Did a customer's later use-tax payment remove an untaxed sale from a Virginia seller's audit sample?

Subject

Manufacturer of automotive servicing equipment/ Accessories/valid exemption certificates

Plain-English summary

A customer's later use-tax payment did not remove the seller's untaxed sale from Virginia's audit sample. The seller's collection duty was fixed at the transaction unless the customer provided a valid exemption certificate or direct-pay permit. When a customer proved it later paid the tax, the Department kept the transaction in the sample but allowed a one-time credit against the assessment.

For Customer C1, documented tax payments on tire changers and a maintenance package produced one-time credits, while those sales remained in the sample. A tire-balancer sale remained taxable because the seller supplied no exemption proof.

For Customer C2, steel wheel weights were removed from the sample because documentation showed their cost was factored into the charge for balancing customers' tires and they were bought for resale. A tire-changer sale remained in the sample with a one-time credit for tax the customer paid. Safety shields remained taxable because employees used them rather than reselling them.

The Department returned the audit for these adjustments and a revised assessment.

What this means for you

Sellers

Collect tax or obtain a valid exemption certificate or direct-pay permit at the time of sale. A customer's later self-assessment does not retroactively eliminate the seller's error from a projected audit sample.

Audited businesses

Proof of duplicate tax payment can still matter. It may support a one-time credit even when it does not change the sample's error factor.

Automotive-service businesses

Product use controls resale treatment. Consumable weights included in a taxable customer service charge qualified for resale on these facts; employee safety equipment did not.

Common questions

Q: Why leave a sale in the sample if the customer paid the tax?
A: The customer's payment did not relieve the seller's collection duty. The Department kept the transaction in the sample and handled the proven payment through a one-time credit.

Q: Were all accessories exempt for resale?
A: No. The documented wheel weights qualified, but safety shields used by employees were taxable consumption.

Q: What happened to the unsupported tire balancer?
A: It remained in the sample because no documentation established an exemption.

Citations and references

• Public Documents 04-75, 06-122, and 07-68.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-56

Original ruling text

April 25, 2014

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 September 2009 through June 2012. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a manufacturer of automotive servicing equipment, accessories and consumables. The Department's audit disclosed that the Taxpayer made untaxed sales or sales that were not supported by valid exemption certificates. The Taxpayer disagrees with the auditor's sample computation and requests the removal of sales from the sample computation to two specific customers, noted as customers C1 and C2. The Taxpayer has provided documentation supporting its request.

DETERMINATION

Sample

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 the Virginia tax has not been paid.

In Public Document (P.D.) 06-122 (10/17/06), a taxpayer was assessed tax on untaxed sales to a customer. The taxpayer contended that the sales should have been removed from the audit sample because the customer paid the tax on the transactions through its own tax filings or by audit assessment. The taxpayer made a number of untaxed sales during the sample period that were not supported by exemption certificates or direct pay permits. The Tax Commissioner concluded that the taxpayer's obligation to collect sales tax on sales to its customers was not dependent on whether such customers paid use tax directly to the Department. The exception to this general rule and a taxpayer's obligation to collect the tax is when the purchaser provides the seller with a valid exemption certificate or a valid direct pay permit. Similarly, in this instance, a customer remitting use tax to the Department as a result of an audit assessment or through its own efforts is not sufficient to relieve the Taxpayer from its obligation to collect the tax at the time of the sales transaction.

Credits

The Department has previously addressed the issue of credits included in sample calculations. In those prior cases, sales held taxable in the audit in which the customers self-assessed the use tax were contested. The Department upheld the sales audit sample techniques while finding no basis for recalculating the sales error factors. However, one time credits were applied to the assessment for the taxes that were paid by the customers. See P.D.s 04-75 (8/25/04) and 07-68 (5/10/07).

Customer C1

C1 purchased various equipment from the Taxpayer, including tire changers, a lathe, a maintenance package and a tire balancer. Based on additional information provided, the Department's auditor found evidence that C1 had accrued and remitted the tax on the tire changers and the maintenance package. Accordingly, the sales at issue will remain in the Department's sample computations and a one-time credit will be allowed against the Department's assessment.

With regard to C1's sale of the tire balancer, there has been no documentation provided for this transaction to support the Taxpayer's assertion that the sale was exempt from the tax. Accordingly, this item will remain in the Department's sample computation.

Customer C2

C2 purchased steel weights, a tire changer and safety shields. The Taxpayer has provided additional documentation demonstrating that the wheel weights are used for balancing customer tires, and the cost of the weights are factored in determining the charge to the customer for balancing tires. These items are for resale and will be removed from the Department's sample computations.

C2 has provided proof that the customer has accrued and remitted the tax to the Department on the tire changer. Accordingly, the sale of the tire changer will remain in the Department's sample computations and a one-time credit will be allowed against the Department's assessment.

The auditor's review of the sale of the safety shields to C2 indicates they are used by C2's employees for safety purposes. Such sales are considered taxable sales of tangible personal property for C2's own use and consumption and are not afforded exemption from the tax. Accordingly, this sale will remain in the Department's sample computations.

CONCLUSION

Based on the foregoing, the Department's audit will be adjusted and a revised assessment and audit report will be issued. No further interest will accrue provided the revised assessment is paid within 30 days from the billing date. I understand that a member of the Department's Appeals and Rulings staff has contacted you as requested and discussed the appeal with you.

The Code of Virginia section and public documents cited are available on-line in the Laws, Rules and Decisions section of the Department's website located at www.tax.virginia.gov . If you have any additional 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/1-5488532802.Q