The Department used a single representative month to calculate our use tax assessment, and the audit took a long time to close -- can we get the sample thrown out and the interest waived?

Plain-English summary

A hotel management firm that oversees daily operations of a Virginia property was audited by the Department for the period November 2014 through June 2015. Because the hotel was newly opened and hadn't been in operation a full calendar year, the firm and the auditor agreed to use April 2015 as a representative sample month to calculate an error rate, which was then projected over the full audit period -- a standard technique used to avoid the burden of a full detailed audit while still producing results close to what a complete audit would show. The audit resulted in an assessment of use tax on various untaxed purchases, which the firm paid in full before appealing.

Two separate arguments, both rejected. First, the firm argued the April 2015 sample period made the assessment unreasonable. The Tax Commissioner explained that sampling is exactly the kind of technique the Department uses when a full audit wouldn't be worth the added burden, that the sample period is chosen to be objectively representative, and -- critically -- that the firm had been told about the sample period at the START of the audit and raised no concerns about its representativeness at that time. Without any documentation showing the sample was flawed or the resulting assessment wrong, the challenge failed.

Second, the firm asked to have the interest waived because of how long the audit took to complete. The Tax Commissioner found the delay was actually attributable to the firm's OWN difficulty gathering documents from its management company -- not to any Department delay. More fundamentally, Virginia law makes interest MANDATORY on any tax assessment; it isn't a punishment for noncompliance that can be excused for good behavior, but simply the cost of having had the use of money that rightfully belonged to the Commonwealth during the period it went unpaid.

Because the assessment had already been paid in full by the time of this ruling, no further collection action was needed -- the ruling simply confirmed the assessment (and its interest) stood as issued.

What this means for you

Businesses undergoing a Virginia sales/use tax audit that proposes a sample period

Raise any objection to the REPRESENTATIVENESS of a proposed sample period at the time it's selected, not after the fact -- and if you do challenge it later, come with actual documentation showing the sample skewed the result, not just a general complaint that the outcome seems high.

Taxpayers hoping to get interest waived for a slow-moving audit

Interest on a Virginia tax assessment is mandatory once the underlying tax is properly due -- it functions as a time-value-of-money charge, not a penalty, so a lengthy audit (especially one delayed by the taxpayer's own document-gathering difficulties) generally won't support a waiver.

Multi-location or newly opened businesses facing their first audit

When a location hasn't operated a full year, using a shorter representative sample period is a normal and accepted audit approach -- agreeing to a sample month at the outset without objection makes it much harder to successfully dispute later.

Common questions

Q: Can I challenge an audit sample period after the audit is complete if I didn't object when it was first proposed?
A: You can raise the challenge, but this ruling shows it's very difficult to win without documentation showing the sample was actually unrepresentative or the resulting assessment was wrong -- silence at the time the sample was selected undercuts a later challenge.

Q: Is interest on a Virginia tax assessment treated as a penalty that can be waived for reasonable cause, like a late-filing penalty might be?
A: No -- this ruling confirms interest is mandatory and represents the value of using money that was properly owed to the Commonwealth, not a penalty for noncompliance, so "reasonable cause" arguments for waiving penalties don't apply the same way to interest.

Q: Does it matter who caused the audit to take a long time to complete?
A: It can factor into the discussion, but even where the delay is attributable to the taxpayer's own document-gathering difficulties (as here), interest still applies because it's tied to the use of unpaid tax money over time, not to who caused the delay.

Citations and references

• No outside Public Documents, regulations, or case law beyond the Code of Virginia sections cited above are referenced in this ruling.

Subject

Administration : Audit - Sample; Offer in Compromise - Length of Audit, Interest Waiver

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-70

Original ruling text

May 25, 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 November 2014 through June 2015. I apologize for the delay in responding to your appeal. I do note that the assessment has been paid in full.

FACTS

The Taxpayer is a hotel management firm that provides daily management of property in a Virginia locality. As a result of this Department’s audit, the Taxpayer was assessed use tax on various untaxed purchases. The Taxpayer contends the length of time taken to close the audit, and the sample period utilized in developing the audit liability resulted in an unreasonable assessment. In addition to contesting the audit sample period, the Taxpayer requests the abatement of the resulting interest.

DETERMINATION

Sampling

Sampling is an audit technique of significant value that is widely used across both the private and public sectors in instances where a detailed audit would not prove beneficial to either the auditor or client. When sampling techniques are properly applied, the final results are usually within a narrow percentage range of the amounts that would have been determined by a detailed audit. The purpose of the audit sample is to determine a factor for errors within a representative selected period. Once the error factor is determined, the factor is projected over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid. Likewise, this same methodology is used when considering transactions on which Virginia tax has been overpaid. Every effort is made to select objectively the sample periods that are representative of the period being audited.

In this instance, the audit period was limited as the new hotel had not been in operation for a full calendar year. The Taxpayer and auditor agreed on using April 2015 as a representative sample of the months the property had been in operation. The Taxpayer argues the sample is unreasonable. However, the Taxpayer was informed of the sample period at the onset of audit and no concerns were raised regarding whether it was representative of the entire audit period. While the Taxpayer claims the sample month resulted in an unreasonable assessment, the Taxpayer has not provided any documentation to invalidate the sample methodology or indicate the assessment is otherwise erroneous.

Interest Abatement

The Taxpayer contends the length of time taken to complete the audit was unreasonable and, therefore, the interest should not be applied. However, the Taxpayer’s difficulty in gathering the necessary documents from their management firm resulted in the delays in the audit. Additionally, Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it represents a fee for the use of money over a period of time. In this instance, the Taxpayer had the use of the money that was properly due the Commonwealth.

CONCLUSION

Pursuant to Virginia Code § 58.1-205 1, an assessment issued by the Department is deemed prima facie correct. The burden of proof is upon the Taxpayer to establish that an assessment is erroneous. The Taxpayer has not met that burden in this case. Therefore, the assessment is upheld. The Taxpayer has paid the assessment in full, therefore, no further action is required regarding the bill in question.

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/1614.A