Can Virginia uphold an estimated sales and use tax assessment against a contractor who refused to give the auditor its purchase records?

Subject

Estimated Assessment

Plain-English summary

The Taxpayer is a real property contractor that does landscaping and installs patios and pools. During a Department audit covering March 2014 through February 2020, the Taxpayer did not provide the records the auditor requested about its purchases. Because of that, the auditor estimated the Taxpayer's use tax liability using gross purchases figures pulled from the Taxpayer's 2014 through 2018 corporate income tax returns. The Taxpayer appealed under Va. Code § 58.1-1821, arguing it had already paid sales tax to its vendors on all the materials it bought, and asked that the whole assessment be abated.

The Tax Commissioner upheld the assessment as properly issued. As a real property contractor, the Taxpayer is treated under Va. Code § 58.1-610 A and Title 23 VAC 10-210-410 as the user or consumer of the materials it installs, so it generally owes sales or use tax on those materials regardless of what its own customers are charged. But the bigger problem was recordkeeping: Virginia law (Va. Code §§ 58.1-102, 58.1-103, 58.1-633 A, and Title 23 VAC 10-210-470) requires taxpayers to keep and produce records substantiating their tax liability, and until the Taxpayer produces those records, the Department has no way to verify its claim that sales tax was already paid. Because the Taxpayer withheld its records, Va. Code § 58.1-618 authorized the Department to estimate the liability from the best available information -- here, the corporate tax returns. The six-year assessment period (rather than the normal three years) was also proper under Va. Code § 58.1-634, which allows a six-year lookback when a taxpayer fails to provide records or file as required.

Even so, the Commissioner did not close the door completely. The ruling gives the Taxpayer one final opportunity: audit staff will contact the Taxpayer, who then has 60 days to hand over the requested records and documentation. If the Taxpayer does that, the auditor will revise the assessment where warranted, and the Taxpayer would then have 90 days from that final review to appeal any remaining contested issues. But if the Taxpayer misses the 60-day window, the assessment becomes immediately due and payable, with no further right to appeal.

What this means for you

Contractors performing real property construction, landscaping, or installation work

Virginia treats contractors like this Taxpayer as the consumer of the materials they install, so sales or use tax generally applies to your purchases of those materials -- not just to what you bill your customers. If you believe you already paid sales tax to your suppliers, that is a valid defense in theory, but it is worthless in an audit unless you can actually produce receipts or records proving it.

Anyone facing a Department of Taxation audit

If you do not provide the records an auditor requests, the Department is legally authorized under Va. Code § 58.1-618 to estimate your tax liability from whatever information is available, such as your income tax returns' gross purchase figures. Refusing to cooperate does not make an assessment go away; it just means the number gets estimated against you, and the burden shifts to you to later prove it wrong with real records.

Taxpayers who receive a "final opportunity" letter like this one

A ruling like this is not necessarily the end of the road. The Commissioner here kept the case open by giving the Taxpayer a defined 60-day window (after being contacted by audit staff) to turn over records, with the promise of an audit revision if the records justify one, plus a 90-day appeal window after that review. Missing that window, however, is final: the assessment becomes due immediately and the Taxpayer loses any further appeal rights.

Common questions

Q: Did the Taxpayer win its appeal?
A: No, not outright. The Commissioner found the assessment was properly issued given the Taxpayer's refusal to provide records. But the Taxpayer was given one last chance to submit records within 60 days of being contacted, which could lead to a revised (lower) assessment if the records support it.

Q: Why was the Department allowed to estimate the tax instead of calculating the exact amount?
A: Because the Taxpayer did not provide the requested purchase records during the audit. Va. Code § 58.1-618 lets the Department estimate a taxpayer's liability from the best available information when records are not provided, and here that meant using gross purchases reported on the Taxpayer's 2014-2018 corporate income tax returns.

Q: The Taxpayer says it already paid sales tax on its purchases. Why didn't that resolve the case?
A: Because the Taxpayer would not let the auditor review records proving that. The ruling states plainly that "[u]ntil such records are provided, the Department cannot address or consider the Taxpayer's position." An unsubstantiated claim of having paid tax is not enough to overturn an assessment.

Q: Why does the assessment cover six years (2014-2020) instead of the normal three-year period?
A: Va. Code § 58.1-634 extends the normal three-year assessment period to six years for a failure to file a return, or if there is reasonable evidence of fraud, or reasonable cause to believe a required return was not filed. The ruling treats this as one of those extended-limitations situations because of the Taxpayer's failure to cooperate with the audit.

Q: What happens if the Taxpayer still doesn't provide records after this ruling?
A: The ruling is explicit: if the Taxpayer fails to provide the records and documentation to the auditor within the 60-day window from being contacted, the assessment becomes immediately due and payable, and the Taxpayer loses any further opportunity to appeal under Va. Code § 58.1-1821.

Citations and references

Statutes:

• Va. Code § 58.1-610 A (contractors deemed users/consumers of tangible personal property furnished under real property contracts)
• Va. Code § 58.1-102 (duty to retain records substantiating returns)
• Va. Code § 58.1-103 (records must be available for inspection by the Tax Commissioner)
• Va. Code § 58.1-633 A (dealers' duty to keep suitable sales/use tax records)
• Va. Code § 58.1-618 (Department may estimate tax liability when records are not provided)
• Va. Code § 58.1-634 (period of limitations; six years for failure to file a return)
• Va. Code § 58.1-1821 (application for correction of assessment)
• Title 23 VAC 10-210-410 (contractor treated as user/consumer of tangible personal property)
• Title 23 VAC 10-210-470 (taxpayer must keep records for three years)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-20

Original ruling text

February 23, 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 assessment issued for the period March 2014 through February 2020.

FACTS

The Taxpayer is a real property contractor that performs landscaping and installs patios and pools. During the performance of the Department’s audit, the Taxpayer did not provide the requested records related to purchases. Accordingly, the auditor assessed the use tax based on gross purchases information taken from the Taxpayer’s 2014 through 2018 corporate income tax returns. The Taxpayer contends that it paid sales tax to its vendors on all materials purchased. Accordingly, the Taxpayer requests that the assessments be abated in full.

DETERMINATION

Virginia Code § 58.1-610 A provides that a person who contracts to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon and who furnishes tangible personal property is deemed to have purchased the tangible personal property for use or consumption. Title 23 of the Virginia Administrative Code (VAC) 10-210-410 further provides that “the law treats every contractor as the user or of all tangible personal property furnished to him or by him in connection with real property construction, reconstruction, installation, repair, and similar contracts.” The general contractor policy also applies to landscape contractors such as the Taxpayer. See Public Document (P.D.) 07-171 (11/7/2007).

It is my understanding that the Taxpayer refused to cooperate with the auditor’s request for records. The Taxpayer indicates in its appeal that it possesses receipts showing that it paid sales tax on its purchases. In order to ascertain whether the sales or use tax was paid on the Taxpayer’s purchases, the auditor must be allowed to review the pertinent records. Until such records are provided, the Department cannot address or consider the Taxpayer’s position.

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

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 VAC 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.”

Pursuant to the cited authorities, the Taxpayer is required to maintain records and to make such records available for review by the Department. In this instance, the Taxpayer did not provide any records for review during the Department’s audit. The assessment was properly issued to the Taxpayer in accordance with Virginia Code § 58.1-618, which authorizes the Department to estimate tax liability in instances when a taxpayer does not provide records for review.

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 P.D. 98-4 (1/4/1998), P.D. 16-75 (5/11/2016) and P.D. 18-83 (5/9/2018).

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. [Emphasis added.]

CONCLUSION

Based upon 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 60 days from the date of contact with the auditor. Once the review is completed by the auditor, revisions to the audit and the audit assessment will be made if warranted.

Further, the Taxpayer will have 90 days from the date the review is finalized to file an appeal with the Department for any contested issues. Should the Taxpayer fail to provide the records and documentation to the auditor within the allotted timeframe, the assessment will become immediately due and payable at that time, and the Taxpayer will have no further opportunity to submit an appeal in accordance with Virginia Code § 58.1-1821.

The Code of Virginia sections, regulation and public documents cited are available on-line at www.virginia.tax.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions concerning this determination, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3536.B

Related Documents

07-171

98-4

16-75

18-83