Tax Type
Retail Sales and Use Tax
Description
Dealer records; Documentation required to substantiate exempt sales
Topic
Collection of Delinquent Tax
Exemptions
Returns/Payments/Records
Date Issued
03-10-1999
March 10, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***
This is in reply to your letter of December 2, 1998, in which you seek correction of the department's sales and use tax assessment issued to ***** (the "Taxpayer'), for the period June 1995 through June 1998.
FACTS
The Taxpayer operates a retail video store providing video rentals, sales, and repair for the public. The department's audit disclosed that sales reported on its federal income tax return were greater than sales reported to the Commonwealth. The Taxpayer explained that the difference was attributable to out-of-state mail order sales, but was unable to provide any documentation to determine taxable versus exempt out-of-state sales. Therefore, the auditor assessed tax on the difference between sales reported on the Taxpayer's federal income tax return and the sales reported to the department.
The Taxpayer states that it was instructed and shown by a previous auditor how to keep its records by a daily log system, but that the current auditor did not accept the established system as valid. The Taxpayer believes that the current auditor's method was not justified on the basis that the Taxpayer was following the advice and guidelines given by a prior auditor. Accordingly, the Taxpayer requests that the sales at issue be removed from the audit, and the assessment be abated.
DETERMINATION
Title 23 of the Virginia Administrative Code 10-210-470, copy enclosed, 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 cannot provide the required documentation to substantiate exempt or out-of-state sales. For example, the Taxpayer did not maintain any daily or monthly sales journal. To track its sales, the Taxpayer listed the daily sales on a desk top calendar categorizing walk-in sales and rentals which were taxed, and VCR servicing and mail order sales which were not taxed. At the end of the month, the VCR service transactions and mail order sales were not reported to the Commonwealth. However, the Taxpayer could not present any documentation to substantiate a breakdown of sales. In the absence of any such definitive records, the Taxpayer's unsubstantiated sales were held taxable in the department's audit.
Based on the lack of documentation in this case to support the Taxpayer's contentions, the department had no choice but to estimate the tax liability based on the best information available from the Taxpayer's available records. While assumptions had to be made by the auditor due to the condition of the records, I believe that the liability resulting from this audit is reasonable. I have enclosed a copy of a prior determination, Public Document 98-72 (04/21/98), which further details the department's longstanding position.
With regard to the Taxpayer's dependence on the instructions by a prior auditor in a previous audit, I cannot agree that such advice should be considered. A review of the department's audit history reveals that this is a first audit of the Taxpayer, and that no prior audit had been conducted on the Taxpayer's operations by the department. Consequently, I do not find any basis to allow for any adjustment of the audit. I note that the department's current auditor left instructions with the Taxpayer on the proper method of accounting for all future sales and on the retention of proper records.
If in the future, the Taxpayer is unsure as to the proper application of the tax to any transaction, I encourage the Taxpayer to contact the department's ***** District Office at ***** for assistance, or the department's customer service section in Richmond at ************
Please return your payment for the balance of tax and interest totaling to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 30 days of the date of this letter. ***** if payment is not received within that time, interest will accrue on the balance due from the date of assessment. If you should have any questions regarding this matter, please contact ***** of the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20218Q
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***
This is in reply to your letter of December 2, 1998, in which you seek correction of the department's sales and use tax assessment issued to ***** (the "Taxpayer'), for the period June 1995 through June 1998.
FACTS
The Taxpayer operates a retail video store providing video rentals, sales, and repair for the public. The department's audit disclosed that sales reported on its federal income tax return were greater than sales reported to the Commonwealth. The Taxpayer explained that the difference was attributable to out-of-state mail order sales, but was unable to provide any documentation to determine taxable versus exempt out-of-state sales. Therefore, the auditor assessed tax on the difference between sales reported on the Taxpayer's federal income tax return and the sales reported to the department.
The Taxpayer states that it was instructed and shown by a previous auditor how to keep its records by a daily log system, but that the current auditor did not accept the established system as valid. The Taxpayer believes that the current auditor's method was not justified on the basis that the Taxpayer was following the advice and guidelines given by a prior auditor. Accordingly, the Taxpayer requests that the sales at issue be removed from the audit, and the assessment be abated.
DETERMINATION
Title 23 of the Virginia Administrative Code 10-210-470, copy enclosed, 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 cannot provide the required documentation to substantiate exempt or out-of-state sales. For example, the Taxpayer did not maintain any daily or monthly sales journal. To track its sales, the Taxpayer listed the daily sales on a desk top calendar categorizing walk-in sales and rentals which were taxed, and VCR servicing and mail order sales which were not taxed. At the end of the month, the VCR service transactions and mail order sales were not reported to the Commonwealth. However, the Taxpayer could not present any documentation to substantiate a breakdown of sales. In the absence of any such definitive records, the Taxpayer's unsubstantiated sales were held taxable in the department's audit.
Based on the lack of documentation in this case to support the Taxpayer's contentions, the department had no choice but to estimate the tax liability based on the best information available from the Taxpayer's available records. While assumptions had to be made by the auditor due to the condition of the records, I believe that the liability resulting from this audit is reasonable. I have enclosed a copy of a prior determination, Public Document 98-72 (04/21/98), which further details the department's longstanding position.
With regard to the Taxpayer's dependence on the instructions by a prior auditor in a previous audit, I cannot agree that such advice should be considered. A review of the department's audit history reveals that this is a first audit of the Taxpayer, and that no prior audit had been conducted on the Taxpayer's operations by the department. Consequently, I do not find any basis to allow for any adjustment of the audit. I note that the department's current auditor left instructions with the Taxpayer on the proper method of accounting for all future sales and on the retention of proper records.
If in the future, the Taxpayer is unsure as to the proper application of the tax to any transaction, I encourage the Taxpayer to contact the department's ***** District Office at ***** for assistance, or the department's customer service section in Richmond at ************
Please return your payment for the balance of tax and interest totaling to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 30 days of the date of this letter. ***** if payment is not received within that time, interest will accrue on the balance due from the date of assessment. If you should have any questions regarding this matter, please contact ***** of the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20218Q
Rulings of the Tax Commissioner