Tax Type
Retail Sales and Use Tax
Description
Purchase mark-up audit procedure; Disclosure of tax information
Topic
Collection of Delinquent Tax
Reports
Date Issued
03-15-1999
March 15, 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 sales and use tax assessment on behalf of your client, ***** (the Taxpayer) for the period February 1994 through September 1997. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates as a restaurant/bar. As a result of the department's audit, an assessment was made for underreported sales of alcoholic beverages. The auditor used a "purchase mark up' method to examine sales. In constructing the purchase mark up analysis, the auditor used information obtained from the Taxpayer's records, suppliers, and the Department of Alcoholic Beverage Control (ABC). Information on the sales price of alcoholic beverages, serving sizes, and special pricing periods was obtained from a Taxpayer's representative. The purchase mark up of liquor and beer showed that the Taxpayer had substantially understated its sales to the department.
The Taxpayer contests the auditor's methodology in calculating sales and maintains that the method used involves assumptions that overstate the Taxpayer's sales tax liability. The Taxpayer claims that it maintained complete records to support all sales of alcoholic beverages reported to the department, and the auditor's use of a purchase mark up method is not an accurate reflection of the Taxpayer's sales. The Taxpayer further indicates that it was not provided the audit working papers used to determine the audit liability. In addition, the Taxpayer claims that the department improperly divulged audit information to ABC.
DETERMINATION
Purchase Mark Up Method
Title 23 of the Virginia Administrative Code (VAC) 10-210-340 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.
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 auditor calculated a purchase mark up for the sample period to test the validity of reported sales. The auditor established cost of goods sold percentages based on known purchase prices and known selling prices. The resulting percentages were then used to calculate sales based on total purchases of liquor and beer. The purchase mark up of liquor and beer showed that the Taxpayer had substantially understated its sales to the department.
Based on the records reviewed and the audit methodology applied in this case, it is clear the Taxpayer under reported its sales to the department. While the Taxpayer claims that the audit method was erroneous and not based on fact of established sales ratios for the industry, the Taxpayer has not provided any convincing evidence to show that the factors applied in this case are unreasonable. Based on the foregoing, and absent evidence to the contrary, I find the audit methodologies and the resulting mark up factors were properly applied in this case. Accordingly, there is no basis to revise the audit
.
Disclosure of Tax Information
The Taxpayer claims that the department informed ABC of the sales and use tax audit which resulted in the ABC filing charges against the Taxpayer based on the protested sales tax audit.
Code of Virginia § 58.1-3(C)(vi), copy enclosed, provides that "the Tax Commissioner is authorized to ... provide to the Alcoholic Beverage Control Board, upon entering into a written agreement, such tax information as may be necessary to facilitate the collection of state and local taxes and the administration of the alcoholic beverage control laws....'
In conducting the audit, the department's auditor requested tax information from ABC on the Taxpayer's reported beer and liquor sales. The department generally requests such information from ABC when conducting audits of restaurants/bars to verify reported beer and liquor sales reported to ABC in comparison with those reported to the department. The fact that the department requested tax information from ABC indicated that the department was conducting an investigation of the Taxpayer's business. I would note that subsequent to the audit, the department received a written request from ABC for sales tax information to be used in conjunction with their investigation of the Taxpayer's business. At that time, the department informed ABC that a sales and use tax audit was conducted by the department, and that the information was being submitted under protest.
Based on the foregoing, I cannot agree with the Taxpayer's assertion that the department improperly disclosed information to ABC.
Audit Working Papers
The Taxpayer indicates that it received the official audit report; however, it was not provided with the auditor's working papers, comments, and other information pertaining to the sales and use tax audit. The Taxpayer requests such information in order to complete its appeal of the sales tax audit.
The ***** District Office has been informed of the Taxpayer's request for additional information pertaining to the sales tax audit. It is my understanding that the auditor has contacted the Taxpayer and personally provided a copy of the audit working papers and comments.
Summary
Based on the foregoing, I believe that a meeting with the Taxpayer is not necessary at this time, as the matters at issue are factual in nature. If the Taxpayer can provide sufficient documentation to support its claim that the assessment is overstated, the department will review this information and revise the assessment if appropriate. The information should be made available to the department within 60 days of the date of this letter and mailed to the department's Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880. If the documentation is not furnished within the specified period, the assessment will be considered correct as issued and collection action will resume.
If you have any questions regarding this letter, please contact ***** of the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13829T
Rulings of the Tax Commissioner