July 16, 2015
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the 'Taxpayer), in which you seek correction of the retail sales and use tax assessment issued for the period January 2009 through December 2012. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates a pawn shop and provides check cashing services. As a result of the Department's audit, the Taxpayer was assessed tax, penalties and interest for underreported sales and the sale of fixtures, furnishings and equipment. At the time of the audit, there was a criminal investigation of the Taxpayer's business operations by other state and federal government agencies. Because the Taxpayer's records were seized in conjunction with the criminal investigation, the auditor relied on bank records and testimony by the Taxpayer's representative regarding cash sales to estimate the sales tax liability. In addition, the auditor assessed the tax on the sale of fixtures, furnishings and equipment in connection with the sale of a restaurant.
The Taxpayer contests the audit assessment and claims: (i) the audit includes exempt out-of-state Internet sales; (ii) the auditor's assumption that only 10% of cash receipts were deposited is erroneous; and (iii) the tax assessed on the restaurant fixtures, furnishings and equipment cannot be addressed until such time the governmental authorities have returned the Taxpayer's records. The Taxpayer requests that the Department allow the Taxpayer time to respond to the contested assessment once the authorities release the Taxpayer's records.
DETERMINATION
Estimated 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 (VAC) 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. As the Taxpayer was unable to produce records to verify sales, the Taxpayer's sales were estimated for the applicable periods and assessed as underreported sales based upon bank records and testimony by the Taxpayer's representative regarding cash sales.
In this instance, the auditor conducted a detailed review of daily deposits on the Taxpayer's two banking accounts to estimate the sales tax liability. Based on the audit, nontaxable cash deposits, deposits for rent, check cashing, interstate sales and, transfers of money between accounts were not included in estimating taxable sales. In addition, the auditor increased cash deposits by 90% based on testimony provided by the Taxpayer's representative. The auditor determined that the Taxpayer underreported sales based on the difference between gross sales reported to the Department and the estimated sales based on deposits from the two bank accounts and estimated underreported cash deposits.
Based on the foregoing, it is clear that the Taxpayer failed to keep adequate and complete records in order for the Department to substantiate the Taxpayer's sales tax liability. I find that the auditor used the best information available to estimate the tax liability based on deposits from the two bank accounts and testimony by the Taxpayer's representative regarding cash sales.
Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed prima facie correct. The burden is on the 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 instance.
Sales Agreement
The sales agreement held taxable in the audit is for the sale of all fixtures, furnishings and equipment from a restaurant. The auditor assessed the tax on the unreported sale of the property based on the bank records and the sales agreement.
In this instance, the seller of the restaurant fixtures, furnishings and equipment is an officer of the corporation that is the Taxpayer. However, a review of the sales agreement clearly shows that the transaction is between two individuals and the Taxpayer is not a party to the agreement. For this reason, I find basis to remove the tax assessed on the sale of the restaurant fixtures, furnishings and equipment from the audit.
Audit Penalty
While the Taxpayer has not raised this issue, I find it necessary to address the issue.
Title 23 VAC 10-210-2032 B 3 addresses penalty on first generation audits and provides that:
Generally, penalty will be waived for first generation audits. First generation audit penalty cannot be waived if any of the following conditions exist:
a. The taxpayer has been previously notified in writing by the Department of Taxation to collect tax on sales or to pay tax on purchases, but has failed to follow instructions;
b. The taxpayer has collected the sales tax, but failed to remit it to the Department of Taxation; or
c. The taxpayer has willfully evaded reporting and remitting the tax to the Department of Taxation and indications of fraud exist.
In this instance, none of the conditions cited above exist that would warrant penalty on this first generation audit. Accordingly, the audit penalty will be waived.
Statute of Limitations
Virginia Code § 58.1-634 provides that the sales and use tax "shall be assessed within three years from the date on which such taxes became due and payable. In the case of a false or fraudulent return with intent to evade payment of the taxes imposed by this chapter, or a failure to file a return, the taxes may be assessed . . . at any time within six years from such date. The Tax Commissioner shall not examine any person's records beyond the three-year period of limitations unless he has reasonable evidence of fraud, or reasonable cause to believe that such person was required by law to file a return and failed to do so."
A review of the audit shows that the Taxpayer filed sales and use tax returns as required by the Va. Code § 58.1-634. Further, I find that no reasonable evidence of fraud has been established. Therefore, there was no justification for extending the assessment period beyond the three-year statute of limitations. Accordingly, the audit assessment will be revised to remove all tax and interest assessed for the periods prior to December 31, 2009.
CONCLUSION
The audit will be revised based on this determination. It is my understanding that the governmental authorities have returned to the Taxpayer the records that were seized during their investigation. Therefore, I will allow the Taxpayer 30 days from the date of this letter to provide documentation to the auditor sufficient to determine the actual tax liability for the audit period at issue. If the information is not provided within the time allotted, the assessment will be upheld and become due and payable.
Upon completion of the review of additional information and the Department's audit adjustments, or the expiration of the 30 days, the Taxpayer will be sent an updated bill with interest accrued to date. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. The Taxpayer should remit payment to: Virginia Department of Taxation, 600 E. Main Street, 15 Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning the payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections and regulations cited are available on at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5531200322.T