When a cigarette retailer cannot document its resale purchases, can Virginia assess tax from distributor records, and is a new owner liable for the prior owner's cigarette sales tax?

Plain-English summary

The taxpayer is a cigarette retailer. Through a compliance program that matches distributor sales data against retailer filings, the Department found the retailer had bought cigarettes tax-free for resale from three distributors but reported far fewer taxable cigarette sales than those purchases implied. Given 14 days to document that the purchases were exempt or that tax was collected and remitted, the retailer did not respond, and an assessment issued for July 2013 through March 2016.

Best information available. Dealers must keep three years of sales, purchase, and exemption records (Va. Code Sec. 58.1-633; 23 VAC 10-210-470). When a dealer cannot, the Department may reconstruct sales from the best information available (Va. Code Sec. 58.1-618). Here the retailer produced no sales records, bank statements, or purchase invoices, so the distributors' records were the best evidence. The auditor multiplied cartons purchased by cost, credited the sales tax the retailer had actually remitted, and assessed the difference. With no contrary proof, the assessment was prima facie correct (Va. Code Sec. 58.1-205).

Successor liability. The retailer said it bought the business on December 1, 2013 and should not owe tax for July-November 2013, when the prior owner ran it. But Va. Code Sec. 58.1-629 makes a buyer who fails to withhold enough of the purchase money to cover the seller's unpaid taxes personally liable for them. As the Department held in P.D. 96-161, a purchaser is liable for sales tax from the prior owner's operation that surfaces on audit. Showing the earlier purchases belonged to the prior owner did not matter -- the buyer's duty was to investigate and hold back funds. So the pre-acquisition amounts stayed.

The one adjustment. The Commissioner found the assessment had not accounted for the retailer's resale inventory on hand at the inspection, and allowed a credit for it. An updated bill will issue, payable within 30 days.

What this means for you

Keep your cigarette purchase and sales records

Distributors report your tax-free purchases to the Department. If your reported taxable sales don't line up and you can't produce records, the Department will assess from the distributor data, and the burden is on you to disprove it.

Buying a business? Hold back money for the seller's taxes

Under Va. Code Sec. 58.1-629, if you don't withhold enough of the purchase price to cover the seller's unpaid sales tax, you become personally liable. Investigate the seller's filing history and outstanding assessments before closing.

Inventory on hand can earn a credit

Cigarettes still in resale inventory at the time of inspection were not sold, so the Department credited them against the assessment. Point to your inventory if an estimated assessment overstates your sales.

Common questions

The distributor's numbers included the prior owner's purchases -- doesn't that help me? No. Successor liability makes you responsible for the prior owner's unpaid tax if you didn't withhold purchase money to cover it. Correcting the account split does not erase the liability.

How did the Department calculate the tax without my records? It multiplied cartons purchased (from distributor data) by cost and credited the tax you had already remitted -- the best information available under Va. Code Sec. 58.1-618.

What relief did I get? A credit for the resale inventory on hand at the inspection, which the original assessment had overlooked.

Citations and references

• Va. Code Sec. 58.1-602 -- resale is excluded from "retail sale"; purchases for resale are tax-free only if actually resold with tax collected.
• Va. Code Secs. 58.1-633, 58.1-618 / 23 VAC 10-210-470 -- recordkeeping duty; best information available when records are missing.
• Va. Code Sec. 58.1-629 / P.D. 96-161 -- successor liability; a buyer who fails to withhold purchase money owes the seller's unpaid tax.
• Va. Code Sec. 58.1-205 -- assessment is prima facie correct; taxpayer bears the burden.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-83

Original ruling text

May 12, 2020

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 July 2013 through March 2016. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a retailer of cigarettes. The Department utilizes a compliance program that verifies retail sales and use tax compliance regarding cigarettes purchased for resale and sales of cigarettes by a retail or wholesale dealer. As a result of this compliance program, the Taxpayer was issued an assessment for tax and interest on untaxed cigarettes purchased from *, and ** (the “Distributors”). The assessment is based on sales information provided by the Distributors identifying the Taxpayer’s purchases of cigarettes exempt of the tax for resale for the period July 2013 through March 2016.

It is the Department’s position that the cigarettes purchased by the Taxpayer for resale would have been sold to the Taxpayer’s customers and, therefore, the sales tax should have been collected and remitted to the Department on such sales. Based on the sales information provided by the Distributors, it was determined that the Taxpayer underreported sales of cigarettes, by the amount of the cigarettes purchased from the Distributors for resale, when compared to sales of cigarettes reported by the Taxpayer to the Department. On June 3, 2016, the Department sent the Taxpayer a summary of the findings and the proposed tax liability. The Taxpayer was allowed 14 days to provide documentation to substantiate that the Taxpayer’s purchases from the Distributors qualified for the resale exemption or that the Taxpayer collected and remitted the sales tax on the sale of those purchases. The Taxpayer failed to respond to the Department’s request for documentation within the allotted time and the assessment was issued.

The Taxpayer contends that it purchased the business from the prior owner on December 1, 2013 and has filed all sales tax returns and correctly paid the tax to the Department for the period December 2013 through March 2016. The Taxpayer claims that the auditor erroneously assessed the tax on sales for the period July 2013 through November 2013 based on incorrect sales information provided by the Distributor. Accordingly, the Taxpayer requests that the entire assessment be abated.

DETERMINATION

Purchases/Sales

The resale exemption provided under the Virginia retail sales and use tax is found in the definition of “retail sale" in Virginia Code § 58.1-602. This code section excludes a sale for resale from the definition of a “retail sale,” which is defined as “a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter.”

Virginia Code § 58.1-623 sets forth the requirements for the proper use of exemption certificates and, in section A, provides that “[a]ll sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.”

Title 23 of the Virginia Administrative Code (VAC) 10-210-280 provides further explanation of the proper use of exemption certificates. Subsection A states that a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.

Virginia Code § 58.1-633 A provides 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 tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner."

The record keeping requirement is further explained in Title 23 VAC 10-210-470 as follows:

Every person who is liable for collection of sales tax or remittance of use tax or both is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Such records must include . . . A daily record of all cash and credit sales, including sales under any type of financing or installment plan in use. A record of the amount of all merchandise purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase . . . A record of all deductions and exemptions claimed in filing sales or use tax returns., including exemption and resale certificates, returned or repossessed goods, and bad debts. . . A record of all tangible property used or consumed in the conduct of the business. . . A true and complete inventory of the stock on hand and its value, taken at least once each year. Records must be open for inspection and examination at all reasonable hours of the business day by the Department of Taxation.

When a dealer fails to maintain adequate records, the Department is authorized by Virginia 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.

The Taxpayer was unable to provide sales records, bank statements and purchase invoices to verify sales. Therefore, the sales information provided by the Distributors was the best information available to assess the audit liability. The documentation provided by the Distributors shows that the Taxpayer purchased cigarettes exempt of the tax for resale. A comparison of the cigarette sales provided by the Distributors to the Taxpayer’s sales reported to the Department shows that the Taxpayer made cigarette purchases totaling $* exempt of the tax for the period December 2013 through March 2016 that are not supported by any resale exemption or tax reporting documentation. For the period July 2013 through November 2013 and prior to the Taxpayer’s acquisition of the business, a comparison of the cigarette sales provided by the Distributors to the prior owner’s sales reported to the Department shows that cigarette purchases totaling $*** were made exempt of the tax that are not supported by any tax reporting documentation.

In calculating the assessment, the auditor multiplied the cartons of cigarettes purchased by the cost price to estimate the audit liability. The Taxpayer was given a credit against the tax liability for sales tax totaling $* collected and remitted to the Department for the period December 2013 through March 2016. Credit was also given against the tax liability for sales tax totaling $*** collected and remitted to the Department for the period July 2013 through November 2013. Lacking evidence to prove otherwise, I find that the audit assessment is correct and is based on the best information available to assess the audit liability.

Successor Liability

The Taxpayer claims that the Distributors erroneously included sales for the prior owner in the documentation provided to the Department in determining the audit liability. The Taxpayer provides documentation from the Distributors correcting the sales and separating the Taxpayer’s account from the prior owner. The Taxpayer maintains that it is not liable for the sales tax prior to its acquisition of the business.

Virginia Code § 58.1-629 provides that:

If any dealer liable for any tax, penalty, or interest levied hereunder sells out his business or stock of goods or quits the business, he shall make a final return and payment within fifteen days after the date of selling or quitting the business. His successors or assigns, if any, shall withhold sufficient of the purchase money to cover the amount of such taxes, penalties, and interest due and unpaid . . . If the purchaser of a business or stock of goods fails to withhold the purchase money as above provided, he shall be personally liable for the payment of the taxes, penalties, and interest due and unpaid on account of the operation of the business by any former owner.

The Tax Commissioner addressed successor liability in Public Document 96-161 (6/28/1996). In that ruling, the taxpayer asks a number of questions relating to the tax liability associated with the purchase of a business. In applying Virginia Code § 58.1-629, the Tax Commissioner ruled that a purchaser of the stock of a business is liable for any sales tax from a period where the previous owner operated the business when such liability might be disclosed upon audit.

The fact that the Taxpayer provides documentation to show the cigarette purchases for the period July 2013 through November 2013 were made by the prior owner has no bearing on successor liability. It is the Taxpayer’s responsibility to investigate non-filed sales and use tax returns and outstanding assessments, and to withhold sufficient funds of the purchase money to cover any potential tax liability. Since sufficient monies were not withheld to account for unpaid taxes, I find that in accordance with Virginia Code § 58.1-629, the Taxpayer is responsible for unpaid taxes and interest for the audit period at issue.

CONCLUSION

After carefully reviewing the information provided by the Taxpayer, I find it is not sufficient to prove the assessment is incorrect. However, it is my understanding that a credit for the Taxpayer’s resale inventory was not taken into consideration at the time of the inspection. As such, I find basis to adjust the assessment to allow a credit in the amount of $* for the Taxpayer’s resale inventory at the time of the inspection.

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 Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessments, you may contact at **.

The Code of Virginia sections, regulations 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 response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/798.T

Related Documents

96-161