My cigarette shop's assessment is overstated because records and inventory were stolen -- does claiming a burglary excuse me from having to document that the assessment is wrong?

Plain-English summary

This is another entry in a series of same-era rulings arising from the Department's cigarette compliance program, which cross-checks distributor sales records against retailers' reported sales tax to catch cigarettes purchased tax-exempt for resale that never show up as taxed sales downstream. Here, a retailer's distributor records showed tax-exempt cigarette purchases for resale that didn't match its reported sales, and the Department sent a summary of findings with 14 days to respond. The retailer's response was distinctive: rather than denying the purchases outright, it claimed the assessment was overstated because its records AND a large amount of inventory had been stolen -- and it asked for, and was granted, additional time to gather documentation supporting that claim.

Even with the extra time, the retailer never actually submitted any documentation -- neither proof that a burglary occurred, nor records showing the assessment's calculation was wrong. Virginia law presumes a Department assessment correct, places the burden on the taxpayer to prove otherwise, and specifically authorizes the Department to reconstruct a dealer's liability from the best information available (here, the distributor's own sales records) when the dealer's own records aren't available. A theft, even if it genuinely happened, doesn't eliminate the underlying tax liability or shift the burden of proof to the Department -- the taxpayer still needs to show, with actual evidence, either that the theft occurred or that the assessment itself doesn't accurately reflect the cigarettes purchased. Because neither showing was made, even after extended time, the Tax Commissioner upheld the assessment, consistent with the Department's handling of similar cigarette-compliance cases.

What this means for you

Retailers claiming a theft or burglary as the reason records can't be produced

A theft claim alone, without supporting evidence (a police report, an insurance claim, any documentation of the loss), doesn't excuse you from your burden of proving an assessment wrong -- and it won't reduce the underlying tax liability calculated from third-party (e.g., distributor) records that still exist independent of your own lost paperwork.

Businesses granted extended time to respond to a compliance audit

Use that time to actually gather and submit real evidence -- an extension without follow-through leaves the original assessment (based on whatever third-party information the Department already has) standing exactly as issued.

Cigarette retailers relying on distributor relationships for resale purchases

Keep your own independent purchase and resale records (invoices, exemption certificates, inventory logs) even though the distributor also keeps records -- if your own records are lost or destroyed, the distributor's records will control the audit, and you'll have no independent basis to dispute them.

Common questions

Q: My business records and inventory were stolen -- does that excuse me from an assessment based on distributor records?
A: Not by itself. You still need to provide actual documentation -- proof of the theft (like a police report) and/or evidence the assessment miscalculates your liability -- to overcome the presumption that a Department assessment is correct.

Q: The Department gave me extra time to respond to an audit finding -- what should I do with that time?
A: Actually gather and submit the documentation needed to support your position. An extension without a substantive response leaves the original proposed assessment standing.

Citations and references

• Public Document 18-184 (10/30/2018), P.D. 20-140 (8/18/2020), and P.D. 20-172 (9/29/2020) -- prior Department determinations addressing similar business-identity-theft/fraud defenses to cigarette-purchase compliance assessments, all reaching the same result

Subject

Purchases/ Sales of Cigarettes

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-91

Original ruling text

July 13, 2021

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 of February 2016 through September 2016. I apologize for the delay in responding to your letter.

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 retailer or wholesale dealer. As a result of the compliance program, the Taxpayer was issued an assessment for tax and interest on untaxed cigarettes purchased from * (the “Distributor”). The assessment is based on sales information provided by the Distributor, identifying the Taxpayer’s purchase of cigarettes exempt of the tax for resale.

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 Distributor, it was determined that the Taxpayer underreported sales of cigarettes, by the amount of the cigarettes purchased from the Distributor for resale.

On March 27, 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 whether the Taxpayer’s purchases from the Distributor qualified for the resale exemption or whether the Taxpayer collected and remitted the sales tax on the sale of those purchases. The Taxpayer responded to the letter claiming the assessment was overstated because the records and a large amount of inventory were stolen. Subsequently, the Taxpayer submitted a letter requesting additional time to gather documentation to support the claim that the assessment is overstated.

DETERMINATION

Purchases/Sales

The resale exemption provided under the Virginia retail sales and use tax is found 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.

In this instance, the documentation provided by the Distributor showed that the Taxpayer purchased cigarettes exempt of the tax for resale. The cigarette sales records provided by the Distributor showed that the Taxpayer made cigarette purchases totaling $* exempt of the tax that are not supported by any resale exemption or tax reporting documentation.

The assessment is calculated on the cost price of the cigarettes based on the sales documentation provided by the Distributor, as this was the best information available. The Taxpayer was given the opportunity to provide documentation to substantiate the exempt purchase or exempt resale regarding the cigarettes at issue, and alleged burglary. The Taxpayer failed to do so even after being provided extended time. Lacking supporting documentation that the assessment is overstated or confirmation of the Taxpayer’s claims of theft, I find that the assessment is correct. This determination is consistent with previous determinations regarding business identity theft including Public Documents 18-184 (10/30/2018), 20-140 (8/18/2020), and 20-172 (9/29/2020).

Virginia Code § 58.1-205 sets out that any assessment of a tax by the Department is deemed prima facie correct. This means that the burden of proving the assessment is erroneous is upon the Taxpayer. Based on the foregoing, the Taxpayer has not met this burden.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of this letter. If the Taxpayer has questions concerning payment of the assessment or bill, the Taxpayer may contact the Delinquent Collections Unit at *.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1596L

Related Documents

18-184

20-140

20-172