Tax Type
Retail Sales and Use Tax
Description
Audit sample with large volume sale; Exemption certificates
Topic
Collection of Delinquent Tax
Penalties and Interest
Property Subject to Tax
Date Issued
03-31-1999
March 31, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ******
This is in reply to your letter in which you seek correction of a sales and use tax assessment issued to ***** (the Taxpayer) for the period August 1994 through July 1997. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer's primary business is the operation of an auction house. An audit resulted in the assessment of sales tax on untaxed sales and use tax on untaxed purchases. The Taxpayer contests the audit and maintains that the sample is not representative of its sales due to the inclusion of one large sale. The Taxpayer maintains that it accepted from its customer a certificate of exemption in good faith for the item held taxable in the audit. The Taxpayer does not dispute the taxability of the sale, but believes that it is unfair to include this sale in the calculation of the error factor.
DETERMINATION
Certificate of exemption
Code of Virginia § 58.1-623 (copy enclosed) provides that "all sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale ... of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt....' As a precaution, however, Title 23 of the Virginia Administrative Code (VAC) 10-210-280 provides that "a certificate that is incomplete, invalid, infirm or inconsistent on its face is never ***** acceptable....' Further, certificates of exemption obtained during or after an audit situation will be accepted only if the department can confirm that the customer's use of the certificate was valid and proper for the specific transaction.
It appears that the Taxpayer did not have an exemption certificate on file for the contested sale, but received the exemption certificate during the audit. While the purchaser is a nonprofit organization, it is not exempt from Virginia sales and use taxation. Indeed, you indicate that the purchaser eventually remitted the tax to you. Clearly, the sale is taxable.
More to the point in this case is the inclusion of that sale in the audit sample calculations, as discussed below:
Audit 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.
In this case, the auditor and the Taxpayer selected a three-month sample that represented high, medium, and low sales. The auditor determined an error factor for the representative sample period selected, and the error factor was extrapolated over gross sales for the audit period.
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. In this case, the Taxpayer has not yet met this burden. Despite the Taxpayer's contentions, I find no basis to invalidate the sample calculations. I see no evidence that the sample is not representative of the audit period or that it is flawed in a manner which would invalidate the sample. The audit reveals that the Taxpayer makes large volume sales on a recurring basis. Thus, to remove the sale in question from the sample base would skew the sample and nullify the validity of the sample.
Tax Remitted
It is my understanding that some of the Taxpayer's customers paid the tax on sales assessed within the audit period. In a conversation with a member of my staff, the Taxpayer further indicates that it remitted such taxes to the department on its monthly sales and use tax return. Form ST-9.
If the Taxpayer can provide sufficient documentation that the tax has been remitted to the department, the Taxpayer will be given credit against the audit liability for the tax paid by the customers on these transactions.
Summary
Based on the foregoing, I find no basis for the removal of the protested sale from the audit sample. The information with respect to the taxes paid by customers and remitted to the department should be provided within 60 days of the date of this letter to the department's Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23218-1880, Attention: ********. Upon review and possible revisions as a result thereof, a revised bill will be mailed to the Taxpayer.
If you have questions regarding this letter, please contact ***** in my Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/16515T
Rulings of the Tax Commissioner