Could a hotel replace Virginia's sample assessment with a detailed audit of one customer's sales?

Plain-English summary

Virginia upheld the sampled sales-tax assessment rather than requiring a detailed audit. The hotel had repeatedly treated one customer's lodging sales as exempt, but the customer was neither a federal instrumentality nor exempt for meals and lodging under its nonprofit letter.

Audit sampling uses errors in a representative period to project likely similar errors across the full audit. A transaction can be removed when the taxpayer proves it is isolated and outside normal business activity, even if it is large.

Here, the customer's accommodation purchases were recurring and were a consistent part of the hotel's ordinary lodging business. The hotel did not prove the sample or assessment was flawed, so the projected result remained in place.

What this means for you

• Read exemption letters for transaction-specific exclusions such as meals and lodging.
• Confirm that a claimed government customer is actually a government instrumentality.
• A large sample item is not automatically nonrepresentative.
• To remove an item from a sample, document why it was isolated and outside normal operations.

Common questions

Q: Were the customer's lodging purchases exempt?
A: No. The nonprofit exemption letter specifically did not apply to taxable meals and lodging.

Q: Why did Virginia keep the transactions in the sample?
A: They were recurring accommodation sales within the hotel's normal business.

Q: Who had the burden to disprove the assessment?
A: The taxpayer, because Virginia assessments are presumed correct.

Citations and references

• Va. Code § 58.1-205.

Subject

Untaxed sales and purchases

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-33

Original ruling text

March 15, 2013

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 May 2009 through March 2012.

FACTS

The Taxpayer operates a hotel and restaurant. As a result of the Department's audit, an assessment was issued for untaxed sales and purchases. The Taxpayer believed that the sales generated from one particular customer were exempt because the customer was an entity of the United States government. The Taxpayer now understands that the customer is not a governmental entity and is subject to the tax as are any of its other customers. The Taxpayer, however, contests the use of the sample method and contends that the sales at issue should be subjected to the tax based on a detail audit method.

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 detail audit would not prove beneficial to either the auditor or the client. When sampling techniques are applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detail audit. The purpose of the audit sample is to determine a factor for errors within a representative select 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.

In this instance, the Taxpayer's sales at issue represent sales to an organization that the Taxpayer believed to be an instrumentality of the United States government, and therefore exempt of the tax. The auditor determined that the customer was not an instrumentality of the federal government. The auditor also found that the customer is a nonprofit organization that was providing the Taxpayer with a nonprofit tax exemption letter claiming exemption from the tax. The tax exemption letter, however, specifically states that the exemption is not applicable to purchases of taxable services such as meals and lodging. Accordingly, the sales at issue were not exempt from the tax. These sales were then used as the basis for the sample and the resulting sales tax assessment.

For an item to be removed from the audit sample the Taxpayer must prove that the transactions at issue are isolated in nature and not a normal part of the Taxpayer's business activity regardless of whether such transactions may constitute a large percentage of the taxable measure in the audit sample. The Taxpayer's records reflect that the sales at issue were not isolated in nature and were a consistent part of the Taxpayer's business, the rental of accommodations.

Virginia Code § 58.1-205 provides that a tax assessment issued by the Department is deemed prima fade correct. The burden is upon the Taxpayer to prove otherwise. Based on a review of the audit report and the information presented, I find no basis to revise the Department's use of the sample to a detailed audit of sales. The Taxpayer has not established or submitted proof that the assessment is flawed or in error. Accordingly, I find that the Department's use of a sample methodology and the resulting assessment to be correct.

An updated bill, with interest accrued to date, will be mailed to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days from the date on the revised billing.

The Code of Virginia section cited is available on-line in the Laws, Rules and Decisions section of the Department's website 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/1-5139568492.Q