The auditor estimated my underreported sales by comparing my federal and state tax returns, and I submitted my bank deposit records to challenge it -- why wasn't that enough to fix the assessment?

Plain-English summary

A Virginia retailer was audited for sales and use tax covering June 2017 through December 2020, and the audit found two problems: underreported sales, and untaxed general expense and fixed-asset purchases. Because the retailer didn't provide the requested point-of-sale records (things like register tapes or computerized transaction logs) during the audit, the auditor instead compared the gross sales the business had reported on its federal tax return against what it had reported on its state sales tax filings. The federal filings showed higher sales than the state filings did, and the auditor used that gap to calculate a monthly average of underreported sales, which the audit treated as sales tax that had been collected from customers but never remitted to Virginia.

On appeal, the retailer specifically challenged the "tax collected but not remitted" portion of the assessment and submitted additional bank records to try to reconcile actual sales. The problem was what those records left out: the business made both cash and credit card sales, but the bank statements it submitted covered only charge-card deposits, with no accounting for cash sales at all. Because Virginia's dealer recordkeeping rules require records sufficient to determine the true amount of tax due, and because a Department assessment is presumed correct until the taxpayer proves otherwise, records that omit an entire category of sales (cash) couldn't do the job. The Department found the retailer hadn't met its burden of proof and upheld the assessment as issued, along with the standard 60-day window to pay before further interest accrues.

What this means for you

Retailers who take both cash and card payments and are contesting an audit with bank statements alone

Bank deposit records showing only card transactions will not reliably reconstruct total sales for a cash-accepting business. If you're trying to rebut a best-information-available estimate, make sure whatever records you submit account for ALL payment types, not just the ones that happen to leave a bank trail.

Any dealer who didn't provide register tapes or POS records during an audit

Once records aren't provided during the audit itself, the auditor is authorized to estimate using whatever reliable outside data is available -- here, a federal-versus-state sales comparison. Overturning that kind of estimate later requires genuinely complete records, not partial ones.

Anyone appealing a "sales tax collected but not remitted" assessment based on a federal/state sales gap

This type of assessment stems directly from your own reported numbers not matching between your federal and state filings. If there's a legitimate explanation for the gap (other than unremitted tax), you'll need documentation that actually reconciles the two filings completely, not just partial bank records.

Common questions

Q: Can Virginia estimate my sales tax liability by comparing my federal and state tax return filings?
A: Yes, when a dealer doesn't provide adequate point-of-sale records during an audit, Va. Code § 58.1-618 lets the Department use the best information available -- including a comparison of gross sales reported on federal versus state filings -- to reconstruct the liability.

Q: Will my bank deposit records be enough to challenge an underreported-sales assessment?
A: Only if they're complete. This ruling shows that bank records covering just one payment type (here, credit card deposits) while omitting another (cash sales) were found unreliable and didn't meet the taxpayer's burden of proving the assessment wrong.

Q: What records should a dealer keep to avoid this kind of dispute in the first place?
A: Va. Code § 58.1-633 and 23 VAC 10-210-470 require dealers to keep suitable records of sales, leases, and purchases -- in practice, that means register tapes or computerized transaction records covering all forms of payment, not just card transactions.

Citations and references

• Va. Code § 58.1-633 (dealers must keep suitable records of sales, leases, and purchases)
• 23 VAC 10-210-470 (dealer recordkeeping requirements)
• Va. Code § 58.1-618 (Department may use best information available when a dealer's records are inadequate)
• Va. Code § 58.1-205 (an assessment is prima facie correct; burden of proof on the taxpayer)

Subject

Administration : Taxpayer Records - Underreported sales; Tax Collected Not Remitted

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-2

Original ruling text

January 11, 2021

Re: § 58.1-1821: 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 June 2017 through December 2020.

FACTS

The Taxpayer, a retailer with a location in Virginia, was audited for the periods at issue. As a result of the audit, the Taxpayer was assessed tax for underreported sales and untaxed general expense and fixed asset purchases. The auditor used state and federal tax return filings to estimate the assessment because the Taxpayer did not provide the requested records for review during the audit. The Taxpayer contests the sales tax collected unremitted portion of the audit and submits additional documentation for review.

DETERMINATION

Dealer Records

Virginia Code § 58.1-633 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 requirements are set out in Title 23 of the Virginia Administrative Code 10-210-470. 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 and purchases to determine whether a tax liability exists.

When the Taxpayer failed to provide sufficient records, the auditor reviewed the Taxpayer’s gross sales reported on its federal tax return filings and compared this to the gross sales reported on its state tax return filings. The federal returns indicated underreported sales. The auditor used this data to determine the monthly taxable average for underreported sales, which was included in the assessment as tax collected unremitted.

The auditor requested sales records, such as register tapes and computerized register transactions, to reconcile the sales tax filings. The Taxpayer failed to provide the necessary records during the audit, or with the appeal. The Taxpayer claimed during the audit that these records are not available for review. In the absence of documentation necessary to determine the sales, the estimated assessment is upheld.

The records submitted with the appeal are insufficient to verify sales. The auditor notes that the Taxpayer makes cash and credit card sales. The bank statements submitted with the appeal are for charge deposits and do not include cash deposits. These records are unreliable because the cash sales made by the Taxpayer are not included. Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed to be prima facie correct and that the burden is on the taxpayer to prove the assessment is erroneous or incorrect. In this instance, the Taxpayer has not provided the necessary documentation to support its contention that the assessment of tax is incorrect. Therefore, the Taxpayer has not met the burden of proof requirement.

Based on this determination, the assessment is correct as issued. 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.

The Code of Virginia sections and regulation 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/3818.G