Virginia Tax has revised its policy regarding the application of penalty to audit deficiencies (Title 23 of the Virginia Administrative Code 10-210-2032). The application of audit penalty is based on the level of compliance exhibited by the taxpayer in complying with Virginia tax laws. For retail sales and use tax assessments issued on or after October 2, 1999, Virginia Tax will allow the taxpayer to calculate an Alternative Method of computing the use tax ratio that takes into account taxes paid to vendors.
Calculation of Use Tax Compliance Ratio
Virginia Tax will continue to compute the use tax compliance ratio as follows:
Measure reported / (Measure reported + Measure found) = Compliance ratio
Provided the taxpayer’s use tax compliance does not meet 60% for the second generation audits, or 85% for third and all subsequent audits, the audit penalty will be applied.
Alternative Method of Computing Use Tax Compliance as Calculated by the Taxpayer
If penalty is applied based on Virginia Tax’s calculation of the use tax compliance ratio, the taxpayer has the option of calculating the use tax compliance ratio under the alternative method below:
(Measure reported + Measure paid to vendors) / (Measure reported + Measure paid to vendors + Measure found) = Compliance ratio
It is the taxpayer’s responsibility to compute the above compliance ratio and provide the auditor with documentation supporting the computation. The taxpayer must compute the alternative ratio based on a review of purchases for the same period used by the auditor to compute the traditional compliance ratio. Tolerances for the alternative method will remain the same as those of the traditional compliance ratio.
If it is determined that the use tax audit is applicable based on the traditional compliance ratio calculations, the auditor will advise the taxpayer. If the taxpayer desires to recalculate the compliance under the alternative method, the auditor will separately assess the audit penalty as a contested issue. The taxpayer must complete the alternative method calculations and provide the documentation to the auditor within 60 days of the audit assessment. If the use tax compliance falls within the acceptable tolerances based on the alternative method calculations, the audit penalty will be abated.