Rulings of the Tax Commissioner

April 5, 2022

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

Dear *****:

This is in response to your letter in which you protest the retail sales and use tax assessment issued to ***** (the “Taxpayer”) as a result of an audit for the period from April 2015 through January 2019. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer, a restaurant located in Virginia was audited by the Department resulting in an assessment for unreported cash sales and uncollected sale tax. The assessment was based on estimations because the Taxpayer failed to maintain sufficient sales records during the audit period. The Taxpayer appeals, contending the audit overstated the Taxpayer’s cash sales, and includes exempt sales. 

DETERMINATION

Unreported Cash Sales 

The estimated assessment was issued to the Taxpayer in accordance with Virginia Code § 58.1-618. Pursuant the statute, the Department is authorized to use the best information available to reconstruct a dealer’s sales or purchases to determine whether a tax liability exists. In this instance, the Taxpayer failed to provide sufficient records during the performance of the audit for review by the auditor. Accordingly, the auditor used the best information available to estimate the Taxpayer’s liability. 

In Public Document P.D. 98-4 (1/4/1998), P.D. 10-143 (7/26/2010), and (P.D.) 16-75 (5/11/2016), dealers failed to provide records during the audits to determine the taxpayers sales and use tax liabilities. In each instance, the dealers did not provide evidence to refute the estimated assessments. Specifically, in P.D. 10-143, the Department found it permissible for an auditor to use credit card sales as reported on the dealer’s bank statements to calculate underreported cash sales, as is the situation in the present case. 

Exemption Certificates

The Taxpayer argues the it made sales to tax exempt customers. Virginia Code § 58.1-623 provides that all sales or leases of tangible personal property are presumed to be subject to tax until the contrary is established. Title 23 of the Virginia Administrative Code (VAC) 10-210-280 A interprets Virginia Code § 58.1-623 and states:

All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a Certificate of Exemption indicating that the property is exempt under the law.

The Department has previously ruled in P.D. 98-29 (2/20/1998) that the absence of an exemption certificate at the time of a sales transaction indicates that the certificate was never accepted in good faith. Thus, exemption certificates obtained after the start of an audit cannot be accepted “in good faith” and are subject to greater scrutiny by the Department. Accordingly, such certificates are acceptable only if the Department is able to confirm that a customer's use of the certificate was valid and proper for a specific transaction identified during the audit.

Here, the Taxpayer has failed to provide valid certificates of exemption from its customers during the audit and has not provided exemption certificates during the pending appeal. The absence of the certificates indicates that they were never accepted in good faith. 

CONCLUSION

The Taxpayer has not provided the records as addressed in its appeal. Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed prima facie correct. The Taxpayer has the burden of proving that the assessment is incorrect. In this instance, the Taxpayer has not provided records or evidence to refute the assessment, and therefore, has not met its burden of proof. Furthermore, Virginia Code § 58.1-1826 precludes a court from granting relief to taxpayers seeking correction of erroneous state tax assessments in cases in which the erroneous assessment is attributable to the taxpayers’ willful failure or refusal to provide the Department with necessary information as required by law.

Based on the foregoing and absent evidence to the contrary, the audit methodology was reasonable with regard to the calculation of cash sales and that the exempt sales were correctly held taxable in the audit. Accordingly, I find no basis to revise the audit. The Taxpayer will receive an updated bill with interest accrued to date. No additional interest will accrue provided the outstanding assessment is paid within 60 days of the date of the bill. 

The Code of Virginia sections, regulation, and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department’s website. 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/2041.A