August 18, 2015
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request an adjustment of the Department's assessments and an abatement of the penalty and interest charges included in the retail sales and use tax assessments issued to the ***** (the "Taxpayer") for the periods October 2010 through April 2014 and October 2010 through March 2014 respectively. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates a grocery store and a café within the grocery store. The Department's audits disclosed that the Taxpayer's records were incomplete and that the Taxpayer accounted for all grocery and café sales through the same register. The Taxpayer stated that it did not have register tapes for any of the initial sample months of April through June 2013. The Taxpayer did provide end of month sales register reports for March and April 2014. The Taxpayer also states that it provided register tapes for the months of February and March 2013.
The Taxpayer contends that the Department's audit assessment is overstated based on the fact that the Taxpayer's operations were closed for a period of time due to flooding of the store and a vehicle crashing into the store. In one instance, freezer equipment was destroyed, and in both instances inventory was lost as were all previous sales records. The Taxpayer seeks an adjustment of the Department's assessments and a waiver of the penalty and interest.
DETERMINATION
Estimate of Sales
Virginia Code § 58.1-633 states that every dealer required to make a return and collect the 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 lack of documentation, the Department's auditor used the best available information from the Taxpayer and the accountant. The Taxpayer did not have any sales journals or reports to support gross, exempt and taxable sales. The Taxpayer did not have register tapes and café sales could not be distinguished from the grocery store sales. Based on the lack of records and the audit methodology applied in this case, it was determined that the Taxpayer underreported its sales to the Department. While the Taxpayer claims that the audit assessment is overstated, the Taxpayer has not provided any additional documentation or evidence to prove that the method applied based on estimates is unreasonable.
Issues
The Taxpayer appeals the Department's assessment based on the following issues:
Issue #1: January 2013, store flooded, closed for six weeks. All sales records and inventory destroyed, auditor calculated unreported sales for this period.
Response: The auditor reviewed insurance documents supporting the Taxpayer's claim of water damage in January 2013. The auditor, however, found credit card deposits that showed the grocery store was open for 27 days before the flooding. Since the Taxpayer did not report any sales for January 2013, the auditor's analysis was based on the best information available, estimating unreported sales of *****.
Issue #2: During the renovation period, February and March 2013, the Taxpayer states that it used a small register which did not provide month-end totals. The Taxpayer states that it acquired those tapes due to great expense and provided those tapes to the auditor showing actual receipts.
Response: The Department's auditor has no record of receiving the February and March 2013 tapes. The auditor states that he did receive detailed register tapes for September 2013, which were used to support that the Taxpayer was properly collecting tax at the reduced food tax rate for the majority of the sales. Without the September 2013 tapes, the auditor would not have documentation to show whether the Taxpayer was collecting tax at the general rate or the reduced food tax rate.
Issue #3: In February 2013, a customer drove his car through the wall of the store, destroying freezers and frozen goods inventory. The Taxpayer states that this incident also caused monetary stress.
Response: The auditor's review of the February 2013 credit card statements showed that the Taxpayer was open for 10 days. Accordingly, based on the auditor's analysis, an estimate for underreported sales was calculated.
Issue #4: The auditors estimate produced underreported sales at a very high level. The Taxpayer states that employees do not know how to operate the register and invariably ring up the same sale twice, once as a cash transaction and if the customer wants to pay with a credit card, the same items are rung up again without voiding the first transaction, showing incorrect higher sales and taxes due.
Response: For March and April 2014, the auditor calculated underreported sales based on actual end of month register tapes. For the months of July 2013 through February 2014, estimated underreported sales were based on the averaged underreported sales for March and April 2014. For the months prior to July 2013, underreported sales were based on actual credit card deposits for April through June 2013, with a 20% estimate for cash not deposited. Based on a sample review of actual register tapes for March and April 2014, the cash percentage was actually 30 to 40%. The auditor did not use that high rate because the auditor accepted the Taxpayer's claims that employees may have mistakenly rung the sales as cash. Unfortunately, the auditor does not have any documentation to support the Taxpayer's claims or determine what sales were rung up twice without voiding. Based on a sample of the September 2013 detailed register tapes, the auditor found no evidence of a duplication of sales.
Issue #5: The Taxpayer states that the auditor estimated the food and general merchandise sales. The Taxpayer states that as an ethnic store, the majority of sales are food sales with very little general merchandise sales.
Response: Based on the analysis of the end of day register tapes for March and April 2014, the auditor determined sales taxed at the reduced food tax rate totaled approximately 80% and sales taxed at the general rate were 20%. These percentages were used to estimate the breakdown of underreported food and general sales for the months in the audit period.
Issue #6: The Taxpayer states that it was able to locate two additional months of register tapes for the auditor’s review.
Response: The auditor states that the months of March and April 2014 were provided. The amounts shown on the tapes were accepted as accurate; however, the resulting analysis based on these tapes reflected underreported taxable 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 case. Accordingly, I find that the Department's methodology used to determine the audit liability is acceptable.
Compliance Penalty
Virginia Code § 58.1-635 mandates the application of penalty to tax deficiencies. Title 23 of the Virginia Administrative Code 10-210-2032 generally provides that a penalty will not be assessed in first generation audits. However, the regulation sets out an exception to this rule that when an audit by the Department discloses that the sales tax has been collected but not remitted, the penalty will apply.
In this instance, the auditor's computation of the compliance penalty for tax collected but not remitted was based on an estimation of the Taxpayer's sales rather than actual sales reflecting taxes collected but not remitted. An estimate, while authorized to determine a tax liability, does not provide a basis of proof that the Taxpayer actually collected the sales tax and failed to remit such tax to the Department. Accordingly, I find cause for a waiver of the assessed compliance penalty.
Interest
Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it simply represents a fee for the use of money over a period of time. In this case, the Taxpayer had the use of the money that was properly due the Commonwealth.
Therefore, I find no basis to waive the interest assessed as a result of the Department's audit.
Financial Hardship
The Taxpayer indicates that the assessment will cause a financial burden. The Taxpayer, however, has not submitted the required financial statements that reflect or verify an inability to pay the assessment. The Taxpayer must present evidence of doubtful collectability to support a claim of financial hardship. Without such information, the Department is unable to consider an offer in compromise based on doubtful collectability.
Virginia Code § 58.1-105 B authorizes the Tax Commissioner to compromise and settle a tax liability of doubtful collectability. If the Taxpayer wishes to pursue a settlement based on a claim of doubtful collectability, please complete and return the enclosed Offer in Compromise Business Request For Settlement and Financial Information Statement For Businesses forms. These forms will allow the Department to review and analyze the Taxpayer's financial situation. Upon completion of the Department's review, a response will be issued based upon the information provided. The completed forms should be sent to: Tax Commissioner, Virginia Department of Taxation, Attn: CICT, P.O. Box 2475, Richmond, VA 23218-2475. You may also fax the forms to (804) 786-2645. If the Department does not receive the completed forms within 30 days of the date of this letter, it will be presumed that the Taxpayer will not submit an offer in compromise based upon doubtful collectability.
The Code of Virginia sections and regulations 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 matter, please contact ***** of the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5810123194.Q