Tax Type
Retail Sales and Use Tax
Description
Nonprofit organization; Exemption Certrificates; Audit penalty
Topic
Accounting Periods and Methods
Penalties and Interest
Taxability of Persons and Transactions
Date Issued
08-16-2000
August 16, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to the ***** (the "Taxpayer") for the period June 1996 through May 1999. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a nonprofit organization. The Taxpayer receives revenue from member dues and from conferences, seminars, advertising, and the sale of publications and videos. The Taxpayer also distributes a magazine that is free to its members. As a result of the department's audit, the Taxpayer was assessed the tax on untaxed purchases and sales.
The Taxpayer alleges that all but one of the sales assessed in the audit are exempt sales to federal credit unions. In addition, the Taxpayer claims that certain purchases assessed in the audit are duplicated. The Taxpayer also maintains that the sample period is not representative of the audit period and further contains items outside the selected sample period. The Taxpayer requests abatement of the penalty applied in this case.
I will address each issue separately below.
DETERMINATION
Sales
Exemption certificates. Title 23 of the Virginia Administrative Code (VAC) 10-210-280(A) restates Code of Virginia § 58.1-623 by setting out that:
All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law.
Thus, when a purchaser does not present a valid exemption certificate, the seller is required to charge and collect the sales tax on the sale of tangible personal property. In this case, the Taxpayer made untaxed sales to purchasers who failed to submit an exemption certificate. Notwithstanding the nature of the buyers' businesses, the Taxpayer is required by Virginia law and regulation to collect the sales tax on all sales for which no exemption certificate is furnished by the purchaser. See Public Document 89-92 (3/8/89) which addresses federally chartered credit unions and the proper certificate of exemption that must be provided for their organization to make tax exempt purchases.
In this case, I find that the documentation provided by the Taxpayer as part of its appeal regarding the contested items establishes the validity of the exemption. Accordingly, I will remove these sales from the audit sample.
Purchases
Duplicate items. The Taxpayer maintains that the auditor recorded line item 1 and 2 on the exceptions list and then included these items in line item 13 and 25. Thus, the Taxpayer contends that line item 13 and 25 should be removed from the audit.
Based on the information provided by the Taxpayer, line item 13 and 25 totaling $8,500 was incorrectly included in line item 1 and 2. The audit will be adjusted to remove these items.
Sampling
Sample not representative. The Taxpayer protests the method used to extrapolate purchases for the sample period. The Taxpayer claims that the sample is not representative of the audit period and that the extrapolation of the error factor overstates the Taxpayer's use tax liability.
In this case, the year 1998 was chosen as the sample period. The auditor found recurring errors in which the Taxpayer failed to accrue the tax on untaxed purchases of prints, brochures, publications, envelopes and other items used in the Taxpayer's business. The auditor calculated an error factor for the representative sample period. The resulting error factor was then applied to the entire audit period.
Every effort is made to objectively select the sample periods that are representative of the period being audited and to reach a consensus with the taxpayer concerning the validity of the sample. The error factor used in computing the tax in the instant case was based upon an audit sample period which was agreed to by the Taxpayer. Although the sample is valid, based on the information you have provided, it is possible that the sample may not be representative of the audit period. As such, the audit will be returned to the ***** District Office, and the auditor will contact the Taxpayer in order to resolve this issue.
Items outside sample period. The Taxpayer claims that items outside the sample period were incorrectly included in the sample.
It is my understanding that the auditor included in the sample only those invoices paid within the sample period. At the same time, the auditor did not include purchases of items invoiced during the sample period but paid outside the sample period. As such, I find no basis to remove any of the contested purchases from the audit sample.
Penalty
On this second audit, the Taxpayer's use tax compliance ratio was 21%. On second audits, it is the department's longstanding policy that the application of penalty is mandatory unless the use tax compliance ratio meets or exceeds 60% for use tax, or there is evidence of exceptional mitigating circumstances causing the tax deficiency. In this case, the Taxpayer has not demonstrated a sufficient level of tax compliance nor has it presented any evidence of exceptional mitigating circumstances.
Accordingly, I find no basis to waive the penalty assessed in this case. However, if the Taxpayer is able to provide evidence that would warrant revision of the audit sample, the compliance ratios will be recomputed. If the recomputed compliance ratios meet or exceed an acceptable level of compliance as noted above, the penalty will be waived.
Summary
The audit will be returned to the ***** District Office to be revised according to the determination set forth herein. The auditor will contact the Taxpayer to resolve the contested sample issue. If the audit staff determines that further revision is necessary, the audit assessment will be revised accordingly, and the Taxpayer will receive a revised audit report and bill.
If you have any questions regarding this determination, please contact ***** of the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25407T
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to the ***** (the "Taxpayer") for the period June 1996 through May 1999. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a nonprofit organization. The Taxpayer receives revenue from member dues and from conferences, seminars, advertising, and the sale of publications and videos. The Taxpayer also distributes a magazine that is free to its members. As a result of the department's audit, the Taxpayer was assessed the tax on untaxed purchases and sales.
The Taxpayer alleges that all but one of the sales assessed in the audit are exempt sales to federal credit unions. In addition, the Taxpayer claims that certain purchases assessed in the audit are duplicated. The Taxpayer also maintains that the sample period is not representative of the audit period and further contains items outside the selected sample period. The Taxpayer requests abatement of the penalty applied in this case.
I will address each issue separately below.
DETERMINATION
Sales
Exemption certificates. Title 23 of the Virginia Administrative Code (VAC) 10-210-280(A) restates Code of Virginia § 58.1-623 by setting out that:
All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law.
Thus, when a purchaser does not present a valid exemption certificate, the seller is required to charge and collect the sales tax on the sale of tangible personal property. In this case, the Taxpayer made untaxed sales to purchasers who failed to submit an exemption certificate. Notwithstanding the nature of the buyers' businesses, the Taxpayer is required by Virginia law and regulation to collect the sales tax on all sales for which no exemption certificate is furnished by the purchaser. See Public Document 89-92 (3/8/89) which addresses federally chartered credit unions and the proper certificate of exemption that must be provided for their organization to make tax exempt purchases.
In this case, I find that the documentation provided by the Taxpayer as part of its appeal regarding the contested items establishes the validity of the exemption. Accordingly, I will remove these sales from the audit sample.
Purchases
Duplicate items. The Taxpayer maintains that the auditor recorded line item 1 and 2 on the exceptions list and then included these items in line item 13 and 25. Thus, the Taxpayer contends that line item 13 and 25 should be removed from the audit.
Based on the information provided by the Taxpayer, line item 13 and 25 totaling $8,500 was incorrectly included in line item 1 and 2. The audit will be adjusted to remove these items.
Sampling
Sample not representative. The Taxpayer protests the method used to extrapolate purchases for the sample period. The Taxpayer claims that the sample is not representative of the audit period and that the extrapolation of the error factor overstates the Taxpayer's use tax liability.
In this case, the year 1998 was chosen as the sample period. The auditor found recurring errors in which the Taxpayer failed to accrue the tax on untaxed purchases of prints, brochures, publications, envelopes and other items used in the Taxpayer's business. The auditor calculated an error factor for the representative sample period. The resulting error factor was then applied to the entire audit period.
Every effort is made to objectively select the sample periods that are representative of the period being audited and to reach a consensus with the taxpayer concerning the validity of the sample. The error factor used in computing the tax in the instant case was based upon an audit sample period which was agreed to by the Taxpayer. Although the sample is valid, based on the information you have provided, it is possible that the sample may not be representative of the audit period. As such, the audit will be returned to the ***** District Office, and the auditor will contact the Taxpayer in order to resolve this issue.
Items outside sample period. The Taxpayer claims that items outside the sample period were incorrectly included in the sample.
It is my understanding that the auditor included in the sample only those invoices paid within the sample period. At the same time, the auditor did not include purchases of items invoiced during the sample period but paid outside the sample period. As such, I find no basis to remove any of the contested purchases from the audit sample.
Penalty
On this second audit, the Taxpayer's use tax compliance ratio was 21%. On second audits, it is the department's longstanding policy that the application of penalty is mandatory unless the use tax compliance ratio meets or exceeds 60% for use tax, or there is evidence of exceptional mitigating circumstances causing the tax deficiency. In this case, the Taxpayer has not demonstrated a sufficient level of tax compliance nor has it presented any evidence of exceptional mitigating circumstances.
Accordingly, I find no basis to waive the penalty assessed in this case. However, if the Taxpayer is able to provide evidence that would warrant revision of the audit sample, the compliance ratios will be recomputed. If the recomputed compliance ratios meet or exceed an acceptable level of compliance as noted above, the penalty will be waived.
Summary
The audit will be returned to the ***** District Office to be revised according to the determination set forth herein. The auditor will contact the Taxpayer to resolve the contested sample issue. If the audit staff determines that further revision is necessary, the audit assessment will be revised accordingly, and the Taxpayer will receive a revised audit report and bill.
If you have any questions regarding this determination, please contact ***** of the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25407T
Rulings of the Tax Commissioner