Could a sheet-metal contractor overturn an audit sample, obtain credits, or limit the audit period based on alleged Department advice?

Subject

Fabrication and installation of sheet metal with respect to real property

Plain-English summary

Virginia upheld the full sales-and-use-tax assessment against a sheet-metal contractor. The contractor did not prove that the audit's October 2006 through September 2007 sample was unrepresentative, so the Department declined to replace the sample or review every audit period in detail.

The contractor said a Department auditor had advised that certain sales did not require returns or additional tax when they were less than 10% of total sales and tax had been paid on purchases. But Virginia's erroneous-advice statute required written advice responding to a specific written request. The contractor supplied no written advice, employee name, or date, and Department records showed no earlier audit.

The contractor also failed to prove entitlement to credits for tax paid on property later sold to customers. Finally, Department records showed that required sales tax returns had not been filed. Virginia therefore upheld the extended audit period and the assessment, with accrued interest.

What this means for you

• An audit sample stands unless the taxpayer proves it is not representative.
• Advice-based abatement requires qualifying written Department advice, not an unsupported recollection.
• Credits must be supported with evidence showing that the taxpayer is entitled to them.
• Failure to file required returns can permit Virginia to examine and assess periods beyond the ordinary three-year window.

Common questions

Why would Virginia not conduct a new sample or review every period?

The contractor did not meet its burden of showing that the selected sample was invalid or unrepresentative.

Why did the alleged auditor advice provide no relief?

There was no evidence of the written advice required by Va. Code § 58.1-1835, nor even the employee's name or the date of the alleged advice.

What was the final result?

The assessment was upheld, and Virginia said an updated bill with interest would be issued.

Citations and references

• Va. Code § 58.1-1835.
• Va. Code § 58.1-634.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-166

Original ruling text

August 10, 2010

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

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment issued for the period April 2003 through May 2009. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a dual role contractor. The primary focus of the Taxpayer's business is the fabrication and installation of sheet metal with respect to real property. The Taxpayer also fabricates sheet metal that is sold to order. The contested issues presented by the Taxpayer in its appeal will be addressed separately below.

DETERMINATION

Sample Period

The Taxpayer contends the sample period used in the audit, October 2006 through September 2007, is not representative of the audit period. The Taxpayer asserts that the assessment on its sales would be substantially lower if the sample period were to be extended to cover all periods in the audit. The Taxpayer requests that another sample be conducted or that each year of the audit period be reviewed.

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 extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid.

After reviewing the audit report and the information provided, I find no basis to conclude that the sample used in the audit to determine the sales measure is not representative of the Taxpayer's business operations during the audit period. The Taxpayer has the burden of proving that the sample used in the audit is invalid. However, the Taxpayer has not met its burden. Accordingly, the sample used in the audit will not be changed. Additionally, a detailed review of all periods in the audit is not warranted.

Department Advice

The Taxpayer contends that it relied on erroneous advice from a Department auditor with respect to the sales at issue in the Non-Contested Sales exceptions list. The Taxpayer states that it was advised that as long as sales of this kind were less than 10% of its total sales and if it paid tax on the purchases, it was not required to file Form ST-9 or to pay the additional tax on these items.

Virginia Code § 58.1-1835 provides, "The Tax Commissioner shall abate any portion of any tax, interest, and penalty attributable to erroneous advice furnished to the taxpayer in writing by an employee of the Department acting in his official capacity if:

1. The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;

2. The portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; or

3. The facts of the case described in the written advice and the request therefore are the same, and the taxpayer's business or personal operations have not changed since the advice was rendered."

The Tax Commissioner is authorized to abate any tax, interest and penalty attributable to erroneous written advice furnished by a Department employee. The Taxpayer, during the performance of the audit and in its appeal, has not provided evidence of its receipt of erroneous written advice as required in Va. Code § 58.1-1835. Additionally, in both the audit and the appeal, the Taxpayer has not provided the name of a Department employee from whom it received the aforementioned advice, nor has the Taxpayer provided a date for when such advice was given.

Based on the Taxpayer's assertion that the advice was provided by a Department auditor, a search was conducted of the Department's archived audits. That search indicated that no prior audits have been conducted by the Department of the Taxpayer's Virginia tax records. Additionally, prior to the audit at issue, the Taxpayer was not registered for the Virginia sales tax or the Virginia consumer use tax. Accordingly, the Taxpayer has not shown that it received erroneous advice from the Department.

Credit

The Taxpayer maintains that it should be given a credit in the audit in instances where it paid tax on tangible personal property that it purchased and later sold to its customers. The Taxpayer contends that its reliance on erroneous advice from the Department led to these mistakes in applying the tax.

The Taxpayer has not proven that it is entitled to a credit. Additionally, because the Taxpayer has not proven that it received erroneous written advice from the Department, the Taxpayer is not entitled to any relief as provided in Va. Code § 58.1­1835.

Audit Period

The Taxpayer requests that the audit period be limited to three years. The Taxpayer contends that it did not file the required sales tax returns because it relied on erroneous advice from the Department.

Virginia Code § 58.1-634 states:

The taxes imposed by this chapter shall be assessed within three years from the date of which such taxes become due and payable. In the case of a false or fraudulent return with intent to evade payment of the taxes imposed by this chapter, or a failure to file a return, the taxes may be assessed, or a proceeding in court for the collection of such taxes may be begun without assessment, at any time within six years from such date. The Tax Commissioner shall not examine any person's records beyond the three-year period of limitations unless he has reasonable evidence of fraud, or reasonable cause to believe that such person was required by law to file a return and failed to do so.

The Taxpayer's record with the Department indicates that the Taxpayer did not file Virginia sales tax returns during the audit period. As such, the Department is authorized to extend the audit period to six months, pursuant to Va. Code § 58.1-634. Additionally, the Taxpayer has not proven that its failure to file tax returns is based on erroneous written advice furnished by the Department. Accordingly, the extension of the audit period is proper and an adjustment of the audit period is not warranted.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit payment to: Virginia Department of Taxation, 600 E. Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia sections 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 Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-4069214127.P