Tax Type
Retail Sales and Use Tax
Description
Deficiency assessment; Audit sample.
Topic
Collection of Delinquent Tax
Date Issued
01-13-1998
January 13, 1998
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 September 1994 through July 1997.
FACTS
The Taxpayer is a real property contractor. The Taxpayer is in the business of installing heating and air conditioning systems. As a result of the department's audit, the Taxpayer was assessed tax on materials purchased for use in real property contracts. Also assessed are certain untaxed sales.
The Taxpayer disagrees with the sample period selected in the audit because it contains three high volume purchases in which another state's tax was paid in error. The Taxpayer does not dispute the taxability of these purchases, but maintains that the extrapolation of the sample overstates the liability. The Taxpayer believes that the removal of these purchases from the sample would more accurately reflect the tax liability due.
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 applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit. The audit techniques in this case were properly applied. The purpose of the audit sample is to determine an error factor for the representative sample period selected, and not to detail all transactions within the selected sample. Once the error factor is calculated, the factor is extrapolated over the entire audit period.
In this case the auditor chose a seven month sample period to identify purchases made during the audit period. The auditor found errors in which the Taxpayer failed to accrue the tax on purchases that were taxable. Among the purchases assessed were purchases from a vendor in which another state's tax was paid in error. The fact that the Taxpayer can attribute errors to one vendor from whom purchases were made does not constitute nonrepresentative transactions because recurring errors were also found in other transactions.
Further, while the Taxpayer may have made minimum purchases from this vendor during the audit period, 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.
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 Taxpayer will receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid accrual of additional interest. If you have any questions regarding this determination, please contact ***** in the Office of Tax Policy at *****.
Rulings of the Tax Commissioner