Tax Type
Retail Sales and Use Tax
Description
Interest and fraud penalty for underreported sales of alcoholic beverages
Topic
Appropriateness of Audit Methodology
Assessment
Penalties and Interest
Date Issued
06-29-2006
June 29, 2006
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ***********
This is in response 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 January 2002 through March 2005. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates a restaurant and bar. The Taxpayer was assessed tax, interest and fraud penalty for underreported sales of alcoholic beverages. In addition, the Taxpayer was assessed a 20 percent amnesty penalty.
Based on an audit performed by the Department of Alcoholic Beverage Control ("ABC") for the period January 2003 through December 2003, the Department of Taxation (the "Department") determined that the Taxpayer had substantially understated its sales of alcoholic beverages. The auditor used average sales for 2003 to calculate taxable sales for the other periods in the audit. The Department compared the sales figures based on its calculation to the sales figures reported on sales tax returns filed by the Taxpayer and assessed the difference as underreported sales.
The Taxpayer claims that the ABC audit is inaccurate and overstates the Taxpayer's alcoholic beverage sales. The Taxpayer asserts that the Mixed Beverage Annual Report (MBAR) filed with the ABC for the 2003 period reflects the correct sales. As such, the Taxpayer contests the Department's assessment and seeks an adjustment to the assessment to reflect sales consistent with the MBAR reports filed by the Taxpayer. The Taxpayer further disputes that any fraud or attempted fraud has occurred in the reporting of its sales.
DETERMINATION
Retail Sales and Use Tax Assessment
Virginia Code § 58.1-618 provides, in part, "If any dealer fails to make a return as provided by this chapter, or a return that is false or fraudulent, it shall be the duty of the Tax Commissioner to make an estimate for the taxable period of the retail sales or distributions of such dealer . . . ."
In this case, the Taxpayer failed to file retail sales and use tax returns for the period February 2002 through December 2003. The Department's Collections Unit worked with the Taxpayer to resolve this matter. In May 2004, the Taxpayer filed the returns and paid the tax.
The ABC conducted an audit of the Taxpayer's records that covered a portion of the period for which the Taxpayer filed the delinquent sales tax returns. The Department compared the information provided by the ABC with the returns, and the results revealed that the Taxpayer had underreported its retail sales to the Department. The Department's auditor estimated the tax liability in accordance with Va. Code § 58.1618 based on the information provided by the ABC.
Audit by the ABC
The Department's audit staff met with agents from the ABC to review the audit findings. The Department found that the ABC used lenient standards in developing its audit figures. The ABC used a 10% spillage factor instead of the standard 5% factor. The lowest regular drink prices of $2 for beer and $3 for mixed drinks were used in its calculations. The ABC used purchase information obtained from beer wholesalers and from the ABC to determine the Taxpayer's actual purchases of beer and alcohol. This refutes the Taxpayer's claim that the alcoholic sales figures developed by the ABC were overstated when in fact they may have been understated due to the lenient standards used in the audit.
Further, ABC agents observed during their investigation that a very small percentage of the Taxpayer's alcoholic beverage sales occurred during the Taxpayer's "happy hour" period. This refutes the Taxpayer's claim that a majority of its alcoholic beverage sales occurred during its "happy hour" period. Thus, the ABC agent made no allowance for "happy hour" pricing.
The Taxpayer maintains that the MBAR filed with the ABC is an accurate representation of it sales of beverages and meals in 2003. The Taxpayer contends that it was never shown that the MBAR was inaccurate. For this reason, the Taxpayer suggests that the Department's reliance on the ABC audit has resulted in an erroneous assessment of retail sales and use tax. To support its position, the Taxpayer states that, in a May 2005 hearing, the ABC dropped the charge that the Taxpayer had failed to file a complete and accurate MBAR as part of an offer in compromise. The Taxpayer has not presented evidence that the charge was dropped because the 2003 MBAR was determined to be accurate. Because of the nature of the hearing, the charge could have been dropped for other reasons. The Department has obtained information showing that the charge for failing to file a complete and accurate MBAR was later substantiated in a subsequent ABC license hearing conducted in November 2005.
Moreover, the ABC audit conducted on the Taxpayer's alcohol purchases was performed using conservative assumptions and still showed that the Taxpayer had substantially underreported retail sales. Based on the above, I disagree with the Taxpayer's contention that the MBAR report for 2003 was accurate and that the Department should revise its sales and use tax audit to reflect the amounts reported on the MBAR.
Virginia Code § 58.1-205 states, "Any assessment of a tax by the Department shall be deemed prima facie correct." As such, the burden of proof is on the taxpayer to show that the assessment is in error. While the Taxpayer asserts that the audit assessment is based on unsubstantiated findings, the Taxpayer has not provided evidence to support this claim. As such, the Taxpayer has failed to meet its burden of proof. Accordingly, I find that the auditor correctly assessed the tax based on the best available information.
Fraud Penalty
Virginia Code § 58.1-635 A provides, in pertinent part
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- When any dealer fails to make any return and pay the full amount of the tax required by this chapter, there shall be imposed, in addition to other penalties provided herein, a specific penalty to be added to the tax .... In the case of a false or fraudulent return where willful intent exists to defraud the Commonwealth of any tax due under this chapter, or in case of a willful failure to file a return with the intent to defraud the Commonwealth of any such tax, a specific penalty of fifty percent of the amount of the proper tax shall be assessed.
Virginia Code § 58.1-635 B provides that "[i]t shall be prima facie evidence of intent to defraud the Commonwealth of any tax due under this chapter when any dealer reports his gross sales, gross proceeds or cost price, as the case may be, at fifty percent or less of the actual amount."
The fraud penalty was assessed with regard to the retail sales and use tax audit because, based on the information provided by the ABC, it was determined that the Taxpayer was consistently reporting its gross sales at 50 percent of the actual amount. While the Taxpayer maintains that there was no attempt to defraud the Commonwealth, the Taxpayer has not provided any documentation to support its contention that fraud does not exist. Based on the standard established in Virginia Code § 58.1-635 B. the fraud penalty is correct as assessed.
CONCLUSION
The audit has been revised from the initial assessment of ***** to ***** based on results of the August 31, 2005 meeting between the audit staff and the Taxpayer. Based on the foregoing, there is no basis to make any further adjustments to the Department's audit assessment. The issues presented in this case are factual matters and no documentation has been provided to support the Taxpayer's position.
The Taxpayer will receive an updated bill including accrued interest charges. The 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 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 *****.
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- Sincerely,
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- Janie Bowen
Tax Commissioner
- Janie Bowen
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AR/56469T
Rulings of the Tax Commissioner