Could a fencing contractor remove assessed use-tax purchases by showing cancelled checks and asserting that the checks were personal cash withdrawals?

Plain-English summary

Virginia upheld use tax on amounts a fencing contractor claimed were personal cash withdrawals. The contractor produced copies of cancelled checks, but its own general ledger recorded the checks in small-tools and materials expense accounts.

Because a Department assessment is presumed correct, the taxpayer had to provide documentary evidence showing that the entries were not taxable business purchases. The checks did not overcome the accounting records, which supported the auditor's treatment.

Common questions

Were cancelled checks enough proof? No. They showed cash withdrawals but did not establish personal rather than business use.

Why did the ledger control? The contractor had classified the amounts as small-tools and materials expenses in its own books.

Who carried the burden? The taxpayer challenging the assessment.

Citations and references

• Va. Code § 58.1-205

Subject

Taxpayer failed to present adequate documentation to substantiate its appeal.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-56

Original ruling text

April 26, 2017

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

Dear *:

This will reply to your letter in which you seek the correction of a retail sales and use tax assessment issued to * (the “Taxpayer”) for the period November 2009 through July 2015. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a fencing contractor. An audit resulted in the assessment of use tax on expensed purchases. The Taxpayer claims that the auditor erroneously assessed the consumer use tax on cash withdrawals for personal use as untaxed expensed purchases. The Taxpayer provides photo copies of cancelled checks to support its claim that the contested amounts are cash draws and not purchases.

DETERMINATION

Virginia Code § 58.1-205 deems any assessment of a tax by the Virginia Department of Taxation to be prima facie correct. This means that the burden of proof is upon the Taxpayer to establish a correction to an assessment that it appeals.

To establish a correction to an assessment, the Taxpayer must have documentary evidence to support its position. In this instance, the Taxpayer's records support the auditor's assessment because the notations in the general ledger show that the checks written for cash are expensed to the Taxpayer's small tools and materials expense general ledger accounts. Accordingly, I find that the Taxpayer has failed to present adequate documentation to substantiate its claim that the assessed amounts are checks written for cash withdrawals for personal use. As such, there is no basis for their removal from the audit.

Based on the foregoing, the assessment is upheld. 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 Code of Virginia section cited is 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 Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/674.T