Did invoice language saying tax was included relieve a flooring contractor from use tax when the vendor did not separately state or remit Virginia tax?

Subject

Flooring samples remained subject to use tax despite tax-included invoice language

Plain-English summary

Virginia upheld use tax on flooring samples bought without a separately stated tax charge. The flooring contractor installed flooring for new-home builders and bought sample materials from a supplier whose invoices said tax was included.

Virginia law required the dealer to state the tax separately. The invoices did not do so, the supplier was not registered to collect Virginia sales tax, and the taxpayer produced no evidence that the supplier remitted tax to the Department. The supplier could not cure the problem by reissuing the invoices after the audit, so the contractor remained liable for consumer use tax.

The Department also upheld the audit projection. Although the sample errors came from one supplier, the error factor was projected against purchases from suppliers that had not properly charged tax. Limiting the projection to the one sampled vendor would undermine the sample's purpose, and the contractor did not prove that the sample was unrepresentative or otherwise flawed.

What this means for you

• A lump-sum statement that tax is included may not establish payment of Virginia sales tax when the amount is not separately stated.
• Purchasers should verify that vendors are properly charging Virginia tax; otherwise consumer use tax can remain due.
• Post-audit invoice revisions do not substitute for evidence that tax was actually collected and remitted.
• A taxpayer challenging an audit sample bears the burden of showing a specific representativeness or methodology defect.

Common questions

Why did the tax-included wording fail?

The invoice did not separately state the Virginia tax, the seller was unregistered, and no evidence showed payment to the Commonwealth.

Could the vendor issue corrected invoices after the fact?

No. The ruling found no basis to allow reissued invoices under these facts.

Why was the error factor applied beyond the sampled supplier?

The projection was designed to estimate similar untaxed purchases across the audit period and suppliers that did not properly charge tax.

Citations and references

• Va. Code §§ 58.1-625 and 58.1-205.
• Virginia Public Documents 99-66, 04-204, and 05-63.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-142

Original ruling text

July 26, 2010

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

Dear *:

This is in reply to your letter in which you seek correction of the Department's retail sales and use tax audit assessment issued to * (the "Taxpayer") for the period January 2006 through December 2008. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a flooring contractor that contracts with various new home builders to install flooring in new homes. The Department's audit disclosed that the Taxpayer purchased sample flooring without payment of the tax to the supplier. The Taxpayer's records also reflect that the Taxpayer did not accrue and remit use tax on these purchases to the Department.

The Taxpayer disagrees with the audit results, contending the materials purchased from the vendor included tax that was not separately stated on the invoice. The Taxpayer requests that it be allowed to have the supplier re-invoice the materials separately listing the tax, or to provide proof that the supplier's records reflect the collection and payment of the tax.

The Taxpayer also contends that the audit's sample computation is erroneous. The auditor's sample reflected invoices from only one supplier, which were used to develop the audit liability based on gross purchases from all suppliers. The Taxpayer contends that the audit liability should be recomputed based on the gross purchases from the one supplier.

DETERMINATION

Separately Stated Tax

Virginia Code § 58.1-625 provides that the sales tax "shall be paid by the dealer, but the dealer shall separately state the amount of the tax and add such tax to the sales price or charge." Thereafter, such tax shall be a debt from the purchaser, consumer, or lessee to the dealer until paid . . . ."

In this instance, while the seller's invoices reflected that the tax was included in the charges to the Taxpayer, the invoices do not indicate a separate charge for sales tax. The Taxpayer has not provided any evidence that the seller remitted any tax to the Department. The auditor's comments note that the seller was not registered to collect and remit the Virginia sales tax. Accordingly, there is no basis to allow the supplier to reissue the invoices in question. In accordance with the statute, the Taxpayer is liable for use tax on the untaxed transactions.

Sample

Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial either to the auditor or the client. When sampling techniques are properly applied, the final results are usually within a narrow percentage range of the actual amount that would have been determined by a detailed audit. The purpose of the audit sample is to determine a factor for errors within a representative selected period. Once the error factor is determined, the factor is projected over the entire audit period against all suppliers that did not properly charge the tax. The purpose of the projection is to account for likely similar transactions on which the Virginia tax was not paid.

In this instance, the auditor found that the purchases from the supplier at issue did not include the sales tax. In addition there were no records produced reflecting that the vendor had collected the tax and paid it to the Commonwealth. Further, there was no evidence from the Taxpayer that it had paid or accrued use tax on the purchases at issue. Therefore, to remove the purchases in question from the sample base or to limit the computation of the sample to the gross purchases from a single vendor would nullify the validity of the sample.

Virginia Code § 58.1-205 provides that tax assessments issued by the Department are deemed prima facie correct. With regard to audit sampling, a taxpayer must demonstrate that a sample used in an audit is not representative of the audit period or that it is flawed in some other manner to invalidate the sample. Lacking the documentation to support its claim, the Taxpayer has not met the burden of proof regarding this issue. See Public Documents 05-63 (4/26/05), 04-204 (11/23/04) and 99-66 (4/15/99).

CONCLUSION

Based on the foregoing, I find no basis to allow for any revision to the audit assessment. The outstanding balance of the assessment is correct and remains due and payable. An updated bill, with interest accrued to date, will be sent to the Taxpayer shortly. The outstanding balance must be paid within 30 days from the date of the consolidated bill to avoid the accrual of additional interest and an additional 20% penalty on the tax due under the terms of Virginia's recent Amnesty.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this matter, please contact * of the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-3873281566.Q