Could Virginia use a locality's meals-tax audit to assess a restaurant for underreported alcoholic-beverage sales?

Subject

Assessed tax, penalty and interest for underreported sales of alcoholic beverages

Plain-English summary

Virginia upheld tax, penalty, and interest assessed on a restaurant's underreported alcoholic-beverage sales. The Department relied on a locality's meals-tax audit, which sampled 2003 and 2004 and estimated liquor and wine sales from purchase records and average selling prices.

The locality's method accounted for waste, breakage, spillage, mixers, and both happy-hour and regular prices. It applied separate error factors to 2001-2003 and 2004-2005. The Department then compared the locality's 2004-2005 figures with the sales reported for state sales-tax purposes.

The Department also reviewed December 2005 records at the restaurant's request and found results consistent with the local audit, so it declined to conduct a full detail audit. Because a Virginia assessment is presumed correct and the restaurant did not provide sufficient evidence showing error, the assessment remained due.

What this means for you

• A state sales-tax audit may use a well-supported local meals-tax audit when the same sales are relevant.
• An estimation method can remain valid when it reasonably accounts for discounts, waste, breakage, spillage, and product mix.
• Bank-deposit arguments alone did not overcome the detailed purchase-and-price analysis described here.
• The taxpayer bears the burden of proving a Virginia assessment wrong with sufficient records or other evidence.

Common questions

Q: Did the locality rely on only one sample year?
A: No. The ruling says it sampled both 2003 and 2004 and applied each year's error factor to the corresponding periods.

Q: Were waste and discounted prices ignored?
A: No. The audit considered waste, breakage, spillage, mixers, and an average of happy-hour and regular prices.

Q: Why did Virginia refuse a full detail audit?
A: A review of December 2005 records produced results consistent with the locality's audit, so the Department found a detail audit unwarranted.

Citations and references

• Va. Code § 58.1-205.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-92

Original ruling text

June 18, 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 March 2004 through December 2005. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates a restaurant. The Taxpayer was assessed tax, penalty and interest for underreported sales of alcoholic beverages.

Based on a meals tax audit performed by the * ("COR") for the period December 2001 through December 2005, the Department determined that the Taxpayer had understated its sales of alcoholic beverages. The Taxpayer maintains that the audit conducted by the COR is flawed and does not accurately reflect the Taxpayer's gross receipts.

The Taxpayer states that the sample methodology used by the locality for determining liquor and wine sales does not allow for all items affecting actual sales such as shrinkage, waste, discounted prices, inventory adjustments and other such factors. In addition, the Taxpayer claims that errors were made in allocating receipts between food and beverage sales. The Taxpayer states that the income, as determined by the Taxpayer's bank deposits, clearly demonstrates that the sales as reported by the Taxpayer are correct. The Taxpayer suggests that the Department's reliance on the COR's audit has resulted in an erroneous assessment of the retail sales and use tax.P. D. 08-92

DETERMINATION

The Department's audit staff met with agents from the COR's office to review the audit findings. After reviewing the audit, the audit staff agreed that the sampling technique used by the COR was properly applied in conducting the meals tax audit. The COR sampled the calendar years 2003 and 2004 and determined that the Taxpayer had underreported sales of liquor and wine. This refutes the Taxpayer's claim that the locality used only the taxable year 2003 to determine gross receipts and applied the results to the other years in the audit when in fact the locality sampled two years.

Further, in determining gross receipts, the COR took into consideration factors such as sales prices, waste, breakage, and spillage. In addition, credit was allowed for "mixers" against liquor sales. The sales price used was an average between "happy hour" prices and regular prices. Based on average sales prices and purchase records reviewed, the COR estimated alcoholic beverage sales. The estimated sales compared to the sales reported by the Taxpayer resulted in underreported sales. The COR determined the error factor for 2003 and applied it to sales reported by the Taxpayer for the period 2001 through 2003. The error factor for 2004 was applied to sales reported by the Taxpayer for the period 2004 and 2005. The Department's auditor compared the sales figures provided by the COR for the period 2004 and 2005 to the sales reported to the Department and assessed the difference as underreported sales.

It is my understanding that the Department's audit staff met with the Taxpayer to discuss the audit issues. The Taxpayer requested that the Department conduct a detail audit for purposes of determining the audit liability. The auditor agreed to review the locality audit and Taxpayer's records for December 2005 to ensure the liability is representative and accurate. The auditor found the results of its review to be consistent with the results obtained by the COR in its audit for meals tax. Therefore, the auditor found that there was no basis to adjust the assessment based on the Taxpayer's December 2005 records. Further, because the December 2005 records were consistent with the results in the COR audit, a detail audit was not warranted.

Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed prima facie correct. The burden is on the taxpayer to prove the assessment is erroneous. The Taxpayer has not provided sufficient evidence to refute the validity of the sales figures computed by the meals tax audit. In addition, the COR has apparently not accepted any change to the figures. Therefore, I find no basis for adjusting the Department's assessment.

CONCLUSION

Based on the foregoing, the assessment is correct. 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 from the bill date to avoid additional interest charges.

The Code of Virginia section cited is 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 Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1493503005.T