Tax Type
Retail Sales and Use Tax
Description
Deficiency assessments, contractor engaged in industrial mechanical and residential plumbing
Topic
Collection of Delinquent Tax
Date Issued
08-30-1999
August 30, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear********
This will reply to your letter in which you seek correction of a retail sales and use tax audit assessment issued to ********** (the "Taxpayer') for the period September 1995 through August 1998. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a contractor engaged in industrial mechanical and residential plumbing. In addition, the Taxpayer has a retail plumbing operation. As a result of the department's audit, an assessment was made for untaxed sales and purchases. The Taxpayer contests the inclusion of one sale in the sample period. The Taxpayer maintains that this sale is unusual and nonrecurring in nature and should be removed for purposes of calculating the error factor. Furthermore, the Taxpayer indicates that the contested sale may be part of an exempt project. The Taxpayer also contests the audit penalty.
DETERMINATION
Sample
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. I have enclosed a copy of Public Documents (P.D.'s) 93-210 (10/27/93) and 91-256 (10/08/91) which further illustrate the department's longstanding position with regard to sample calculations.
Despite the Taxpayer's contentions, I can find no basis for the removal of the protested item from the audit sample. 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 transaction in this case appears to be an integral part of the Taxpayer's business activity, as other fabricated work is present in the sample period.
Furthermore, while the Taxpayer contends that the contested sale may be used in an exempt project, the Taxpayer has not yet obtained an exemption certificate for the project. If the Taxpayer can provide documentation that the project qualifies for exemption, the department will revisit the contested sale issue and adjust the audit accordingly.
Penalty
The Taxpayer is taking exception to the department's method of computing the sales tax compliance ratio for purposes of assessing audit penalty. The Taxpayer contends that its method of computing the sales compliance ratio is clearly more accurate than the sales compliance ratio of 33% computed by the department. Furthermore, the Taxpayer feels that in computing the sales compliance ratio, the department should include exempt sales in the sales measure reported.
In performing the audit, the sales deficiency was computed using gross sales as a base to extrapolate the results of the sample. The purpose of the audit sample is to determine a factor for errors within a representative selected period. Once an error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax was not charged. This method determines a compliance ratio representative of the entire audit period. The Taxpayer's use of the error factor is not an acceptable method to determine sales compliance since the error factor determines only the percentage of the audit deficiency within the sample period. I find that the method used by the department to determine the Taxpayer's sales compliance ratio was properly applied.
In addressing the inclusion of exempt sales in the computation of the compliance ratio, I would note that the purpose of the sales tax compliance ratio is to determine sales tax on taxable sales. To include exempt sales to customers in computing the sales tax compliance ratio would inaccurately portray the taxpayer's compliance with the Virginia sales tax laws.
In order for penalty to be waived on third and subsequent audits, sales tax compliance ratios must meet or exceed 85%. Based on the above, and the fact that the Taxpayer's sales tax compliance on this sixth audit is 33%, I find that the penalty was properly assessed in this case in accordance with Code of Virginia § 58.1-635 and Title 23 of the Virginia Administrative Code (VAC) 10-210-2032, copies enclosed.
Summary
Based on the foregoing, I find no basis for correction of the assessment at this time. However, if the Taxpayer is able to provide evidence that the-contested sale was used in an exempt job, the audit will be revised and the compliance ratio recomputed. If the recomputed compliance ratio meets or exceeds an acceptable level of compliance as noted above, the penalty will be waived.
The requested information should be furnished to the auditor at the District Office within 60 days from the date of this letter. If the audit staff determines that a revision is necessary, the audit will be revised. If the requested information is not received within the allotted time, the audit and assessment will be correct as issued, and the Taxpayer will receive an updated bill with interest accrued to the date of protest. If you have any questions regarding this determination, please contact ***** in the Office of Tax Policy at ******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20415T
Rulings of the Tax Commissioner