12-176 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Failure to file sales tax returns; Insufficient records; Failure to pay collected taxes

Topic

Accounting Periods and Methods

Collection of Delinquent Tax

Records/Returns/Payments

Statute of Limitations

Date Issued

11-05-2012

November 5, 2012

Re: § 58.1-1821 Intent to Appeal: Retail Sales and Use Tax

Dear *****:

This reply is in response to your letter in which you advise the Department of your intent to appeal the retail sales tax audit assessment issued to ***** (the "Taxpayer"), for the period September 2005 through August 2011.

FACTS

The Taxpayer operates an independent grocery store. A review of the Department records indicated that the Taxpayer had not filed sales tax returns with the Department for more than six years. Under audit, the Taxpayer did not have sufficient records and was not able to produce cash register tapes, sales journals, general ledgers, Forms ST-9 or any other accounting records. The Taxpayer did provide cash flow statements for three years, but without any supporting documentation.

The Department's auditors conducted an observation of the Taxpayer's sales on two separate days. This observation methodology provided the auditors with the opportunity to see how the Taxpayer's sales transactions are handled and to develop a sales base to establish a sales estimate for the audit period. The Department's audit disclosed that the Taxpayer was selling food and various products and collecting the sales tax on its sales. Because the Taxpayer had not filed sales tax returns with the Department, it was determined that the Taxpayer was not reporting the tax that was being collected. Based on the observation of the Taxpayer's sales, projected sales for the audit period were allocated to exempt sales, non-food sales, and sales of prepaid wireless phone cards.

The Taxpayer disagrees with the audit results and timely submitted its intent to appeal, but without documentation or statutory citations to support the grounds for its objections. A member of the Department's Appeals and Rulings Unit contacted the Taxpayer and its representative in an effort to determine the grounds for its appeal. The Taxpayer did not present any sufficient grounds or documentation other than expressing its disagreement with the Department's assessment.

DETERMINATION

Estimate of Sales

Virginia Code § 58.1-633 states that every dealer required to make a return and collect sales tax "shall keep and preserve suitable records of the sales, leases, or purchases . . . 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." The record keeping requirement is further explained in Title 23 of the Virginia Administrative Code 10-210-470.

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 Taxpayer's inadequate records, the Department's auditor conducted an observation of the Taxpayer's business. In such an observation, Department auditors position themselves at a Taxpayer's business and observe all of the sales transactions that are made during certain business days. In this instance, the auditors selected two days, October 21, 2011 and October 24, 2011.

Based on the fact that the Taxpayer maintained inadequate records, the observation methodology applied in this case, and the fact that the Taxpayer failed to file any returns for more than six years, it was determined that the Taxpayer underreported its sales to the Department. While the Taxpayer objects to the resulting audit assessment, the Taxpayer has not provided any documentation other than the gross sales derived from the cash flow statements. This information was combined with the observation information to project the sales figures for the audit period and to compute the resulting tax liability.

Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed prima facie correct. The burden is on a taxpayer to prove the assessment is erroneous. Lacking the documentation to support its claim, the Taxpayer has not met the burden of proof in this case. Accordingly, I find that the Department's methodology used to determine the audit liability is correct.

Administrative Appeal

Virginia Code § 58.1-1821 states, "Any person assessed with any tax administered by the Department of Taxation may, within ninety days from the date of the assessment, apply for relief to the Tax Commissioner." Title 23 VAC 10-20-165 D 4 states "An incomplete appeal or notice of intent to appeal does not satisfy or extend the 90-day limitation period."

Pursuant to both Va. Code § 58.1-1821 and the cited regulation, the Taxpayer was required to file a complete administrative appeal no later than June 11, 2012. While the Taxpayer's protest letter was received on June 11, 2012, it did not satisfy the requirement that a complete administrative appeal be filed with the Department within the 90-day period. The Taxpayer's appeal letter did not provide any documentation or authorities to support the grounds for protesting the assessment. Therefore, the Taxpayer's application for correction is barred by the statute of limitations.

CONCLUSION

Based on the foregoing, the assessment is correct as issued. A revised bill, with interest accrued to date, will shortly be sent to the Taxpayer. No additional interest will accrue provided the outstanding balance is paid within 30 days from the date of this letter. Please remit payment to the: Virginia Department of Taxation, Attention: *****, 600 E. Main Street, 23rd Floor, Richmond, Virginia 23219. If you have any questions concerning the payment of the assessment, you may contact ***** at *****.

The Code of Virginia and regulation sections cited are available on-line in the Laws, Rules and Decisions section of the Department's website located at www.tax.virginia.gov. If you have any questions regarding this response, please contact ***** of the Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Craig M. Burns
        Tax Commissioner

AR/1-5116084645.Q

Rulings of the Tax Commissioner