I didn't keep my restaurant's register tapes, and the auditor estimated my tax. Can I still knock it down by claiming exempt nonprofit sales and that my prices included the tax?

Plain-English summary

A restaurant was audited for retail sales and use tax (April 2019 through March 2022). Its books and records were incomplete — notably, it hadn't kept its cash-register tapes — so the auditor estimated the tax by computing an error rate from a full year of receipts and applying it. The restaurant appealed on three grounds and raised financial hardship. The Tax Commissioner upheld the assessment on all points — a textbook example of how missing records doom an appeal.

Estimated assessments are allowed when records are missing. When a dealer fails to keep or produce adequate records, Virginia authorizes the Department to use the "best information available" to determine the tax (Va. Code § 58.1-618). Dealers are required to keep, for three years, complete records of sales, purchases, deductions, and exemptions (Va. Code § 58.1-633 A; 23 VAC 10-210-470). Because this restaurant didn't, the auditor's estimate was proper — and the burden was on the taxpayer to show it was wrong.

1. Sales to nonprofits (schools and churches). The restaurant claimed roughly 30% of its sales were to tax-exempt schools and churches. But not all nonprofits qualify for exemption; an organization must meet all the statutory requirements, and if it does, the Department issues it an exemption certificate (Va. Code § 58.1-609.11). A dealer generally needs that certificate to treat a sale as exempt (Va. Code § 58.1-623 A). Here the few certificates shown didn't relate to the audit-period transactions. And for church-run schools, the exemption covers purchases made by the educational institution with its own funds (23 VAC 10-210-310 H 2) — the restaurant offered no evidence the purchases were paid from official entity funds. Inviting the auditor to "call and verify" the organizations doesn't shift the burden, which stays on the dealer (23 VAC 10-210-280 A). Claim denied.

2. "The 6% tax was already in my gross sales." The restaurant argued that its reported gross sales included the sales tax (and tips), so taxing the full gross double-counts. The Department can back the tax out of gross receipts using an accounting factor — but only when the dealer has kept sufficient records to verify the method (P.D. 93-78; the tax must normally be separately stated, Va. Code § 58.1-625). With no source documentation for gross sales, taxable sales, or tax collected, the Department couldn't verify the claim. Denied.

3. Recordkeeping. The restaurant admitted it underpaid due to improper computations and discarded register tapes after recording them. Virginia's sales tax is a transactional tax — taxability and tax-paid status are proven transaction by transaction with underlying documents (P.D. 00-100). Without them, the auditor's estimation was sustained.

Result. The assessment was upheld; a revised bill (interest to date) issues, payable within 60 days to avoid more interest. Because the restaurant cited financial hardship, the Department pointed it to an offer in compromise based on doubtful collectibility (with a 30-day window to submit the forms).

What this means for you

Restaurants and other cash-heavy businesses

Keep your register tapes and daily sales records — for at least three years. If you can't document your sales and the tax you collected, the Department can estimate your liability from whatever information it has (Va. Code § 58.1-618), and you'll bear the burden of disproving an estimate built on incomplete data. Good records are your only real defense in a sales-tax audit.

Businesses that sell to schools, churches, or other nonprofits

A buyer being a nonprofit does not make the sale exempt. The organization must qualify and hold a Virginia exemption certificate, the purchase must be made by and paid from the funds of the exempt entity, and you need the certificate on file for the transaction at issue (Va. Code §§ 58.1-609.11, 58.1-623 A). Certificates that postdate the sales, or aren't tied to the audited transactions, won't help.

Businesses that fold tax into the menu or shelf price

If you advertise tax-included prices, you can back the tax out of gross receipts — but only with records that substantiate your accounting method (P.D. 93-78). Keep the documentation, and remember the tax is generally supposed to be separately stated (Va. Code § 58.1-625).

Common questions

Q: My records were incomplete. Can the Department really just estimate my tax?
A: Yes. When a dealer can't produce adequate records, Virginia lets the Department use the best information available to compute the tax (Va. Code § 58.1-618). Here the auditor built an error rate from a year of receipts, and the estimate was upheld because the restaurant couldn't rebut it.

Q: About 30% of my sales were to churches and schools. Aren't those automatically exempt?
A: No. Only qualifying nonprofits with a Virginia exemption certificate are exempt, the purchase must be made and paid for by the exempt entity, and you need the certificate for the specific transactions (Va. Code §§ 58.1-609.11, 58.1-623 A). Certificates unrelated to the audit period don't establish the exemption.

Q: My prices already include the 6% tax. Can I subtract it from the assessment?
A: Only if your records prove it. The Department will use an accounting factor to remove tax from tax-included gross sales, but only when the dealer has kept sufficient records to verify the method (P.D. 93-78). Without documentation, the adjustment is denied.

Q: Paying this will be a real hardship. Any options?
A: The Department noted you can request an offer in compromise based on doubtful collectibility, submitting financial documentation on the required forms. It's discretionary and requires evidence of your financial situation.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-203 — Department's authority to interpret and enforce the tax laws
• Va. Code § 58.1-609.11 — sales and use tax exemption for qualifying nonprofit organizations
• Va. Code § 58.1-623 A — all sales taxable until the contrary is shown; dealer relieved only by a valid exemption certificate
• Va. Code § 58.1-618 — Department may use the best information available when a dealer fails to provide records
• Va. Code § 58.1-625 — dealers must separately state the tax on the sales price
• Va. Code § 58.1-633 A — dealer recordkeeping requirement
• 23 VAC 10-210-310 H 2 — church-run schools' purchases exempt when made by the educational institution with its own funds
• 23 VAC 10-210-470 — three-year records dealers must keep

Authorities the Commissioner relied on (described here, not linked): P.D. 93-78 (backing tax out of tax-included gross sales requires sufficient records) and P.D. 00-100 (transactional tax requires per-transaction proof); and the strict-construction cases Commonwealth v. Community Motor Bus, 214 Va. 155 (1973), Commonwealth v. Research Analysis Corp., 214 Va. 161 (1973), and Golden Skillet Corp. v. Commonwealth, 214 Va. 276 (1973).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-73

Original ruling text

June 4, 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 April 2019 through March 2022.

FACTS

An audit was conducted on the books and records of the Taxpayer, a restaurant, for the period at issue. According to the audit report, the books and records were incomplete, and the auditor computed an error rate based on a full calendar year of receipts resulting in an assessment. The Taxpayer filed an application for correction contending that the auditor failed to accept legitimate deductions based on lack of documentation, 30% of sales were to non-profit organizations exempt from the tax, and 30% of the liability resulted from the inclusion of the 6% sales tax in taxable sales. The Taxpayer also states that the assessment would create a financial hardship for the business.

ANALYSIS

Strict Construction of Exemptions

The Department has the authority to interpret and enforce the laws of the Commonwealth governing taxes in accordance with Virginia Code § 58.1-203. With regard to such interpretations, settled case law requires strict construction of sales and use tax exemptions. Where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Commonwealth v. Community MotorBus , 214 Va. 155 (1973); Commonwealth v. Research Analysis Corporation , 214 Va. 161 (1973); and Golden Skillet Corp. v. Commonwealth , 214 Va. 276 (1973).

Nonprofit Exemption

The Taxpayer contends that some of the assessed sales during the audit period were made to non-profit and tax-exempt organizations such as schools and churches. For Virginia retail sales and use tax purposes, not all nonprofit organizations are eligible for an exemption. In addition, some exemptions may be limited to certain types of sales or purchases. In general, Virginia Code § 58.1-609.11 provides sales and use tax exemptions for nonprofit organizations and entities. Under the statute, a nonprofit organization must meet all of the established requirements in order to receive sales tax exempt status. If a nonprofit organization is eligible for the exemption, the Department will issue an exemption certificate to the nonprofit entity upon request.

During the examination, the auditor noted a few recent exemption certificates were presented, but none were related to transactions during the audit period. Virginia Code § 58.1-623 A provides “[a]ll sales or leases are subject to the tax until the contrary is established.” In almost all circumstances, an exemption certificate is required in order to relieve a dealer from liability.

In the case of the schools, Title 23 of the Virginia Administrative Code (VAC) 10-210-310 H 2 provides in part that “kindergartens, primary schools, secondary schools, preschools, nurseries, day care centers, and similar activities held in the public church buildings that carry out the work and ministry of the church and that are not separate legal or business entities are generally exempt from the tax on the purchases of tangible personal property...” Purchases by such entities must be made by the educational institution. No evidence of payment from official entity funds was provided.

The Taxpayer provided a number of names and organizations to the auditor and indicated that the auditor could contact these entities to verify their status. Title 23 VAC 10-210-280 A states “[a]ll sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law.” As such, it is incumbent upon the Taxpayer to gather and retain records in order to show its sales were exempt from the tax.

Taxpayer Records

In its application, the Taxpayer admits it unintentionally underpaid its monthly tax as a result of improper computations. In addition, the Taxpayer failed to keep register tapes after they were recorded in the books and only reported taxable sales on its returns.

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 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 other pertinent information as may be required by the Department. This recordkeeping requirement is further explained in Title 23 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 Department reviews transactions based on the documentation presented for each transaction. This is consistent with longstanding policy that the retail sales and use tax is a transactional tax, and 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. See Public Document (P.D.) 00-100 (5/25/2000).

The Taxpayer indicates that the business did not keep cash register receipts requested by the auditor, contributing to underreported sales on the Taxpayer’s monthly sales tax filings. In this case, the Taxpayer failed to maintain sufficient records in order for the Department to accurately measure its compliance with Virginia retail sales and use tax requirements. When a dealer fails or refuses to provide adequate records for review during an audit, the Department is authorized to use the best information available to determine whether a tax liability exists pursuant to Virginia Code § 58.1-618. As permitted by statute, the auditor, in this case, used the records available to compute the assessment.

Tax Included in Gross Sales

In its application, the Taxpayer is requesting a deduction in the gross amount due, claiming that reported gross sales amounts include Virginia sales tax and tip amounts. In P.D. 93-78 (3/12/1993), while reiterating the statutory requirement that sales tax must be separately stated pursuant to Virginia Code § 58.1-625, the Department accepted a dealer’s accounting method where it divided its gross sales price by a factor to determine the taxable sales price. Such a concession may be made when a dealer has maintained sufficient records that verify an alternative accounting methodology. As stated above, however, the Taxpayer has not provided records to substantiate with accuracy the gross sales, taxable sales, or even sales tax collected during the audit period. Without the corresponding source documentation, the Department is unable to verify the Taxpayer’s contention on this point.

DETERMINATION

The Taxpayer failed to produce the requested records to verify sales and purchases as required under Virginia laws, rules, and regulations. Without the proper source documentation from the Taxpayer, the auditor’s estimation of sales during the audit period is sustained. Further, the Taxpayer failed to show that it made exempt sales to eligible nonprofit organizations or that it was entitled to an adjustment for tax included in its gross sales.

Based on this determination, the assessment is upheld. A revised bill with interest accrued to date will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within sixty days of the date of the bill.

The Taxpayer indicates that paying the full amount of the assessment will cause a financial burden. As such, the Taxpayer may wish to request an offer in compromise based on doubtful collectibility. The Taxpayer must present evidence of doubtful collectibility to support a claim of financial hardship. If the Taxpayer wishes to pursue a settlement based on doubtful collectibility, please complete and return the enclosed OIC – Fee and OIC B – 3 forms to: Tax Commissioner, Virginia Department of Taxation, P.O. Box 2475, Richmond, Virginia 23218-2475. These forms will allow the Department to review and analyze the Taxpayer’s financial situation. Upon completion of the Department’s review, a response will be issued based upon the information provided. If the Department does not receive the completed forms within thirty days of the date of this letter, it will be presumed that the Taxpayer will not submit an offer in compromise based on doubtful collectibility.

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, Adjudication and Resolution Division, at or **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/4838.Z

Related Documents

93-78

00-100