Should Virginia remove one of two annual production charges from a one-year audit sample when including both distorted the projection?

Subject

Question inclusion of both annual expense charges and purchase cost in audit sample

Plain-English summary

Virginia's auditor examined fixed assets in detail and used a one-year sample to project untaxed expensed purchases across the audit period. The sample ran from September 2003 through August 2004. It included two charges connected with annual video or audio production for the taxpayer's convention.

The Commissioner accepted sampling as a useful audit method but agreed that including both annual production charges distorted this particular sample. One annual charge was removed, the purchase sample was recalculated, and the Department issued a revised bill rather than canceling the audit.

What this means for you

• A taxpayer can challenge a particular sample item without invalidating sampling as an audit method.
• The successful objection was tied to frequency: two annual expense charges in a one-year sample overstated the projected error.
• The remedy was recalculation after removing one charge, not waiver of the remaining liability.

Citations and references

• The ruling relied on the stated audit-sampling facts and did not cite a statute or regulation for its sample adjustment.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-60

Original ruling text

May 10, 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 November 2002 through October 2005. I apologize for the delay in responding to your letter.

FACTS

The Department's auditor performed a detailed examination of the Taxpayer's fixed assets and a one-year sample test of expensed purchases. The Taxpayer questions the validity of the Department's audit sample with respect to the inclusion on one invoice for the purchase of video production services. The Taxpayer's indicates that the sample period overlaps two separate fiscal years and includes two charges for audio production in connection with the Taxpayer's annual convention held in separate fiscal years. The Taxpayer claims that the inclusion of both audit production expense charges skews the sample. The Taxpayer requests that one of the charges for the audio production be removed from the sample and the sample recalculated.

DETERMINATION

Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial either to the auditor or the client. When sampling techniques are properly applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit. The purpose of the audit sample is to determine an error factor for the entire audit period.

In this instance, the auditor used a one-year sample from September 2003 through August 2004 to identify untaxed purchases made during the audit period. The Taxpayer's fiscal year is September 1 through August 31. After reviewing the audit report and the information provided by the Taxpayer, I agree that the inclusion of both annual expense charges for video production in the purchase sample distorts the results of the sample. Accordingly, I will agree to remove one of the annual expense charges and recalculate the purchase sample.

The audit will be revised in accordance with this determination. A revised and updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *. If you have any questions regarding this response, you may contact ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-993128930T