July 9, 2024
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letters submitted for ***** (the “Taxpayer”) in which you dispute the denial of a sales tax refund for the period of April 2016 through September 2016 and a use tax refund for the period of April 2016 through November 2016. I apologize for the delay in responding to your request.
FACTS
The Taxpayer, a manufacturer of medical devices and equipment, filed a refund claim for the taxable period at issue asserting it erroneously accrued and paid sales and use tax due to accounting errors. Along with its claim, it provided tax summary reports used to produce the original sales and use tax returns. The Taxpayer also submitted spreadsheets with a sales and use tax general ledger and corresponding trial balance along with amended returns that calculated refund amounts.
The Department reviewed the documentation provided by the Taxpayer and denied the claim on the basis that detailed, rather than summary, schedules were required in order for the claim to be supported. The Taxpayer filed an application for correction, contending that the documentation it sent with its request shows that sales and use tax was erroneously remitted.
DETERMINATION
Under Virginia Code § 58.1-633, every dealer required to file a retail sales and use tax return and pay or collect such tax must keep and preserve suitable records of the sales, leases, or purchases, as the case may be, subject to the retail sales and use tax. The dealer must also maintain such other books of account as may be necessary to determine the amount of tax due and “such other pertinent information as may be required by the Tax Commissioner.” See Virginia Code § 58.1-633 A.
This recordkeeping requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-470 which states that 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) A daily record of all cash and credit sales, including sales under any type of financing or installment plan in use;
b) A record of the amount of all merchandise purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase;
c) 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;
d) A record of all tangible property used or consumed in the conduct of the business;
e) A true and complete inventory of the stock on hand and its value, taken at least once each year.
The Department reviews the applicability of the sales and use tax based on the documentation presented for each transaction. This is consistent with longstanding and established policy that the retail sales and use tax is a transactional tax and that the determination as to the taxation of a specific transaction is based on the underlying documents that support the transaction. Thus, documentation must be provided to prove the tax was paid on each transaction with a vendor.
Because the Taxpayer indicated that it did not have any physical locations in Virginia, it filed its amended returns using Virginia Out-Of-State Dealer’s Sales and Use Tax Returns (currently Form ST-8) instead of Virginia Retail Sales and Use Tax Returns (currently Form ST-9). In addition, the Taxpayer contends that, after it was purchased by ***** (the “Parent”), its sales and use tax reporting was transitioned to the shared services division of the Parent. The shared services division utilized state tax summary reports to prepare the original sales and use tax returns. Upon review, however, it appeared that sales transactions that were sometimes reported in multiple periods in the summary reports.
To determine the correct amount of tax that should have been remitted, the Taxpayer’s general ledger was reconciled to its trial balance summary. This reconciliation revealed that the summarized amounts reported on original returns overstated the actual tax collected and remitted. The Taxpayer requested a refund for the difference between the tax liability reported on the original and the amended returns.
The Department’s auditor reviewed the documentation sent by the Taxpayer and asked for detailed schedules supporting the sample transactions that were reviewed. The Taxpayer declined and requested that the refund claims be closed so that it could file an application for correction. The documents that were sent with the application were forwarded to the auditor for review. According to the auditor, the documents were identical to those attached to the initial refund claims.
The Department has addressed the use of information included in general ledgers in a number of public documents. In general, the Department has found that general ledger balances can differ from the amount of tax required to be remitted on a sales and use tax return. Thus, the Department requests detailed documentation from taxpayers to support balances included in a general ledger.
For example, in Public Document (P.D.) 96-199 (8/19/1996), the Department increased a dealer’s liability based on discrepancies found between taxable sales accrued in general ledger balances and taxable sales reported on its sales tax returns. The dealer argued that the amount calculated on the return included a reduction for the amount of exempt sales but failed to provide detailed supporting documentation for the exempt sales.
In P.D. 05-169 (12/13/2005), a restaurant provided its general ledger as proof of the amount of tax paid for purchases of menus. The detailed documentation provided, however, did not reflect that the tax was accrued at the 4.5% rate imposed at that time. Thus, the restaurant was unable to show it had paid or accrued the proper amount of tax.
P.D. 08-113 (6/26/2008) addressed an issue where a dealer asserted that a reconciliation with its monthly accrual of tax from its general ledger indicated that it had overstated the amount of use tax remitted with its returns. Again, the dealer was unable to provide any documentation to support its contention.
Finally, in P.D. 19-85 (8/12/2019), the Department ruled that a dealer’s general ledger was insufficient to verify whether the correct amount of tax was remitted on sales made during the audit period. Because the general ledger for accruals was set up by entity, rather than by the states in which it was registered for retail sales and use tax, the dealer’s ledger failed to provide detailed information regarding Virginia sales and Virginia sales tax charged, collected, and remitted to the Department.
Pursuant to Virginia Code § 58.1-205, any assessment of tax by the Department is prima facie correct, meaning the burden of proof is upon a taxpayer to show that the assessment is in error. The Taxpayer failed to provide detailed schedules as requested by the auditor to support its contention that it erroneously remitted sales and use tax. Accordingly, the denial of the refund requests was appropriate.
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 web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/3248.B