Tax Type
Retail Sales and Use Tax
Description
Audit sample techniques; Estimated amounts for sample extrapolation
Topic
Collection of Delinquent Tax
Date Issued
04-15-1999
April 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 issued to ***** (the Taxpayer) for the period August 1995 through July 1998. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is an out-of-state retailer who sells lighting fixtures and accessories. As a result of the department's audit, the Taxpayer was assessed the tax on the sale of tangible personal property delivered to Virginia customers in which the Taxpayer failed to charge the Virginia sales tax.
The Taxpayer claims that three large items found in the three-month sample period are not representative of the entire audit period. These transactions involved tangible personal property shipped to Virginia in which the Taxpayer charged another state's sales tax. The Taxpayer claims that a detail audit would more accurately reflect the tax liability due. To compromise, the auditor offered to expand the audit period to include an additional three months; however, the Taxpayer indicated that this was not acceptable. The Taxpayer also questions the gross sales figure used by the auditor for extrapolation purposes.
DETERMINATION
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.
In this case, the auditor reviewed sales invoices for November 1995, August 1996, and November 1997 as the sample period. The auditor determined an error factor for the representative sample period selected. The error factor was extrapolated over estimated gross sales for the 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. In this case, the auditor found recurring errors in which the Taxpayer erroneously charged another state's sales tax on property delivered to Virginia. The fact that the Taxpayer can attribute errors to three specific accounts does not mean that the sample was not representative. Recurring errors were also found in other accounts. Further, while the Taxpayer claims that the transactions in question are isolated to the sample period, there are likely similar transactions outside the sample period on which the Virginia tax was not properly charged, as such sales appear to be an integral part of the Taxpayer's business activity. The removal of the transactions in question would nullify the purpose and validity of the sample in that other sales may not have been properly taxed. Despite the Taxpayer's contentions, I find no basis to invalidate the sample calculations.
Before requiring that a detailed audit be conducted or a sample period be adjusted or extended, the Taxpayer must demonstrate that the sample is not representative of the audit period or that it is flawed in a manner which would invalidate the sample. 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.
Extrapolation of the Sample
It is my understanding that the auditor requested gross sales figures for the audit period; however, the auditor did not receive the requested information. The auditor extrapolated the results of the sample using the best available information and provided the Taxpayer a copy of the audit calculations prior to assessment. When the auditor did not receive any comments from the Taxpayer, the auditor issued the assessment based on the gross sales available during the audit.
The Taxpayer claims that it has actual gross sales figures. If the Taxpayer can provide verifiable sales information, the auditor will use the information to extrapolate the results of the sample.
Summary
Based on the information currently before me, it appears that the assessment is correct. However, the audit will be returned to the ***** District Office, and the auditor will contact the Taxpayer in order to resolve the contested issue regarding the extrapolation of gross sales. The auditor will review the additional information provided by the Taxpayer and adjust the audit accordingly.
Following the auditor's review, the Taxpayer will receive a revised bill, with interest accrued to the date of protest. This bill should be paid within 30 days from the date of the revised bill to avoid the accrual of additional interest. In addition, if the Taxpayer has specific evidence that the sample period for this audit inaccurately reflects its tax liability, the Taxpayer should provide this information during the auditor's visit.
If you should have any questions regarding this determination, you may contact************* in the Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/17713T
Rulings of the Tax Commissioner