Was Virginia's two-sample sales audit of a metal fabricator flawed, and should customer-paid use tax remove a sale from the sample?

Plain-English summary

Virginia upheld the audit's two separate sales samples. The fabricator made metal both for retail resale and for its own real-property installations. After new equipment substantially increased retail sales, the auditor used one three-month sample before the change and another after it, then applied each error percentage to the corresponding period.

The company called the sampling flawed and offered its own lower annual calculations, but it did not present evidence refuting the sales assessed in the sample months. The samples also matched the Department's longstanding one-to-three-month guideline and accounted for the business change.

One customer proved it had paid use tax on a $50 purchase included in the seller's sample. The sale stayed in the sample because the sample measured the seller's own collection and reporting compliance, not combined seller-and-customer compliance. Virginia instead credited the customer's paid tax against the fabricator's audit liability.

Common questions

Q: Why did Virginia use two samples?
A: Retail sales changed materially after the company acquired new equipment.

Q: Did customer-paid use tax remove the sale from the sample?
A: No. The sale remained, but the seller received a credit for the tax actually paid.

Citations and references

• Va. Code § 58.1-205.
• Virginia Public Document 04-99 (September 8, 2004).

Subject

Untaxed retail sales and purchases: Contractor fabricates metal for resale and self

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-133

Original ruling text

August 20, 2012

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

Dear *:

This reply is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you request correction of the retail sales and use tax assessment issued for the period August 2004 through September 2010. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a dual role contractor who fabricates metal for resale and for its own use in real property installations. The Taxpayer, who was registered to collect sales tax during the audit, was assessed for untaxed retail sales and purchases.

The Taxpayer protests the sampling methodology used in the audit, arguing it is inherently flawed. The Taxpayer contends the auditor's calculations do not accurately reflect its business activity. The Taxpayer requests a detailed audit of its sales and presents its own calculation of its sales tax liability as support.

The Taxpayer also contends that it has been assessed tax for sales previously assessed by the Department. The Taxpayer presents letters from its customers to support its contention that several sales assessed in the audit were taxed previously by the Department in the sales and use tax audit of its customers.

DETERMINATION

Sampling

Virginia Code § 58.1-205 deems any assessment of tax by the Department to be prima facie correct. The burden rests with the Taxpayer to prove the assessment is incorrect.

During the audit, the Taxpayer informed the auditor of material changes in its business activities. The Taxpayer stated that its retail sales increased substantially during the audit period due to new equipment purchases that allowed it to provide a more diverse selection of products for retail sale. The auditor agreed to conduct two separate three-­month samples before and after the change in the Taxpayer's operations. The two resulting percentages of error were applied to the Taxpayer's gross sales for the applicable periods.

The Taxpayer protests the sampling results and requests a detailed review of its sales based on its own calculation of its sales tax liability. The Taxpayer's calculation of taxable sales is materially lower than assessed sales. The assessed taxable sales for the sample months of October 2008, July 2009 and March 2010 are higher than the total annual taxable sales calculated by the Taxpayer for 2008, 2009 and 2010. Although the Taxpayer offers to present sales invoices to support its calculations, it offers no evidence to refute the sales assessed in the sample periods. Therefore, I find the sales assessed in the sample months to be correct. Additionally, the Taxpayer argues that the sampling methodology is flawed although it offers no basis for its contention.

Based on the foregoing, the Taxpayer has failed to prove that the sampling methodology is flawed and that a detailed audit of sales is necessary. The auditor's three month sampling periods meet longstanding Department audit guidelines that recommend one to three month sampling periods. Additionally, the auditor's use of two separate three-­month samples before and after the Taxpayer's increase in retail sales, allowed for the significant change in the Taxpayer's business. As such, I find the sampling methodology was properly applied.

Taxes Paid in Customer Audit

The Taxpayer maintains that it has been assessed tax on sales for which use tax has already been remitted to the Department by its customers. To support its argument, the Taxpayer presents two letters from its customers, * (Company A) and *** (Company B). The letters state the companies were audited by Virginia. However, although both companies state that they paid their respective tax assessments, the letter from Company B fails to state the amounts assessed included purchases made from the Taxpayer. As such, the letter from Company B cannot be considered in this appeal.

Company A states in its letter that it was assessed use tax for purchases it made from the Taxpayer. A review of Company A's audit indicates that a purchase in the amount of $50 was included in Company A's assessment, as well as in the Taxpayer's sample measure of error. As Company A has paid use tax on a purchase made from the Taxpayer, the Taxpayer believes it is being assessed the same tax.

The Department has previously addressed this issue in Public Document (P.D.) 04-99 (9/8/04). In the ruling, the taxpayer was assessed sales tax based on sampling results. The taxpayer argued that the measure of error mistakenly included sales made to customers who self-assessed use tax. Based on documentation provided by the taxpayer, the auditor credited the use tax remitted directly to the Department by the taxpayer's customer in the months they occurred in the sample. However, the taxpayer believed sales related to the remitted use tax should have also been removed from the sample. The determination explains that the sample examines the taxpayer's sales tax collection and reporting responsibilities. To remove sales from the sample for which use tax had been paid directly to the Department by the taxpayer's customers would distort the sample. The sample is not intended to determine the combined compliance of the taxpayer and its customers.

The Taxpayer presents documentation that indicates Customer A paid use tax directly to the Department for a sale included in the sample. Pursuant to P.D. 04-99, the sale will not be removed from the sample. However, I will agree to allow a credit against the Taxpayer's audit liability for the use tax paid directly to the Department by Company A

Based on the foregoing, the audit assessment will be revised. A revised 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. The Taxpayer should 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 section and public document 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, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4816325772.M