If a business didn't have invoices ready during a Virginia sales and use tax audit, can it still fix the assessment by submitting invoices later during the appeal?

Plain-English summary

A Virginia dermatology practice was audited for retail sales and use tax covering April 2011 through March 2017. During the audit, the Department's auditor found a number of purchases where the invoices on hand did not show that sales tax had been charged, so those purchases were assessed use tax. After the audit closed, the taxpayer appealed under Virginia Code § 58.1-1821 and, along with the appeal, supplied invoices for many of the disputed transactions that it had not produced while the audit was actually being performed.

The Tax Commissioner's ruling walks through each disputed category. For most of the "Contested Purchases" (line items 1 through 8) and many of the "Non-Contested Purchases" (personal expenses charged to the company credit card and later reimbursed), the invoices submitted with the appeal did include a stated sales tax charge, so those line items were removed from the audit. But documentation still had to hold up: for a set of chairs (Line Item 3), the taxpayer claimed one chair had been returned and that a second invoice existed, but never actually produced that documentation, so the assessment stayed. For a printer (Line Item 8), no invoice was ever provided, either during the audit or with the appeal, so that item also remained taxable. Several other non-contested line items stayed in the audit either because no invoice was ever supplied or because the invoice that was supplied still did not show sales tax was charged and paid.

The larger point of the ruling is procedural: Virginia Code § 58.1-633 A requires dealers and, by extension, taxpayers to keep suitable records to substantiate the tax treatment of their purchases. Under Virginia Code §§ 58.1-603 and 58.1-604, sales tax applies to retail sales and use tax applies when sales tax was not collected or paid at the time of a taxable purchase; Virginia Code § 58.1-625 makes the tax a debt owed by the purchaser until paid. A taxpayer who failed to produce documentation during the audit is not automatically barred from producing it later on appeal -- the Tax Commissioner reviewed the newly submitted invoices on their merits -- but the appeal only succeeds line-item by line-item, and only where the taxpayer actually comes forward with adequate proof that sales tax was charged and paid (or, alternatively, that a purchase was returned and refunded).

Because the underlying assessments had already been paid in full, the practical remedy here was a partial refund with accrued interest, limited to the specific line items where the late-submitted invoices satisfied the Department.

What this means for you

If your business is under audit

Provide invoices and other supporting records to the auditor while the audit is still open whenever possible -- it avoids the need for an appeal at all. If documentation genuinely was not available during the audit, this ruling shows the Department will still consider it on appeal, but you need the actual invoice, credit memo, or similar proof showing sales tax was charged and paid (or that an item was returned and refunded). A taxpayer's own recollection or assertion, without the supporting document, is not enough -- see Line Item 3, where the claim of a second invoice and a returned chair did not save that line item because the invoice itself was never produced.

For accountants and tax professionals handling appeals

When preparing a § 58.1-1821 appeal, go line item by line item and attach the specific invoice for each contested transaction, not just a general explanation. This ruling shows the Tax Commissioner evaluates each line item independently: transactions with a supporting invoice showing tax charged get removed from the audit, while transactions still lacking that proof -- even if only partially -- remain assessed. Keep in mind Virginia Code § 58.1-633 A's recordkeeping requirement is the backbone of these determinations, so encourage clients to maintain organized purchase records going forward to avoid similar assessments.

Common questions

Can you fix a Virginia sales and use tax audit assessment by submitting invoices after the audit is over?
Yes -- this ruling shows the Tax Commissioner reviewed invoices submitted for the first time with the taxpayer's appeal, and removed the corresponding line items from the audit where those invoices showed sales tax had been charged and paid.

Does simply claiming an invoice exists or that an item was returned resolve an audit issue?
No. In this ruling, the taxpayer's assertion that a second invoice existed and that a chair had been returned was not enough on its own; because the actual invoice or credit memo was never provided, that line item remained in the audit.

What happens to line items where no invoice is ever produced, during the audit or on appeal?
They remain part of the assessment. The printer purchase (Line Item 8) and several non-contested purchases stayed taxable because no invoice was ever supplied to show sales tax had been charged and paid.

What was the ultimate outcome of this appeal?
Because the original assessment had already been paid, the Department returned the audit to field audit staff to make the approved adjustments, and the taxpayer was to receive a refund with accrued interest for the line items removed from the audit.

Citations and references

• Virginia Code § 58.1-1821 (basis for the taxpayer's application/appeal)
• Virginia Code § 58.1-603 (imposition of retail sales tax)
• Virginia Code § 58.1-604 (imposition of use tax)
• Virginia Code § 58.1-625 (tax as a debt owed by the purchaser until paid)
• Virginia Code § 58.1-633 A (dealer/taxpayer recordkeeping requirements)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-167

Original ruling text

September 22, 2020

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

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessments issued for the period April 2011 through March 2017. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a dermatology practice that performs skin and cosmetic treatments and surgeries. The Department conducted an audit of the Taxpayer, and the auditor assessed use tax on certain purchases of tangible personal property made by the Taxpayer. The Taxpayer did not pay sales tax on the transactions at the time they were made. The Taxpayer contests the assessment on several transactions for the reasons stated below.

DETERMINATION

The Virginia retail sales and use tax applies to the sale or the use of tangible personal property. Virginia Code § 58.1-603 imposes the sales tax “upon every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth.” Virginia Code § 58.1-604 imposes the use tax “upon the use or consumption of tangible personal property in this Commonwealth, or the storage of such property outside the Commonwealth for use or consumption in this Commonwealth

Virginia Code § 58.1-625 provides that “The tax levied by this chapter shall be paid by the dealer, but the dealer shall separately state the amount of the tax and add such tax to the sales price or charge. Thereafter, such tax shall be a debt from the purchaser, consumer, or lessee to the dealer until paid and shall be recoverable at law in the same manner as other debts.”

Virginia Code § 58.1-633 A provides that:

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 accordance with these authorities, the sales tax applies to sales of tangible personal property. In instances where the sales tax is not collected or paid at the time the transaction takes place, the purchaser becomes liable for the use tax. Further, taxpayers are required to maintain accurate books and records of transactions for review by the Department. In light of the above authorities, I will address the issues raised in the Taxpayer’s appeal.

Fixed Assets Exceptions

Line Item 3

The transaction at issue is for the purchase of chairs by the Taxpayer. The transaction was held taxable in the audit because the invoice reviewed by the auditor did not include a charge for sales tax. The amount held taxable in the audit is for the charge for the chairs, less the freight charge.

The Taxpayer maintains it has two separate invoices related to the purchase of the chairs, and one chair was returned to the vendor during the audit period. The Taxpayer has not provided additional invoices, credit memos or other documentation to demonstrate that the sales tax was properly charged and paid at the time the transaction took place, or that part of the purchase was returned and a refund was issued. Accordingly, the transaction will remain in the audit.

Line Item 8

The Taxpayer states that the transaction at issue is for the purchase of a printer. The Taxpayer claims that the printer was subsequently returned to the vendor. The transaction was held taxable in the audit because the Taxpayer did not provide an invoice during the audit for review. The Taxpayer has likewise not provided an invoice with the appeal. Without such documentation, the Department is unable to determine whether the sales tax was properly charged and paid at the time the transaction occurred. Accordingly, the transaction will remain in the audit.

Contested Purchases (Line Items 1 through 8)

These transactions were held taxable because the Taxpayer did not provide invoices for review during the performance of the audit. The Taxpayer provides the invoices with its appeal and the invoices include a charge for sales tax. Accordingly, these transactions will be removed from the audit.

Non-Contested Purchases

The Taxpayer made several purchases from vendors for personal expenses during the audit period. The Taxpayer states these purchases were made using the company credit card, and the charges were later reimbursed to the Taxpayer. These purchases were held taxable in the audit because the Taxpayer did not provide invoices for review.

The Taxpayer provides invoices with its appeal for line items 22, 23, 24, 25, 30, 31, 32, 33, 36, 37, 38, 39, 40, 41 and 78. These line items will be removed from the audit because the invoices provided with the appeal include a charge for sales tax. Line items 26, 27, 28, 34 and 35 will remain in the audit because the documentation provided with the appeal does not demonstrate that the sales tax was charged and paid at the time of purchase. Line items 49, 81, 96 and 97 will remain in the audit because invoices were not provided with the appeal. With respect to line item 98, the invoice was reviewed during the audit and it was confirmed that the transaction is for books and that sales tax was not charged and paid on this transaction. Accordingly, this transaction will remain in the audit.

CONCLUSION

The audit will be returned to the appropriate field audit staff to make the adjustments in accordance with this determination. The Taxpayer will receive a revised audit report reflecting the adjustments. The assessments at issue have been paid in full. Accordingly, the Taxpayer will receive a refund with accrued interest based upon the audit adjustments required by this determination.

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 web site. If you have any questions about this determination, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1821P