If I can't produce records during a Virginia sales tax audit, can I just argue the assessment should be reduced to my own rough estimate of taxable purchases?

Plain-English summary

A moving business was audited for 2013-2018 and couldn't show the Department that it had paid sales tax to vendors or properly accrued and remitted use tax on its purchases. Over the course of the audit, the auditor repeatedly asked for financial statements and supporting records; the company kept asking for more time but ultimately produced only a fixed asset list and a partial 2017 general ledger — nowhere near enough to substantiate its tax position. The auditor issued an assessment based on the limited information available. On appeal, the company didn't dispute that its records were incomplete — it simply asked the Department to reduce the assessment to its own estimate that only 10-15% of its purchases were actually taxable.

The Department upheld the assessment in full. Virginia law requires every taxpayer to keep suitable records for three years and make them available for inspection, and when a taxpayer fails to provide adequate records during an audit, the Department is specifically authorized to determine tax liability using the "best information available" — which is exactly what happened here. Virginia law also makes an assessment presumed correct once issued, putting the burden squarely on the taxpayer to prove it wrong. The company's list of purchases showing amounts it claimed were tax-paid, without the underlying invoices or supporting documentation, and its bare assertion of a 10-15% taxable rate, simply didn't meet that burden. The Department noted a further consequence: Virginia law bars a court from granting relief to a taxpayer whose assessment stems from the taxpayer's own willful failure to provide the Department with legally required records.

What this means for you

Businesses facing a records-based audit assessment

Keep and be ready to produce complete, itemized records — invoices, general ledgers, financial statements — for at least three years. If your records are incomplete when an audit happens, the Department doesn't have to accept your own estimate of what the "real" taxable percentage should be; it's entitled to build an assessment from whatever information it does have, and that assessment then carries a legal presumption of correctness that you must affirmatively disprove.

Businesses tempted to negotiate around missing records

Simply proposing a lower percentage without documentation to support it is not a winning strategy. If you want to challenge an audit assessment built on incomplete records, you need to actually produce the missing records or other objective evidence — not just assert an alternative number.

Accountants and tax professionals

This ruling is a clean, citable example of the "best information available" doctrine under Va. Code § 58.1-618 operating in tandem with the presumption-of-correctness rule in § 58.1-205(1) — and a reminder of the harsher backstop in § 58.1-1826, which can bar a court from granting relief at all where the taxpayer's own willful failure to produce records caused the estimate-based assessment in the first place.

Common questions

Q: What happens if I can't produce complete records during an audit?
A: The Department is authorized to use the best information available to it to determine your tax liability, and that resulting assessment is presumed correct.

Q: Can I just propose my own percentage estimate to reduce the assessment?
A: Not without supporting documentation. An unsupported estimate doesn't meet your burden of proving the Department's assessment incorrect.

Q: How long do I need to keep sales and use tax records?
A: Generally three years from the required filing date for the return the records support.

Q: Can a court help me if I never gave the Department my records?
A: Not necessarily — Virginia law can bar a court from granting relief where the assessment resulted from the taxpayer's own willful failure to provide required records.

Q: Does this ruling apply to my audit?
A: Not automatically. This is a published ruling based on this business's specific facts and the law as it stood in 2023; the outcome for your own audit depends on the records you can actually produce.

Citations and references

• Va. Code § 58.1-102 (three-year record retention duty)
• Va. Code § 58.1-103 (records available for inspection)
• Va. Code § 58.1-633 A; 23 VAC 10-210-470 (dealer recordkeeping requirements)
• Va. Code § 58.1-618 (best information available)
• P.D. 98-4, P.D. 16-75, P.D. 18-83, P.D. 20-28 (assessments from best available information)
• Va. Code § 58.1-205(1) (presumption of correctness; taxpayer's burden)
• Va. Code § 58.1-1826 (court relief barred for willful failure to provide records)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-96

Original ruling text

August 9, 2023

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 January 2013 through December 2018. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a moving business, was assessed use tax on purchases for which it could not provide documentation that sales tax had been paid to vendors or that the Taxpayer had accrued and remitted the use tax. After several attempts to obtain satisfactory records, the auditor issued the assessment based on the records available. The Taxpayer appeals, contending that the assessment is overstated and requests that it be reduced to its estimate of 10-15% of gross sales.

DETERMINATION

The General Provisions in Chapter 1 of Title 58.1 of the Virginia Code govern all taxes administered by the Department of Taxation and provide the following in Virginia Code § 58.1-102:

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 Title 58.1 of the Virginia Code specifically addresses the Virginia Retail Sales and Use Tax and requires in Virginia Code § 58.1-633 A requires 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 of the Virginia Administrative Code 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.”

In this instance, the Taxpayer provided incomplete and undocumented records of its business activities. As a result, the auditor repeatedly requested financial statements and other documentation from the Taxpayer. However, the Taxpayer failed to respond to the auditor’s requests for information, often citing the need for additional time to compile the information. The auditor was able to obtain a fixed asset list and a partial general ledger report from 2017. This documentation was insufficient to support the Taxpayer’s claims that taxes had been paid.

Pursuant to Virginia Code § 58.1-618, the Department is authorized to use the best information available to determine whether a tax liability exists in instances where the taxpayer does not provide adequate records for review during the Department’s audit. The Taxpayer has provided a list of purchases showing amounts paid for sales and use tax but has not provided the underlying supporting documentation. Based on the Taxpayer’s Virginia corporate income tax returns the assessment was properly issued to the Taxpayer in accordance with Virginia Code § 58.1-618.

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, Public Document (P.D.) 98-4 (1/14/1998), P.D. 16-75 (5/11/2016), P.D. 18-83 (5/9/2018), and P.D. 20-28 (2/7/2020).

CONCLUSION

Virginia Code § 58.1-205 1 deems any tax assessment issued by the Department as prima facie correct. This means that the burden of proof is upon the Taxpayer to prove that the assessment is incorrect. The Taxpayer has not met this burden and, therefore, the tax liability assessed in the audit is upheld. Further, 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 assessment is attributable to the taxpayer’s willful failure or refusal to provide the Department with necessary information as required by law.

The Code of Virginia sections, regulation and public documents 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 (804) ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3694.F

Related Documents

98-4

16-75

18-83

20-28