Could a grocery store overturn estimated tax and penalties after collecting sales tax but failing to file and remit it?

Plain-English summary

Virginia upheld the estimated audit, fraud penalty, post-amnesty penalty, and interest on the existing record. The grocery store had collected sales tax but lacked register tapes, journals, ledgers, returns, and other accounting records for most of the audit period.

Auditors observed one low-sales day and one high-sales day, averaged them into a monthly estimate, allowed 5% for exempt sales, divided the rest between food and nonfood, and credited ten months already paid. Without contrary documentation, the store did not overcome the assessment's presumption of correctness.

The store's accountant had prepared returns, and the store knew it had not remitted most collected taxes. Because those funds were held in trust for Virginia and were retained for the store's use, the 50% fraud penalty was proper. Amnesty-eligible periods also carried the extra 20% penalty, and statutory interest could not be waived.

Virginia still directed the auditor to review records that had become available after the audit. Any supported revision would produce a new bill, and Collections would arrange a repayment plan.

Common questions

Q: Could Virginia estimate sales without the store's books?
A: Yes. The law allowed use of the best information available when adequate records were missing.

Q: Why was the fraud penalty upheld?
A: The store knowingly retained sales tax it had collected for the Commonwealth.

Citations and references

• Va. Code §§ 58.1-205, 58.1-618, 58.1-625, 58.1-633, 58.1-635, 58.1-1812, and 58.1-1840.1.
• 23 VAC 10-210-470.

Subject

Collecting the sales tax on its sales, but not reporting that tax to the Department.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-35

Original ruling text

March 28, 2012

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 assessment issued to * (the "Taxpayer") for the audit period September 2007 through August 2010. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates an independent grocery store. The Department's audit disclosed that the Taxpayer was selling its products, collecting the sales tax on its sales, but not reporting that tax to the Department. The Department's Collections Office had been in contact with the Taxpayer in an attempt to have the Taxpayer file missing sales tax returns. Since the missing returns were not being filed, the Collections Office referred the Taxpayer to the Office of Compliance - Field Operations, which conducted the audit at issue.

The Taxpayer did not have cash register tapes, sales journals, general ledgers, Forms ST-9 or any other accounting records for the months prior to August 2010. Accordingly, the Department used the best information available to determine the Taxpayer's liability owed to the Department.

The Taxpayer disagrees with the audit results and contends that it now has records available for review. After the audit was closed, the Taxpayer filed the remainder of its returns for the audit period without payment. The Taxpayer states that its records and returns as filed indicate that the correct balance due the Department is far below the amount determined by the Department's audit. The Taxpayer seeks to make payment of the balance due, as determined by the returns filed after the audit, and has submitted a payment of *. The Taxpayer requests that it be allowed to enter into a payment agreement based on its figures. The Taxpayer also seeks a waiver of the penalties and interest.

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.

Estimate of Sales

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. Because of the lack of documentation, the Department's auditor conducted an observation of the Taxpayer's business. In such an observation, Department auditors positioned themselves at the Taxpayer's business and observed all of the sales transactions that were made during certain business days. Two such days were chosen that represented low and high sales of an average week. The resulting gross sales figures were averaged and projected for a monthly total. An allowance of 5% was made for exempt sales, with the balance allocated to unremitted non-food sales and to unremitted food sales. Because the Taxpayer filed and paid the tax for 10 months of the 36-month audit period, a credit was allowed for the taxes that had been paid.

Based on the lack of records 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 assessment is overstated, the Taxpayer has not provided any additional documentation or evidence to prove that the method applied in this case to determine the tax liability is unreasonable.

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. Accordingly, I find that the Department's methodology used to determine the audit liability is correct.

Fraud Penalty

Virginia Code § 58.1-635 provides, in pertinent part:

When a dealer fails to make any return and pay the full amount of the tax required by this chapter, there shall be imposed, in addition to other penalties provided herein, a specific penalty to be added to the tax . . . In the case of a false or fraudulent return where willful intent exists to defraud the Commonwealth of any tax due under this chapter, or in the case of a willful failure to file a return with the intent to defraud the Commonwealth of any such tax, a specific penalty of fifty percent of the amount of the proper tax shall be assessed.

I note, specifically, that the Taxpayer's CPA prepared sales tax returns for taxes collected by the Taxpayer for the period under audit. The Taxpayer's CPA then states that the Taxpayer "negligently" did not file all of the returns as required. Based on the information presented, it is clear that the Taxpayer was aware of the fact that it had not remitted to the Department a majority of the taxes collected for the months for which returns had not been filed with the Department. Pursuant to Va. Code § 58.1-625, the taxes collected by the Taxpayer were held in trust for the Commonwealth. The Taxpayer chose to retain those funds for its own use. The fraud penalty, assessed as a result of the Taxpayer's willful failure to remit the tax it collected to the Department, is properly applied and there is no basis for its waiver.

Post-Amnesty Penalty

Virginia Code § 58.1-1840.1 established the Virginia Tax Amnesty Program and provides that:

If any taxpayer eligible for amnesty under this section and under the rules and guidelines established by the Tax Commissioner retains an outstanding balance after the close of the Virginia Tax Amnesty Program because of the nonpayment, underpayment, nonreporting or underreporting of any tax liability eligible for relief under the Virginia Tax Amnesty Program, then such balance shall be subject to a 20 percent penalty on the unpaid tax. This penalty is in addition to all other penalties that may apply to the Taxpayer.

Because the audit at issue covered Amnesty-eligible periods (taxable periods ending on or before May 31, 2009), and a fraud penalty was properly applied, the post­amnesty penalty was also properly assessed.

Interest

Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it simply represents a fee for the use of money over a period of time. In this case, the Taxpayer had use of the money that was properly due the Commonwealth. Therefore, I find no basis to waive the interest assessed as a result of the Department's audit.

CONCLUSION

The balance of the Department's assessment is correct. However, I will request that the Department's auditor contact the Taxpayer's CPA to review any records that may now be available in support of the Taxpayer's contention that the Department's assessment is overstated. If a revision is warranted, the auditor will revise the assessment and an updated bill will be sent to the Taxpayer. In either instance, the Department's Collections Office will contact the Taxpayer to establish a mutually agreeable plan for repayment.

The Code of Virginia sections and regulation cited are available on-line in the Tax Policy Library section of the Department's website located at www.tax.virginia.gov . If you have any questions regarding this determination, please contact * of the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4728072700.Q