Could a taxpayer limit Virginia's audit extrapolation to 2003-2004 because its purchasing practices allegedly changed?

Subject

Purchases were incorrectly exempted from retail sales and use tax

Plain-English summary

Virginia refused to limit the audit extrapolation to 2003-2004 and upheld applying the sample's error factor across the full January 1999-July 2004 audit period. The taxpayer accepted that purchases had been incorrectly exempted beginning in 2003 but claimed earlier purchasing habits were different.

The Department found that purchases for government contracts, even if infrequent, were an integral part of the taxpayer's normal business rather than isolated transactions. Removing them would distort the sample rather than improve it.

Because an audit sample is intended to estimate error for the entire audit period and the taxpayer did not establish that the methodology was invalid, Virginia left the extrapolation and assessment unchanged.

What this means for you

• A sampled transaction generally stays in the sample when it is part of normal business activity, even if it is infrequent.
• To narrow an extrapolation period, show with records that a real operational change makes the earlier period noncomparable.
• Merely asserting changed purchasing habits did not invalidate this sample.
• Virginia viewed acknowledged later errors as supporting the likelihood of similar earlier errors.

Common questions

Q: Why were government-contract purchases kept in the sample?
A: They were part of the taxpayer's normal business, not isolated transactions unrelated to its operations.

Q: Did Virginia accept different error factors for pre-2003 and later periods?
A: No. The Department said the sample's purpose was to determine one error factor for the entire audit period.

Q: What would support removing a transaction?
A: The taxpayer would need to show that it was isolated and not a normal part of business activity.

Citations and references

• Department determination dated April 26, 2007, as discussed in P.D. 08-77.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-77

Original ruling text

June 6, 2008

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

Dear *:

This will reply to your letter in which you seek reconsideration of the Department's determination of April 26, 2007 regarding a retail sales and use tax assessment issued to * (the "Taxpayer") for the period January 1999 through July 2004. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer takes exception to the sampling methodology used in the audit. The auditor chose the period January 2003 through July 2004 as the sample period and extrapolated the error factor for this period over the entire audit period. In its April 26, 2007 determination letter, the Department found that the sample and extrapolation methods were properly applied. The Taxpayer states that the initial appeal letter provided incomplete facts. The Taxpayer agrees to the results of the extrapolation for 2003 through 2004, but contends that the error factor should not be applied to periods before 2003 due to a change in purchasing habits.

DETERMINATION

Upon review of the audit report and the information presented, I find no basis to invalidate the sample and extrapolation. 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 in this case claims the purchases for government contracts do not represent a typical sale, this claim does not, by itself, render the sample inaccurate. It may well be that purchases of tangible personal property for government contracts are infrequent, but such purchases appear to be an integral part of the Taxpayer's normal business. Therefore, to remove the sales in question from the sample period would skew the sample and nullify its validity.

The sampling methodology in this case was properly applied. The purpose of the audit sample is to determine an error factor for the entire audit period, not for a partitioned portion of the audit period. The Taxpayer acknowledges that purchases were incorrectly exempted from retail sales and use tax beginning in 2003; therefore, it is likely that similar errors were made in the collection and remittance of the sales and use tax for periods prior to 2003. Based on the above, an adjustment of the extrapolation and error factor is not warranted.

An updated bill, with interest accrued to date, will be sent to the Taxpayer under separate cover. No further interest will accrue provided the bill is paid within 30 days of the date on the bill. If you have any questions about this determination, you may contact the Office of Tax Policy, Appeals and Rulings, at *.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1550496328.i