I didn't give the auditor my records, so Virginia estimated my sales tax from my federal returns — can the estimate itself be challenged as overstated?

Plain-English summary

A Virginia dealer was audited for September 2017 through April 2021 but failed to provide adequate records, so the auditor built an estimated assessment from the best available information — the dealer's federal corporate income tax returns — covering unreported sales, general expense purchases, and fixed asset purchases. The dealer appealed under Va. Code § 58.1-1821, contending the estimates were overstated.

The estimate was authorized. Every taxpayer must retain records substantiating its returns for three years and make them available for inspection (Va. Code § 58.1-102, § 58.1-103), and sales-tax dealers specifically must keep suitable records of sales, leases, and purchases (§ 58.1-633 A; 23 VAC 10-210-470). When a dealer produces nothing, § 58.1-618 lets the Department determine liability and assess based on whatever information is available. And under § 58.1-205, the assessment is prima facie correct — the burden is on the taxpayer, who here provided no documentation at all.

But an estimate still has to make sense. Even with the burden unmet, the Tax Commissioner examined the audit's own logic, with a different result for each of its three parts:

• Gross sales — UPHELD. After the dealer ignored requests for point-of-sale and accounting records, the auditor reconciled federal returns against the dealer's Virginia ST-9 sales-tax filings and found a variance in every year. That was a proper method, and the unreported-sales exceptions stand.
• General expense purchases — REVISED. The auditor computed the use-tax measure from cost of goods sold on the federal returns. That was not rationally related to a use-tax liability, because COGS is generally inventory bought tax-exempt for resale. The proper starting point is the trade or business expense deductions (rents, advertising, "other deductions"), and on remand the analysis must also recognize that the dealer likely paid sales tax on some purchases and that some deductions may reflect exempt services.
• Fixed assets — OVERTURNED. The auditor assumed untaxed asset purchases, but the federal returns showed a small and declining depreciation deduction across the audit period — a strong indication that no assets were purchased. That portion of the assessment was thrown out entirely.

The assessment goes back to audit staff for revision; a revised report and updated bill will follow, with no additional interest if paid within 30 days of the bill. The dealer was formally put on notice of its recordkeeping duties (23 VAC 10-210-90) and warned that continued failure to keep and provide records could mean penalties in future audits (see P.D. 09-118, P.D. 21-63).

What this means for you

Dealers who can't (or won't) produce records

If you don't produce records, the Department will estimate — lawfully — from whatever it can find, usually your federal returns, and the assessment arrives presumed correct with the burden on you. This taxpayer got relief only because parts of the estimate were internally illogical; nothing about the sales portion changed. Keep three years of complete sales, purchase, and accounting records, and produce them when asked.

Anyone facing an estimated assessment

An estimate must be rationally related to the tax being measured, and this ruling shows the Commissioner will police that even when the taxpayer proves nothing: cost of goods sold is a bad proxy for taxable purchases (it's mostly exempt resale inventory), and an assumed asset purchase can be rebutted by the returns themselves (declining depreciation). Scrutinize how the number was built, not just how big it is.

Accountants and preparers

The audit trail here ran through the client's own filings — federal returns reconciled against ST-9s. Variances between those two get flagged year by year. And note the closing warning: once a client has been formally notified of recordkeeping duties, the next audit can add penalties.

Common questions

Q: Can Virginia really assess sales tax without my records?
A: Yes. When a dealer fails to provide required records, Va. Code § 58.1-618 authorizes the Department to determine liability from available information — here, federal income tax returns — and § 58.1-205 makes the resulting assessment prima facie correct, with the burden on the taxpayer to disprove it.

Q: The taxpayer submitted no documentation — why did parts of the assessment still fall?
A: Because the estimate's methodology has to be rational. Using cost of goods sold to measure untaxed purchases made no sense (COGS is mostly tax-exempt resale inventory), and the returns' small, declining depreciation deduction contradicted the assumption that fixed assets were bought. The Commissioner corrected both even without taxpayer evidence.

Q: What records does a Virginia sales-tax dealer have to keep?
A: Suitable records of sales, leases, and purchases and any other books needed to determine the tax due (§ 58.1-633 A), preserved for three years and open to Department inspection (§ 58.1-102, § 58.1-103; 23 VAC 10-210-470).

Q: What happens next in this case?
A: The audit returns to field staff to revise the expense-purchase measure and remove the fixed-asset portion, then a revised bill issues. No additional interest accrues if it's paid within 30 days, but the taxpayer is now on notice that future recordkeeping failures could draw penalties.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-1821 — administrative appeal (application for correction) to the Tax Commissioner
• Va. Code § 58.1-102, § 58.1-103 — three-year record retention and inspection duties for all taxpayers
• Va. Code § 58.1-633 A — dealer recordkeeping for the retail sales and use tax
• Va. Code § 58.1-618 — estimated assessment on available information when records aren't provided
• Va. Code § 58.1-205 — assessments are prima facie correct; burden on the taxpayer
• 23 VAC 10-210-470 — dealers must keep three years of adequate and complete records
• 23 VAC 10-210-90 — the notice-of-recordkeeping-responsibilities regulation cited in the closing warning

Authorities the Department relied on (described here, not linked): P.D. 09-118 (7/31/2009) and P.D. 21-63 (5/18/2021) (taxpayers are responsible for staying current on Virginia tax-law changes; recordkeeping warnings).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-59

Original ruling text

April 25, 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 September 2017 through April 2021.

FACTS

An audit was conducted on the books and records of the Taxpayer, a Virginia dealer, for the period at issue. When the Taxpayer failed to provide adequate information and documentation to audit staff, an assessment on untaxed sales, general expense purchases, and fixed asset purchases was made using available information. The Taxpayer filed an application for correction, contending that the estimates based on federal income tax returns were overstated.

ANALYSIS

The general provisions in Chapter 1 of Title 58.1 of the Code of Virginia govern all taxes administered by the Department. 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, “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.”

Virginia Code § 58.1-633 A, which specifically addresses the recordkeeping requirements for the Virginia retail sales and use tax, states that dealers are required to “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 similarly provides that a retail sales and use tax dealer is “required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability.”

The purpose of a sales and use tax audit is for the Department to determine a dealer’s tax compliance. As provided in the aforementioned authorities, the Taxpayer is required to maintain proper records and provide them for inspection by the Department, such that the Taxpayer’s sales and use tax compliance can be determined. When the Taxpayer failed to provide the required documentation or records for the audit period at issue, Virginia Code § 58.1-618 authorized the Department to determine the existence of a liability and make an assessment based on information that may be available.

Sales

The auditor reconciled federal corporate income tax returns and Virginia ST-9 filings to verify gross sales, after making unsuccessful attempts to solicit the proper source documentation from the Taxpayer (e.g., point of sales records or internal accounting records). A variance was discovered for each year included in the audit period resulting in an exception measure for unreported sales.

General Expense Purchases

Using the same federal filings, the auditor calculated a purchases measure on which to assess use tax. However, the measure computation was based on cost of goods sold reported on the federal return. Because cost of goods sold are generally items purchased tax exempt for resale, such purchases are not rationally related to a computation of a use tax measure. Instead, the auditor could have used trade or business expense deductions (e.g., rents, advertising, and expenses listed as other deductions) reported on the federal returns in order to estimate a liability.

Fixed Asset Purchases

The auditor assessed an estimated amount of fixed asset purchases subject to Virginia use tax because no purchase records were provided by the Taxpayer. A review of the federal returns, however, indicates that the depreciation deduction decreased over the period of the audit. While not precluding the possibility of an asset purchase, the reduction, coupled with the already minimal amount of the depreciation, indicates a strong likelihood that no assets were purchased during the audit period.

DETERMINATION

Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed to be prima facie correct and that the burden is on the taxpayer to prove the assessment is erroneous or incorrect. In this instance, the Taxpayer has not provided documentation to support its contention that the assessment was overstated.

However, although an estimated assessment is justified, the available records indicate better methodologies could have been employed in order to determine a liability. In accordance with this determination: (1) the portion of the assessment pertaining to verification of gross sales is upheld and (2) the portion of the assessment pertaining to fixed asset purchases is overturned.

The portion of the assessment pertaining to general business expense purchases will be subject to revision to limit the analysis of purchases to those deductions reported on the federal return that could have included taxable purchases. In analyzing these deduction accounts, a determination should be made as to the fact that the Taxpayer likely paid sales tax on at least some of its purchases, and a number of exempt service transactions could have been included in the purchases.

Based on information and evidence provided, the assessment will be returned to audit staff for review and adjustment. Once complete, a revised audit report and updated bill will be issued to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days of the date of the bill.

The Taxpayer is hereby instructed to follow the statutes cited above and is considered to have been notified by the Department of its record keeping responsibilities. See Title 23 VAC 10-210-90. It is also the responsibility of the Taxpayer to stay current regarding any and all changes to Virginia law that may affect its tax obligations. See Public Document (P.D.) 09-118 (7/31/2009) and P.D. 21-63 (5/18/2021). Continued failure to preserve and provide required records could result in assessments, including penalties, in future audits.

The Code of Virginia sections and regulations 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 **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/3997.Z

Related Documents

09-118

21-63