Which Virginia audit items and penalties were removed for a meal-service provider?

Plain-English summary

Virginia granted partial relief: it removed four documented exempt sales and waived the ordinary sales-tax audit penalty, but kept the consumer-use-tax penalty and the penalty on unremitted sales tax.

The taxpayer's documentation established that four challenged sales were made to exempt clients, so those line items came out of the audit. That correction raised the sales-tax compliance ratio on the taxpayer's fifth audit from 62% to 99.9%.

For a third or later audit, the regulation allowed waiver when sales-tax compliance reached at least 85%. Virginia therefore waived the penalty on the remaining sales-tax audit deficiency. The separate penalty for sales tax that had been collected but not remitted was not covered by that waiver.

The use-tax result differed. Its compliance ratio was only 9%, far below the 85% threshold. The taxpayer cited good faith, but the regulation did not treat ordinary good-faith efforts to collect, pay, or accrue tax as exceptional mitigating circumstances. That penalty remained.

What this means for you

• Exemption documentation can change both the tax measure and the audit compliance ratio.
• Sales-tax and consumer-use-tax compliance are tested separately.
• A ratio-based waiver may not cover tax collected from customers but never remitted.
• Good faith alone may not satisfy the exceptional-circumstances standard.
• Recalculate penalty ratios after every successful audit adjustment.

Common questions

Q: Which sales were removed?
A: Four challenged line items supported by documentation showing sales to exempt clients.

Q: Why was the sales-tax penalty waived?
A: The revised compliance ratio was 99.9%, above the 85% threshold for this fifth audit.

Q: Did the waiver cover unremitted sales tax?
A: No. That penalty remained.

Q: Why did the use-tax penalty remain?
A: The use-tax compliance ratio was only 9%, and good faith was not an exceptional mitigating circumstance.

Citations and references

• Va. Code § 58.1-1821.
• 23 VAC 10-210-2032 B 1, B 3, B 5, and B 8.
• Virginia Public Document 06-140, discussed for reconsideration conditions.

Subject

Provider of meal services for various facilities; tax on untaxed sales and purchases

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-198

Original ruling text

October 31, 2013

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

Dear *:

This is in response to the letter submitted by * requesting correction of the retail sales and use tax assessment issued to *** (the "Taxpayer") as a result of an audit for the period June 2006 through December 2010. I understand that you are now the contact person for the Taxpayer in this matter.

FACTS

The Taxpayer provides meal services for various facilities. An audit resulted in the assessment of sales and use tax on untaxed sales and purchases of tangible personal property. The Taxpayer takes exception to several sales included in the audit. In addition, the Taxpayer requests abatement of the assessed penalty on the basis that it acted in good faith.

DETERMINATION

Sales Exceptions

The Taxpayer disputes the tax assessed on line items 1, 3, 4, and 5 included in the Department's sales exceptions list on the basis that these sales were to exempt clients. Based on the documentation provided, I find basis for the removal of these items from the audit.

Penalty

The assessment of penalty on tax audit deficiencies is mandatory. See Title 23 of the Virginia Administrative Code (VAC) 10-210-2032 B 1. Notwithstanding, the penalty regulation allows for its waiver if a certain level of compliance is achieved or if exceptional mitigating circumstances exist. See Title 23 VAC 10-210-2032 B 5 and 8.

Pursuant to Title 23 VAC 10-210-2032 B 5, penalty may be waived on third and subsequent audits if the Taxpayer's compliance ratio for sales tax meets or exceeds 85%. Based on the above sales tax revision, the compliance ratio for sales tax is recomputed from 62% to 99.9%.

Because the recomputed sales tax compliance ratio on this fifth audit is greater than 85%, the penalty assessed with respect to the sales tax will be waived. This waiver does not apply to the penalty assessed on the unremitted sales tax. See Title 23 VAC 10-210-2032 B 3.

Also, pursuant to Title 23 VAC 10-210-2032 B 5, penalty may be waived on third and subsequent audits if the Taxpayer's compliance ratio for use tax meets or exceeds 85%. In this regard, penalty was assessed with respect to the use tax because the use tax compliance ratio is only 9%. Pursuant to Title 23 VAC 10-210-2032 B 8, penalty may also be waived for exceptional mitigating circumstances. Good faith actions to collect, pay and accrue the tax do not constitute exceptional mitigating circumstances. Lacking any exceptional mitigating circumstances or a sufficient level of use tax compliance, I find no basis for relief of the penalty assessed regarding the consumer use tax in this audit.

CONCLUSION

The audit will be revised in accordance with this determination. A revised bill, with interest accrued to date, will be sent to the Taxpayer for the remaining balance owed. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 23 rd Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

Although you asked to be notified prior to the issuance of a determination letter if it was not consistent with the relief requested in your appeal, the Department does not provide such notifications. A taxpayer that is issued a determination that is not in its favor in whole or in part may request a reconsideration provided it meets certain conditions as described in § 6 A of Public Document 06-140 (11/29/06).

The Code of Virginia section, regulation and public document cited are available on-line 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, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5389379986.R