Could Virginia reconstruct a government contractor's sales and use tax from a prior audit when the contractor lacked records for the current period?

Subject

Auditor used the Taxpayer's prior audit, dealer failed to maintain adequate records

Plain-English summary

A U.S. government contractor lacked adequate records for a January 1995-through-August 1999 sales-and-use-tax audit. Virginia therefore used the contractor's prior 1992-through-1994 audit to project the later liability.

The Tax Commissioner upheld that reconstruction. Virginia law required dealers to keep records sufficient to determine tax, and allowed the Department to use the best available information when they did not. The contractor offered older-period invoices, not documentation for the period under appeal, to argue that underground phone-line usage contracts were exempt services. That did not support changing the later audit.

One adjustment was required. Beginning January 1, 1996, Virginia taxed mixed maintenance contracts providing both repair parts and labor on one-half of the total charge. The audit was revised accordingly for the identified contracts, while the remainder of the assessment stayed in place.

What this means for you

• Missing records allowed Virginia to reconstruct liability from a prior audit.
• Evidence from the prior period did not prove how transactions should be treated in the current audit period.
• Intervening law changes still had to be applied to the reconstructed assessment.
• Adequate contemporaneous records are the strongest protection against projected liabilities.

Citations and references

• Va. Code §§ 58.1-618 and 58.1-633, best-information assessments and dealer records.
• Va. Code § 58.1-609.5(9), mixed maintenance contracts.
• 23 VAC 10-210-470, required dealer records.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-30

Original ruling text

April 9, 2007

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

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period January 1995 through August 1999.

FACTS

The Taxpayer is a contractor with the United States government. The Taxpayer was assessed tax, compliance penalty, amnesty penalty and interest for the aforementioned period. Due to a lack of records, the auditor used the Taxpayer's prior audit for the period of January 1992 through December 1994 to project the sales and use tax liability for the audit under appeal. The Taxpayer contends that certain items in the prior audit should be revised, which would result in an accurate liability in the present audit.

DETERMINATION

Virginia Code § 58.1-633 requires every dealer "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." This record keeping requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-470.

When a dealer fails to maintain adequate records, the Department is authorized by Va. Code § 58.1-618 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 best information available to reconstruct the Taxpayer's sales and purchases to determine whether a liability existed was a prior retail sales and use tax audit conducted by the Department.

Underground Phone Lines

You contend that tax has been assessed erroneously on usage contracts for underground phone lines, as these contracts represent exempt service transactions.

You have not provided any documentation for the periods at issue to support your position. Instead, you have submitted invoices from periods reviewed during the prior audit (January 1992 through December 1994). The transactions assessed in the prior audit were used to project the Taxpayer's liability for the current audit due to the lack of records and documentation. The Taxpayer was provided an opportunity at the completion of the prior audit to contest any issues assessed in the prior audit and failed to do so. Absent documentation relating to the transactions incurred during the audit period at issue, I find no basis to revise the audit.

Maintenance Agreements

In the prior audit, the Taxpayer was assessed use tax on the full amount of the maintenance agreements in accordance with the law in effect during the periods under audit. Effective January 1, 1996, Va. Code § 58.1-609.5 9 was amended to tax maintenance contracts which provide for both repair or replacement parts and repair labor at one-half of the total charge for such contracts.

In light of the law change, I will agree to revise the audit to tax the maintenance contracts identified in the prior audit and included in the audit under appeal at one-half of the total charge for such contracts.

CONCLUSION

Based on the above determination, the portion of the assessment related to the maintenance contracts will be revised. In all other respects, the assessment is upheld. An updated bill with interest accrued to date will be sent to the Taxpayer. No additional interest will accrue provided the bill is paid within 30 days of the date on the bill. Please remit payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attention: *. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia sections and regulation cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this determination, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-957601522i