Tax Type
Retail Sales and Use Tax
Description
Promotional pens included in the audit sample
Topic
Appropriateness of Audit Methodology
Date Issued
06-24-2002
June 24, 2002
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter of April 22, 2002, in which you seek correction of a retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period January 1999 through December 2001.
FACTS
The Taxpayer is a furniture manufacturer. The only contested issue is the Taxpayer's purchase of promotional pens included in the audit sample as a recurring expense and extrapolated over the audit period. The Taxpayer maintains that the purchase of the pens is an isolated transaction and not a part of the Taxpayer's regular business activity. The Taxpayer concedes the promotional pens are taxable; however, the Taxpayer believes the pens should not be included in the extrapolation of the audit sample. Accordingly, the Taxpayer requests this issue be removed from the audit extrapolation and taxed separately.
DETERMINATION
Sampling is an audit technique of significant value that is widely used in the public and private sectors. The department uses sampling in sales and use tax audits where a detailed audit would not prove beneficial to either the auditor or the taxpayer. When sampling techniques are properly applied, the result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit.
The department will remove an item from an audit sample only if it is shown that the transaction is isolated in nature and not a normal part of a taxpayer's business activity. See the enclosed Public Documents 91-103 (6/28/91), 93-198 (9/23/93), and 99-250 (8/30/99) that further address sampling techniques.
It may be that the Taxpayer does not normally engage in this type of specific advertising purchase (i.e., promotional pens). It is likely, however, that the Taxpayer makes other types of advertising purchases. For example, I understand that the Taxpayer has an advertising budget, and the purchase of advertising items is an integral and normal part of the Taxpayer's business activity. Therefore, while the Taxpayer may not normally purchase promotional pens, there is no evidence to suggest that the purchase of promotional advertising is isolated in nature.
Based on the information currently before me, the Taxpayer has not proven that the contested purchase is unusual to its operations. I can, therefore, find no basis for the removal of these items from the audit sample. However, if the Taxpayer can show that promotional purchases are not a part of the Taxpayer's normal business activity, I will certainly revisit this issue. Documentation to this effect may be presented to the audit staff within 60 days of the date of this letter. If such documentation is not sent within the allotted time, the assessment will be considered correct and the Taxpayer will receive a revised bill with updated interest.
If you have any questions about this response, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
AR/40853T
Rulings of the Tax Commissioner