Can Virginia estimate a use tax assessment from a contractor's income tax returns, and use a six-year period, when the contractor did not provide records or file sales tax returns?

Plain-English summary

The taxpayer is an out-of-state real property contractor with a Virginia location. It never filed Virginia sales and use tax returns, and it did not respond to the auditor's repeated requests to discuss the audit, provide records, or sign the Waiver of Time Limitation on assessment. With nothing else to work from, the auditor built a consumer use tax assessment from the only records available -- the contractor's Virginia corporate income tax returns for 2013-2017.

Estimated assessment was proper. Taxpayers must keep records for three years and make them available (Va. Code Secs. 58.1-102, 58.1-103; dealers specifically under Va. Code Sec. 58.1-633 and 23 VAC 10-210-470). When a taxpayer does not provide records, the Department may use the best information available to estimate a liability (Va. Code Sec. 58.1-618). Using the income tax returns as that best information was proper (consistent with P.D. 98-4, 16-75, 18-83, 20-28).

Six-year period was proper. The tax normally must be assessed within three years, but where a taxpayer fails to file a return, the Department may reach back six years (Va. Code Sec. 58.1-634). Because the contractor filed no sales and use tax returns, the six-year period applied.

One final opportunity. Although the assessment stood, the Commissioner -- noting the contractor's stated willingness to comply -- gave it one last chance: field audit staff will contact it, and it must provide all requested records within 45 days. The audit will then be revised if warranted, and if the review produces a refund (a lien had already collected some funds), refund interest will be paid.

What this means for you

File your returns and keep records -- or the Department estimates for you

If you don't file and don't produce records, the Department can estimate your tax from whatever it has, including your income tax returns. That estimate is presumed correct, and the burden is on you to disprove it.

Non-filing opens a six-year window

The normal three-year assessment period stretches to six years when you fail to file a return (Va. Code Sec. 58.1-634). Not filing does not shorten your exposure -- it lengthens it.

Engage the auditor early

This contractor got a final 45-day chance only because it expressed willingness to comply. Ignoring audit requests is what produced the estimated assessment in the first place.

Common questions

Can the Department really use my income tax returns to assess use tax? Yes. When you provide no other records, your income tax returns can be the best information available under Va. Code Sec. 58.1-618.

Why six years instead of three? Because you failed to file sales and use tax returns, which extends the assessment period to six years under Va. Code Sec. 58.1-634.

Is the estimated assessment final? Not entirely -- the Commissioner granted 45 days to provide records for review and revision, with refund interest on any overpayment.

Citations and references

• Va. Code Sec. 58.1-618 -- estimated assessment from the best information available when records are not provided (P.D. 98-4, 16-75, 18-83, 20-28).
• Va. Code Secs. 58.1-102, 58.1-103, 58.1-633 / 23 VAC 10-210-470 -- duty to keep records for three years and make them available.
• Va. Code Sec. 58.1-634 -- three-year assessment period; six years for failure to file a return.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-75

Original ruling text

May 5, 2020

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 assessment issued to * (the “Taxpayer”) for the period July 2013 through March 2019.

FACTS

The Taxpayer is a real property contractor headquartered in xxxxxx with a location in Virginia. The Department issued a consumer use tax assessment to the Taxpayer in accordance with Virginia Code § 58.1-618, which authorizes the Department to issue an estimated assessment under certain circumstances. The assessment was issued after several attempts by the auditor to discuss the audit with the Taxpayer and to have the Taxpayer sign and return the Waiver of Time Limitation on Assessment of Taxes (the “waiver”). The assessment was calculated based on the only records available to the auditor, the Taxpayer’s Virginia corporate income tax returns for the tax years 2013 through 2017. The auditor also found that the Taxpayer did not file sales and use tax returns during the audit period.

The Taxpayer contests the audit assessment for the period at issue. The Taxpayer states that is has limited presence in Virginia, but understands the need to comply with Virginia tax law. Accordingly, the Taxpayer requests the opportunity to complete the audit with the Department’s auditor.

DETERMINATION

The General Provisions in Chapter 1 of Virginia Code 58.1 govern all taxes administered by the Department of Taxation and provide the following in Virginia Code § 58.1-102:

It shall be the duty of every taxpayer to retain suitable records and documents substantiating all information contained on any return required by this subtitle and any such other pertinent records or documents as the Tax Commissioner may require by regulation. The records and documents shall be preserved for a period of three years from the required date for filing a return to which such records or documents pertain.

Virginia Code § 58.1-103 further provides that “All records and documents required by this subtitle or by rule or regulation shall be available during regular business hours for inspection by the Tax Commissioner or his duly authorized agents.”

Chapter 6 of Virginia Code 58.1 specifically addresses the Virginia Retail Sales and Use Tax and requires in Virginia Code § 58.1-633 A that dealers “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.” Title 23 of the Virginia Administrative Code 10-210-470 also provides that the taxpayer is “required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability.”

In this instance, the Taxpayer failed to respond to the auditor’s repeated requests for information in order to commence and perform the audit. In addition, the Taxpayer failed to respond to the auditor’s repeated requests to provide a signed waiver. Pursuant to Virginia Code § 58.1-618, the Department is authorized to use the best information available to determine whether a tax liability exists in instances where the taxpayer does not provide records for review during the Department’s audit. The assessment, based on the Taxpayer’s Virginia corporate income tax returns, was properly issued to the Taxpayer in accordance with Virginia Code § 58.1-618.

The Tax Commissioner has previously addressed instances in which taxpayers failed to provide records for review by the Department and assessments were estimated based on the best available information. See, Public Document (P.D.) 98-4 (1/4/1998), P.D. 16-75 (5/11/2016), P.D. 18-83 (5/9/2018), and more recently P.D. 20-28 (2/7/2020).

In addition, the auditor issued the assessment for a six-year period in accordance with Virginia Code § 58.1-634, which addresses the period of limitations and states that:

The taxes imposed by this chapter shall be assessed within three years from the date on which such taxes became due and payable. In the case of a false or fraudulent return with intent to evade payment of the taxes imposed by this chapter, or a failure to file a return, the taxes may be assessed, or a proceeding in court for the collection of such taxes may be begun without assessment, at any time within six years from such date. The Tax Commissioner shall not examine any person's records beyond the three-year period of limitations unless he has reasonable evidence of fraud, or reasonable cause to believe that such person was required by law to file a return and failed to do so.

CONCLUSION

Based on the information presented, the assessment was properly issued. Notwithstanding the foregoing, I am willing to grant the Taxpayer one final opportunity to provide documentation to the Department for review with respect to the audit period at issue.

The Taxpayer will be contacted by the appropriate field audit staff to discuss the records and documentation the Taxpayer will be required to provide. The Taxpayer must provide all requested records and documentation to the audit staff within 45 days from the date of contact with the auditor. Once the auditor completes the review, revisions to the audit and the audit assessment will be made if warranted. I understand that a lien was issued and the funds collected were applied to the assessment at issue, leaving a balance due. Should the document review and revisions result in a refund, the Taxpayer will also receive refund interest accrued to date.

The Code of Virginia sections, regulation and public documents cited are available on-line at www.virginia.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/2151P

Related Documents

98-4

16-75

18-83

20-28