August 5, 2024
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ***** :
This will respond to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the “Taxpayer”) for the period April 2013 through March 2019. I apologize for the delay in responding to your request.
FACTS
The Taxpayer is a communications contractor, providing fiber optic cable network installation and repair services in Virginia. The Taxpayer had a use tax account with the Department but did not file returns for periods at issue. The Taxpayer did not have a sales tax account prior to the audit. Under a first-generation audit, the 2015 calendar year was selected as an average year based on the Taxpayer’s expense purchases and material purchases less payroll. The Taxpayer was unable to provide sufficient records to show that it properly paid sales or use tax on numerous purchases for the sample period. Purchase invoices were listed as exceptions where tax was not charged, or the invoice was not provided.
Because use tax liability was found in the initial three-year period reviewed, the audit period was extended to include additional proceeding periods and brought forward to 2019. The Taxpayer signed a waiver of time limitations agreement for the entire extended audit period so the audit work could be completed. The exceptions found during the sample period were used to calculate an error factor, which was applied to the total expenses by month to determine the Taxpayer’s liability. The Department issued an assessment for the unpaid tax liability, penalty, and interest. The Taxpayer filed an application for correction, contending that the Department’s methodology in calculating its tax liability overstated the liability, and alleging it had found additional documentation that was not available when the audit was conducted.
DETERMINATION
Methodology
The Taxpayer asserts that the methodology used to calculate the tax deficiency is inaccurate because enough information is available to calculate a lower error factor for the 2018 calendar year. The Taxpayer believes the lower error factor should be applied to the entire audit period rather than the 2015 error factor.
Sampling is an audit technique of significant value that is widely used in both the public and private sectors. The Department uses sampling in sales and use tax audits where a detailed audit would be administratively burdensome to the taxpayer or the Commonwealth. When sampling techniques are properly applied, the final results should be 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.
For this audit, the sample was selected because it represented an average range within the initial audit period. The auditor then conducted a detailed review of the sample period to determine the error factor.
The Taxpayer believes the audit liability is overstated and seeks to replace the selected sample period with a period that was unilaterally selected after errors were found in the initial audit period. After reviewing the audit report and the information presented, the auditor’s use of the one-year sample period was proper. Although it contends that the audit sample is not representative of the entire audit period, the Taxpayer has not demonstrated that the sampling methodology was flawed or unrepresentative of the audit period.
Additional Documentation
The Taxpayer asserts that the liability should be reduced because it discovered additional invoices showing tax was paid on certain transactions included on the audit’s exceptions lists. It also now claims to have evidence indicating that several errors were made in calculating the sample amount. The additional documentation provided on appeal was forwarded to the auditor for review. Based on the auditor’s evaluation, the audit should be adjusted to reflect the additional information provided.
Based on the audit report and information presented, the Department finds no basis to invalidate the sample and extrapolation. Accordingly, the selection of the 2015 calendar year and the resulting error factor is upheld.
The case, however, will be returned to the audit staff to make adjustments based on the new information provided during the application for correction. The auditor may also request additional information from the Taxpayer, if needed, to verify the proper treatment of a transaction. For requests of additional information, the Taxpayer and audit staff will decide on a mutually agreed upon time to provide requested records. Once the auditor’s review is complete, an updated audit report, a written explanation of any changes or lack thereof, and an updated bill with accrued interest to date will be mailed to the Taxpayer. If the Taxpayer continues to disagree with revised assessment, it will be given 90 days from the issuance of the revised assessment to file an application for correction pursuant to Virginia Code § 58.1-1821.
Additional information concerning retail sales and use tax audit sampling is available online at www.tax.virginia.gov in the Laws, Rules, and 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 *****, or via email at *****.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/2218.C