Could a telecommunications company reduce an Invoice Capture Tool asset gross-up when the supporting records for related contested assets had not been provided?

Subject

An audit resulted in the assessment of use tax on purchases of expensed purchases and assets.

Plain-English summary

A landline telephone provider was assessed use tax on expensed purchases and assets for September 2008 through September 2011. Part of the audit used an Invoice Capture Tool (ICT) to analyze electronic invoice data and gross up asset exceptions.

The taxpayer did not identify a particular ICT asset as wrong. Instead, it asked for its liability to fall if a related company's separately contested asset exceptions were later removed. The consolidated audit calculations had been separated, so changes for one parent affected only that parent's subsidiaries.

Virginia left the gross-up in place because the requested invoices, backup detail, maintenance contracts, and other records had not been provided. Assessments are presumed correct, taxpayers bear the burden of proving an adjustment, and dealers must preserve records needed to determine tax.

Virginia nevertheless allowed the related entity 60 more days to supply the documentation and postponed collection until that related matter was finalized or the deadline passed. If supported asset removals changed this taxpayer's ICT calculation, Virginia would issue a revised bill.

Common questions

Did the taxpayer prove any specific asset should be removed? No. It raised only the contingent effect of possible adjustments in the related audit.

Was the assessment permanently fixed? Not necessarily. Timely supporting records in the related case could produce a revised ICT calculation and bill.

Citations and references

• Va. Code §§ 58.1-205(1), 58.1-1825 D, and 58.1-633 A.
• 23 VAC 10-210-470.
• Winchester TV Cable Co. v. State Tax Commissioner, 216 Va. 286, 217 S.E.2d 885 (1975).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-4

Original ruling text

February 3, 2016

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

Dear *:

This is in response to your letter requesting correction of the retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for the periods September 2008 through September 2011. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer provides landline telephone communications. An audit resulted in the assessment of use tax on purchases of expensed purchases and assets. The asset exceptions included an asset gross-up using an Invoice Capture Tool (ICT) program that enabled the transfer of the Taxpayer's electronic data ( e.g. , invoice data) to the Department, the analysis of such data, and the generation of asset exceptions.

While a consolidated audit of two parent companies was performed initially, I understand that the calculations used for each one were separated. As such, a change to one company's ICT assets will not affect the other company's ICT assets. Rather, a change to the ICT calculations of one parent company affects only the ICT calculations for the subsidiaries belonging to such parent company.

While the Taxpayer has no particular disagreement on any particular item in the ICT asset portion of the audit, it requests a reduction to its liability in the event any asset exception is removed from the ICT calculations.

DETERMINATION

Burden of Proof

Virginia Code § 58.1-205(1) sets out the statutory rule that "[a]ny assessment of a tax by the Department shall be deemed prima facie correct." This means that the Taxpayer carries the burden of proving a correction to an assessment.

For an application to court, Virginia Code § 58.1-1825(D) sets out that "[i]t shall be the burden of the applicant in any such proceeding to show that the assessment or collection or action on a transferred credit or other tax attribute complained of is erroneous or otherwise improper."

Records

Virginia Code § 58.1-633(A) sets out the statutory requirements for records as follows:

Every dealer required to make a return and pay or collect any tax under this chapter shall keep and preserve suitable records of the sales, leases, or purchases, as the case may be, 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.

In addition, Title 23 of the Virginia Administrative Code (VAC) 10-210-470 requires the following:

Records must be open for inspection and examination at all reasonable hours of the business day by the Department of Taxation. The dealer may maintain such records on microfilm.

If an assessment has been made and an appeal to the Commissioner or to court is pending, all records relating to the period covered by such assessment must be preserved until the final disposition of the appeal.

Exemptions

The courts have long held that exemptions from the retail sales and use tax are strictly construed against a taxpayer because taxation is the rule and not the exception. When a tax statute is susceptible to alternative constructions, one granting an exemption and the other denying it, the latter construction will be adopted. See Winchester TV Cable Co. v. State Tax Commissioner , 216 Va. 286, 217 S.E.2d 885 (1975).

Invoice Capture Tool (ICT) Gross-Up of Assets

While the Taxpayer requests an adjustment to the ICT assets held in the audit, the documentation requested by the Department's auditor for assets contested by a related entity has not been furnished. Because the burden of proof has not been satisfied in such other case, the ICT asset gross-up amount in the instant audit cannot be revised.

CONCLUSION

Based on this determination, the assessment is correct. Notwithstanding, I have allowed an additional sixty (60) days from the date of this letter for the related entity to furnish supporting documentation and information ( e.g. , invoices, back-up detail, maintenance contracts, etc.) to the Department's auditor for the originally contested items that, if removed, would affect the ICT calculation in the instant audit. Accordingly, I will postpone collection actions until such related case is finalized or the additional documentation is not received within the allotted time, whichever occurs sooner.

Once the ICT assets are adjusted, a revised bill will be sent to the Taxpayer for the remaining balance due, if any. For questions about the revision, please contact the Auditor, * at ***. If the ICT assets are not adjusted, 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, please contact at **.

Please note that failure to remit full payment within the 30-day period may result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's Amnesty Program. See the enclosure entitled "Important Payment Information."

The Code of Virginia sections and regulation 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/1-6037069306.R