Rulings of the Tax Commissioner

May 1, 2019

Re:  § 58.1-1821 Application:  Retail Sales and Use Tax

Dear *****:

This is in response to your letters in which you seek correction of the retail sales tax assessment issued to ***** (the “Taxpayer”) for the period January 2012 through December 2013. I apologize for the delay in responding to your appeal. 

FACTS

The Taxpayer is a retailer of cigarettes. 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 “Distributors”). The assessment is based on sales information provided by the Distributors identifying the Taxpayer’s purchases of cigarettes exempt of the tax for resale 

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 Distributors, it was determined that the Taxpayer underreported sales of cigarettes, by the amount of the cigarettes purchased from the Distributors for resale, when compared to sales of cigarettes reported by the Taxpayer to the Department. On December 16, 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 assessment and claims that the auditor requested three months of purchase invoices and was to return within a week to conduct a review of requested information. However, the Taxpayer claims that the auditor never returned. The Taxpayer also contends that the auditor did not provide a summary of the proposed tax liability prior to the assessment being issued. The Taxpayer argues that the auditor estimated sales, which are not the Taxpayer’s actual sales.  Further, the Taxpayer claims that it sells cigarettes below the purchase price because of a rebate provided by the manufacturers, which is passed on to the Taxpayer’s customers. The Taxpayer requests the Department allow the Taxpayer the opportunity to present evidence of the Taxpayer’s actual sales.

DETERMINATION

Purchases/Sales

The resale exemption provided under the Virginia retail sales and use tax is found in Virginia Code § 58.1-602. This code section excludes a sale for resale from the definition of "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.

The documentation provided by the Distributors show 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 the cost to estimate the audit liability. The Taxpayer was given a credit of $***** against the tax liability for sales tax collected and remitted to the Department during the months covered by the assessment. While the Taxpayer denies that the Department sent a summary of findings prior to the assessment, the Department’s records show that a notice was sent to the Taxpayer on December 16, 2014 outlining 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. Further, it is my understanding that, at the time of the inspection, the auditor instructed the Taxpayer to send requested purchase information for 2012, 2013 and 2014 to the auditor via e-mail for review. However, the auditor states that the information was not received.  The Taxpayer had ample time to provide documentation to support its claims and failed to do so. Lacking evidence to support the Taxpayer’s claims, I find that the audit 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. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance 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 Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/592.T