Tax Type
Retail Sales and Use Tax
Description
Assessment made on the Taxpayer's sales, expense purchases and asset purchases.
Topic
Appropriateness of Audit Methodology
Exemptions
Records/Returns/Payments
Date Issued
10-16-2009
October 16, 2009
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 "Taxpayer") for the period April 2001 through December 2006. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a wholesale bakery and restaurant that was audited by the Department. An assessment was made regarding the Taxpayer's sales, expense purchases and asset purchases. Due to the lack of adequate records, the Department used estimates to determine a portion of the Taxpayer's liability. The Taxpayer claims the estimates resulted in an erroneous assessment. The Taxpayer disputes the validity of two waivers executed with the Department to extend the statute of limitations for making the assessment. The Taxpayer agrees that the assessment on its restaurant sales for the year 2004 is correct.
DETERMINATION
Record Keeping Requirements
Virginia Code § 58.1-633 A provides that:
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- Every dealer required to make a return and pay or collect any tax under this chapter, shall keep and preserve suitable records of the sales, leases, or purchases, as the case may be, taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.
- Every dealer required to make a return and pay or collect any tax under this chapter, shall keep and preserve suitable records of the sales, leases, or purchases, as the case may be, taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.
During the audit, the Taxpayer was unable to provide the auditor with detailed records and information to verify sales for the bakery and restaurant parts of the business. Supporting records for certain expense and asset purchases held in the audit were also unavailable. The Taxpayer was given opportunities to provide documentation to support adjustments to the audit. The audit was adjusted in cases where documentation was provided that supported adjustments. For example, the auditor noted that there were differences between bank deposits and sales reported on federal income tax returns for the Taxpayer's bakery sales. The Taxpayer was able to provide some documentation for the differences and the audit was adjusted accordingly. However, some discrepancies in this area and in other areas remained in the audit.
Further, I cannot agree that an adjustment to the fixed asset liability is warranted based on the revised, handwritten invoice provided by the Taxpayer. The original invoice for the assets at issue did not show a line item for sales tax or shipping. While a second invoice was presented to the auditor that shows amounts for sales tax and shipping, this appears to be an altered version of the original invoice and its authenticity is questionable. This invoice is only acceptable if the Taxpayer obtains a signed letter or statement from the seller certifying that the charges on the invoice are accurate and that the seller remitted the sales tax on the invoice to the Department. The seller must also furnish a valid Virginia registration number under which the tax was reported.
Purchases were reviewed by the auditor using expense deduction information from the Taxpayer's federal income tax returns. The Taxpayer was unable to provide invoices for many of the expense purchases listed as exceptions in the audit. Consistent with the record keeping requirements previously addressed in this letter, the items remained in the audit because the Taxpayer could not provide evidence that sales or use taxes were paid on these expense items.P. D. 09-152
In accordance with Va. Code § 58.1-205, a tax assessment issued by the Department is considered prima facie correct and the burden is on the taxpayer to prove that the assessment is incorrect. Based on the record keeping requirements discussed above, there is currently no basis to adjust the audit without adequate records and documentation to support such adjustments. I will agree, however, to allow the Taxpayer 45 days to provide the Department with additional documentation to review for possible adjustments to the audit.
Exemption Certificates
Title 23 VAC 10-210-280 A states:
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- 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.
The Taxpayer was not collecting exemption certificates at the time of sale to substantiate exempt sales to its customers. The Taxpayer provided some exemption certificates to the auditor during the audit. Some sales were removed from the audit based on the auditor's determination that the exemption certificates for those customers were valid. Other certificates were deemed to be invalid and sales to those customers were not removed from the audit.
In Public Document (P.D.) 98-29 (2/20/98), the Department ruled that exemption certificates received by a taxpayer during or after an audit are subject to greater scrutiny by the Department and can only be accepted if the Department is able to confirm that the customer's use of the certificate is valid and proper for the specific transaction at issue. The absence of a certificate of exemption at the time of a sales transaction indicates the certificate was not accepted in good faith by the seller. A review of the exemption certificates provided reveals that some are missing signatures, account numbers or other required information. As P.D. 97-95 (2/21/97) states, exemption certificates are required to contain certain information to make them valid on their face. I am also concerned that the certificates appear to have been prepared by the same person and not by each customer, as would normally be expected. In accordance with the Department's policy, the certificates of exemption were correctly disallowed by the auditor and the assessment is correct with respect to this issue.
Audit Period and Waiver of Time Limitation
For sales and use tax purposes, Va. Code § 58.1-634 states, in part, "taxes imposed by this chapter shall be assessed within three years from the date on which such taxes became due and payable." The statute also states that in cases where returns have not been filed, the Department may make an assessment at any time within six years from the date the taxes became due and payable. If additional time is needed by the Department to complete an audit and to issue an assessment for additional taxes, Va. Code § 58.1-220 authorizes the Tax Commissioner and the taxpayer to extend the statutory time limitation to make the assessment. Form DT-36, Waiver of Time Limitation on Assessment of Taxes, is used by the Department for this purpose.
The Taxpayer and the Department initially signed a Form DT-36 for the audit period November 1, 2000 through October 31, 2006 that extended the period for assessment to November 30, 2007. A second Form DT-36 was later signed for the audit period November 1, 2000 through May 31, 2007 that extended the period for assessment to April 30, 2008. A third Form DT-36 was executed by both parties for the audit period November 1, 2000 through November 1, 2006 that extended the period for assessment to July 31, 2008. The Taxpayer changed the end date of the audit period from October 31, 2006 to November 1, 2006 on the third Form DT-36. The Department's assessment was issued to the Taxpayer on July 28, 2008. The Taxpayer claims the second waiver is invalid because the audit period was changed without the Taxpayer's permission. The Taxpayer also maintains the third waiver is invalid because it was never signed by a representative of the Department and returned to the Taxpayer.
Most taxpayers are required to file sales and use tax returns based on a monthly reporting period. The Department conducts sales and use tax audits that cover a span of these monthly periods. The sales and use tax liability is calculated separately for each monthly period included in the audit based on the requirement that sales and use tax returns are filed on a monthly reporting basis. For sales and use tax audits, each monthly filing period within the audit period is subject to the applicable statute of limitations as set out in Va. Code § 58.1-634. Thus, the oldest monthly periods in the audit are typically the periods protected by the waiver, as the time period for assessing these periods expires first. While the audit period on the second Form DT-36 was changed, the beginning of the audit period, November 1, 2000, remained the same. In this case, the monthly periods that were changed on Form DT-36 were assessed on July 28, 2008, which is within the statute of limitations. The fact that the audit period was changed on the Form DT-36 has no bearing on the validity of the assessment, as the statute of limitations for assessing the periods at issue had not expired. I also note that the Taxpayer signed the second Form DT-36, which indicates acceptance of the information on the waivers.
The Taxpayer contends that the last Form DT-36 was never signed by a representative of the Department and returned. However, the Department has a copy of the signed waiver on file that was signed by the Taxpayer on March 28, 2008 and by the Department's representative on April 2, 2008. The original was mailed to the Taxpayer's listed business address. A copy of the signed waiver is enclosed. While I apologize for the possible confusion caused by the problems with the waivers, the audit assessment is correct with respect to this issue.
CONCLUSION
I appreciate the Taxpayer's concerns with respect to the Department's use of a second auditor to finish the audit. Unfortunately, the first auditor left the Department's employment and the second auditor was assigned to finish the audit. The Department's records indicate that the Taxpayer was not presented with a final audit report by the first auditor. This change in auditors resulted in the need for the second auditor to reexamine some of the Taxpayer's records to insure the audit was done correctly. I can assure you that it was not the intent of the Department's audit staff to treat the Taxpayer inappropriately.
As previously stated., the Taxpayer may submit documentation for review and possible adjustments to the audit within 45 days from the date of this letter. The audit will be adjusted if warranted and a revised bill, with accrued interest to date, will be issued to the Taxpayer. If the requested information is not received within 45 days or the information provided is not sufficient to warrant further adjustments to the audit, the assessment will be considered correct. An updated bill, with accrued interest, will then be issued to the Taxpayer. In either case, the bill should be paid within 30 days to avoid the accrual of additional interest.
The Code of Virginia sections, regulations and public documents 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 website. If you have any questions regarding this matter or wish to submit additional documentation for the audit, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/1-2646257926.S
Rulings of the Tax Commissioner