October 4, 2018
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 Virginia retail sales and use tax assessment issued for the period May 2012 through April 2015. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a wholly-owned subsidiary of ***** (the “Parent”). Through its subsidiaries, the Parent owns and operates all of its restaurants in the United States and Canada, with the exception of some of its restaurants that are either jointly owned with third parties, or are franchised entities. During the audit period, the Parent owned the ***** restaurant chain (the “Restaurant”). On July 28, 2014, the Parent sold the Restaurant and its related assets and liabilities to an unrelated third party (the “Third Party”) under the terms of the Asset and Purchase Agreement.
The auditor held the sale of the Restaurant’s assets subject to the sales tax in the Taxpayer’s audit because the sales tax was not charged to the Third Party when the sale of the assets was made. The Taxpayer contests the audit assessment for two reasons. The Taxpayer maintains that the audit assessment is not valid or timely issued to the Taxpayer. Second, if the assessment is determined to be valid and timely filed, the Taxpayer maintains that the occasional sale exemption applies to the sale of the Restaurant’s assets to the Third Party, and the portion of the assessment related to the sale should be removed from the audit.
DETERMINATION
Audit Assessment
Virginia Code § 58.1-634 provides that:
The taxes imposed by this chapter 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, or a proceeding in court for the collection of such taxes may be begun without assessment, 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.
Relying on Virginia Code § 58.1-634, the Taxpayer contends that the audit assessment is neither valid nor timely issued and that the tax liability should be abated. In this instance, the Taxpayer and the Department entered into a waiver agreement that extended the time limitation in which the Department was required to finalize the audit and issue a Notice of Assessment to the Taxpayer. The waiver extended the limitations period for assessment to October 31, 2016. The Taxpayer provides that it received an audit letter dated October 4, 2016 advising that a Notice of Assessment was forthcoming. The Taxpayer states that it did not receive a Notice of Assessment prior to October 31, 2016. The Taxpayer further states that a screenshot of the audit assessment was emailed to the Taxpayer incorrectly stating the audit period.
Statute of Limitations
The Department’s records indicate that the Taxpayer’s audit liability was assessed and a Notice of Assessment was generated on October 11, 2016. This is within the three year limitations period provided in the cited statute. The screen shot of the Notice of Assessment provided to the Taxpayer verifies the timely assessment of the audit liability.
In regard to timely issuance of a Notice of Assessment, the decision rendered in Circuit City Stores, Inc. v. Commonwealth of Virginia, Department of Taxation, 65 Va. Cir. 260 (2004) is determinative. The court decided that the burden of proving that the notice of assessment was delivered rests upon the Department. The court further ruled that the Department must show at the least, that it delivered, by some means, the notice.
In response to the court’s decision, the Department developed a Certificate of Mailing for Notice of Assessment form to document the delivery of assessments for mailing. Based upon the Certificate of Mailing for Notice of Assessment signed by the Postmaster at the United States Postal Service (the “USPS”) Capitol Station location in Richmond, Virginia, the Taxpayer’s Notice of Assessment was delivered to the USPS by the Department for mailing on October 11, 2016, well before the expiration of the waiver agreement. Based on the Certificate of Mailing, I find that the Department met its burden of proof and the Notice of Assessment was timely issued to the Taxpayer.
Validity of Assessment
During the audit, the Taxpayer presented the auditor with documentation representing tax overpayments made by the Taxpayer on its monthly sales tax returns in regard to certain fixed assets. The Taxpayer requested that the overpayments be applied to offset the audit liability. Due to a change in the Virginia retail sales and use tax rate effective July 1, 2013, separate assessments are required for audit periods prior to July 2013 and for periods on and after July 2013. In this instance, separate assessments were required for the period May 2012 through June 2013 and July 2013 through April 2015 which comprise the Taxpayer’s overall audit period. The overpayments were credited to the May 2012 through June 2013 period, resulting in a zero tax liability for that portion of the audit period. As such, no assessment, nor a Notice of Assessment, was generated for the period May 2012 through June 2013.
An assessment and a Notice of Assessment were generated for the July 2013 through April 2015 period because there was an outstanding liability resulting from the audit for that period. The Taxpayer is mistaken in its belief that the screenshot version of the notice incorrectly stated the taxable period of the audit. The notice correctly stated the portion of the audit period for which an audit liability exists. The Taxpayer should note that the notice accurately reflects the tax liability stated in the audit report issued to the Taxpayer.
Occasional Exemption - Restaurant Sale
Based upon the information presented, I find that the audit assessment related to the sale of the Restaurant’s assets and issued to the Taxpayer is incorrect because the Taxpayer is not a party to the sales transaction that caused the assets to be sold. As stated above, the Restaurant was sold by the Parent during the audit period. The Parent is listed as the seller in the Agreement that authorized the sale of the Restaurant. The sale of the Restaurant is reported on the Parent’s federal income tax return and is classified as discontinued operations on the Parent’s consolidated statements of earnings and cash flows. The decision making power regarding the Restaurant’s direction and expenditures rested with the Parent, and the Parent made the decision to sell the Restaurant to the Third Party. Based upon the specific facts in this case and a plain reading of the Agreement, the Taxpayer is not a party to the Agreement and did not authorize the sale. Therefore, the Taxpayer is not subject to the sales tax liability attributable to the sale of the Restaurant’s assets. Accordingly, the assessment related to the sale of the Restaurant assets will be abated in full as it was not assessed to the proper entity.
CONCLUSION
The audit will be returned to the appropriate field audit staff, and the audit will be revised in accordance with this determination. The remaining portion of the assessment was properly issued and is not at issue in this appeal. A revised bill, with interest accrued to date, will be issued to the Taxpayer as warranted. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit payment to: Virginia Department of Taxation, 600 E. Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia section cited is 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 about this determination, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1115P