My business couldn't produce complete records for some sales and purchases during an audit, so the auditor assessed tax based on estimates and other transactions with the same vendor -- can I still get the assessment reduced by pointing to invoices showing tax was paid on similar purchases?

Plain-English summary

Virginia's sales and use tax is a transactional tax -- meaning every individual transaction has to stand on its own documentation. This ruling reinforces that a dealer can't lean on a general pattern of proper tax handling with a vendor to excuse specific transactions that lack their own records.

A commercial wholesaler of cabinets was audited and assessed tax for untaxed sales to supposedly exempt customers, along with general expense and fixed asset purchases, because the wholesaler couldn't document them. Virginia Code § 58.1-633 A requires dealers to keep suitable records of all taxable sales, leases, and purchases, and 23 VAC 10-210-470 requires those records be kept for three years, including invoices, purchase orders, and bills of lading substantiating each purchase.

The Department pointed to a prior ruling (P.D. 08-29) establishing that even invoices showing sales tax was regularly paid to a particular vendor aren't enough, by themselves, to remove OTHER, undocumented transactions with that same vendor from an audit -- because the tax is assessed transaction by transaction, the Department reviews the documentation for each specific transaction, not a vendor-wide pattern.

Here, the wholesaler didn't respond to the auditor's repeated requests for records documenting its claimed exempt sales and purchases. After multiple delays, what it eventually provided was insufficient to support the untaxed transactions, and no evidence at all was offered regarding tax paid on the disputed purchases. On appeal, the only new documentation was retail sales agreements for two vehicles -- but the auditor had already obtained the necessary information for those specific assets from depreciation schedules the wholesaler's own representative had supplied, so this didn't change anything.

Because the wholesaler failed to maintain adequate records, the Department was authorized under Va. Code § 58.1-618 to use the "best information available" to reconstruct the liability -- here, matching profit-and-loss statements against the wholesaler's own ST-9 sales tax returns and extrapolating an error rate from that data. Since Virginia assessments are presumed correct (Va. Code § 58.1-205) and the burden is on the taxpayer to prove otherwise with real records, and since Va. Code § 58.1-1826 bars judicial relief where an erroneous assessment results from the taxpayer's own willful failure to provide required information, the Department upheld the assessment in full.

What this means for you

Any dealer claiming exempt sales or documenting business purchases

Keep transaction-specific records -- invoices, purchase orders, exemption certificates -- for each individual sale or purchase, not just general proof that you've historically handled a vendor's transactions correctly. Virginia reviews sales tax transaction by transaction, and a pattern of proper handling with one vendor doesn't excuse gaps on other specific transactions.

Dealers facing an audit where records are incomplete

Respond promptly and completely to an auditor's records requests. If you don't, the Department can (and will) reconstruct your liability using the "best information available" -- such as matching your profit-and-loss statements against your own ST-9 filings -- and that reconstructed liability is presumed correct on appeal unless you can rebut it with actual documentation.

Anyone appealing an assessment based on incomplete audit records

New documentation offered for the first time on appeal has to actually fill the gap the auditor identified. Producing records for information the auditor already had from another source (like depreciation schedules) won't move the needle on transactions that remain undocumented.

Common questions

Q: I can show that sales tax was properly paid on many of my purchases from a vendor -- does that cover other undocumented transactions with the same vendor?
A: No. Virginia's sales and use tax is a transactional tax; documentation is required and reviewed for each specific transaction, not inferred from a general pattern with the same vendor.

Q: What happens if I don't provide adequate records during an audit?
A: The Department is authorized to use the "best information available" to reconstruct your sales or purchases and estimate your liability -- for example, matching profit-and-loss statements against your own sales tax return filings and extrapolating an error rate.

Q: Can I challenge an estimated assessment based on incomplete records?
A: Yes, but the assessment is presumed correct and the burden is on you to prove it wrong with actual documentation. General arguments or partial records addressing only some of the disputed items generally won't be enough.

Q: Is there any relief if the erroneous assessment resulted from my own failure to give the Department information during the audit?
A: No -- Virginia law specifically bars courts from granting relief where an erroneous assessment is attributable to the taxpayer's willful failure or refusal to provide required information.

Citations and references

• Va. Code § 58.1-633 A (dealers must keep suitable records of taxable sales, leases, and purchases)
• 23 VAC 10-210-470 (three-year record retention requirement; documentation must substantiate each purchase)
• P.D. 08-29 (4/2/2008) (invoices showing tax regularly paid to a vendor don't excuse other undocumented transactions with that vendor; the tax is reviewed transaction by transaction)
• Va. Code § 58.1-618 (Department may use best information available to reconstruct a dealer's sales/purchases when records are inadequate)
• Va. Code § 58.1-205 (Department assessments are prima facie correct; burden of proof is on the taxpayer)
• Va. Code § 58.1-1826 (no judicial relief where an erroneous assessment stems from the taxpayer's willful failure to provide required information)

Subject

Administration : Records - Audit Documentation, out of state sales, exemption certificates

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-59

Original ruling text

April 5, 2022

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 September 2014 through August 2017. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a commercial wholesaler of cabinets. As a result of the Department’s audit and due to a lack of documentation, the Taxpayer was assessed retail sales and use tax for untaxed exempt sales, general expense purchases and fixed asset purchases. The Taxpayer appeals, contending sufficient documentation was provided to support untaxed sales to exempt customers as well as general expense and fixed asset purchases, and requests the assessment be abated.

DETERMINATION

Virginia Code § 58.1-633 A states:

Every dealer required to make a return and pay or collect any tax under this chapter shall 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 of the Virginia Administrative Code (VAC) 10-210-470, which interprets Virginia Code § 58.1-633, states “[e]very person who is liable for the 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 documentation includes records for all tangible personal property used or consumed in the conduct of business and records for all merchandise purchased including bills of lading, invoices, purchase orders, and other evidence to substantiate each purchase.

In Public Document 08-29 (4/2/2008), the Department addressed a number of scenarios concerning sales and use tax recordkeeping requirements. In one instance, the Department ruled that the presentation of invoices demonstrating sales tax regularly paid to vendors is not sufficient evidence to remove multiple transactions with the same vendor from an audit. The Department reviews transactions based on the documentation presented for each transaction. This is consistent with longstanding and established policy that the retail sales and use tax is a transactional tax, and the determination as to the taxation of a specific transaction is based on the underlying documents that support the transaction. Thus, documentation must be provided to prove the tax was paid on each transaction with a vendor.

The Taxpayer did not respond to the auditor’s request for records documenting exempt sales to customers and purchases by the business over numerous occasions. After multiple delays, the Taxpayer provided documentation insufficient to support untaxed transactions with customers and no evidence regarding the payment of taxes on purchases by the business. No additional documentation regarding exempt sales or purchases has been provided with the appeal. The Taxpayer provided Retail Sales Agreements for two vehicles, however, the auditor had obtained the necessary information for these assets from the depreciation schedules provided by the Taxpayer’s representative.

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 Taxpayer did not provide complete and relevant records to the auditor, so the auditor utilized the best available information to examine and estimate the liability. The auditor utilized profit and loss statements that had been matched with the Taxpayer’s ST-9s and extrapolated the error rate based on the Taxpayer’s ST-9 data.

CONCLUSION

Virginia Code § 58.1-205 deems assessments issued by the Department to be prima facie correct. This means that the burden of proving the assessment is incorrect rests upon the Taxpayer. The provision of adequate records and other documentation is necessary to prove that the tax assessed on the audit is incorrect. In this instance, the Taxpayer has not met the burden of proof. Furthermore, 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 erroneous assessment is attributable to the taxpayers’ willful failure or refusal to provide the Department with necessary information as required by law.

Because the Taxpayer has failed to provide documentation in compliance with Virginia Code § 58.1-633 and Title 23 VAC 10-210-470, the assessment is upheld. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 60 days of the date of the bill.

The Code of Virginia sections, regulation and public document 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 response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1984.A

Related Documents

08-29