July 27, 2021
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 retail sales and use tax assessment issued for the period May 2014 through April 2017. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer, a restaurant and bar was audited by the Department. Because records were not provided, the audit was conducted utilizing information furnished by the Department of Alcoholic Beverage Control (ABC). The auditor acquired alcohol purchase information and the Mixed Beverage Annual Review (MBAR) report filed by the Taxpayer in addition to menus and beverage pricing obtained from a related business. The auditor utilized the pricing from the Taxpayer’s second business to estimate pricing for drinks in this establishment.
The Taxpayer disputes the audit findings, contending the gross purchase markup methods do not sufficiently account for spillage, theft, mixed drinks, ending inventory, and bar prices. The Taxpayer also contests the application of fraud and amnesty penalties.
DETERMINATION
Records
Virginia Code § 58.1-633 states 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 the tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner." 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.
The Taxpayer refused to respond to correspondence or provide records to the Department or the assigned ABC agent during and after the audit. The Department’s auditor was only able to review ABC purchases, MBAR reports, and records the ABC agent seized from the Taxpayer’s other business. The auditor utilized the pricing from the Taxpayer’s similar business, also under audit, to estimate the pricing for drinks in this establishment.
The Taxpayer contends the auditor did not account for ending inventory, utilized a spillage allowance that did not sufficiently account for employee theft, utilized incorrect bar prices, and did not provide an allowance for mixed drinks. The auditor did allow for mixed drinks in the calculations, applied the standard spillage allowance, and estimated bar prices utilizing the pricing obtained from the Taxpayer’s second business, as this was the best information available to the auditor. While contending the assessment is overstated, the Taxpayer has not provided any additional records with which the auditor may adjust the calculations. Simply arguing that an estimated assessment is overstated without offering objective analysis and documentation as to the correct amount of tax is not convincing evidence that shows the factors applied in this case are unreasonable. See Public Document (P.D.) 99-28 (3/15/1999).
Electronic Deposits
The Taxpayer contends consumers generally use credit and debit cards for most business transactions. Thus, the Taxpayer argues that examining the bank statements for these transactions supports a reduction in the liability. The Taxpayer has outlined credit card deposits for the sample period, contending a simple observation of these numbers supports the contention that the liability is overstated. The Taxpayer has not, however, provided point of sale detail or z tape data to support the claim of an overstated liability.
Sample
The Taxpayer objects to the sample used to extrapolate the sales and use tax liability. The Taxpayer believes the sample period used does not accurately reflect an average month of sales and subsequently created an error factor that increased the tax liability. The Taxpayer also believes that the daily sales figures derived from the MBAR report are inherently flawed due to the fluctuations between an average day and the high and low days within the month. While the Taxpayer argues that the sample period is not representative, the Taxpayer refused to provide any information to support this contention to the auditor or the assigned ABC agent.
Fraud Penalty
Virginia Code § 58.1-635 A provides, in pertinent part
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 case of a false or fraudulent return where willful intent exists to defraud the Commonwealth of any tax due under this chapter, or in case of a willful failure to file a return with the intent to defraud the Commonwealth of any such tax, a specific penalty of fifty percent of the amount of the proper tax shall be assessed.
Virginia Code § 58.1-635 B provides that “[i]t shall be prima facie evidence of intent to defraud the Commonwealth of any tax due under this chapter when any dealer reports his gross sales, gross proceeds or cost price, as the case may be, at fifty percent or less of the actual amount.”
Title 23 of the Virginia Administrative Code 10-210-2032 B 3 provides generally that penalty will not be assessed in first generation audits. In this first audit of the Taxpayer, the auditor's application of the penalty for tax collected but not remitted was based on an estimation 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 with intent to defraud the Commonwealth, as contemplated in Virginia Code § 58.1-635 B.
Amnesty Penalty
The 2017 General Assembly enacted legislation establishing a Tax Amnesty program, spanning a 60-75 day period that was administered by the Department. The Guidelines for the Virginia Tax Amnesty Program are addressed in Public Document 17-156 (9/5/2017). The Amnesty Laws authorize the Department to administer a Virginia Tax Amnesty Program to increase and accelerate the collection of delinquent taxes. Taxpayers with delinquent returns for amnesty-eligible periods qualified for amnesty benefits. Any tax liability that was eligible for amnesty benefits but remained unpaid is subject to a 20% amnesty penalty in addition to all other penalties. The amnesty-eligible periods for ongoing field audits is the month of April 2017 and prior.
CONCLUSION
Virginia Code § 58.1-205 1 deems any tax assessment issued by the Department as prima facie correct. This means that the burden of proof is upon the Taxpayer to prove that the assessment is incorrect. The Taxpayer has not met this burden, and adjust the tax liability assessed in the audit is upheld.
With regard to the penalties, the fraud penalty will be abated. However, I find the amnesty penalty was properly applied.
In accordance with this determination, the audit will be adjusted to remove the assessed fraud penalty. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of this letter bill.
The Code of Virginia sections, regulation and public document 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 regarding this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1606L