Could a restaurant remove meal deductions and fixed assets from an audit without records proving the deductions or prior tax payment?

Subject

Missing records supported meal estimates and tax on fixed assets

Plain-English summary

Virginia upheld the restaurant audit because records did not substantiate meal deductions or tax paid on fixed assets. For returned, discounted, and complimentary meals, the restaurant's reported deductions were much higher than those observed during a two-day review.

The auditor allowed 10% of the reported deductions and taxed the balance. Virginia found that approach reasonable because the restaurant could not document its claimed amounts and some estimated returned meals had never entered daily sales.

The restaurant also lacked invoices showing sales tax paid on fixed assets listed in its depreciation schedule. Those purchases remained taxable.

The assessment stood. For asserted financial hardship, the ruling pointed to an offer in compromise based on doubtful collectibility, supported by current financial information.

What this means for you

• Track voids, returns, comps, discounts, and deleted checks contemporaneously.
• Reconcile deduction records to daily sales so an auditor can verify the amounts.
• Retain fixed-asset invoices showing sales or use tax payment.
• Financial hardship does not itself invalidate an assessment, though separate collection relief may exist.

Common questions

Did Virginia disallow every meal deduction?

No. The auditor allowed 10% of the reported amount based on the observation period.

Why were fixed assets taxed?

The restaurant supplied no invoices or records proving tax had been paid.

Citations and references

• Va. Code §§ 58.1-105, 58.1-205, 58.1-618, and 58.1-633.
• 23 VAC 10-210-470.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-158

Original ruling text

October 18, 2009

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you seek correction of the retail sales and

use tax assessment issued to * (the "Taxpayer"), for the period May 2005 through July 2007. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates a restaurant. The Taxpayer was audited and assessed tax on sales and fixed asset purchases. The Taxpayer asserts that the auditor assessed the tax on returned goods and on discounted and complimentary meals. The Taxpayer contends that the Retail Sales and Use Tax Act excludes the imposition of the tax on discounted food or food deleted from the customer's check for poor quality or for customer dissatisfaction. In addition, the Taxpayer claims that the assessment includes fixed asset purchases on which the tax has been paid.

DETERMINATION

Records

Virginia Code § 58.1-633 states that every dealer required to make a return and collect sales tax "shall keep and preserve suitable records of the sales, leases, or purchases . . . taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner." The record keeping requirement is explained in Title 23 of the Virginia Administrative Code 10-210-470.

P. D. 09-158

October 16, 2009

Page 2

When a dealer fails to maintain adequate records, the Department is authorized by Va. Code § 58.1-618 to use the best information available to reconstruct a dealer's sales or purchases to determine whether a tax liability exists.

Returned, Discounted and Complimentary Meals

When the Taxpayer was unable to provide the necessary documentation to substantiate the deductions made for the returned goods and the discounted and complimentary meals, the audit staff utilized the observation method to determine whether the deductions for meals during the sample period had been properly reported and taxed. According to the audit comments, the Taxpayer took deductions based on an estimated value of returned meals and drinks when such meals and drinks had not been included in the daily sales. Further, deductions reported on the sales journal for the sample period were considerably higher than the deduction for meals during the two-day observation period.

Based on the observations, the auditor allowed 10 percent of the total deductions for returned goods and the discounted and complimentary meals reported by the Taxpayer during the sample period and assessed the tax on the difference. While the Taxpayer claims that the assessment is erroneous, the Taxpayer has not provided any documentation to support its claim. Without such documentation, the Department is authorized to utilize the best information available in the performance of the audit. Accordingly, I find that the method utilized by the auditor to assess tax on the transactions at issue is reasonable and proper.

Fixed Assets

The auditor reviewed the Taxpayer's fixed asset depreciation schedule and assessed the tax on those assets for which the Taxpayer was unable to provide documentation that the tax was charged on the invoice. According to the audit comments, the Taxpayer could not provide any invoices or records to support its claim that the tax was paid on the fixed asset purchases.

Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed prima facie correct. The burden is on the taxpayer to prove the assessment is erroneous. Lacking the documentation to support its claim, the Taxpayer has not met the burden of proof in this case. Accordingly, I find that the auditor was correct in holding these transactions taxable in the audit.

P. D. 09-158

October 16, 2009

Page 3

CONCLUSION

Based on the foregoing, the assessment is correct. An updated bill, with interest accrued to date, will be mailed to the Taxpayer. No additional interest will accrue provided the assessment is paid within 30 days from the date of the updated bill.

The Taxpayer claims that upholding the assessment may create a financial hardship. The Taxpayer may submit an offer in compromise to the Department based on doubtful collectibility pursuant to Va. Code § 58.1-105. Such offer must be submitted using the Department's Form OIC-BUS, which is available on-line at www.tax.virginia.gov in the Business Form and Instructions section of the Department's web site. The offer must be accompanied by a current financial information statement. If you have any questions about making an offer, you may contact the Department's Collections Unit at (804) 367-8045.

The Code of Virginia sections and regulation cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2615225470.T