Tax Type
Retail Sales and Use Tax
Description
TP claims records maintained were sufficient to determine its tax liability
Topic
Appropriateness of Audit Methodology
Records/Returns/Payments
Date Issued
02-07-2006
February 7, 2006
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to your client, ***** (the "Taxpayer") for the period August 2000 through September 2003. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is primarily engaged in wholesale and retail sales of tobacco and tobacco related products. The Taxpayer operates four retail store locations in Virginia. At issue is the tax assessed as a result of disallowed exempt sales. In this case, the auditor held that adequate records were not available to identify exempt sales made to customers; therefore, the auditor used a comparison method to determine the audit liability based on the best available records.
The Taxpayer contests the assessment, claiming that the records maintained were sufficient to determine its tax liability, and that it is not required to maintain more specific records of exempt sales. In addition, the Taxpayer contests the methodology used to establish the percentage of monthly exempt sales for sample purposes.
DETERMINATION
Exempt Sales
As provided by Va. Code § 58.1-633 A and Title 23 of the Virginia Administrative Code (VAC) 10-210-470, every dealer registered to collect and remit the sales or use tax is required to keep and maintain for three years adequate and complete records necessary to determine and substantiate the amount of its tax liability, including exemption and resale certificates. Of additional importance, I would note that Va. Code § 58.1-633 B provides that
-
- all wholesalers and jobbers in this Commonwealth shall keep a record of all sales of tangible personal property, whether such sales be for cash or on terms of credit. Such records shall include the name and address of the purchaser, the number of the certificate of registration issued to the purchaser, the date of the purchase, the article purchased, and the price at which the article is sold to the purchaser. Any wholesaler or jobber failing to keep such records shall be guilty of a Class 1 misdemeanor. Any person who is both a retailer and a wholesaler or jobber and who fails to keep proper records showing wholesale sales and retail sales separately shall pay the tax as a retailer on both classes of his business.
Virginia Code § 58.1-623 and Title 23 VAC 10-210-280 A provide 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. A certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice by the Department.
The Taxpayer clearly has an obligation to substantiate sales of tangible personal property that are made exempt from the tax. This is a responsibility shared by all dealers who sell tangible personal property. Further, it is clear from the language in Va. Code § 58.1-633 B that the law requires a person who is both a retailer and wholesaler, as is the Taxpayer, to keep the same detailed records of exempt sales as those set out in the statute for wholesalers.
In this case, the Taxpayer's cash register tapes distinguish taxable and exempt sales; however, the register tapes do not indicate any exemption information for the purchaser. Furthermore, the Taxpayer did not maintain any records that would link the exempt sale to the purchaser. The auditor could not match certificates of exemption to specific exempt sales as reported by the Taxpayer.
In regard to the exemption certificates, most of them were disallowed as invalid because they were either not dated, missing the account number, carried an incorrect customer name, or dated prior to the company's registration with the Department.
Virginia Code § 58.1-205 deems any tax assessment issued by the Department of Taxation as prima facie correct. Accordingly, the burden of proof is upon the taxpayer to establish through convincing evidence that a tax assessment is erroneous. The Taxpayer has failed to meet this burden of proof. Accordingly, I find that the auditor correctly assessed the tax on the contested sales in accordance with the cited authorities.
Concerning employee signed affidavits, these documents are not sufficient to prove that the contested sales qualify for exemption from the tax. Further, you claim that the affidavits prove that employees properly handled taxable and exempt sales. I cannot agree because most of the certificates on file were invalid.
Sample
According to the audit comments, several attempts were made to select sample months within the audit period; however, the Taxpayer was unable to reconstruct sufficient records to determine its tax liability. Because the Taxpayer failed to maintain adequate records during the audit period, both the auditor and Taxpayer agreed that the Taxpayer would keep sufficient documentation for September, October and November 2003 to determine the tax liability for the audit period. When the auditor returned in December to review these records, the Taxpayer made the auditor aware that several significant changes beginning in September drastically decreased exempt sales from prior months within the audit period. For instance, the Taxpayer indicated retail sales were inflated for the month of September 2003 because wholesale sales in connection with supplier incentive programs were recorded with retail sales. In addition, the Taxpayer claimed that a significant wholesale customer ceased doing business in September 2003, thus substantially reducing the amount of exempt sales reported in that month and subsequent months.
For the reasons above, the auditor determined that the periods September, October, and November 2003 would not be representative of the audit period. Because no records were available to substantiate taxable or exempt sales during the audit period, the auditor determined the tax liability using a comparative data method based on information from September 2003 and sales and use tax return data. A percentage of exempt sales to gross sales was determined using return data. The auditor compared these results to September 2003 and applied the tax to the variances as additional taxable sales. I note that the auditor made an allowance for the reduction in sales for September 2003 at the #3 tobacco outlet store as a result of the loss of one of the Taxpayer's customers.
When a dealer fails to maintain adequate records, the Department is authorized by Va. Code § 58.1-618 to use the best information available to reconstruct a dealer's sales or purchases to determine whether a tax liability exists. Because of the lack of detailed documentation, the auditor relied upon the best available information to determine the tax liability. Upon review, I find that the auditor's methodology used to determine the Taxpayer's liability is reasonable.
CONCLUSION
Based on the forgoing, there is no basis to make any adjustments to the Department's audit assessment. The matters presented in this case are factual issues and no additional documentation has been provided.
The Taxpayer will receive an updated bill including accrued interest charges. This bill should be paid within 30 days from the date of the bill to avoid the accrual of additional interest. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attention: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may
contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
-
-
-
-
-
-
-
- Sincerely,
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Kenneth W. Thorson
Tax Commissioner
-
-
-
-
-
-
-
-
AR/50286T
Rulings of the Tax Commissioner