Tax Type
Retail Sales and Use Tax
Description
Audit sampling; Credit card purchases
Topic
Collection of Delinquent Tax
Property Subject to Tax
Date Issued
04-13-1999
April 13, 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 issued to ************* (the Taxpayer) for the period May 1992 through April 1998. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a masonry contractor. The Taxpayer was audited and assessed tax on untaxed purchases of tangible personal property used in its business operations.
The Taxpayer contests the audit assessment and claims that the sample method used overstates its tax liability. Further, of the untaxed purchases picked up in the purchase sample, the Taxpayer takes exception to the inclusion of items purchased from two companies on the basis that the companies were registered for the collection and remittance of sales tax. The Taxpayer also questions how the auditor derived monthly purchases on which the error factor was applied.
DETERMINATION
Sample
The Taxpayer contests the assessment associated with expensed purchases and claims that the untaxed items found in the sample period are not representative of the entire audit period. The Taxpayer maintains that purchases of blades from one vendor represent 95 percent of the total audit sample. Thus, the Taxpayer claims that a detailed purchase analysis of this vendor for the audit period, including a five percent gross up of such purchases to allow for other items not taxed in the sample, more accurately reflects the tax liability due.
In this case, the auditor examined purchases for the year 1997 and found recurring errors in which the Taxpayer failed to accrue the use tax on untaxed purchases of office supplies, construction 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.
Despite the Taxpayer's contentions, I can find no basis to invalidate the sample used to calculate the error factor and extrapolated over 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. Based on the information before me, the Taxpayer has not met this burden. The fact that the purchase of blades from one vendor represents a significant amount of the purchase sample does not by itself render the sample inaccurate. For example, the purchase of blades seems to be an integral part of the Taxpayer's business activity and are purchased on a consistent and recurring basis. While purchases from this particular vendor may be lower for the period before and after the sample period, it is likely that the Taxpayer purchased blades from other vendors outside the sample period since such items are an integral part of the Taxpayer's business. Therefore, to detail purchases from one particular vendor and not all purchases would not accurately reflect the Taxpayer's tax liability.
Contractor Purchases
In this case, the Taxpayer was held liable for untaxed purchases of tangible personal property made with the Taxpayer's credit card. While the Taxpayer was unable to provide the auditor with documentation that the sales tax was paid on such purchases, the Taxpayer claims that the items were purchased from Virginia suppliers registered to collect the sales tax. Accordingly, the Taxpayer believe
s that the contested items should be removed from the audit.
Title 23 of the Virginia Administrative Code (VAC) 10-210-6030 provides that "[t]he tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased.'
Title 23 VAC 10-210-410 addresses purchases by contractors and provides that every contractor is deemed the final user or consumer of all tangible personal property furnished to him or by him in connection with real property construction, reconstruction, installation, repair, and similar contracts. If a vendor fails to charge and collect the sales tax on a taxable transaction, regardless of whether or not the vendor is registered to charge and collect the Virginia sales or use tax, the contractor must report and remit the consumer use tax to the department on such purchases. As a construction contractor, the Taxpayer is obligated to report and pay the use tax on any untaxed purchases of tangible personal property.
The audit shows that the contested items were purchased from suppliers outside the state and delivered to the Taxpayer in Virginia. Your argument that the suppliers have locations within Virginia that are registered to collect the tax is not sufficient evidence that the tax was paid on the contested items. Lacking the documentation to show that the tax was paid, I find that the auditor was correct in holding such transactions taxable in the audit. However, if the Taxpayer can provide documentation that the tax was paid on the contested items, they will be removed from the audit.
Extrapolation of Error Factor
You question how the purchases on which the error factor was applied were determined for each period.
The department uses gross sales to extrapolate expense purchases, as monthly gross sales are generally easy to obtain. When increases and decreases in gross sales vary directly with purchases, the use of gross sales to extrapolate the results of a purchase sample is an acceptable audit procedure.
In this case, the auditor divided the use tax deficiency by the total purchases for the sample period to arrive at the percentage of error factor. The percentage of error factor multiplied by the total sales base for the audit period resulted in the use tax deficiency. The sales for each monthly period on which the error factor was applied were computed by dividing gross sales by twelve for each year of the audit period.
Summary
Based on the information presented, it appears that the assessment is correct. Nevertheless, if the Taxpayer can provide additional documentation regarding the payment of sales tax on certain purchases and the sample issue, the auditor will certainly review it and make any appropriate revisions. Any documentation should be sent to the auditor within 60 days of the date of this letter. If the documentation is not received within the specified time period, the assessment will be considered correct as issued.
If you have any further questions regarding this determination, you may contact ***********at the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/17647T
Rulings of the Tax Commissioner