Tax Type
Retail Sales and Use Tax
Description
Audit sampling techniques; Paving contractor
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
01-16-1986
January 16, 1986
Re: §58.1-1821 Application/Sales and Use Tax
Dear *****************
This will reply to your letter of December 2, 1985, in which you submit an application for correction of sales and use tax assessed ************* to as the result of an audit.
FACTS
******************** is engaged as a paving contractor. The taxpayer manufactures asphalt, most of which is used in its construction contracts. A small amount of the asphalt is sold to other consumers. An audit of the taxpayer produced an assessment for its failure to remit the tax on all of its purchases and its failure to collect and remit the tax on certain of its sales.
The taxpayer contests the assessment issued by the department, contending that the sample used by the department to compute untaxed sales did not accurately reflect untaxed sales during the audit period. In addition, the taxpayer contends that a large portion of the sales to which the results of the sample were applied were sales to the federal government. The taxpayer also contests certain purchases judged taxable by the department, but does not specify which purchases it feels should not be included in the audit.
DETERMINATION
As to the department's calculation of untaxed sales, it should be noted that sampling is a widely used audit technique that has proven to be of significant value. When sampling techniques are understood and properly applied, the resulting computation should fall within a very narrow percentage range of the actual amount that would be determine in full detail audit.
As the courts have consistently held that a tax assessment issued by the proper authorities is prima facie correct and valid and that the burden of proof is upon the taxpayer to prove otherwise, the taxpayer must demonstrate that the sample period used is not representative of the audit period or that it is flawed in some other manner. Because such information has not been presented, I can offer no relief from the assessment with respect to untaxed sales at this time. I would find basis for relief of a portion of the assessment, however, if the taxpayer can provide evidence to substantiate its claim that one half of its sales during the audit period were to the federal government. If this was actually the case, any sales made to the federal government will be removed from the total sales figure to which the results of the department's sample were applied.
The application of the sales and use tax to paving contractors, like the taxpayer, who produce tangible personal property both for use in their real estate construction contracts and for sale to other consumers, is set forth in Section 630-10-27 of the Virginia Retail Sales and Use Tax Regulations. This regulation specifically addresses the issue of purchases of tangible personal property by such contractors:
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- persons (producing tangible personal property primarily for their own use in real property construction contracts) who sell tangible property to consumers must register, collect, and pay the tax on the retail selling price of the tangible personal property. Such person is entitled to purchase exempt from the tax only that tangible Personal property which can be identified at the time of purchase as purchases for resale. If the person is unable to identify at the time of purchase the tangible personal property which will be resold, such person is required to pay the tax to his supplier. If at a later date, the person sells the tangible personal property at retail, the tax is collected upon the retail selling price. Such persons are not entitled to credit for the tax paid to suppliers since the transactions are separate and distinct taxable transactions. Emphasis added.
- persons (producing tangible personal property primarily for their own use in real property construction contracts) who sell tangible property to consumers must register, collect, and pay the tax on the retail selling price of the tangible personal property. Such person is entitled to purchase exempt from the tax only that tangible Personal property which can be identified at the time of purchase as purchases for resale. If the person is unable to identify at the time of purchase the tangible personal property which will be resold, such person is required to pay the tax to his supplier. If at a later date, the person sells the tangible personal property at retail, the tax is collected upon the retail selling price. Such persons are not entitled to credit for the tax paid to suppliers since the transactions are separate and distinct taxable transactions. Emphasis added.
Section 58.1-610 of the Code of Virginia provides that persons acting as contractors are subject to the tax as the ultimate users or consumers of tangible personal property furnished in connection with real estate construction contracts. Accordingly, the assessment of tax on all of the taxpayer's purchases was proper.
Based upon the foregoing, I see no basis for relief of any part of the assessment at this time. However, I will permit the taxpayer to present information relating to its sales to the federal government and to present information as to why it feels the sampling technique used by the department was invalid. Such information should be presented within the next 45 days to the department's Technical Services Section at P. O. Box 6-L, Richmond, Virginia 23282. If you desire a conference to discuss this matter, please contact the department and a suitable meeting time will be arranged.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner