Tax Type
Retail Sales and Use Tax
Description
Discounts for early payment; Allocation between selling price and tax
Topic
Basis of Tax
Collection of Tax
Date Issued
10-09-1990
October 9, 1990
Re: §58.1-1821 Application/Sales and Use Tax
Dear ****
This will reply to your letter of January 8, 1990, on behalf of ****** (the Taxpayer), seeking correction of a sales and use tax assessment for the period of January 1, 1987 through August 31, 1989.
FACTS
The Taxpayer is in the retail lumber business. It was revealed through a recent sales and use tax audit that the Taxpayer was incorrectly accounting for the cash discount offered to their customers. The Taxpayer offered to its customers a 2% cash discount for early payment. In some instances customers took the discount on the total invoice amount, including tax. In other cases, customers took the discount on the selling price of the product only.
When customers took advantage of the discount on the total invoice amount, the Taxpayer correctly took credit for the discount on their monthly return by allocating the discount between selling price and tax. However, when the Customer took the discount on the selling price only, the Taxpayer incorrectly took credit on its return for the total amount of the discount, without allocating any portion of the discount to tax. This method of crediting the monthly return resulted in the Taxpayer's accrued sales tax liability shown on its books exceeding the sales tax shown due on its returns. The auditor held that the difference between the accrued sales tax liability shown on the Taxpayer's books and the actual sales tax paid represented tax collected, but not remitted.
The Taxpayer contends that the underpayment of tax was the result of an error in their accounting system which failed to appropriately allocate the cash discounts between sales price and sales tax. The Taxpayer has corrected this problem so that it will not occur in the future.
DETERMINATION
Virginia Regulation 630-10-18 addresses cash and trade discounts and states, in part, the following:
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- Computation of the discount. In computing the amount of a discount which may be subtracted from gross sales, the discount must be allocated between sales price and sales tax. ... Emphasis added.
Based upon the above regulatory requirement that, "... the discount must be allocated between sales price and sales tax...," the Taxpayer was clearly accounting for these discount transactions incorrectly. However, the audit assessment is overstated to the extent that it held the taxpayer liable for additional tax based upon the full amount of the discounts. (See attached copy of Public Document # 88-49.) Accordingly, the assessment will be adjusted to reflect additional sales tax due by the Taxpayer on 4.3% of the discount not allocated by the Taxpayer in those cases where the discount taken by the customers was computed on the purchase price only.
While the department has determined in this case that there is sufficient reason to adjust the audit to remove a portion of the tax resulting from the surplus in the sales tax accrual account, I must point out that in the future steps must be taken to ensure that all discounts offered to customers must be allocated between sales price and sales tax.
A representative from the department will contact the Taxpayer as soon as practicable to make the appropriate revisions. If you, or the Taxpayer, should have any further questions, please feel free to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner