Rulings of the Tax Commissioner

August 24, 2023

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

Dear *****:

This will respond to your letter in which you seek to settle the retail sales and use tax assessment issued to *****. (the “Taxpayer”) for the period January 2015 through December 2020.

FACTS

The Taxpayer is an electrical contractor with its headquarters and operations in Virginia. Under a second generation audit, the Department found that the Taxpayer did not pay tax on various transactions and issued an assessment for the unpaid tax, penalty, and interest. The Taxpayer submits an appeal, in which it agrees with the exceptions listed in the audit but disputes the audit methodology, requests a waiver of the assessed penalty, and offers to settle the outstanding liability for a reduced amount.

ANALYSIS

Audit Methodology

The Department’s audit utilized sampling to determine the amount of assessed liability. Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial either to the auditor or the client. When sampling techniques are properly applied, the final results are usually within a narrow percentage range of the actual amount that would have been determined by a detailed audit.

The purpose of the audit sample is to determine a factor for errors within a representative select period. Once the error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid. Every effort is made to select objectively the sample periods that are representative of the period being audited.

The Taxpayer argues that the sampling technique utilized is improper in this instance because ***** (the “Vendor”) accounted for the vast majority of the error factor. The Taxpayer requests that the transactions with Vendor be removed from the audit sample because they do not typically purchase from Vendor. 

In order for a transaction to be removed from the audit sample and the extrapolation, the Taxpayer must establish that the transaction is an isolated event and not a part of its normal operations. See Public Document (P.D.) 99-35 (3/29/1999), P.D. 07-44 (4/26/2007), and P.D. 18-63 (5/2/2018). Based upon the information provided, the transaction at issue is not of the type that can be removed from the audit sample because the Taxpayer regularly makes similar purchases from other vendors as a part of its business operations. The mere fact that transactions were listed from one vendor with which the Taxpayer does not normally do business is not sufficient grounds to remove the transactions from the audit sample. By its nature as a sample, the audit may not have included purchases from other infrequent vendors on which the tax was neither paid nor accrued.

Penalty

Virginia Code § 58.1-635 mandates the application of penalty to tax deficiencies. Title 23 of the Virginia Administrative Code (VAC) 10-210-2032 provides that the application of penalty to audit deficiencies is mandatory and its application is generally based on the percentage of compliance determined by computing the dealer’s compliance ratio. In second generation audits, the penalty will generally be applied unless the taxpayer’s compliance ratios meet or exceed 85% for sales tax and 60% for use tax. 

The Taxpayer provided letters from three vendors stating the total amount of purchases and sales tax paid for periods within the audit period. However, the letters provided are not sufficient supporting documentation for purposes of calculating the alternative method compliance ratio. The Taxpayer must actually compute the alternative method compliance ratio and provide copies of the vendor invoices for each transaction to verify the amount of Virginia sales tax paid. The documentation provided is not sufficient to determine if the alternative method compliance ratio would reduce the compliance penalty in this case. 

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 P.D. 17-156 (9/5/2017). Taxpayers with underpaid liability 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 201 and prior. Since the audit period includes months prior to April 2017, the amnesty penalty must be assessed. 

Offer in Compromise

Virginia Code § 58.1-105 grants the Tax Commissioner the authority to accept an offer in compromise and to settle claims of disputed or doubtful liability, or doubtful collectibility and to waive penalty for reasonable cause. The Taxpayer agrees with the exceptions found in the audit and disputes only the audit methodology of sampling used to extrapolate the error over the entire audit period. As already discussed, sampling is a legitimate and necessary tool used to estimate a tax deficiency. Therefore, the Taxpayer has not provided sufficient evidence of doubtful liability. 

CONCLUSION

After review of the above authorities and documentation provided by the Taxpayer, 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 Code of Virginia sections, regulation, and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at (804) *****, or via email at *****@tax.virginia.gov.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/4169-C