Tax Type
Retail Sales and Use Tax
Description
Deficiency assessments, manufacturer of high-tech navigational equipment
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 of May 19, 1999, in which you seek correction of a retail sales and use tax audit assessment issued to ***** (the "Taxpayer') for the period December 1995 through November 1998.
FACTS
The Taxpayer is a manufacturer of high-tech navigational equipment. The Taxpayer takes exception to the sampling method used by the auditor to assess the tax liability and claims that the audit fails to properly apply statistical sampling techniques. In addition, the Taxpayer maintains that the audit sample contains two exceptions which are not representative of the Taxpayer's normal business activity and seeks the removal of these items from the sample.
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 understood and 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 a factor for errors within a representative selected period. Once the 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 has not been paid. Every effort is made to objectively select the sample periods that are representative of the period being audited and to reach a consensus with the taxpayer concerning the validity of the sample. In this case, the auditor used the block sampling method to determine whether the Taxpayer was properly accruing use tax on purchases. The department has historically used this method when conducting audits. See Public Document 89-177 (5/31/89) and 83-253 (12/9/83).
In this case, both the auditor and the Taxpayer agreed to a review of three months that represented high, low, and average purchases. The auditor found recurring errors in which the Taxpayer failed to accrue the tax on untaxed purchases of tools, maintenance agreements, cleaners, office supplies and other items used in the Taxpayer's business. The auditor calculated an error factor for the representative sample period selected. The error factor was then extrapolated over gross sales for the audit period.
The Taxpayer claims that two items found in the sample are not representative of the entire audit period. 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. While the Taxpayer claims that there were two non-standard purchases included in the sample, the Taxpayer does not identify the specific purchases which are non-standard, nor does the Taxpayer furnish any proof that such purchases were isolated in nature and not a normal part of the Taxpayer's operation. Although the Taxpayer may consider an item to be a non-standard transaction, this does not necessarily mean that the transaction constitutes a unique or isolated purchase. The Taxpayer must be able to demonstrate that such purchases are not a normal part of the Taxpayer's operation.
Based on the information currently before me, I find that the sampling audit technique has been properly applied in this case and, therefore, must conclude there is insufficient basis to allow the adjustment requested by the Taxpayer. Accordingly, the assessment as issued is proper.
The Taxpayer will receive an updated bill with interest accrued to date. The bill should be paid within 30 days of the date of this letter to avoid accrual of additional interest.
If you have any questions regarding this matter, you may contact of the department's Office of Tax Policy at ******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/23348T
Rulings of the Tax Commissioner