Could Virginia estimate a floor-covering dealer's sales tax from a prior audit when current records were inadequate?

Plain-English summary

Virginia accepted an estimated audit based on the dealer's prior audit because the dealer did not provide adequate current records. The floor-covering contractor gave the auditor unsigned federal returns and monthly income statements, but did not reconcile those revenues to sales reported on its sales-tax returns.

Dealers had to keep sales, purchase, and account records sufficient to determine tax. When those records were missing, Virginia could reconstruct liability from the best information available. Here, the prior audit was acceptable because the taxpayer supplied no valid current data and did not prove the estimate wrong.

Virginia nevertheless allowed 45 days after the determination for the dealer to provide enough documentation to establish its actual liability. Without that timely proof, the assessment would be upheld and become payable.

Common questions

Q: Can seasonal business patterns defeat an estimated audit by themselves?
A: No. The taxpayer still needed valid records showing why the estimate was wrong.

Q: Was the dealer given another chance to document actual sales?
A: Yes. The ruling allowed 45 days to submit sufficient records to the auditor.

Citations and references

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

Subject

Dealer fails to maintain adequate records

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-41

Original ruling text

April 12, 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 period June 2007 through May 2010. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is engaged as a contractor selling and installing floor coverings. At the beginning of the audit, the Taxpayer provided the auditor with three unsigned federal tax returns and monthly income statements. The auditor asked the Taxpayer to reconcile the differences between the monthly income statement revenues and the sales reported on the sales tax returns. The Taxpayer did not provide the reconciliation. Because there was no other informational data provided to the auditor, the Department's audit assessment was estimated based on the Department's prior audit of the Taxpayer. The Taxpayer contends the auditor reviewed a minimal amount of records and because of seasonal variances in the business, a revision of the Department's assessment is warranted.

DETERMINATION

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.

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. As the Taxpayer failed to maintain adequate records during the audit period to substantiate actual tax liabilities, the auditor used the best available information (the Department's prior audit) to estimate the Taxpayer's tax liability. While I note that the Taxpayer contends that the auditor only reviewed one month's worth of records of its seasonal business, the auditor documents that the Taxpayer would not supply valid data to complete a current review of the Taxpayer's actual tax liabilities.

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.

Based on the foregoing, and absent evidence to the contrary, I find that the audit methodology applied in this case is acceptable. Accordingly, there is no basis to revise the audit findings at this time. I will, however, allow the Taxpayer 45 days from the date of this letter to provide documentation to the auditor sufficient to determine the actual tax liability for the current audit period. If the information is not provided within the time allotted, the assessment will be upheld and become due and payable.

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 matter, please contact * of the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4827999937.Q