My business is on its third consecutive audit and I didn't provide records this time either -- do I still get a final chance to submit them, and does the exceptions list matter?

Plain-English summary

This ruling is a near-twin of the same-day P.D. 24-117, sharing the identical audit period (May 2018 through April 2021), the same "3rd generation" (third consecutive) audit fact pattern, and effectively the same legal analysis and outcome -- another entry in this corpus's audit-records "second chance" family (see also P.D. 24-126 and P.D. 25-122). Rather than repeat the full doctrine writeup, this summary highlights what's genuinely distinct.

The shared baseline. A business failed to provide adequate records to complete its third consecutive sales and use tax audit. As in P.D. 24-117, Virginia's recordkeeping statutes (Va. Code §§ 58.1-102, 58.1-103, 58.1-633 A; 23 VAC 10-210-470) required the taxpayer to keep and produce suitable records, and when it didn't, the auditor turned to the taxpayer's federal income tax return information to estimate untaxed purchases for an exceptions report -- authorized under Va. Code § 58.1-618's best-information-available standard. When the taxpayer didn't respond to the auditor's follow-up request either, the audit was completed and the estimated assessment issued.

The one new detail: the exceptions list. This ruling specifically explains the standard audit mechanic that gives a dealer its opportunity to fix an estimate: during an audit, the auditor provides the dealer an exceptions list, allowing the dealer to submit documentation showing which listed items should be removed. Here, the Department noted plainly that the taxpayer failed to avail itself of this opportunity while the audit was still in progress -- it simply didn't respond. That's a slightly more explicit procedural explanation than P.D. 24-117 gave for the same underlying failure-to-respond fact.

Same burden-of-proof and "one final chance" outcome. Just as in P.D. 24-117, a Department assessment is presumed correct (§ 58.1-205), and a court can't grant relief where the assessment stems from the taxpayer's own willful failure to provide required information (§ 58.1-1826) -- so merely promising documentation now doesn't carry the taxpayer's burden. And just as in P.D. 24-117, despite already missing its chance during the audit, the Department extends one final opportunity: the auditor will contact the taxpayer within 30 days to arrange a documentation review, with the outstanding liability becoming immediately due and payable if this last window is also missed. The current application is closed, with a 90-day window to file a new one if issues remain after a revised audit report (Va. Code § 58.1-1821, 23 VAC 10-20-165).

What this means for you

Businesses on a repeat audit who receive an "exceptions list" during the audit

Use it. The exceptions list is your built-in, in-audit opportunity to document why specific flagged items shouldn't be part of an estimated assessment -- missing that window (as happened here) doesn't end your options, but it does mean you're relying on the Department's discretionary final-chance offer rather than the audit's normal process.

Anyone comparing this ruling to a near-identical companion (like P.D. 24-117)

When two rulings share nearly identical facts and outcomes, focus on what's actually different -- here, it's the explicit exceptions-list explanation, not a different legal result.

Common questions

Q: What's an "exceptions list," and why does it matter?
A: It's the list an auditor gives a dealer during an audit, showing which specific items are being estimated against the dealer, so the dealer can supply documentation to remove them. Not using it while the audit is open means you have to rely on any final opportunity the Department later chooses to extend.

Q: Is this ruling different from P.D. 24-117 in its outcome?
A: No -- both share the same period, the same "3rd generation audit" fact pattern, and the same result: the estimated assessment stands, with one final 30-day documentation window before the liability becomes immediately due.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-102 -- general duty to retain records substantiating a return, preserved for three years
• Va. Code § 58.1-103 -- required records must be available for inspection by the Tax Commissioner during regular business hours
• Va. Code § 58.1-633 A -- dealer recordkeeping requirement for sales/use tax
• 23 VAC 10-210-470 -- dealers must keep and preserve adequate records for three years
• Va. Code § 58.1-618 -- authorizes the Department to use the best information available to reconstruct a dealer's sales/purchases and determine tax liability
• Va. Code § 58.1-205 -- a Department assessment is prima facie correct; burden of proof is on the taxpayer
• Va. Code § 58.1-1826 -- a court cannot grant relief where the assessment is attributable to the taxpayer's willful failure to provide required information
• Va. Code § 58.1-1821 and 23 VAC 10-20-165 -- a taxpayer may file a new application for correction within 90 days of a revised audit report

Authorities the Department relied on (described here, not linked): P.D. 98-4 (1/4/1998), P.D. 16-75 (5/11/2016), P.D. 18-83 (5/9/2018), P.D. 20-28 (2/7/2020), and P.D. 22-108 (6/9/2022) (estimated assessments based on best available information when a taxpayer fails to provide records) -- the same audit-records "second chance" family as the already-enriched P.D. 24-117, P.D. 24-126, and P.D. 25-122.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-118

Original ruling text

November 14, 2024

RE: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letters submitted on behalf of * (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessment issued for the periods May 2018 through April 2021.

FACTS

As a result of a 3rd generation audit, the Taxpayer was issued an estimated assessment on its assets and purchases after it failed to provide adequate records during the audit. The Taxpayer filed an application for correction contending that many of the purchases were exempt and that required documentation can be provided upon request.

DETERMINATION

Virginia Code § 58.1-102 provides:

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.”

More specifically, 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 (VAC) 10-210-470 also provides that, for sales and use tax purposes, a taxpayer is “required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability.”

The Department has previously addressed instances in which dealers 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 (1/4/1998), P.D. 16-75 (5/11/2016), P.D. 18-83 (5/9/2018), P.D. 20-28 (2/7/2020), and P.D. 22-108 (6/9/2022).

In this instance, the Taxpayer failed to provide sufficient documentation in order to perform the audit. As a result, the auditor reviewed federal income tax return information to estimate untaxed purchases for an exceptions report. The proposed report was submitted to the Taxpayer for review and additional information was requested at that time. When the Taxpayer failed to respond, the audit was completed and an assessment was issued.

The estimated assessment was issued in accordance with Virginia Code § 58.1-618, which authorizes the Department to use the best information available to reconstruct a dealer’s sales or purchases to determine whether a tax liability exists. In its appeal, the Taxpayer offers to provide documentation if requested. During an audit, an exceptions list is provided to the dealer in order to allow such dealer to provide documentation to show which items should be removed from the list. The Taxpayer failed to avail itself of the opportunity to provide documentation while the audit was still in progress.

Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed prima facie correct. The burden is on the dealer to prove the assessment is erroneous. In addition, 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 was attributable to a taxpayer’s willful failure or refusal to provide the Department with necessary information as required by law.

Despite its failure to respond to the auditor’s request for records, the Taxpayer will be given one final opportunity to provide documentation for review. The Taxpayer will be contacted by the auditor within 30 days of the date of this letter to discuss the documentation that must be provided. The Taxpayer must make all of the requested documentation available to the auditor at a mutually agreed-upon time. The auditor will review the documentation and make adjustments, as appropriate, and issue a revised audit report. If the documentation is not provided within the allotted time frame stated above, the outstanding liability will become immediately due and payable.

In accordance with this decision, this application is being closed. At the conclusion of the auditor’s review, should issues remain, the Taxpayer may submit an application for correction within 90 days of the audit revision pursuant to Virginia Code § 58.1-1821 and Title 23 VAC 10-20-165.

The Code of Virginia sections and regulation cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at or **.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR\4763.F

Related Documents

98-4

16-75

18-83

20-28

20-75

21-20

22-108

23-96

24-2