Tax Type
Retail Sales and Use Tax
Description
Audit sample, applied purchase sample and the same error factor of one restaurant to the other locations.
Topic
Collection of Delinquent Tax
Date Issued
03-11-1998
March 11, 1998
Dear***:
This is in reply to your letter of January 22, 1998, in which you seek correction of a sales and use tax assessment issued to ***** (the Taxpayer) for the period January 1994 through November 1996.
The Taxpayer, a restaurant, operates several locations in Virginia. The auditor conducted a one month purchase sample on one of the restaurants located in and applied the same error factor to the other locations. The purchase deficiency was computed by using gross sales as the base to extrapolate the results of the sample. The Taxpayer contends that using a purchase base is more appropriate than using a sales base when computing a purchase deficiency. The Taxpayer also requests waiver of penalty.
Extrapolation of Sample
In conducting an audit of purchases, it is often difficult for a taxpayer to provide purchase information on which to extrapolate the results of the sample. When increases and decreases in gross sales vary directly with purchases, the use of gross sales to extrapolate the results of a purchase sample is an acceptable audit procedure. According to the auditor's comments, all the Taxpayer's purchase records were not available at the time of the audit so that the error factor could not be computed using gross purchase information. Therefore, the auditor divided the use tax deficiency by the total sales for the sample period to arrive at the percentage of error factor. The percentage of error factor multiplied by the total sales base for the audit period resulted in the total sample audit deficiency.
The Taxpayer requests that the department use a purchase base to determine the audit liability. A review of the Taxpayer's computations shows that the Taxpayer uses the total cost of goods sold divided by total gross receipts for all locations to arrive at a cost of sales percentage. The Taxpayer takes the Virginia gross receipts multiplied by the average cost of sales percentage to determine Virginia cost of sales. The Taxpayer contends that the Virginia cost of sales figure multiplied by the initial error factor will result in a more accurate use tax measure.
Despite the Taxpayer's contentions, I find no basis for using the Taxpayer's purchase information to revise the extrapolation in computing the Taxpayer's use tax liability. For example, the Taxpayer's use of the sales based error factor in its calculations inaccurately portrays the Taxpayer's use tax liability. If the Taxpayer desires to use the purchase base in computing the Taxpayer's use tax liability, the base used to determine the error factor must also be changed from a sales to a use base. I would note, however, that this will result in a higher error factor and will increase the amount of use tax assessed, including the associated penalty and interest.
Penalty
The auditor assessed the penalty in accordance with the Taxpayer's compliance ratios. As this was the second generation audit, the Taxpayer was required to meet an 85% ratio for sales and 60% ratio for use tax. The Taxpayer met and exceeded the sales ratio requirement at 100%, but failed to meet the use tax requirement with a ratio of 9%.
The Taxpayer states that it has complied with the sales and use tax laws. Further, the Taxpayer states that of the fixed assets included in the department's compliance computations, 46% of the non-taxed assets related to assets on which taxes were paid to another state. Based on this unintentional error, the Taxpayer states that it made a good faith effort to pay all required taxes, and accordingly, requests waiver of the penalty.
For audit purposes, the department computes a compliance ratio for the sales portion of the audit (retail sales made by the taxpayer), and the use tax portion of the audit (purchases on which no sales tax has been paid). In the instant case, the application of the penalty was based on an unacceptable level of compliance for purchases. While I recognize the Taxpayer's effort to pay the sales tax at the time of purchase, the sales tax paid to the Taxpayer's suppliers has no bearing on the accrual and remittance of the use tax on untaxed purchases. As the purchaser in the transactions in which the tax was incorrectly remitted to the wrong state, the Taxpayer did not meet the compliance requirements for paying the Virginia sales tax on those transactions. Accordingly, I find that the auditor correctly applied the penalty.
Summary
Based on the foregoing, I find no basis for correction of the assessment. A revised Notice of Assessment with accrued interest will be mailed to you as soon as practicable and should be paid within 30 days of receipt to avoid the accrual of additional interest and collections activities. If you have any questions regarding this letter, please contact ***** in my Office of Tax Policy at *****.
Dear***:
This is in reply to your letter of January 22, 1998, in which you seek correction of a sales and use tax assessment issued to ***** (the Taxpayer) for the period January 1994 through November 1996.
The Taxpayer, a restaurant, operates several locations in Virginia. The auditor conducted a one month purchase sample on one of the restaurants located in and applied the same error factor to the other locations. The purchase deficiency was computed by using gross sales as the base to extrapolate the results of the sample. The Taxpayer contends that using a purchase base is more appropriate than using a sales base when computing a purchase deficiency. The Taxpayer also requests waiver of penalty.
Extrapolation of Sample
In conducting an audit of purchases, it is often difficult for a taxpayer to provide purchase information on which to extrapolate the results of the sample. When increases and decreases in gross sales vary directly with purchases, the use of gross sales to extrapolate the results of a purchase sample is an acceptable audit procedure. According to the auditor's comments, all the Taxpayer's purchase records were not available at the time of the audit so that the error factor could not be computed using gross purchase information. Therefore, the auditor divided the use tax deficiency by the total sales for the sample period to arrive at the percentage of error factor. The percentage of error factor multiplied by the total sales base for the audit period resulted in the total sample audit deficiency.
The Taxpayer requests that the department use a purchase base to determine the audit liability. A review of the Taxpayer's computations shows that the Taxpayer uses the total cost of goods sold divided by total gross receipts for all locations to arrive at a cost of sales percentage. The Taxpayer takes the Virginia gross receipts multiplied by the average cost of sales percentage to determine Virginia cost of sales. The Taxpayer contends that the Virginia cost of sales figure multiplied by the initial error factor will result in a more accurate use tax measure.
Despite the Taxpayer's contentions, I find no basis for using the Taxpayer's purchase information to revise the extrapolation in computing the Taxpayer's use tax liability. For example, the Taxpayer's use of the sales based error factor in its calculations inaccurately portrays the Taxpayer's use tax liability. If the Taxpayer desires to use the purchase base in computing the Taxpayer's use tax liability, the base used to determine the error factor must also be changed from a sales to a use base. I would note, however, that this will result in a higher error factor and will increase the amount of use tax assessed, including the associated penalty and interest.
Penalty
The auditor assessed the penalty in accordance with the Taxpayer's compliance ratios. As this was the second generation audit, the Taxpayer was required to meet an 85% ratio for sales and 60% ratio for use tax. The Taxpayer met and exceeded the sales ratio requirement at 100%, but failed to meet the use tax requirement with a ratio of 9%.
The Taxpayer states that it has complied with the sales and use tax laws. Further, the Taxpayer states that of the fixed assets included in the department's compliance computations, 46% of the non-taxed assets related to assets on which taxes were paid to another state. Based on this unintentional error, the Taxpayer states that it made a good faith effort to pay all required taxes, and accordingly, requests waiver of the penalty.
For audit purposes, the department computes a compliance ratio for the sales portion of the audit (retail sales made by the taxpayer), and the use tax portion of the audit (purchases on which no sales tax has been paid). In the instant case, the application of the penalty was based on an unacceptable level of compliance for purchases. While I recognize the Taxpayer's effort to pay the sales tax at the time of purchase, the sales tax paid to the Taxpayer's suppliers has no bearing on the accrual and remittance of the use tax on untaxed purchases. As the purchaser in the transactions in which the tax was incorrectly remitted to the wrong state, the Taxpayer did not meet the compliance requirements for paying the Virginia sales tax on those transactions. Accordingly, I find that the auditor correctly applied the penalty.
Summary
Based on the foregoing, I find no basis for correction of the assessment. A revised Notice of Assessment with accrued interest will be mailed to you as soon as practicable and should be paid within 30 days of receipt to avoid the accrual of additional interest and collections activities. If you have any questions regarding this letter, please contact ***** in my Office of Tax Policy at *****.
Rulings of the Tax Commissioner