Could a bakery receive audit credit for claiming it collected the reduced food rate but mistakenly remitted the general sales-tax rate?

Subject

Bakery lacked transaction records to prove sales-tax overpayment

Plain-English summary

Virginia agreed that the bakery products qualified for the reduced food sales-tax rate, but denied the claimed overpayment credit because the bakery could not prove what it had actually collected from customers.

The bakery said a clerical error caused it to remit the general 5% rate even though it collected only the reduced rate. Its summary reports and amended returns did not verify that claim, and the point-of-sale system did not produce detailed Z-tapes. Without daily, weekly, or monthly support, the auditor could not determine whether customers had actually paid the general or reduced rate.

Result: no overpayment credit was allowed, and the assessment remained correct.

What this means for you

• Preserve register-level records showing the tax rate charged to each sale.
• Reconcile tax collected from customers with tax reported and remitted.
• Amended returns and summary reports do not prove an overpayment by themselves.
• Document reduced-rate food sales separately and contemporaneously.

Common questions

Q: Did Virginia dispute that the bakery goods used the reduced rate?

A: No. The unresolved issue was whether the bakery had actually over-remitted compared with tax collected.

Q: Were amended returns enough to obtain credit?

A: No. Virginia required supporting sales records.

Citations and references

• Va. Code §§ 58.1-633(A) and 58.1-205.
• 23 VAC 10-210-470.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-122

Original ruling text

June 24, 2015

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

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessments issued to * (the "Taxpayer") for the period July 2008 through December 2012. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a bakery with two locations in Virginia. As a result of the Department's audits of both locations, the auditor found that the Taxpayer failed to file returns for multiple periods. The auditor extended the audit periods to include the non-filed returns. As a result, separate assessments were issued for the tax, penalty and interest on the unreported sales. The Taxpayer claims that the auditor denied credit in the audits for amended returns filed by the Taxpayer correcting a clerical error that resulted in the overpayment of the sales tax. The Taxpayer requests that the assessments be adjusted to reflect the credits for overpayment of the sales tax. The Taxpayer sites Public Documents (P.D.) 05-169 (12/13/05) and 05-78 (5/31/05) in support of its claim for credit.

DETERMINATION

Pursuant to Va. Code § 58.1-633 A, every dealer required to file a retail sales and use tax return and pay or collect such tax must keep and preserve suitable records of the sales, leases, or purchases, as the case may be, subject to the retail sales and use tax. The dealer must also maintain such other books of account as may be necessary to determine the amount of tax due, and "such other pertinent information as may be required by the Tax Commissioner." This record keeping requirement is further explained in Title 23 of the Virginia Administrative Code 10-210-470.

As a result of the Department's audit, it was determined that the Taxpayer's bakery products qualify as food for home consumption and are subject to the reduced sales tax rate. The auditor verified that the sale of bakery products qualifies for the reduced sales tax rate and estimated the tax for the periods in which no returns were filed at the reduced tax rate based on average gross sales from returns filed by the Taxpayer. However, for returns previously filed, the Taxpayer reported the tax at the 5% general sales tax rate. The Taxpayer claims that it collected the tax on such sales at the reduced sales tax rate but remitted the tax at the 5% general sales tax rate as a result of a clerical error. The Taxpayer provided the auditor amended returns and requested credit in the audit for the tax overpaid.

In this instance, the summary reports provided by the Taxpayer to complete the sales tax returns were not adequate to determine that the tax was overpaid to the Department. The auditor requested daily, weekly, or monthly reports to verify that the sales tax was collected at the reduced rate; however, this information was not provided. Moreover, because the Taxpayer's point of sale system does not provide Z-tapes, the auditor was unable to determine whether the tax was collected at the general sales tax rate or collected at the reduced tax rate on the sales at issue. Without documentation, the auditor could not verify that the sales tax was overpaid; therefore, the auditor properly denied the credit.

Virginia Code § 58.1-205 sets out that any assessment of a tax by the Department is deemed prima facie correct. This means that the burden of proving that the assessment is erroneous is upon the Taxpayer. Based on the information provided, the Taxpayer has not met this burden. Without documentation to verify the Taxpayer's contention that the tax was overpaid to the Department, I find no basis to allow a credit in the audit. Further, because this is a documentation issue, P.D. 05-169 and P.D. 05-78 cited by the Taxpayer in support of its claim for credit are not applicable in this instance.

CONCLUSION

Based on the determination in this letter, the assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer. 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, 23rd Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia sections, regulation and public documents 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/1-5614840444.T