October 3, 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 2020 through March 2023. We apologize for the delay in responding.
FACTS
Under audit, the Department found that the Taxpayer, a furniture retailer in Virginia, entered into a lease agreement with a vendor for the use of product imaging (photo) equipment but failed to remit the required tax. The equipment included various tangible personal property used to take pictures of the Taxpayer’s products for use in advertising materials. The Department’s auditor included the lease payments in its sample exceptions list used to calculate the Taxpayer’s error factor. This error factor was extrapolated over the audit period to determine the Taxpayer’s total exceptions resulting in an assessment of tax and interest. The Taxpayer paid the assessment in full and timely filed an application for correction, contending that the transactions should be removed from the extrapolation because the equipment lease was an unusual transaction for its business.
DETERMINATION
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 objectively select sample periods that are representative of the period being audited.
The Taxpayer argues that the inclusion of the equipment lease transactions was improper because it does not typically enter into transactions for the lease of photographic equipment. In order for a transaction to be removed from the audit sample and the extrapolation, a dealer 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. 13-39 (3/20/2013), P.D. 18-63 (5/2/2018), and P.D. 23-101 (8/24/2023).
In P.D. 02-103 (6/24/2002), the Department addressed a furniture manufacturer that disputed the inclusion of promotional pen purchases in the audit sample. The Department found that, while the dealer may not have normally purchased the specific advertising items at issue, it made other types of advertising purchases suggesting that the purchase of promotional advertising was not isolated in nature.
Based upon the information provided, the transactions at issue are not of the type that would be removed from the audit sample because the Taxpayer maintains various accounts for advertising expenses across various media types. By its nature as a sample, the audit may not have included purchases of advertising or promotional items on which the tax was neither paid nor accrued.
Accordingly, the assessment at issue is upheld. Because the Taxpayer has paid the disputed assessment in full, no further action is required.
The 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 ***** or *****.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/4761.Z