Document Number
17-47
Tax Type
Consumer Use Tax
Description
The burden of proving that the assessment is incorrect is upon the Taxpayer
Topic
Records/Returns/Payments
Date Issued
04-06-2017

April 6, 2017

Re:    § 58.1-1821 Application:  Consumer Use Tax

Dear *****:

This will reply to your letter in which you seek the correction of a consumer use tax assessment issued to ***** (the “Taxpayer”) for the period March 2009 through February 2015.  I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a real property construction contractor that was audited by the Department.  Consumer use taxes were assessed on various expense and fixed asset purchases made by the Taxpayer during the period audited.  In accordance with Va. Code § 58.1-634, the audit period was extended from three years to six years because the auditor determined that the Taxpayer was required to file consumer use tax returns during the three-year audit period, but failed to do so.

The Taxpayer's records did not contain adequate information for the auditor to verify whether sales or use taxes were paid on the purchase transactions that occurred during the audit period.  The auditor reviewed the Taxpayer's general ledger and accounts payable records and included in the audit transactions that were identified as potential purchases of tangible personal property or taxable services.  The Taxpayer later provided some invoices for review by the auditor, and the audit was revised based on the information provided.

The Taxpayer states the revised liability still contains purchase transactions on which the sales tax was paid, and many of the vendors that remain in the audit charged the sales and use tax.  The Taxpayer contends that multiple transactions from a specific vendor should be removed from the audit if a review of one or more purchase invoices demonstrates that the vendor charged the Taxpayer sales or use tax.  The Taxpayer has submitted a spreadsheet and some backup documentation to support a reduction in the audit liability.

DETERMINATION

Taxpayer Records

Virginia Code § 58.1-633 A states:

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.

Title 23 of the Virginia Administrative Code (VAC) 10-210-470, which interprets Va. Code § 58.1-633, states “[e]very person who is liable for the collection of sales tax or remittance of use tax or both is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability.”  The regulation provides examples of the types of records that must be maintained by taxpayers.  Records for all tangible personal property used or consumed in the conduct of a business must be maintained.  In addition, records must be kept of all merchandise purchased including bills of lading, invoices, purchase orders and other evidence to substantiate each purchase.

In this case, the auditor did not have suitable purchase records to review the details of specific transactions and to verify the Taxpayer's payment of sales and use taxes.  As a result, the auditor reviewed the Taxpayer's general ledger accounting records to conduct the audit. This review allowed the auditor to identify purchase transactions that occurred during the audit period.  However, payment of the tax could not be verified for many of the purchase transactions.

I understand that the auditor provided the Taxpayer with a copy of Public Document (P.D.) 08-29 (4/2/08).  P.D. 08-29 addresses the Department's recordkeeping policy and is applicable to the Taxpayer's case.  P.D. 08-29 states that the presentation of invoices demonstrating that the tax was paid on certain transactions with a specific vendor is not sufficient evidence to remove multiple transactions with the same vendor from an audit.  The assumption that a vendor that charges the tax on some invoices charges the tax on all invoices to the same customer is not a valid basis to remove all the transactions with that vendor from an audit.  The Department reviews transactions based on the documentation presented for each individual transaction.  This is consistent with longstanding and established policy that the sales and use tax is a transactional tax, and the determination as to the taxation of a specific transaction is based on the underlying document(s) that supports the transaction.  Thus, documentation must be provided to prove that the tax was paid on all audit transactions with a vendor.

Complete Appeal

Virginia Code § 58.1-1821 provides taxpayers the right to appeal tax assessments issued by the Department if the taxpayer believes that the assessment is incorrect.  Taxpayers are required to file a “complete appeal,” which is defined in Title 23 VAC 10-20-165 A as “an administrative appeal containing sufficient information, as prescribed in subsection D of this section, so that the grounds upon which the taxpayer relies in contesting an assessment are fully set forth to allow the Tax Commissioner to make an informed final determination.”  Title 23 VAC 10-20-165 D provides that all essential documentation that supports the appeal must be furnished to the Department.

The Taxpayer has provided some documentation with the appeal.  The documentation does not support the reduction in the audit liability claimed by the Taxpayer.  However, the Taxpayer furnished a limited number of invoices that support the removal from the audit of some the purchase exceptions.  The audit liability will be revised accordingly.  Based on the statutory recordkeeping requirements and the other authorities cited in this determination, there is no basis for further adjustments to the Taxpayer's audit liability.

Extension of Audit Period

Virginia Code § 58.1-634 states that the Tax Commissioner may examine a person's records beyond the three-year period of limitations when he has reasonable cause to believe that such person was required by law to file a return and failed to do so.  In such instances, the taxes may be assessed at any time within six years from the date that such taxes became due and payable.  The Taxpayer was not registered to file consumer use tax returns with the Department, and the auditor determined that returns should have been filed during the initial three-year audit period.  Once it is established that a taxpayer failed to file a return for any month in which a return is due, the audit period may be extended to six years.  See P.D. 96-86 (05/9/96).  Therefore, the auditor properly extended the audit period to six years.

CONCLUSION

Virginia Code § 58.1-205 deems assessments issued by the Department to be prima facie correct.  This means that the burden of proving that the assessment is incorrect is upon the Taxpayer.  The provision of adequate records and other documentation is necessary to prove that a sales and use tax audit assessment is incorrect, either during the audit or with the filing of an administrative appeal.

In accordance with this determination, the audit will be returned to the appropriate field audit staff for revision.  The audit staff will adjust the audit assessments based on the documentation provided with the Taxpayer's appeal.  A revised copy of the audit report and updated bills will be sent to the Taxpayer.  The bills 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 Laws, Rules and Decisions section of the Department's web site.  If you have any questions concerning this determination, please contact  ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

 

Craig M. Burns
Tax Commissioner

 

 

AR/644.S                                                                         

Rulings of the Tax Commissioner

Last Updated 10/02/2017 07:20