My restaurant's sales tax audit doesn't match our internal records, and I couldn't get the auditor all the documentation they wanted -- can the assessment still stand?

Plain-English summary

A specialty restaurant and bar was audited for retail sales and use tax for a period spanning March 2015 through February 2018. The auditor found that the sales tax returns the taxpayer had filed didn't match either its own Mixed Beverage Annual Review (MBAR) report (required for businesses serving mixed alcoholic beverages) or its point-of-sale (POS) summary reports -- and for several months near the end of the audit period, the taxpayer hadn't even filed returns until prompted by the audit. The Department assessed additional tax and interest for underreported alcohol and food sales, plus tax the business had collected from customers but never remitted (which also drew a penalty, since collected-but-unremitted trust-fund tax is treated more seriously than a simple underreporting error).

The taxpayer appealed, arguing its filed figures were inaccurate because it used substantial quantities of alcohol (roughly 14 barrels of beer per year) in cooking and desserts -- alcohol that, it claimed, wouldn't show up in the state's mixed-beverage sales records but was nonetheless not "sold." However, the taxpayer never backed this claim up: during the audit, its own representative mentioned using brandy in cooking (which the auditor did exclude from the mixed-beverage sample) but never mentioned using beer for food preparation, and the auditor's review of the actual business records found no support for either beer-in-meals or beer-in-desserts claims. The taxpayer also repeatedly failed to follow through -- missing a scheduled meeting to submit outstanding POS reports and becoming unreachable -- forcing the auditor to finalize the audit using the best information available, as Virginia law expressly permits when a taxpayer doesn't provide necessary records.

On appeal, the taxpayer proposed revised sales figures but still provided no supporting documentation or amended returns. Virginia law presumes a Department assessment correct, placing the burden on the taxpayer to prove otherwise -- and separately bars courts from granting relief where an assessment resulted from the taxpayer's own willful failure to provide required information. Because the taxpayer never substantiated its cooking-alcohol theory or produced the missing records, the Tax Commissioner found no basis to adjust the audit and upheld the assessments in full.

What this means for you

Restaurants and bars serving alcohol that use it in cooking, desserts, or other non-sold preparations

If you intend to argue that reported alcohol purchases or usage don't correspond to taxable sales because of in-house cooking use, raise it EARLY and back it up with contemporaneous, verifiable documentation (recipes, usage logs, purchase records tied to specific menu items) -- a general claim mentioned only in passing, without records, is unlikely to survive an audit or a later appeal.

Any business facing a sales tax audit where filed returns don't match internal records (MBAR, POS reports, etc.)

Provide complete records and stay responsive to the auditor -- if you don't, the Department is legally permitted to finalize the audit using the best information available, and Virginia law separately bars courts from granting relief when the resulting assessment traces back to your own willful failure to cooperate.

Taxpayers appealing an assessment based on proposed "revised" figures

A proposed revision is not, by itself, evidence -- you must actually submit supporting documentation (or amended returns) to have any chance of overcoming the strong legal presumption that the Department's assessment is correct.

Common questions

Q: What happens if I don't give the auditor complete sales records during a Virginia sales tax audit?
A: The Department may finalize the audit using the best information reasonably available under Va. Code § 58.1-618, and the resulting assessment is presumed correct -- the burden then falls on you to prove it wrong.

Q: I believe my sales tax return is more accurate than the state's assessment -- do I just need to say so on appeal?
A: No. Simply proposing revised figures without underlying documentation or amended returns is not enough; you must affirmatively rebut the assessment's presumption of correctness with actual evidence.

Q: Can a court give me relief from an assessment if I didn't fully cooperate with the audit?
A: Not if the assessment is attributable to your willful failure or refusal to provide the Department with information required by law -- Va. Code § 58.1-1826 specifically bars that kind of relief.

Citations and references

• Va. Code § 58.1-618 -- allows the Department to finalize an audit using the best information available when a taxpayer doesn't provide necessary records or documentation
• Va. Code § 58.1-205 -- a Department tax assessment is deemed prima facie correct, with the burden on the taxpayer to prove it erroneous
• Va. Code § 58.1-1826 -- precludes a court from granting relief on an assessment attributable to a taxpayer's willful failure or refusal to provide required information

Subject

Unreported Sales - Dealer Records

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-104

Original ruling text

August 10, 2021

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 March 2015 through February 2018. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a specialty restaurant and bar, was assessed tax and interest for underreported sales of alcoholic beverages and food. The Taxpayer was also assessed tax, interest, and penalty for taxes collected but not remitted to the Department. Before the audit period, the Taxpayer had not filed returns for the taxable period September 2017 through February 2018. During the audit, the Taxpayer filed returns for the missing periods, but did not pay the amount owed. The auditor reviewed the available records and found that the sales tax returns filed by the Taxpayer for the audit period did not match the Mixed Beverage Annual Review (MBAR) report or point of sale (POS) summary reports provided during the audit. In addition, the Taxpayer did not provide complete POS summary reports for the entire audit period.

The Taxpayer submits an administrative appeal claiming that the sales were not underreported for the audit period in question. The Taxpayer contends that the sales tax reported on its tax returns and MBAR report are not accurate because it purchased alcohol to use in preparing food and desserts. The Taxpayer believes the assessment should be revised and proposes to amend its sales tax returns. The Taxpayer includes revised figures in its appeal correspondence, but does not include any documentation or amended returns with its appeal.

DETERMINATION

The Taxpayer states that its filed sales tax returns do not match the figures provided on the MBAR report because the restaurant uses alcohol in desserts and cooking. The Taxpayer states that it uses approximately 14 barrels of beer for cooking each year and contends that this alcohol would not be reflected in sales records reported to the Department of Alcoholic Beverage Control (ABC).

During the audit, the Taxpayer met with the auditor to review serving sizes and pricing to determine an accurate measure of alcohol sales. During the meeting, the auditor notes that the Taxpayer mentioned using brandy in cooking and this was excluded from the mixed beverage sample, but did not report using beer in the preparation of food for sale. Further, the records reviewed during the audit do not show that beer was used in meal preparation. In addition, the records reviewed during the audit did not indicate that beer was used in making desserts.

After the initial meeting, the auditor continued to work with the Taxpayer to gather complete information and documentation to determine an accurate measure of sales. The auditor’s comments indicate that the Taxpayer later agreed to meet with the auditor to submit missing POS reports, but did not appear. The auditor was also unable to reach the Taxpayer to finalize the audit. When the Taxpayer did not respond or provide the necessary records for review, the audit was finalized using the best information available as permitted under Virginia Code § 58.1-618.

Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed prima facie correct. The burden is on the taxpayer to prove the assessment is erroneous. In addition, Virginia Code § 58.1-1826 precludes a court from granting relief to taxpayers seeking correction of erroneous state tax assessments in cases in which the assessment was attributable to a taxpayer’s willful failure or refusal to provide the Department with necessary information as required by law. Despite a number of requests by the Department, the Taxpayer failed to provide sufficient evidence to refute the validity of the assessments.

Based on evidence provided, I find no basis for adjusting the Department's audit. Accordingly, the assessments are upheld. Updated bills, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessments are paid within 60 days from the date of this letter.

The Code of Virginia section cited, along with other reference documents, 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 Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1797.G