Tax Type
Individual Income Tax
Retail Sales and Use Tax
Description
Illegal drug sales; Jeopardy assessment of individual income tax and sales tax
Topic
Collection of Delinquent Tax
Date Issued
07-27-1988
July 27, 1988
Re: §58.1-1821 Application
§58.1-313 Jeopardy Assessment; Individual Income Tax
§58.1-631 Jeopardy Assessment; Retail Sales and Use Tax
Dear***************
This is in response to your letter of September 2, 1987, in which you applied for correction of assessments of income and sales tax against your client.
Facts
Your client was arrested and charged with possession of a controlled substance with intent to distribute. At the time of the arrest the police seized a large quantity of marijuana, a truck, and a substantial sum of cash. Your client has pleaded guilty pursuant to a plea agreement.
Your client has not filed any retail sales and use tax returns although it appears that he made sales of tangible personal property in Virginia on at least one occasion. In addition, he has not filed income tax returns although he has a Virginia address, his truck was registered in Virginia, and he appears to have income from Virginia sources derived from sales transactions in Virginia.
Based on information which the department believed reliable at the time, the department estimated the extent of your client's income and sales transactions in Virginia and assessed income and sales tax on a jeopardy basis.
Discussion
The department has information that your client "fronted" (i.e., furnished on credit) a quantity of marijuana. Under the definition of "sale" for purposes of the retail sales and use tax, a transfer of property for credit is a taxable sale. Although the quantity may suggest that the sales were for resale, your client has not presented any exemption certificates from his customers. In addition, under clause (ii) of the definition of "retail sale," the Tax Commissioner may require your client to collect the tax. See §58.1-602 for the definitions of "sale" and "retail sale."
Therefore, your client is clearly liable for sales and income taxes, penalty and interest arising from these unreported transactions. Initially, the department assumed that your client made sales and earned income for the entire calendar year up to the date of arrest. Upon review of the case, the department has concluded that the evidence available at this time does not support an assessment for the entire year. Therefore, the assessments will be revised to conform more closely to the evidence available.
Based on the amount of cash and marijuana seized, your client's Virginia address, and the list of Virginia phone numbers seized, the department has assumed that the cash seized was derived from sales in Virginia and estimated your client's liability for retail sales and use tax and income tax as shown on the attached sheet. The estimate of income tax liability reflects the income derived from sales which generated the cash seized, less an estimate of the cost of goods sold, personal exemption and standard deduction. Your client has not filed a Virginia income tax return for 1986, so a 100% penalty under §58.1-308 is being assessed and no other losses or deductions will be allowed. See I.R.C. §280E.
Determination
Accordingly, the income tax and sales tax assessments will be revised as shown on the attached sheet. The department has received a portion of the seized cash and applied it toward your client's sales tax liability. The taxpayer will shortly receive a revised bill which should be paid within thirty days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner