Could a retail chain remove a large untaxed sale from Virginia's audit sample when it lacked a valid exemption certificate?

Subject

Sales tax not collected sold items not supported by valid exemption certificates

Plain-English summary

Virginia kept a large untaxed sale in the audit sample because the retailer did not show that it was isolated from normal business. The store also lacked a valid exemption certificate or other documentation supporting the tax-free treatment.

An audit sample estimates errors across the full audit period from a representative period. A transaction may leave the sample when the taxpayer proves it is isolated and not part of normal operations. Dollar size alone—even when the item heavily affects the sample—does not establish that exception.

The contested sale appeared consistent with the chain's ordinary retail activity. Because assessments were presumed correct and the taxpayer did not prove otherwise, the Commissioner upheld both the sample and the assessment.

What this means for you

• Obtain valid exemption certificates and retain them with the sale records.
• To remove an item from a sample, show why it is genuinely isolated from normal operations.
• A large transaction is not automatically an outlier for audit purposes.
• The taxpayer bears the burden of proving a Virginia assessment wrong.

Common questions

Why was the sale taxable? The retailer had not collected tax and could not support an exemption with a valid certificate or other documentation.

Why did its size not remove it from the sample? The sale still appeared to be a normal business transaction rather than an isolated event.

Citations and references

• Va. Code § 58.1-205.
• P.D. 99-66 (April 15, 1999) and P.D. 04-204 (November 23, 2004).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-16

Original ruling text

February 29, 2008

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 2003 through December 2006.

FACTS

The Taxpayer is a retail chain store. The Department's audit disclosed that the Taxpayer sold various items to customers and did not collect tax. The sales were not supported by valid exemption certificates, and the Taxpayer was unable to provide documentation supporting the exempt sales. The auditor included these sales in the audit sample and assessed tax. The Taxpayer disagrees with the audit results, citing one sale that is of a large dollar amount. The Taxpayer believes the sale should be taxed separately and not included in the audit sample.

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 detail audit would not prove beneficial to either the auditor or the client. When sampling techniques are applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detail audit. The purpose of the audit sample is to determine a factor for errors within a representative select period. Once the error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid.

For an item to be removed from the audit sample, the Taxpayer must show that the transaction is isolated in nature and not a normal part of the Taxpayer's business activity. While the Taxpayer claims that the contested sale does not represent a typical sale, this claim does not, by itself, render the sample inaccurate. It may well be that the sale amount is large, but it appears to be consistent with the Taxpayer's normal business sales.

Public Documents 99-66 (4/15/99) and 04-204 (11/23/04) are on point with the facts of the Taxpayer's case. These documents explain that an item cannot be removed from the audit sample unless the transaction is isolated in nature and not a normal part of the taxpayer's operation, regardless of whether the item is a large dollar transaction or that it may constitute a large percentage of the taxable measure in the audit sample.

Upon review of the audit report and the information presented, I find no basis to remove the contested sale from the sample. Virginia Code § 58.1-205 provides that a tax assessment issued by the Department is deemed prima facie correct. The burden is upon the taxpayer to prove otherwise. The Taxpayer has not met this burden. Accordingly, the assessment is correct.

An updated 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 thirty days from the date of this letter.

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

Sincerely,

Janie E. Bowen

Tax Commissioner

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