October 17, 2018
Re: § 58.1-1821 Application: Retail Sales and Use Tax and
Tobacco Products Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you seek correction of the retail sales tax assessment for the period September 2013 through January 2014 and the tobacco products tax assessment issued on May 15, 2014. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a retailer of cigarettes and other tobacco products. The Department utilizes a compliance program that verifies retail sales and use tax compliance regarding cigarettes purchased for resale and sales of cigarettes by a retail or wholesale dealer. As a result of this compliance program, the Taxpayer was issued an assessment for tax, penalty and interest on untaxed cigarettes purchased from ***** (the “Distributor”). The assessment is based on sales information provided by the Distributor identifying the Taxpayer’s purchases of cigarettes exempt of the tax for resale. In addition, as a result of an on-site inspection, an assessment was issued for the tobacco products tax, penalty and interest on untaxed tobacco products.
It is the Department’s position that the cigarettes purchased by the Taxpayer for resale would have been sold to the Taxpayer’s customers and, therefore, the sales tax should have been collected and remitted to the Department on such sales. Based on the sales information provided by the Distributor, it was determined that the Taxpayer underreported sales of cigarettes, by the amount of the cigarettes purchased from the Distributor for resale, when compared to sales of cigarettes reported by the Taxpayer to the Department. On April 28, 2014, the Department sent the Taxpayer a summary of the findings and the proposed tax liability. The Taxpayer was allowed 14 days to provide documentation to substantiate that the Taxpayer’s purchases from the Distributor qualified for the resale exemption or that the Taxpayer collected and remitted the sales tax on the sale of those purchases. The Taxpayer failed to respond to the Department’s request for documentation within the allotted time and the assessment was issued.
The Taxpayer contests the sales tax assessment and claims that it did not purchase cigarettes from the Distributor and that the Department has no evidence to support the assessment other than the Distributor’s claims. The Taxpayer claims fraudulent activity by the Distributor regarding such cigarettes. The Taxpayer maintains that it purchases cigarettes from other distributors and the purchases, sales receipts and credit transaction records in connection with such purchases are consistent with its reported sales to the Department. The Taxpayer argues that had such cigarettes been sold outside Virginia the sales would not be subject to Virginia sales tax. The Taxpayer requests that the assessment be abated.
DETERMINATION
Purchases/Sales
The resale exemption provided under the Virginia retail sales and use tax is found in the definition of “retail sale" in Virginia Code § 58.1-602. This code section excludes a sale for resale from the definition of a “retail sale,” which is defined as “a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter.”
Virginia Code § 58.1-623 sets forth the requirements for the proper use of exemption certificates and, in section A, provides that “[a]ll sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.”
Title 23 of the Virginia Administrative Code (VAC) 10-210-280 provides further explanation of the proper use of exemption certificates. Subsection A states that a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.
Virginia Code § 58.1-633 A provides 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 VAC 10-210-470 as follows:
Every person who is liable for 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. Such records must include… A daily record of all cash and credit sales, including sales under any type of financing or installment plan in use. A record of the amount of all merchandise purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase. . .A record of all deductions and exemptions claimed in filing sales or use tax returns., including exemption and resale certificates, returned or repossessed goods, and bad debts. . .A record of all tangible property used or consumed in the conduct of the business. . .A true and complete inventory of the stock on hand and its value, taken at least once each year. Records must be open for inspection and examination at all reasonable hours of the business day by the Department of Taxation.
When a dealer fails to maintain adequate records, the Department is authorized by Virginia 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.
In this instance, I would point out that the assessment is not for the month of January 2014 but for the period September 2013 through January 2014 as set out in the Department’s June 11, 2014 letter sent to the Taxpayer. The documentation provided by the Distributor shows that the Taxpayer purchased cigarettes exempt of the tax for resale. A comparison of the cigarette sales provided by the Distributors to the Taxpayer’s sales reported to the Department shows that the Taxpayer made cigarette purchases totaling ***** exempt of the tax that are not supported by any resale exemption or tax reporting documentation.
The assessment is calculated based on the sales documentation provided by the Distributors as this was the best information available. The auditor multiplied the cartons of cigarettes purchased by an estimated selling price of $50.00 per carton to estimate the audit liability. A notice was sent to the Taxpayer on April 28, 2014 of the Department’s findings regarding the Taxpayer’s exempt purchases of cigarettes and a request for documentation to substantiate the exempt resale of such cigarettes. While the Taxpayer denies that it purchased cigarettes from the Distributor, the sales invoices and resale exemption certificate signed by the Taxpayer meets the record keeping requirements set out in the above cited authorities and show that the Taxpayer purchased the contested cigarettes exempt of the tax for resale from the Distributor. Lacking evidence to support the Taxpayer’s claim of fraudulent activity by the Distributor, I find that the audit assessment is correct.
The Taxpayer is correct that had the cigarettes been sold outside Virginia they would be exempt from the Virginia retail sales tax pursuant to the interstate commerce regulation in Title 23 VAC 10-210-780 A. However, the Taxpayer has not provided any documentation to support that, in this instance, the purchased cigarettes at issue were sold outside of Virginia.
Virginia Code § 58.1-205 sets out that any assessment of a tax by the Department is deemed prima facie correct. This means that the burden of proving that the assessment is erroneous is upon the Taxpayer. Based on the foregoing, the Taxpayer has not met this burden.
Tobacco Products Tax
As a result of an inspection at the Taxpayer’s location, the Taxpayer was found to be in possession of untaxed tobacco products. When questioned, the Taxpayer stated that it purchased the tobacco products from a distributor outside the United States but did not have documentation to support the purchase. Because the Taxpayer failed to keep any records of the purchase, it cannot be verified that the tobacco products were purchased from a registered distributor. As such, the Department issued an assessment for the tobacco products tax on the untaxed tobacco products pursuant to Virginia Code §§ 58.1-1021 02 and 58.1-1021 04.1
Virginia Code § 58.1-1021.02 provides that “[i]n addition to all other taxes now imposed by law, there is hereby imposed a tax upon the privilege of selling or dealing in tobacco products in the Commonwealth by any person engaged in business as a distributor.”
Virginia Code § 58.1-1021.01 defines “Distributor as:
1) any person engaged in the business of selling tobacco products in the Commonwealth who brings, or causes to be brought, into the Commonwealth from outside the Commonwealth any tobacco products for sale in the Commonwealth; 2) any person who makes, manufactures, fabricates, or stores tobacco products in the Commonwealth for sale in the Commonwealth; 3) any person engaged in the business of selling tobacco products outside the Commonwealth who ships or transports tobacco products to any person in the business of selling tobacco products in the Commonwealth; or 4) any retail dealer in possession of untaxed tobacco products in the Commonwealth. [Emphasis added].
Virginia Code § 58.1-1021 provides that:
It shall be the duty of every person storing, using or otherwise consuming in this Commonwealth cigarettes subject to the provisions of this article to keep and preserve all invoices, books, papers, cancelled checks, or other memoranda touching the purchase, sale, exchange, receipt, ownership, storage, use or other consumption of such cigarettes for a period of three years. All such invoices, books, papers, cancelled checks, or other memoranda shall be subject to audit and inspection by any duly authorized representative of the Department at any reasonable time. . . .
The Taxpayer is deemed a distributor because it meets criteria 4 above. In this instance, the Taxpayer was in possession of untaxed tobacco products and could not show that the tobacco products were purchased from a registered distributor. Accordingly, the tobacco products tax assessment is correct.
Penalty
Virginia Code § 58.1-635 mandates the application of penalty to tax deficiencies and provides that:
When any dealer fails to make any return and pay the full amount of the tax required by this chapter, there shall be imposed, in addition to other penalties provided herein, a specific penalty to be added to the tax in the amount of six percent if the failure is for not more than one month, with an additional six percent for each additional month, or fraction thereof, during which the failure continues, not to exceed thirty percent in the aggregate . . . If such failure is due to providential or other good cause shown to the satisfaction of the Tax Commissioner, such return with or without remittance may be accepted exclusive of penalties. [Emphasis added.]
As the Taxpayer has not shown good cause for its failure to properly comply with its tax compliance responsibilities as a retailer of cigarettes, I find no basis to remove the assessed 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.
CONCLUSION
The assessment is upheld as issued. The Department’s records show that the Taxpayer has paid ***** that was applied to the uncontested bill *****. Accrued penalty and interest remain outstanding on that bill. Updated bills, with interest accrued to date, will be sent to the Taxpayer. The outstanding balances should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessments, you may contact ***** at *****.
The Code of Virginia sections and regulations cited 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 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/561.T