My business was audited for sales and use tax and hit with an estimated assessment I think is arbitrary. Can Virginia estimate my tax if my records are incomplete, and are bank and credit-card statements enough proof?

Plain-English summary

The Department ran a first-generation (first-time) sales and use tax audit on a Virginia consuming contractor for March 2017 through February 2023. A contractor is generally the user and consumer of the materials it buys, so it owes sales or use tax on those purchases. When the auditor asked for records, the taxpayer handed over only federal tax returns, bank statements, and credit-card statements — nothing that actually showed Virginia tax had been paid on its purchases — so the auditor built exceptions for untaxed purchases and issued an assessment. The taxpayer appealed, calling the estimate arbitrary. The Tax Commissioner upheld the assessment.

What records a dealer must keep. Every dealer must keep and preserve suitable records of its taxable sales, leases, and purchases (§ 58.1-633 A), and the regulation spells this out: for three years, adequate and complete records including a daily record of cash and credit sales, a record of all merchandise purchased backed by bills of lading, invoices, or purchase orders, records of exemptions and resale certificates claimed, records of property used or consumed, and an annual inventory (23 VAC 10-210-470). Those records must be available for inspection during regular business hours (§ 58.1-103) — and here the taxpayer refused to let the auditor see records at its place of business and produced the bank and card statements only after being told the audit would be closed and assessed.

Why bank and credit-card statements weren't enough. Sales and use tax is a transactional tax: whether a given purchase was properly taxed turns on the underlying document for that transaction. Bank and credit-card statements show that money moved, but they rarely, if ever, show whether Virginia tax was actually charged and paid on the purchase — so they cannot establish compliance.

The "best information available" power. When a dealer's records are inadequate, the Department is expressly allowed to reconstruct the dealer's sales or purchases using the best information available to determine the tax due (§ 58.1-618). Here the most verifiable figures were the amounts the taxpayer itself reported on its income tax returns, and the auditor's use of them tracked how the Department has handled incomplete-records cases before. That is a recognized methodology, not an arbitrary one.

Burden of proof. A Department assessment is prima facie correct (§ 58.1-205), so the taxpayer had to prove it wrong. Having failed to keep adequate records, make them available, or produce transaction-level proof of tax paid, the taxpayer did not carry that burden — the assessment was upheld, with no additional interest if paid within 30 days.

What this means for you

Businesses and contractors facing a sales/use tax audit

Keep — and be ready to hand over — the transaction-level documents: purchase invoices, bills of lading, purchase orders, resale/exemption certificates, and records of what you used or consumed, for at least three years. Contractors especially: you generally owe tax as the consumer of your materials, so an auditor will look for proof that tax was paid on each purchase. Cooperate with the on-site records request; refusing access and producing only summaries late in the audit (as this taxpayer did) makes an estimated assessment more likely, not less.

If you keep only bank and credit-card statements

Those are not a substitute for invoices. They show payments, not whether Virginia tax was charged on each item. If invoices are all you can produce after the fact, the Department can disregard the statements and estimate your liability from other data — including the sales and income figures you reported elsewhere.

Tax preparers

If a client's records are incomplete, understand that § 58.1-618 lets the Department estimate the tax from the best information available, and that its estimate is presumed correct under § 58.1-205. Challenging an estimated assessment as "arbitrary" rarely works unless you can produce the transaction-level documentation that should have existed in the first place. Advise clients to build and retain a compliant recordkeeping system before an audit, not during one.

Common questions

Q: Can Virginia just estimate my sales and use tax?
A: Yes, when your records are inadequate. Section 58.1-618 lets the Department reconstruct your sales or purchases from the best information available. Here it used the taxpayer's own income-tax-return figures, which the Commissioner found reasonable rather than arbitrary.

Q: I gave the auditor my bank and credit-card statements. Isn't that proof I paid the tax?
A: No. Sales and use tax is transactional, so proof depends on the underlying document for each purchase. Bank and card statements rarely show whether Virginia tax was actually charged and paid, so they are not sufficient to establish compliance.

Q: How long do I have to keep sales and use tax records, and what do they include?
A: Three years, and they must be adequate and complete: daily sales records, purchase invoices/bills of lading/purchase orders, exemption and resale certificates, records of property used or consumed, and an annual inventory (23 VAC 10-210-470). They must also be available for the Department to inspect (§ 58.1-103).

Q: I think the estimated assessment is too high. How do I fight it?
A: The assessment is presumed correct (§ 58.1-205), so you must prove it wrong — practically, by producing the transaction-level documentation showing the correct tax. A general objection that the numbers are "arbitrary," without that proof, will not overcome the presumption.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-633 A — dealer's duty to keep suitable records of taxable sales, leases, and purchases
• Va. Code § 58.1-103 — records must be available for inspection during business hours
• Va. Code § 58.1-618 — Department may estimate tax from the best information available
• Va. Code § 58.1-205 — assessment prima facie correct; burden on the taxpayer
• 23 VAC 10-210-470 — the specific three-year recordkeeping requirements (daily sales, purchase invoices, exemption certificates, property used/consumed, annual inventory)

Authorities the Commissioner relied on (described here, not linked): prior Department public documents holding that transaction-level documentation is required to prove tax was paid and that bank/credit-card statements are insufficient (P.D. 00-100, 25-30), and that an estimated assessment based on the best available information is appropriate when records are incomplete (P.D. 97-35, 97-215, 98-87).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-122

Original ruling text

November 20, 2025

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 March 2017 through February 2023.

FACTS

A first-generation audit was conducted on the books and records of the Taxpayer, a Virginia consuming contractor, for the period at issue. In response to the auditor’s request for records, the Taxpayer provided general records including federal tax returns, credit card statements, and bank statements. No source documentation specifically substantiating the payment of Virginia sales and use tax was submitted. Based on the information provided, generated exceptions were determined in the audit for untaxed purchases resulting in an assessment. The Taxpayer filed an application for correction contending that the estimated assessment was calculated using arbitrary values.

ANALYSIS

Dealer Records

The Taxpayer contends that the untaxed purchase totals listed in the audit do not match records provided during the audit. According to the audit report, credit card and bank statements were provided only after a notice that the audit would be assessed and closed.

Virginia Code § 58.1-633 A requires every dealer to keep and preserve suitable records of the sales, leases, or purchases subject to the retail sales and use tax. The dealer must also maintain such other books of account that may be necessary to determine the amount of tax due. This recordkeeping requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-470, which promulgates:

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 purpose of a sales and use tax audit is for the Department to determine a dealer’s compliance with the relevant Virginia tax statutes and regulations. Because the retail sales and use tax is a transactional tax, the determination as to the taxation of a specific transaction is based on the underlying documents that support that transaction. Thus, documentation must be provided to prove the tax was paid to a vendor on the transaction. See Public Document (P.D.) 00-100 (5/25/2000) and P.D. 25-30 (2/27/2025). Credit card and bank statements rarely, if ever, provide sufficient details to verify whether tax was properly paid on a given transaction, and are, therefore, not sufficient to determine the Taxpayer’s compliance with Virginia law.

Virginia Code § 58.1-103 further provides that records and documents must be available during regular business hours for inspection by the Department. According to the auditor’s report, the Taxpayer refused to allow the Department access to its records at its place of business. While the Department is willing to make accommodations as to how and where records are provided, it is the Taxpayer’s responsibility to make them available.

Estimated Assessment

Pursuant to Virginia Code § 58.1-618, the Department is permitted 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 provided insufficient records of its sales and use tax compliance to be reviewed by the auditor.

The most verifiable information available were amounts reported by the Taxpayer on its income tax returns. The auditor methodology used was consistent with prior determinations issued by the Department in which estimated assessments were issued because the taxpayer’s records were incomplete. See P.D. 97-35 (1/27/1997), P.D. 97-215 (5/12/1997), and P.D. 98-87 (5/8/1998).

DETERMINATION

Pursuant to Virginia Code § 58.1-205, an assessment of tax by the Department is prima facie correct, meant the burden of proof is upon the taxpayer to show that the assessment is in error. In accordance with the documentation provided and the cited authorities, the Department makes the following determinations with respect to the issues raised by the Taxpayer.

The Taxpayer failed to maintain adequate records and make them available for inspection by the Department. Under the circumstances, the audit appropriately applied the best information available at the time of the audit to estimate the Taxpayer's sales and use tax liability. The audit assessment for the period at issue is upheld. No additional interest will accrue provided the outstanding assessment is paid within thirty days of the date of the bill.

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 and Legal Affairs, Tax Adjudication and Resolution Division, at or **.

Sincerely,

James J. Alex
Tax Commissioner
Commonwealth of Virginia

AR/4561.Z

Related Documents

97-35

97-215

98-87

00-100

20-56

25-30