Could a dealer replace Virginia's estimated food-sales assessment with supplier invoices and mixed-beverage reports?

Subject

Taxpayer underreported alcohol and food sales/Dept. of Alcoholic Beverage Control

Plain-English summary

Virginia denied the refund claim and upheld the auditor's reconstructed food-sales assessment because the dealer lacked adequate, verifiable records. The dealer offered supplier invoices and Mixed Beverage Annual Reviews as a better measure than the audit estimate.

The Department could not verify that the invoices represented all food purchases. The alcoholic-beverage regulator had audited beer and alcohol sales, not food sales, and had found that the dealer failed to file complete and accurate mixed-beverage reports. Those materials therefore did not establish actual food sales.

When a dealer does not preserve adequate records, Va. Code § 58.1-618 permits Virginia to reconstruct sales using the best available information. The auditor applied a minimum 45% factor to alcohol-sales figures supplied by the regulator. On this record, the Commissioner found that method reasonable and refused the refund. Accrued interest remained due.

What this means for you

• Dealers must keep complete sales and purchase records for the required period.
• A partial set of supplier invoices may not prove total purchases or sales.
• Reports accepted or reviewed for alcohol regulation do not necessarily verify food sales for tax purposes.
• The 45% factor was a case-specific reconstruction based on missing records, not a general rule for every dealer.

Common questions

Why were the invoices rejected? Virginia could not confirm that they were a complete record of food purchases.

Did the alcohol regulator approve the dealer's food figures? No. It did not audit food sales and found the mixed-beverage reports incomplete and inaccurate.

Citations and references

• Va. Code §§ 58.1-633 and 58.1-618.
• 23 VAC 10-210-470.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-41

Original ruling text

April 17, 2008

Re: § 58.1-1824 Protective Claim for Refund: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you seek reconsideration of the Department's prior determination issued to your client, * (the "Taxpayer"), regarding the retail sales and use tax assessment issued for the period January 2002 through March 2005. The Taxpayer has paid the assessment and files a protective claim for refund of overpaid taxes. I apologize for the delay in responding to your letter.

FACTS

In the Department's prior letter, it was determined that the Taxpayer had underreported alcohol and food sales. The auditor estimated the audit assessment in accordance with Va. Code § 58.1-618 based on information provided by the Department of Alcoholic Beverage Control ("ABC").

The Taxpayer contests the assessment and claims that the method used by the Department overstates the Taxpayer's food tax liability. The Taxpayer requests reconsideration with respect to the audit liability assessed on food sales for the period February 2002 through December 2004, based on additional information recently released by the ABC. The records include supplier invoices for the Taxpayer's food purchases. The Taxpayer believes that the food supplier invoices better mirror actual food sales than the estimate determined by applying the 45% minimum food sales threshold to gross alcohol sales. The Taxpayer maintains that the purchase records are consistent with the sales reported on the Taxpayer's Mixed Beverage Annual Reviews (MBAR) for the period, which the Taxpayer claims were uncontested by the ABC.

DETERMINATION

Virginia Code § 58.1-633 addresses dealer's records and provides, in part, the following:

Every dealer required to make a return and pay or collect any tax under this chapter shall 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 sets forth the Department's regulation with respect to dealer's records and provides that every dealer liable for the collection and remittance of sales and use tax is required to keep and preserve for three years adequate and complete records necessary to determine sales and use tax liability.

Regarding the additional information, the Department has no way of verifying that the purchase invoices provided are a complete record of the Taxpayer's food purchases for the period in question. For this reason, I find the purchase invoices are insufficient documentation to determine the tax liability for food sales.

Further, I do not agree with the Taxpayer's claim regarding the MBAR report. The ABC investigation showed only that the Taxpayer had collected sales tax on food and alcohol beverages but failed to file returns and report the tax for the period February 2002 through April 2004. The ABC conducted an audit on the Taxpayer's beer and alcohol beverage sales but not on food sales. The ABC has determined that the Taxpayer failed to file complete and accurate MBAR reports. Based on these facts, I find that the MBAR report is not sufficient evidence to support the Taxpayer's claim that food sales are accurate.

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. Absent adequate records, the auditor used a minimum 45% factor and applied it to audit figures provided by the ABC for mixed beverage sales to estimate the Taxpayer's liability. Because of the lack of sufficient documentation, the auditor relied upon the best available information to determine the tax liability. Based on the statute and the Department's regulation with regard to record retention by dealers, the auditor's method of deriving the use tax liability in this audit was reasonable and is upheld.

CONCLUSION

Based on the above, there is no basis to grant the Taxpayer's claim for refund. A review of the audit bill shows an outstanding balance for accrued interest that remains due and payable. An 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 Code of Virginia section and regulation cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1282708634.T