Did a hotel prove that Virginia's Invoice Capture Tool used the wrong sample population, gross-up, or exception total in its audit?

Plain-English summary

Virginia upheld the hotel's Invoice Capture Tool sample, including its population, gross-up, and total exception values. The hotel challenged a stratified random sample used in its August 2007-July 2010 sales-and-use-tax audit.

The hotel's source data contained more than $15 million of negative transactions. The auditor removed offsetting positive and negative transactions above $20,000, then excluded the remaining negative transactions from the sampled population under Department policy. The hotel had been told it could offset a removed negative transaction against a corresponding positive transaction found to be an exception, but it supplied no such matches during the audit.

Virginia explained that a representative sample produces an error factor that is projected across the audit period to account for likely similar underpayments and overpayments. The Invoice Capture Tool uses strata so fewer items in each group need detailed review.

The Commissioner found no error in the population or calculations. Because an assessment is presumed correct and the hotel did not prove otherwise, the fully paid assessment remained unchanged.

What this means for you

• Reconcile positive and negative entries before giving audit data to the Department.
• If an excluded credit offsets a sampled exception, identify the matching transaction during the audit.
• A sampling challenge needs a demonstrated computational or population error, not merely a different interpretation of summary fields.
• Preserve the source data, strata, exception list, and gross-up calculations needed to reproduce the result.

Common questions

Q: Why did Virginia use sampling?
A: Sampling was used to estimate errors across a large audit population without examining every transaction.

Q: How were transactions over $20,000 treated?
A: The auditor removed offsetting positive and negative transactions above that amount.

Q: Could negative transactions offset positive exceptions?
A: Yes when corresponding transactions were identified, but the hotel did not supply those matches during audit.

Q: What was the outcome?
A: The sample and paid assessment were upheld.

Citations and references

• Va. Code § 58.1-205 1.

Subject

Audit Sampling Method questioned

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-125

Original ruling text

July 3, 2013

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

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer") in which you seek correction of the retail sales and use tax assessment issued for the period August 2007 through July 2010. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates as a hotel. The Department's Invoice Capture Tool (ICT) was used in the performance of the audit at issue. The Taxpayer maintains that the representations in the stratified random sample document are not accurately stated. The Taxpayer contends that there is a discrepancy in the population subject to sampling. The Taxpayer also contends that the total exception value on the same document is overstated by the amount of the exceptions and argues that the gross-up amount should be the true total exception value. For these reasons, the Taxpayer requests that the assessment be reduced.

DETERMINATION

Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial either to the auditor or the client. When sampling techniques are properly applied, the final results are usually within a narrow percentage range of the actual amount that would have been determined by a detailed audit. The purpose of the audit sample is to determine a factor for errors within a representative selected period. Once the error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid. Likewise, this same methodology is used when considering transactions on which Virginia tax has been overpaid. The ICT sampling methodology provides a more comprehensive approach to reviewing a taxpayer's financial records. Use of the ICT makes it easier to draw a representative sample from which a smaller number of items may be examined in each stratum than to sample the total population.

In this instance, the discrepancy at issue in the Taxpayer's letter is the difference between the ICT sample and the original transaction totals provided by the Taxpayer. The information provided by the Taxpayer included over $15 million in negative transactions. The auditor removed all offsetting negative and positive transactions over $20,000. In accordance with Department policy, the remaining negative transactions, which equal the discrepancy amount at issue, were removed from the population sampled by the ICT. The Taxpayer was informed that any negative transactions that were removed from the population could be offset against any corresponding positive transactions that were determined to be exceptions. During the performance of the audit, the Taxpayer did not provide any offsetting positive transactions to the negative transactions included in the population for the gross-up. Based upon the information presented, I find that the population subject to sampling, the gross-up and the total exception values are correct.

Virginia Code § 58.1-205 1 states that "Any assessment of a tax by the Department shall be deemed prima facie correct." The burden of proving that the assessment is incorrect rests with the taxpayer. The Taxpayer has not met its burden of proving that the sampling procedures, or any figures in the sample are incorrect as provided in Va. Code § 58.1-205 1.

Based on this determination, the assessment is correct. The bill at issue has been paid in full.

The Code of Virginia section cited and other reference documents are available on­line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. 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/1-5251540388.P