Could a Virginia watercraft business defeat retail and watercraft tax assessments by asserting that it made no sales during the audit period?

Subject

Assessed sales and use tax on untaxed watercraft sales

Plain-English summary

Virginia upheld both the retail sales-and-use-tax and watercraft sales-and-use-tax assessments. The taxpayer said it made no sales during the April 2009 through March 2010 audit period. The auditor found sales and rental agreements and other records showing otherwise.

The taxpayer had taken over another company after that company defaulted on a loan the taxpayer guaranteed. The two businesses' sales were commingled during a period when both were registered to collect the relevant taxes. The taxpayer itself registered in May 2009, while the other company's accounts closed effective December 2009.

Virginia law treated the taxpayer as a dealer and presumed sales and leases taxable unless shown otherwise. Because Department assessments are presumed correct, the taxpayer had to prove the audit wrong. The Commissioner found that it had not met that burden.

A Department of Game and Inland Fisheries investigation had also led to criminal charges for allegedly selling watercraft without a valid dealer license. The ruling said Virginia would adjust the tax audit if the court case later affected the taxpayer's audit liability.

What this means for you

• Registration dates, sales agreements, rental records, and overlapping operations can establish dealer activity.
• When two businesses' transactions are commingled, maintain records that clearly identify the seller and reporting account.
• A taxpayer challenging an assessment must provide evidence overcoming its presumed correctness.
• A related regulatory or criminal case may affect the tax result, but it did not justify canceling this assessment on the existing record.

Common questions

Did the taxpayer's statement that it made no sales control?

No. The auditor's sales, rental, and registration evidence contradicted that assertion.

Was the assessment final regardless of the dealer-license case?

The assessment was upheld and remained payable, but the Department said it would adjust the audit if the court result affected the tax liability.

Citations and references

• Va. Code § 58.1-612 A.
• Va. Code § 58.1-613 A.
• Va. Code § 58.1-623 A.
• Va. Code § 58.1-205.
• Va. Code § 58.1-3.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-76

Original ruling text

May 23, 2011

Re: § 58.1-1821 Application

Retail Sales and Use Tax

Watercraft Sales and Use Tax

Dear *:

This is in response to your letter in which you request correction of the retail sales and use tax and watercraft sales and use tax assessments issued to * ("the Taxpayer"), for the period April 2009 through March 2010. I apologize for the delay in the Department's response.

FACTS

The Taxpayer sells, rents and services boats and other watercraft. In addition, the Taxpayer sells watercraft accessories. The Department conducted an audit of the Taxpayer's business as a result of an investigation by the Department of Game and Inland Fisheries (the "DGIF"). As a result of the Department's audit, the Taxpayer was assessed the retail sales and use tax on untaxed sales, asset and expense purchases. In addition, the Taxpayer was assessed the watercraft sales and use tax on untaxed watercraft sales. The Taxpayer contests the audit assessments and claims that it had no sales during the audit period.

According to the audit comments, the Taxpayer stepped in to take over * (the "Company") because the Company was in default on a loan for which the Taxpayer was guarantor. According to the Department's records, the Company closed its retail and watercraft sales and use tax accounts with the Department effective December 2009. The Taxpayer registered with the Department for the collection of the retail and watercraft sales and use taxes in May 2009. While the Taxpayer claims that it did not engage in any sales until May 2010, the auditor found sales and rental agreements and other documentation confirming that the Taxpayer had sales during the audit period. The auditor also found that sales were commingled between the two businesses during a period when both companies were registered with the Department for the collection of the retail and watercraft sales and use taxes. The auditor assessed the tax on the sales for the overlapping periods based on the dates of registration with the Department.

DETERMINATION

Virginia Code § 58.1-612 A provides that the sales tax is "collectible from all persons who are dealers." This same section defines a dealer as every person who "sells at retail, or who offers for sale at retail, or who has in his possession for sale at retail, or for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth, tangible personal property."

Pursuant to Va. Code § 58.1-613 A, "[e]very person desiring to engage in or conduct business as a dealer in this Commonwealth shall file with the Tax Commissioner an application for a certificate of registration for each place of business in this Commonwealth." Va. Code § 58.1-623 A provides that "[a]II sales or leases are subject to the tax until the contrary is established."

Pursuant to the aforementioned authorities, and based upon the facts presented, the Taxpayer had sales and rentals of tangible personal property and watercraft that were subject to tax during the audit period. Pursuant to Va. Code § 58.1-205, any tax assessed by the Department is prima facie correct. The Taxpayer has the burden of proving that the tax assessed by the Department is incorrect. Based on the information provided, the Taxpayer has failed to meet that burden. Accordingly, I find no basis to warrant any revisions to the audit or the assessment as issued.

Virginia Code § 58.1-3 provides that state agencies and any other administrative or regulatory unit of state government shall divulge to the Tax Commissioner or his authorized agent, upon written request, information relating to any tax administered by the Department of Taxation. It is my understanding that the DGIF filed criminal charges against the Taxpayer for selling watercraft without a valid watercraft dealer license for the period April 2009 through April 2010. Should the results of the court case impact the Taxpayer's audit liability, the Department will adjust the audit accordingly.

CONCLUSION

The assessment is upheld and remains due and payable. An updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding balance is paid within 30 days from the date of the bill. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 23rd Floor, Richmond, Virginia 23219, Attention: *. If you have any questions concerning payment of the assessment or you would like to establish a payment plan with the Department's Collections Unit, 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 response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4562868281.T