Were tire-disposal fees taxable, was the audit sample valid, and did Virginia correct overstated discount and unreported-sales adjustments?

Plain-English summary

Tire-disposal fees were taxable, and the audit's sampling method was valid, but two parts of the assessment were overstated. Virginia treated disposal fees tied to tire sales as services included in the taxable sales price. A three-month sample produced an error percentage that was extrapolated across the audit period, including the sample months. The estimated total for those months matched the detailed test-period amount, so no sampling adjustment was required.

The repair business offered its own percentage-off and dollar-off newspaper coupons. It charged customers tax before the discount, then reported only the discounted sales and remitted less tax than it had collected. Under the retailer-coupon rule, the coupon reduces the taxable sales price; the business needed to collect and remit consistently with that rule rather than retain excess tax collected.

The audit calculation for February through October 2011 wrongly added back disallowed discount deductions even though the business had filed no returns and therefore had taken no such deductions for those months. Those additions had to be removed.

The audit had also counted sales from Store #5 twice during the same period. Virginia ordered that duplication removed and returned the audit for revision.

Common questions

Q: Were tire-disposal fees part of the taxable price?
A: Yes. They were services connected with the tire sale.

Q: Did Virginia replace the sample estimates with actual sample-month amounts?
A: No. The properly applied sample produced the same total for the test period.

Q: Were all audit adjustments upheld?
A: No. Virginia removed unfounded discount add-backs and duplicate Store #5 sales.

Citations and references

• Va. Code § 58.1-602.
• 23 VAC 10-210-430.

Subject

Auto service failure to charge sales tax on disposal fees. also assessed for disallowed discounts and unremitted sales tax.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-161

Original ruling text

October 15, 2012

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

Dear *:

This reply is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period November 2008 through October 2011.

FACTS

The Taxpayer provides automotive repair services. The Taxpayer was audited by the Department and assessed for its failure to charge sales tax on disposal fees. The Taxpayer was also assessed for disallowed discounts and unremitted sales tax.

The Taxpayer argues the disposal fees assessed in the sample months do not reconcile to actual amounts in the sample. The Taxpayer also contends that deductions for discounts are incorrectly disallowed and assessed in months in which the deductions were not taken.

DETERMINATION

Sample Methodology - Disposal Fees

Virginia Code § 58.1-602 defines "sales price" as "[t]he total amount for which tangible personal property or services are sold, including any services that are a part of the sale, valued in money, whether paid in money or otherwise". In accordance with the foregoing statute, the Taxpayer was assessed for failure to charge sales tax on disposal fees related to the sale of tires. A three month sample of the untaxed fees was used to calculate a percentage of error. The percentage was then applied to monthly gross sales, including the sample months, to compute total estimated untaxed disposal fees for the audit period.

The Taxpayer argues that fees assessed in the sample months are higher than actual untaxed disposal fees found for those same periods. The Taxpayer believes actual amounts rather than estimates should be assessed in the sample months.

Sampling is an audit technique of significant value that is widely used in the public and private sectors. The Department uses sampling in all types of sales and use tax audits where a detailed audit would not prove beneficial to either the auditor or the taxpayer. When sampling techniques are properly applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit.

The purpose of the audit sample is to determine an error factor within a representative select period. Once the error factor is determined, it is extrapolated over the entire period. In the audit, the sample months were used to calculate the average percentage of untaxed sales for the audit period. Estimated untaxed disposal fees for the entire three-month sample period total *, which is the same total amount found in the detailed test period. Accordingly, I find the sample methodology was properly applied and there is no basis for adjustment.

Disallowed Discounts

The Taxpayer uses newspaper coupons to offer a variety of discounts on parts. Although the Taxpayer charged the tax on the total price of the parts when sold, when reporting those same sales to the Department, the Taxpayer reduced the taxable amounts by the discount and underreported sales tax collected. To recapture the unremitted tax, the auditor disallowed a percentage of the Taxpayer's deductions for discounts based on test period results.

The Taxpayer failed to file returns for the period February 2011 through October 2011. In calculating unreported sales, disallowed discount deductions were added back to the sales. The Taxpayer contends that because sales for those periods were unreported, the deductions for discounts were never taken.

I have reviewed the calculation of unreported sales for the periods February 2011 through October 2011 and agree it is overstated by the disallowed discount deductions. Accordingly, disallowed deductions for discounts will be removed from the calculation of unreported sales for the period February 2011 through October 2011.

Retailer's Coupons

According to the auditor's comments, the Taxpayer sells parts and offers percentage-off and direct dollars discounts via newspaper coupons. Such discounts are considered retailers' coupons under Virginia sales and use tax policy. The application of the tax to such coupons is addressed in Title 23 of the Virginia Administrative Code 10-210-­430. The regulation provides, in pertinent part, that "[t]he value of a retailer's coupon is not included in the sales price of the advertised merchandise. For example, when a retailer accepts $.80 in cash and a retailer's coupon valued at $.20 for a product, the tax is computed on $.80. This coupon has no value to the retailer and is an advertisement of a discount."

The Taxpayer charges the sales tax on its parts sales before deducting the discounts. The Taxpayer then reports the discounted sales to the Department and remits the tax computed on the discounted sales amounts. This is an error and is the contributing factor as to why the Taxpayer remits less tax than collected. It is my understanding that this has been a practice of the Taxpayer in the previous audit as well as in the current audit. To correct this issue for the future, the Taxpayer is required to collect and remit the sales tax on retailer coupon transactions in accordance with the above regulation.

Adjustment for Unreported Sales

As a result of the Department's audit, the Taxpayer was assessed for failure to report sales realized from one of its locations, Store #5. During the appeal, it was discovered that sales from Store #5 were added twice to unreported sales for the months of February 2011 through October 2011. As such, the assessment will be adjusted to reduce unreported sales by the overstated sales attributable to Store #5.

CONCLUSION

Based on this determination, the audit will be returned to the field audit staff to make the appropriate adjustments to the audit within 30 days of the letter date. A revised bill, with interest accrued to date, will be mailed to the Taxpayer after the revisions are complete. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the revised bill.

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 letter, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5030466981.M