Tax Type
Retail Sales and Use Tax
Description
Penalties and Interest; Audits; Compliance ratio
Topic
Collection of Delinquent Tax
Date Issued
01-31-1997
January 31, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear******************
In your letter, you seek correction of the sales and use tax assessment issued to****************** (the Taxpayer). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a manufacturer of bathroom fixtures. An audit for the period August 1992 through May 1995 resulted in the assessment of use tax on untaxed purchases.
The Taxpayer takes exception to the tax assessed on certain rentals of tangible personal property and maintains that it has properly paid North Carolina sales tax on them because the Taxpayer took possession of these items in North Carolina. The Taxpayer also takes exception to the audit methodology using gross sales in computing the error factor for purchases and in the base for extrapolating the error factor. The Taxpayer maintains that it has the appropriate records to prove the amount of gross purchases so that the error factor can be computed using gross purchase information. In addition, the Taxpayer requests waiver of the audit penalty based on personnel turnover and vendor changes.
DETERMINATION
Based on the documentation provided, I find basis for removal of the contested rentals from the audit, specifically line items 19, 20, 22, 24 and 25 of the audit's purchase exception list. Accordingly, the tax and associated penalty and interest on these items will be abated.
I also find basis for using the Taxpayer's purchase information to revise the error factor and the extrapolation in computing the Taxpayer's use tax liability. Accordingly, this adjustment will reduce the amount of use tax assessed, including the associated penalty and interest.
Although these adjustments have improved the Taxpayer's use tax compliance ratio from 23% to 40%, the department's consistent policy is to apply penalty on second audits unless the taxpayer's use tax compliance ratio meets or exceeds 60%. Although these adjustments are significant, the Taxpayer has not achieved an acceptable level of compliance to warrant waiver of the penalty.
The department will also waive penalty when there is evidence of exceptional mitigating circumstances. I would note, however, that the department does not view turnover or changes in personnel or vendor changes to constitute exceptional mitigating circumstances. Although I appreciate the Taxpayer's efforts in diligently reporting and timely filing its returns and taking corrective action to avoid future errors, in the absence of exceptional mitigating circumstances, there is no basis to waive the penalty which is still applicable to the revised tax deficiencies.
Based on the foregoing, the audit will be revised in accordance with this determination as soon as practical. Upon completion of the revision, the auditor will send the Taxpayer a revised audit report and bill for the outstanding revised liability.
If you should have any questions about the revision, please contact ****** of the department's ****Audit Unit at*********
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11045R
Rulings of the Tax Commissioner