Could Virginia estimate a restaurant's six-year sales-tax liability from one month of ABC records when the restaurant supplied no reliable sales records?

Subject

The audit assessment is based on information provided by ABC. The burden of proof is upon the Taxpayer to prove that the assessment is incorrect.

Plain-English summary

A restaurant and bar appealed a sales-and-use-tax audit covering November 2007 through June 2013. Virginia Alcoholic Beverage Control records showed that January 2012 sales had been underreported by more than 50%, so the auditor extended the period to six years and extrapolated from that month.

Virginia found the restaurant's other ABC reports unreliable because the investigation had already identified underreporting. January 2012 was the only available month with reconstructed daily sales, and comparisons with other reports and alcohol purchases also indicated substantial underreporting.

Because dealers must keep adequate sales records, Va. Code § 58.1-618 allowed the Department to use the best information available. The assessment was presumed correct under Va. Code § 58.1-205, and the restaurant had not carried its burden of proving the estimate wrong.

The Department nevertheless allowed 30 days to submit complete records for other months, such as register tapes, sales figures, and bank deposits. If adequate records were supplied, Virginia would consider expanding the sample; otherwise the original assessment would be upheld.

Citations and references

• Va. Code §§ 4.1-118, 58.1-3 C (vi), 58.1-633, 58.1-618, and 58.1-205.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-43

Original ruling text

April 7, 2016

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 audit assessment issued to your client, * (the "Taxpayer"), for the period of November 2007 through June 2013. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates a restaurant and bar. The Department's audit was conducted using information furnished to the auditor by the Department of Alcoholic Beverage Control (ABC). ABC conducted an investigation of the Taxpayer's business and seized records for the month of January 2012. Based on the records reviewed, ABC determined that the Taxpayer underreported gross sales to ABC for January 2012. ABC provided the Department the results of the January 2012 investigation in accordance with an interagency information sharing agreement pursuant to Virginia Code §§ 4.1-118 and 58.1-3 C (vi). The Department compared the information provided by ABC to the gross sales reported to the Department on monthly sales tax returns for January 2012. The result was that the Taxpayer had underreported sales to the Department for the month of January 2012 by *. Due to the fact that sales for the month of January 2012 were underreported by an amount greater than 50%, the auditor extended the audit period to six years and extrapolated the deficiency over a 68 month audit period. The auditor applied a credit in the audit for the tax paid on the sales included in the sample. The auditor also applied fraud penalty to the audit findings.

The Taxpayer takes exception to the audit findings on a number of issues. First and foremost, the Taxpayer objects to the use of a one month sample to extrapolate the sales and use tax audit liability over a 68 month audit period. The Taxpayer believes a one month sample cannot accurately reflect true sales within a restaurant due to the seasonal and cyclical nature of the restaurant industry. The Taxpayer also believes that the daily sales figures derived from the Mixed Beverage Annual Review (MBAR) reports are inherently flawed due to the wide range of difference between an average day and the high and low days with the month. The Taxpayer believes the audit findings are incorrect and requests that the audit assessment be abated. In addition, the Taxpayer claims that at no time during the audit did the auditor request records from the Taxpayer.

DETERMINATION

Records

Virginia Code § 58.1-633 states that every dealer required to make a return and collect sales tax "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 the tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner." When a dealer fails to maintain adequate records, the Department is authorized by Va. Code § 58.1-618 to use the best information available to reconstruct a dealer's sales or purchases to determine whether a tax liability exists.

While the Taxpayer argues that the one month sample is not representative of the audit period when records for other periods were readily available, it is my understanding that the other records referred to in the Taxpayer's appeal are MBAR reports filed by the Taxpayer with ABC of gross sales of alcoholic beverage and food sales. The ABC investigation revealed that the Taxpayer underreported sales on the January 2012 MBAR report; therefore, there is doubt regarding the reliability of the remaining MBAR reports.

I would also point out that a comparison of the 23 months of gross sales reported by the Taxpayer on the MBAR reports to the gross sales reported by the Taxpayer on the retail sales and use tax returns filed with the Department results in a larger audit deficiency than the extrapolation of the January 2012 gross sales provided by ABC. In addition, the auditor also reviewed purchase information provided by ABC for alcoholic beverages for the period December 2011 through November 2012. Without considering a mark-up on the alcoholic purchases, the auditor determined that the Taxpayer had grossly underreported taxable sales of alcoholic beverages.

According to the auditor, the one month sample of January 2012 used to extrapolate the audit liability was the only month available that showed actual daily sales figures. This being the case, January 2012 was the most detailed information available to the auditor. While the methodology used by the auditor is not consistent with the Department's general sampling methodology, the auditor used the best information available, i.e. , January 2012 gross sales constructed by ABC, to estimate the Taxpayer's sales tax liability. Further, the Taxpayer's argument that the exceptions list gives clear examples of errors and inaccuracies of typical sales in the sample period is not sufficient justification for adjusting gross sales in the absence of documented sales records.

Request for Records

On January 15, 2014, the auditor sent the Taxpayer a letter prior to the assessment providing copies of the audit working papers that identify the transactions that the auditor deemed subject to the tax. The auditor requested that the Taxpayer review the work papers and scheduled a meeting on January 21, 2014 to allow the Taxpayer to discuss any items it may have believed were not subject to the tax. The auditor did not receive a response from the Taxpayer and issued the assessment based on the best available information. It is my understanding that the auditor has repeatedly tried to contact the Taxpayer to set up an appointment, to no avail. I again point out that the audit assessment is based on information provided by ABC. The auditor gave the Taxpayer the opportunity to discuss the audit liability prior to the assessment and provide additional documentation. Therefore, the Taxpayer's claim that at no time during the audit did the auditor request records from the Taxpayer is not accurate.

Virginia Code § 58.1-205 1 deems any tax assessment issued by the Department as prima facie correct. This means that the burden of proof is upon the Taxpayer to prove that the assessment is incorrect. The Taxpayer has not met that burden, and I find no basis to revise the auditor's use of the one month sales sample. Nevertheless, if the Taxpayer can provide detailed records for other months included in the audit, i.e. , cash register tapes, daily or monthly sales figures, daily bank deposits, etc., the Department will consider expanding the audit sample period provided the records are complete and accurate.

CONCLUSION

In accordance with this determination, the Taxpayer will be allowed 30 days from the date of this letter to provide sufficient documentation to support expanding the audit sample. The documentation should be sent to: Virginia Department of Taxation, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23262-7203, Attention: *. If the additional information is not submitted within 30 days from the date of this letter, the original audit assessment will be upheld and an updated bill with accrued interest will be issued to the Taxpayer.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have any questions concerning this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5721704269.T