What audit relief did Virginia grant a food and facilities management company that disputed untaxed sales, purchases, penalties, and a local meals-tax overpayment?

Subject

Documentation controlled sales, purchases, penalties, and meals-tax relief

Plain-English summary

Virginia granted only limited audit relief. A customer's direct payment permit supported removal of one sale, and vendor documentation supported removal of one purchase. The other contested sales and purchases stayed in the audit because the company did not supply the requested records.

The company's claimed overpayment involved local meals tax that it said it had mistakenly remitted to the state. Its schedule did not prove the amount paid or the requested reduction in reported sales. The Commissioner allowed 45 days to provide the locality's audit report, invoices, proof of payment, and other verification. If verified, the Department would transfer the meals tax to the locality; the locality would decide whether to issue a credit or refund.

Virginia also refused to waive the audit penalties. The company had 94% sales-tax compliance but only 35% use-tax compliance on its sixth audit. Department policy did not waive the sales penalty for tax collected but not remitted, the low use-tax compliance did not qualify for automatic waiver, and the stated cooperation did not amount to exceptional mitigating circumstances. The 20% post-amnesty penalty also remained.

Result: the assessment would be revised for the two supported items. The remaining assessment and penalties stood, subject to review of the meals-tax documents.

What this means for you

• Preserve invoices, exemption or direct-payment documents, vendor records, and proof of remittance for the full audit period.
• A valid direct payment permit can shift collection responsibility, but unsupported claims can still fail.
• Cooperation with an auditor does not by itself establish exceptional grounds for penalty waiver.
• A local tax mistakenly paid to Virginia may still require the locality to decide the ultimate refund.

Common questions

Q: Did the company win its sales and use tax appeal?

A: Only in part. One sale and one purchase were removed; the other undocumented items remained.

Q: Did Virginia order a refund of the local meals tax?

A: No. The company first had to prove the overpayment. Virginia would then transfer verified tax to the locality, which would decide any credit or refund.

Q: Why were the penalties not waived?

A: The use-tax compliance ratio was below the automatic-waiver threshold, collected sales tax had not been remitted, and the stated reasons were not exceptional mitigating circumstances.

Citations and references

• Va. Code §§ 58.1-624(D), 58.1-633, 58.1-635, 58.1-1840.1(F)(1), and 58.1-3833(C).
• 23 VAC 10-210-470; 23 VAC 10-210-2032(B)(3), (5), and (8); 23 VAC 10-20-165(F)(1).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-216

Original ruling text

December 8, 2015

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

Dear *:

This is in response to the letter 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 apologize for the delay in responding to your appeal.

FACTS

The Taxpayer provides food and facilities management services, as well as other support services. An audit by the Department resulted in the assessment of sales tax on sales of tangible personal property and the assessment of use tax on purchases of assets and other tangible personal property.

The Taxpayer contests the sales tax assessed on certain untaxed sales, as well as the use tax assessed on certain untaxed purchases of tangible personal property. The Taxpayer also requests waiver of the penalty assessed on tax collected but not remitted and the purchases held in the audit. In addition, the Taxpayer submits a claim of tax overpayment to the Department.

DETERMINATION

Virginia Code § 58.1-633 states that every dealer required to make a return "shall keep and preserve suitable records of the sales, leases, or purchases . . . taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner." The record keeping requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-470.

Sales

In regard to line 22 of the sales exception list, the Taxpayer furnished a direct payment permit from the customer but did not furnish any sales invoices. The direct payment permit provisions of Va. Code § 58.1-624 D provide that upon receipt of a direct payment permit number, a dealer is absolved from all duties and liabilities for the collection and remittance of the tax with respect to sales, distributions, leases or storage of tangible personal property to such permit holder. Based on the direct payment permit, I find basis to remove line 22 of the non-contested sales from the audit.

In regard to the other contested sales, the Taxpayer requested additional time to provide documentation to support any claims that it may raise. Such additional time was granted but no additional documentation was provided. Lacking the documentation to support its claim, the Taxpayer has not met the burden of proof required in this instance. As such, no further adjustments may be made to the sales held in the audit.

Purchases

Based on the vendor documentation furnished for line 9 of the purchases exception list, I find basis for the removal of such item from the audit.

The Taxpayer requests the removal of lines 26 and 27 from the purchases exception list on the basis that such contested items represent payments made to a vendor for the long term lease of motor vehicles. The Taxpayer claims that these lease payments included Virginia sales tax. The Taxpayer indicates that the vendor does not provide a monthly hard copy invoice but bills electronically without tax details provided. At the time of audit, no documentation was furnished to support this claim. After the appeal was filed, the Taxpayer was given additional time to furnish evidence to support its claim but no documentation has been furnished. Lacking the documentation to support its claim, the Taxpayer has not met the burden of proof required. As such, the contested items must remain in the audit.

The Taxpayer disputes that tax was assessed correctly on other purchases held in the audit and requests additional time to provide documentation in support of its claim. After receipt of the appeal, the Taxpayer was given additional time to furnish evidence to support its claim but no such evidence has been furnished. Lacking the documentation to support its claim, the Taxpayer has not met its burden of proof. As such, no further adjustments may be made to the purchases held in the audit.

Local Meals Tax

The Taxpayer was audited by a Virginia locality for meals tax for periods that overlap the Department's audit. In the course of the locality's audit, the Taxpayer discovered that it had remitted both the retail sales tax and the locality's meals tax to the Department. The erroneous remittance of the meals tax to the Department occurred from January 2009 through June 2009. During this six month period, the Taxpayer claims that it was not registered to report the meals tax to the locality but was collecting such tax in accordance with a contract with its customer. The Taxpayer furnishes a schedule to show how it computed the overpayment to the Department.

The documentation furnished does not establish that the claimed overpayment amount was remitted to the Department. Nor does the documentation establish that the reported sales should be reduced as claimed. In order to verify the Taxpayer's claims, complete documentation to support its claims must be furnished to the Department's auditor within 45 days of the date of this determination. This documentation must include the locality's audit report, sales invoices, documentation establishing that tax was overpaid to the Department as claimed, and any other documentation needed by the auditor to verify this overpayment.

Virginia Code § 58.1-3833 C provides that “[a]ll food and beverage tax collections and all meals tax collections shall be deemed to be held in trust for the county, city or town imposing the applicable tax." [Emphasis added.] Thus, regardless of the fact that the Taxpayer was not registered with the locality, the part of the tax collection that was intended as a collection of the locality's meals tax is deemed to be held in trust for the locality. If the Taxpayer furnishes the requested documentation and the auditor is able to verify the extent of meals tax erroneously paid to the Commonwealth, the Department will transfer the amount of erroneously paid tax to the affected locality. Because such tax collection authority belongs to the locality, it will be the locality's decision to grant any credit or refund to the Taxpayer, as it may deem appropriate.

Penalty

A 50% penalty rate was applied to the sales tax collected but not remitted that was held in the audit for the period October 2006. A 50% penalty rate was also applied to the untaxed assets included in the audit. The 50% penalty rates consist of the 30% compliance penalty and the 20% post-amnesty penalty. In addition, a similar 50% penalty rate was applied to other untaxed purchases of tangible personal property for the periods June 2006 through May 2009. A 30% penalty rate was applied to the untaxed purchases assessed for the periods June 2009 through December 2010.

The Taxpayer requests waiver of these penalties based on the following reasons: (1) any final amount of tax found to be due in this assessment was not an intentional avoidance of the tax; (2) the Taxpayer was cooperative with the auditor; (3) the Taxpayer was agreeable to signing the requested statute extensions; and (4) all records requested by the audit staff were provided if possible.

None of the penalties assessed in this case are based on fraud or any evidence of intentional tax avoidance by the Taxpayer. Rather, the compliance penalty of 30% applies when there is a failure to timely report and pay the full amount of tax. See Va. Code § 58.1­635. The compliance penalty may generally be waived if a certain minimum percentage of tax compliance is achieved. For third and subsequent audits, the compliance penalty is generally waived when a taxpayer's compliance ratios meet or exceed 85% for sales tax and 85% for use tax. See Title 23 VAC 10-210-2032 B 5. In this case, the Taxpayer's percentage of compliance on this sixth audit was 94% for sales tax and 35% for use tax. In regard to the sales tax, the compliance penalty was imposed on nine sampled sales because the Department's long-standing policy does not allow waiver of the compliance penalty when a taxpayer has collected the sales tax but failed to remit it to the Department. See Title 23 VAC 10-210-2032 B 3.

In regard to use tax, the compliance penalty was imposed because the level of compliance was well below the threshold for automatic waiver of the penalty. The only other basis for penalty waiver is for exceptional mitigating circumstances. See Title 23 VAC 10-210-2032 B 8. The reasons cited by the Taxpayer for penalty waiver do not constitute exceptional mitigating circumstances.

The 20% post-amnesty penalty is imposed on any tax liability that was eligible for amnesty benefits but was not paid. See subsection F 1 of Va. Code § 58.1-1840.1 and Public Document 09-140 (9/28/09). Amnesty benefits were available for retail sales and use tax periods prior to June 2009. The reasons cited by the Taxpayer for penalty waiver do not provide sufficient justification to waive the post-amnesty penalty. Based on all of the foregoing, I find no basis for waiving the penalties assessed in this case.

CONCLUSION

The assessment will be revised in accordance with this determination. Once all adjustments have been made, 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, 15 th Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

In addition, the auditor will contact you within 15 days of the date of this determination to arrange for the receipt of the additional documentation for the overpayment claim.

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. However, 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 subsection F 1 of Title 23 VAC 10-20-165.

The Code of Virginia sections, regulations 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 Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5389380078.R