Tax Type
Retail Sales and Use Tax
Description
Collection of tax generally; Valid assessment in absence of contrary evidence
Topic
Collection of Tax
Returns/Payments/Records
Date Issued
05-12-1997
May 12, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax, Employer Withholding Tax,
Corporate Income Tax, and Individual Income Tax
Dear**************************
This is in response to your letter seeking correction of the sales and use tax and the
individual income tax assessments issued to the above referenced Taxpayers.
FACTS
The Taxpayers own and operate restaurants selling food and alcoholic beverages. The department conducted a sales and use tax audit for the periods June 1993 through February 1996 and October 1991 through September 1994. The audit revealed that the Taxpayer did not maintain adequate sales records to substantiate the amount of sales reported to the department during the audit periods. For instance, the Taxpayers had only kept a portion of the register tapes as proof of daily sales. Accordingly, the department was unable to fully reconcile daily sales summaries with the register tapes provided. For one location, the department was unable to substantiate the actual selling price of beer and wine.
The Taxpayers were also assessed for under-reported employer withholding taxes for the periods June 1993 through December 1994, for unreported individual income taxes for the calendar years 1985 through 1994, and for under-reported 1995 corporate income tax.
The Taxpayers take exception to all of the above assessments. Although the Taxpayers believe that it is proper for the department to reconstruct sales activity, they disagree with the methodology to derive taxable sales and believe that the resulting assessments overstate their tax liabilities. Specifically, the Taxpayers maintain that the auditor underestimated the size of the waste or shrinkage factor applicable to their business operations by using a shrinkage factor of 1.25%.
Based on the information presented, the Taxpayers initially maintained that they experienced a shrinkage factor of 3% but subsequently revised their estimated shrinkage factor to be 5%. In conjunction with this, the Taxpayers also estimated a theft factor of 5%. The Taxpayers now submit, however, that the shrinkage factor is (I) well over 15% based on an independent accountant's review of purchases and sales made during the period January 1996 through September 1996, or (ii) in the range of 10% to 12% for packaged beer and 15% to 20% for draft beer based on a consultant's analysis of the Taxpayers' operations.
Accordingly, the Taxpayers request that the department use a higher shrinkage factor as outlined above. The Taxpayers also take exception to the markup factor of 4.4 used in the audit for beer and wine sales and maintain that a markup factor of 3.72 should be used.
DETERMINATION
Virginia Regulation 630-10-30 provides, in part, that every dealer liable for the collection and remittance of sales and use tax is required to keep and preserve for at least three years adequate and complete records necessary to determine its sales and use tax liability.
When complete records are not available for inspection and examination by the department in the course of an audit, the auditor must resort to other measures to determine the actual tax liability. In such instances, the department is authorized under Code of Virginia § 58.1--618 to estimate the tax liability and assess the tax estimated to be unpaid. This statute deems such estimated assessments to be prima facie correct. Although the statute allows the department to estimate tax liabilities when complete records are not available, l would note that the statute does not allow taxpayers to estimate their tax liabilities. Instead, the statute requires every dealer to be able to prove its actual tax liability.
Accordingly, unless the Taxpayers provide the department with all of the records necessary to make an accurate determination of their actual tax liabilities, the department may estimate the Taxpayers liabilities, and the estimates are deemed correct until proven otherwise.
Retail Sales and Use Tax
As the Taxpayers failed to maintain adequate records during the audit period to substantiate their actual tax liabilities, the department used the available records for the period in question to estimate the Taxpayers' liabilities. Although I appreciate the Taxpayers' efforts to present an analysis of their sales tax liabilities, l find that this analysis does not provide sufficient basis to warrant revision of the assessments for the reasons stated below.
For beer and wine sales, it is my understanding that the Taxpayers kept inventory control forms which listed employee comps and breakages and showed restocking of beer coolers for the bartenders shift. Although the Taxpayers had not maintained all of its sales records, the Taxpayer was able to provide some of its inventory control records to the department's auditor. Using those records presented, a 1.25% shrinkage factor was calculated.
In regard to the accountant's analysis, l would note that he examined periods outside of the department's audit. As such, we cannot conclude from his analysis that a shrinkage factor of over 15% actually occurred, or is truly representative, of the shrinkage experienced during the audit period. To put the 15% shrinkage factor into perspective for one location, the daily average loss would equate to over 100 beers a day for every day that the location was open for business during April 1995. However, the accountant's analysis does not prove that this degree of shrinkage actually occurred in April 1995. Furthermore, as the accountant's analysis relies upon cash register tapes furnished by the Taxpayers, no assurance has been made that all of the Taxpayers' sales records are available for the last two months of the audit period which were included in the accountant's analysis. Absent complete documentation, the accountant's analysis is inconclusive.
I am also not persuaded by the consultant's conclusions which are based on observations of the Taxpayers' operations at some time subsequent to the audit. In assessing taxes, l would note that the department is under no legal obligation to recognize a shrinkage factor when sales records are incomplete. Nor is the department obligated to use estimated "industry norms" or comparisons with other business operations for determining a shrinkage factor. In this case, l would note that the department looked at the actual information available for the period in question to calculate the shrinkage factor.
At the location which he observed, the consultant saw no inventory or purchase controls in use, especially a "point-of-sale" cash register system, to minimize losses on bottled beer. I would note, however, that the department's auditor observed a cash register at the bar from which all beer was distributed. The consultant also noted that there was a faulty pressure gauge on the draft beer dispensing system and that there was an average loss of one to two ounces of beer per ten ounce serving. However, no evidence has been submitted that the Taxpayer experienced problems of this nature during the periods in question. The consultant further states that the Taxpayers have a liberal discounting or comping practice in effect but does not record them. Although the Taxpayers may have incomplete controls to track employee and customer discounts and comps, it is the Taxpayers' responsibility to ensure that they maintain adequate records of all transactions, discounts, and comps affecting their inventories.
As retailers buying food, beer and wine for resale to retail customers, the Taxpayers are ultimately responsible for ensuring that they comply with the recordkeeping requirements set out in the law and regulations. Although the Taxpayers dispute the shrinkage factor used in the department's audit, they have not provided conclusive evidence to justify changing the shrinkage factor to a higher percentage.
In regard to the Taxpayers request for a lower markup factor, the Taxpayers have not provided any evidence to refute the markup used in the audit. Accordingly, based on all of the foregoing, and absent evidence to the contrary, l find no flaw with the audit methodologies and the resulting shrinkage and markup factors applied in this case and therefore find no reason to revise the audit findings. Accordingly, the estimated sales and use taxes assessed to the Taxpayers are valid.
Individual Income Tax
Based on the foregoing, and absent evidence to the contrary, l find that all of the individual income tax assessments are correct as issued to the Taxpayers.
It is my understanding that one of the Taxpayers has recently filed his 1994 individual income tax return. Unless the 1994 employer withholding assessment is paid in full, the department cannot honor the state withholding taxes claimed on his 1994 individual income tax return.
Employer Withholding Tax and Corporate Income Tax
The Taxpayer has presented no evidence to refute the assessments issued for unpaid employer withholding taxes and corporate income taxes.
Based on all of the foregoing, the assessments issued to the Taxpayers are valid. To preclude further interest charges, the outstanding liabilities of***** should be paid to the department within the next 45 days. Payment may be sent to the address listed on each bill, or to the attention of********** at the Department of Taxation, Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12125R
Rulings of the Tax Commissioner