Could two one-time lead-lined drywall purchases be projected across the full audit period?

Plain-English summary

Virginia abated the projected portion of the use-tax assessment because the two sample errors were isolated specialty purchases rather than normal business activity. The drywall contractor did not contest tax on the two lead-lined drywall purchases and had already paid that noncontested amount.

The Department had performed a detailed asset audit with no errors and used a one-year sample for purchases. The only sample exceptions were the two lead-lined drywall purchases, a specialty material the contractor did not normally use and bought from a nonlocal vendor because it was unavailable locally.

This was the contractor's first audit, and it had registered as an occasional consumer-use-tax filer. Considering the business, records, and one-time nature of the purchases, Virginia declined to extrapolate those errors across the full three-year period. The relief was expressly limited to this audit period.

What this means for you

• Sample errors may be removable when records show they are isolated and outside ordinary operations.
• Document why a specialty purchase occurred, whether it recurred, and how it differs from normal inputs.
• A clean review of related records can help show that sample errors are not representative.
• Removing extrapolation does not erase the tax due on the actual untaxed purchases.

Common questions

Q: Was tax on the two drywall purchases abated?
A: No. The contractor did not contest that tax and paid it; Virginia abated the projected portion.

Q: Why were the purchases nonrepresentative?
A: Lead-lined drywall was an unusual specialty item, purchased only once from that vendor and not normally used by the contractor.

Q: Did the ruling bar sampling in future audits?
A: No. The determination limited relief to this audit period.

Citations and references

• Virginia Public Document 02-103.

Subject

Purchases were isolated in nature and not a normal part of the Taxpayer's business.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-39

Original ruling text

March 20, 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 January 2009 through December 2011. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a drywall contractor. The Taxpayer was assessed consumer use tax in the audit in instances where the Virginia sales tax was not paid to the vendor at the time of the sale. The purchases were for lead lined drywall and represent the two exceptions included on the Purchases Exceptions list in the audit. The Taxpayer states that the lead lined drywall at issue is a specialty item, and that it does not typically use lead lined drywall in its applications. The Taxpayer maintains the purchases at issue were one-time purchases from the vendor, and that the purchases were made from the vendor at issue because the product was not available from a local vendor.

The Taxpayer does not contest the assessment of tax on the charges at issue. However, the Taxpayer does contest the extrapolation of the purchases sample over the entire audit period. The Taxpayer states that it conducted an extensive review of all invoices and receipts over the audit period, and found that it had complied with and had paid all Virginia sales tax as required. The Taxpayer maintains that the extrapolation is unfair and requests that the extrapolation be deemed incorrect and the assessment related to the extrapolation abated. The Taxpayer has paid the non-contested assessment in full.

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 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. Public Document 02-103 (6/24/02)

In this instance, the Taxpayer's assets and purchases records were audited by the Department. A detailed audit was performed on the assets, and the purchases were audited based upon a one year sample. The audit of the Taxpayer's assets records showed no errors in the Taxpayer's compliance. The audit of the Taxpayer's purchases records showed two exceptions in the sample period. The audit at issue is a first generation audit for the Taxpayer. I understand that the Taxpayer has registered for the Virginia consumer use tax as an occasional filer.

Upon review of the audit report and the information presented, I find that the purchases at issue are isolated in nature and not a normal part of the Taxpayer's business. Based upon the factors enumerated above and the nature of the Taxpayer's business, I find that the purchases at issue represent a one-time event that occurred during the audit period. Accordingly, for the purpose of this audit period only, the contested portion of the assessment will be abated in full.

The public document cited is 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 response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5170576684.P