Did a fencing contractor prove that cash withdrawals recorded as tools and materials were personal and not taxable purchases?

Subject

Fencing Contractor, Tangible Personal Property

Plain-English summary

Virginia again upheld sales and use tax on a fencing contractor's cash transactions because the contractor did not document its claim that the money was withdrawn for personal use.

The general ledger recorded the checks in small-tools and materials expense accounts. The contractor supplied no purchase invoices and no evidence sufficient to overcome the assessment's presumed correctness. Checks recorded as salary distributions had not been included in the audit, but the contested expense-account entries remained taxable.

What this means for you

Bookkeeping classifications can become audit evidence. If cash is posted to business tool or material accounts, a later statement that it was personal is unlikely to succeed without invoices, withdrawal records, or other contemporaneous support.

Citations and references

• Va. Code § 58.1-205 — assessment presumed correct and taxpayer's burden of proof.
• P.D. 17-56 — the earlier determination upheld on reconsideration.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-201

Original ruling text

December 13, 2017

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

Dear *:

This will reply to your letter in which you seek reconsideration of the Department's determination letter issued as Public Document (P.D.) 17-56 (4/26/17) to * (the “Taxpayer”) for the period November 2009 through July 2015.

FACTS

The Taxpayer is a fencing contractor. An audit by the Department resulted in an assessment for untaxed expensed purchases.

In the Taxpayer's initial appeal, the Taxpayer claimed that the contested amounts were cash withdrawals for personal use and not for the purchase of tangible personal property. Further, the Taxpayer argues that if the purchases had been for materials and small tools, the Taxpayer would have paid the sales tax on such items at the time of purchase.

DETERMINATION

The Tax Commissioner's response in P.D. 17-56 upheld the assessment because the Taxpayer did not provide adequate documentation to substantiate its claim that the assessed amounts were checks written for cash withdrawals for personal use. Rather, the Tax Commissioner found that the Taxpayer's records supported the assessment because the general ledger showed the checks written for cash were expensed to the Taxpayer's small tools and materials expense general ledger accounts. I would point out that the Taxpayer provides no invoices for the cash purchases. However, any checks written for cash that was noted in the general ledger as a salary distribution was not included in the audit.

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 upon a review of the audit information regarding the checks written to cash and the explanations provided in the Taxpayer's request for reconsideration, the Taxpayer has not met this burden.

Accordingly, with respect to the issues addressed herein, the determination previously issued is upheld. Based on this determination, the assessment is correct. An updated bill with interest accrued to date will be mailed to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. If the Taxpayer has questions concerning payment of the assessment or needs to set up a payment plan, please contact the Department's Collections Unit at (804) 367-8045.

The Code of Virginia section 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 Office of Tax Policy, Appeals and Ruling, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1280.T