My solar company's sales tax assessment includes sales I say were shipped to out-of-state customers, but I couldn't produce the invoices during the audit -- can I still get the assessment corrected if I find the paperwork now?

Plain-English summary

A company that designs, wholesales, sells, and installs residential and commercial solar power systems was audited for January 2016 through December 2018. The auditor assessed sales and use tax on sales, purchases, and assets whose taxable nature couldn't be verified. The company sought correction, arguing the assessment was overstated because it included sales made through out-of-state vendors and shipped to out-of-state customers — transactions it says fall outside Virginia's sales and use tax reach — and claimed it had since gathered the documentation to prove it.

Recordkeeping requirements, and why documentation matters transaction-by-transaction. Virginia Code § 58.1-633 A requires every dealer to keep suitable records of sales, leases, and purchases, plus whatever other records the Tax Commissioner requires to determine the tax due. 23 VAC 10-210-470 spells out specifics: a daily record of cash and credit sales, purchase records (invoices, bills of lading, purchase orders), records of deductions and exemptions claimed (including exemption/resale certificates), records of tangible property used in the business, and a complete annual inventory. Because Virginia's sales and use tax is a transactional tax, the Department reviews and taxes each transaction based on its own supporting documentation — a taxpayer must document that tax was properly paid (or properly excluded) on each individual transaction with a vendor, not just assert it in the aggregate.

What went wrong during the audit. The company had been a quarterly filer before switching to monthly filing partway through the audit period; its monthly returns remitted sales tax in some months but not others, and it stopped reporting any sales at all after December 2017 (continuing to file zero-tax returns through 2018). When the auditor requested purchase records, income tax returns, a general ledger, and invoices, the company produced only some incomplete bank statements — the Department has no record of ever receiving the invoices the company says it could supply.

Why the burden stayed on the taxpayer. Under Va. Code § 58.1-205, a Department assessment is presumed correct, putting the burden on the taxpayer to prove it wrong — and Va. Code § 58.1-1826 goes further, barring a court from granting relief where the assessment stems from the taxpayer's own willful failure to provide the information required by law. Without adequate transaction-level documentation, the company couldn't meet that burden, so the assessment stood.

A genuine final opportunity. Because the company represented that it now has the necessary documentation ready for review, the Department isn't treating this as the final word — it's giving the company 30 days to contact the assigned Senior Auditor and arrange a review of the records. If that review supports adjusting the assessment, a revised audit report will follow. But this is explicitly framed as a last chance: if the documentation isn't provided this time, the current assessment will stand.

What this means for you

Businesses claiming some sales fall outside Virginia's tax reach (e.g., out-of-state shipments)

You need transaction-level proof — invoices, bills of lading, and similar records tied to each specific sale — not just a general assertion that some portion of your business was out-of-state. Virginia's sales and use tax is applied transaction-by-transaction, and the documentation burden is yours.

Anyone who couldn't produce complete records during an audit but has since located them

Ask promptly whether the Department will accept a follow-up documentation review, as it did here — but treat any such opportunity as final. A second missed deadline will likely leave the original assessment in place with no further chances.

Dealers whose filing pattern shifted or lapsed mid-audit-period

Gaps or inconsistencies in your own filing history (like switching frequencies or reporting no sales for extended periods) can draw closer audit scrutiny — keep the underlying transaction records to back up your returns regardless of how your filing pattern changes.

Common questions

Q: I think my sales and use tax assessment is too high because some sales were really out-of-state — what do I need to prove that?
A: Documentation for each specific transaction — invoices, shipping records, and similar proof tied to that sale — not just a general claim that some portion of your sales were out-of-state.

Q: I couldn't find my invoices during the audit but have them now — is it too late?
A: Not necessarily, but treat it as a final opportunity. As in this ruling, the Department may give you a short window (here, 30 days) to submit the documentation, with the current assessment standing if you miss that window too.

Q: Who has the burden of proof once an assessment is issued?
A: The taxpayer. Under Va. Code § 58.1-205, a Department assessment is presumed correct, and it's the taxpayer's job to prove otherwise with adequate documentation.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-633 A — dealer recordkeeping requirement for sales/use tax
• 23 VAC 10-210-470 — specific records a dealer must keep: daily sales records, purchase invoices, deduction/exemption records, tangible property records, annual inventory
• 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

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-126

Original ruling text

November 18, 2024

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

Dear * :

This will reply 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 2016 through December 2018.

FACTS

The Taxpayer, a designer, wholesaler, seller, and contractor of residential and commercial solar power systems, was audited by the Department for the period at issue. The Department’s audit resulted in the assessment of sales and use tax for sales, purchases, and assets in which the auditor could not verify the taxable nature of the transactions. The Taxpayer filed an application for correction contending that tax assessed was excessive because it included sales made from out-of-state vendors and shipped to out-of-state customers. It asserts that it has gathered the required documentation to support its claim.

DETERMINATION

Virginia Code § 58.1-633 A states that every dealer required to file a retail sales and use tax return and pay or collect such tax must keep and preserve suitable records of the sales, leases, or purchases, as the case may be, subject to the retail sales and use tax. The dealer must also maintain such other books of account as may be necessary to determine the amount of tax due and “such other pertinent information as may be required by the Tax Commissioner.” This record keeping requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-470:

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) A daily record of all cash and credit sales, including sales under any type of financing or installment plan in use;

b) A record of the amount of all merchandise purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase;

c) 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;

d) A record of all tangible property used or consumed in the conduct of the business;

e) A true and complete inventory of the stock on hand and its value, taken at least once each year.

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 that 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 had been a quarterly filer of sales tax returns prior to and into the early months of the audit period. Filing frequency was thereafter changed to monthly. The Taxpayer’s monthly returns remitted sales tax in some months but remitted no sales tax in others. The Taxpayer last reported sales in December 2017. It filed returns in 2018 but remitted no sales tax during that period.

In this case, the auditor requested purchase records, income tax returns, a general ledger, and invoices. The Taxpayer only submitted bank statements, some of which were missing or otherwise not provided. The Taxpayer indicated that it was able to provide copies of invoices, but the Department has no record of receiving them.

Pursuant to Virginia Code § 58.1-205, any assessment of tax by the Department is prima facie correct, meaning the burden of proof is upon the Taxpayer to show that the assessment is in error. 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.

Because it has asserted that it has documentation ready to be reviewed, the Taxpayer will be given one final opportunity to provide the necessary records and information to the Department’s audit staff. The Taxpayer should contact *, Senior Auditor, at or ** within 30 days of the date of this letter to set up a mutually agreeable time in order to determine what documentation is required, and for review once it is provided. Once reviewed, the Department’s auditor may request additional information. A revised audit report will be issued and the assessment may be adjusted if warranted.

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/3247.B

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