Could Virginia estimate restaurant cash sales and untaxed purchases when the operators' records were missing or unverifiable?

Subject

Estimated restaurant sales and purchase assessments upheld pending records

Plain-English summary

Virginia upheld estimated sales-and-use-tax assessments against restaurant operators whose records were missing, incomplete, or unverifiable. The restaurants lacked daily sales logs and register tapes, and reported sales did not consistently match available bank statements, federal returns, and mixed-beverage reports. Purchase records were also incomplete.

Virginia therefore allowed the auditor to use the best information available. For sales, the auditor started with credit-card sales recorded on bank statements, estimated monthly cash sales at 50% of credit-card sales, and used averages for months without bank statements. For purchases, the auditor used available bank and financial statements and monthly averages where records were missing.

The taxpayers claimed the estimates overstated cash sales, included exempt sales, and taxed purchases on which tax had already been paid. But they had not produced verifiable records showing that the methodology was unreasonable or that the disputed purchases were already taxed.

Virginia kept the assessments in place but gave the taxpayers 60 days to submit the previously requested documentation. The auditor could adjust supported issues; any issue without sufficient proof would remain assessed.

What this means for you

• Virginia dealers must keep records adequate to verify sales, purchases, exemptions, and tax paid.
• When records are unreliable, the Department may reconstruct liability from bank data, financial statements, observations, and averages.
• An assessment is presumed correct, so the taxpayer bears the burden of proving an error.
• A late opportunity to provide records does not guarantee relief; adjustments depend on what the documents substantiate.

Common questions

Why did Virginia estimate cash sales as 50% of credit-card sales?

The bank statements showed minimal cash deposits, and the restaurants lacked reliable register tapes or daily logs. Virginia found the resulting method reasonable absent contrary evidence.

Were claimed exempt sales and tax-paid purchases removed?

Not immediately. The taxpayers had not provided verifiable support.

Was the appeal completely over?

No. The taxpayers received 60 days to provide additional documentation, after which supported adjustments could be made.

Citations and references

• Va. Code §§ 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. 10-143

Original ruling text

July 26, 2010

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 assessments issued to * and *** (collectively, the "Taxpayers") for the periods October 2003 through December 2007, November 2001 through February 2004 and March 2004 through December 2007, December 2002 through February 2004 and May 2003 through June 2005, respectively. I apologize for the delay in responding to your letter.

FACTS

The Taxpayers operate restaurants. As a result of the Department's audits, assessments were issued for the tax on underreported sales and untaxed purchases. The Taxpayer contests the assessments and claims that the audit liabilities: (1) overstate the Taxpayer's cash sales; (2) include exempt sales; and (3) include purchases on which use tax has been paid. The Taxpayer states that it can produce the required bank statements and reports to support its claim that the audit liabilities are overstated.

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 further explained in Title 23 of the Virginia Administrative Code 10-210-470.

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.

It is my understanding that the Taxpayer's records were missing, incomplete, or not verifiable. The Taxpayer did not maintain a daily log of sales or cash register tapes to verify daily and monthly sales. The actual gross sales reported on the Taxpayer's monthly sales tax returns for the locations were not consistent with those reported on available bank statements, federal income tax returns, and the Mixed Beverage Annual Review (MBAR) report. In addition, purchase records were missing or not verifiable. As the Taxpayer failed to maintain adequate records during the audit period to substantiate its actual tax liabilities, the auditor used the best information available to estimate the Taxpayer's tax liability.

Audit Methodology

Sales

The auditor observed the Taxpayer's sales activities for two locations to determine whether the Taxpayer was properly collecting and remitting sales tax due on taxable sales. The auditor found that the sales receipts produced for the observations were not numbered consecutively. Further, the Taxpayer could not produce a sales receipt for a large party of guests. The Taxpayer later informed the auditor that the meal was complimentary and produced a sales receipt for alcohol sales only. In addition, the auditor found that the number of the remaining sales receipts did not match the total parties, even taking into account that some parties could have more than one receipt. The Taxpayer could not produce register tapes to verify the daily sales receipts provided to the auditor.

Because of the unreliable data, the auditor used credit card sales recorded on the Taxpayer's bank statements and sales data reported to the Department as a basis for calculating total sales for the restaurant locations. The bank statements indicated minimal cash deposits. Therefore, the auditor calculated 50% of the credit card sales for each month to estimate cash sales. An average sales figure was used to estimate sales for the months where no bank statements were available. The auditor compared the sum of the credit card sales and estimated sales to the gross sales reported on the Taxpayer's monthly returns and assessed the difference as underreported sales.

Based on the records reviewed and the audit methodology applied in this case, it was determined that the Taxpayer underreported its sales to the Department. While the Taxpayer claims that the audit method overstates the sales liabilities, the Taxpayer has not provided any documentation or evidence to prove that the method applied in this case is unreasonable. Further, while the Taxpayer claims that a new computerized cash register system contains data that proves cash sales were not being underreported, the Taxpayer has no register tapes to verify such sales.

Based on the foregoing and absent evidence to the contrary, I find that the audit methodology was reasonable and the resulting sales figures were properly computed. Accordingly, there is no basis to revise the audits for underreported sales.

Purchases

Because of the condition of the Taxpayer's records, the Department was unable to verify that tax had been paid on many of the purchases. The Department estimated the Taxpayer's use tax liability for expense purchases based on available bank statements and financial statements. An average of monthly purchases was used to estimate purchases for the months where no bank statements or financial statements were available. While the Taxpayer claims that the tax has been paid on purchases held taxable in the audit, the Taxpayer has not provided any verifiable documentation to support its claim. Therefore, I do not find cause to adjust the assessment for these purchases.

Additional Documentation

According to the audit comments, the auditor requested that the Taxpayer provide missing bank statements; however, the documents were not provided. The Taxpayer now claims that it can produce the required bank statements and reports to address errors in the audits. A member of the Appeals and Rulings staff contacted the Taxpayer's representative and gave instructions to provide any additional documentation to the audit staff for review. According to the audit staff, the Taxpayer has not provided any additional documentation to date.

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.

CONCLUSION

The Taxpayer will be allowed 60 days from the date of this letter to provide the audit staff with the additional documentation previously requested. The audit will be adjusted, as warranted, based on the Department's review of the additional documentation provided. The assessments will be considered correct with respect to those issues for which the Taxpayer cannot provide sufficient documentation to substantiate its claim.

Upon completion of the auditor's review or the expiration of the 60 days, the Taxpayer will be sent updated bills with interest accrued to date. No additional interest will accrue provided the outstanding balances of the bills are paid within 30 days from the bill dates. The Taxpayer should remit payment to: Virginia Department of Taxation, Attention: *, 600 E. Main Street, 15th Floor, Richmond, Virginia 23219. If you have any questions concerning payment of the assessment, you may contact at **.

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 website. If you have any questions about this determination, you may contact * in the Department's Office of Tax Policy, Appeal and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-2783357336.T