phone conversation with a member of my staff in which you seek correction of a sales and use tax assessment issued to ***** (the Taxpayer) for the period January 1993 through December 1995. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a manufacturer of various supplies and operates four businesses in Virginia. As a result of the department's audit, four separate assessments were issued for untaxed sales and purchases. The auditor selected a one year sales sample for each company being audited. Of the untaxed sales picked up in the audit sample, the Taxpayer takes exception to the inclusion of certain sales made to customers based on the reasoning that the Taxpayer's customers self-assessed the use tax on such transactions. The Taxpayer contests the inclusion of these sales in the computation of the error factor and requests that the transactions be removed from the audit sample for purposes of extrapolation.
DETERMINATION
Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial either to the auditor or the client. 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. The purpose of the audit sample is to determine an error factor for the entire audit period.
The auditor used a twelve month sample to identify sales made during the audit period. The auditor found errors in which the Taxpayer failed to collect the tax on sales that were taxable or where no certificate of exemption was on file. While the tax on the transactions in question may have been paid by the customers, there are likely similar transactions outside the sample period on which the Virginia tax has not been paid. To remove the items in question from the sample base would skew the sample and nullify the validity of the sample. I would note that the Taxpayer was given credit against the audit liability for the tax paid by the customers on these transactions.
Despite the Taxpayer's contentions, I can find no basis for the removal of the protested items from the audit sample. The courts have held that a tax assessment issued by the proper assessing authorities is prima facie correct and that the burden is upon the taxpayer to prove otherwise. Based on the information before me, the Taxpayer has not met this burden. For an item to be removed from the audit sample, the Taxpayer must show that the transaction was isolated in nature and not a normal part of the Taxpayer's operation. The contested transactions in this case appear to be an integral part of the Taxpayer's business activity.
The department addressed this issue in its response to the Taxpayer's appeal regarding the audit assessment issued to another related business. In that audit, the Taxpayer contested a sale held taxable in the audit in which the customer self-assessed the use tax. In Public Document 97-51 (2/10/97), copy enclosed, the sales audit techniques were upheld, and the department found no basis for recalculating the error factor on the sale. However, credit was given against the assessment for the tax paid by the customer.
Based on the foregoing, I find that the sampling techniques have been properly applied in this case. Accordingly, the assessment as issued is proper. The Taxpayer will receive an updated bill with interest accrued to the date of the Taxpayer's letter of appeal. The Taxpayer should pay the bill within 30 days to avoid the accrual of additional interest charges. If you have any questions, please contact ***** of the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13636T
Rulings of the Tax Commissioner