Could a Virginia taxpayer replace a sample audit with a detailed audit because it expected a lower liability?

Subject

Taxpayer could not produce valid exemption certificates to support the exempt sales

Plain-English summary

Virginia upheld the sample-based sales-and-use-tax assessment and declined to require a detailed audit. In the selected sample months, the company could not produce valid exemption certificates for sales reported as exempt, and it had not properly taxed maintenance contracts.

The auditor developed an error factor from those sample exceptions and applied it to the monthly gross-sales base. Because a Department assessment is presumed correct and the company did not prove the sampling method invalid, the Commissioner found no basis to replace the sample with a detailed audit.

The ruling also noted that the company had filed a bankruptcy petition covering the assessment and that the Department's Legal Unit was notified.

What this means for you

• Keep valid exemption certificates for sales reported as exempt.
• Apply Virginia's tax treatment for maintenance contracts consistently and retain supporting records.
• Wanting a detailed audit because it may produce a lower result is not enough; the taxpayer must prove the assessment or sampling method is erroneous.
• The assessment here was upheld on the record presented.

Common questions

Q: Why were the reported exempt sales included in the audit sample?
A: The taxpayer could not produce valid exemption certificates supporting those sales.

Q: What other errors appeared in the sample?
A: The sample included maintenance-contract sales that were not properly taxed; the auditor used 50% of the contract charges as provided by the cited statute.

Q: Did Virginia order a detailed audit?
A: No. The taxpayer did not prove that the sample methodology was invalid, so the Commissioner found no cause to require one.

Q: What was the outcome?
A: The assessment was upheld.

Citations and references

• Va. Code §§ 58.1-205 and 58.1-609.5.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-96

Original ruling text

June 18, 2008

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

Dear *:

This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the audit period August 2003 through July 2006.

FACTS

The Taxpayer is a multi-national provider of consulting services and data storage, storage management and data protection solutions. The Taxpayer was audited by the Department, and the sample method was used to test for sales tax compliance. For the sample months chosen for the audit period, the auditor found sales that were not supported by valid exemption certificates. Additionally, the sample periods included sales of maintenance contracts where the tax was not applied. The auditor included these sales in the sample computation at 50% of the contract charges, as provided by Va. Code § 58.1-609.5. The Taxpayer disagrees with the resulting assessment, contending that a detailed audit would have produced a lower liability. The Taxpayer requests that the audit by revised by conducting a detailed audit.

DETERMINATION

Sampling is a widely used audit technique that is employed when a detailed audit would not prove beneficial either to the auditor or the client. The use of such a method has been proven to produce final results within a narrow percentage range of the actual amount that would have been determined by a detailed audit.

In this instance, the Department's auditor, based on a schedule of gross sales for the audit period, selected sample months that included sales reported as exempt. However, the Taxpayer could not produce valid exemption certificates to support the exempt sales. The sample months also included sales of maintenance contracts that were not properly taxed. Based on these exceptions, an error factor was developed based on the sampled sales and the overall gross sales population. The error factor was then applied to the individual monthly totals of the gross sales base amount and the resulting measure became the basis for computing the assessment.

Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed prima facie correct. The burden is upon the taxpayer to prove the assessment is erroneous. In this instance, the Taxpayer has not proven that the sample methodology is not valid and, accordingly, has not met this burden. The method utilized by the auditor is consistent with the procedures used by the Department in other sample audits. Accordingly, I do not find cause to allow for a detailed audit in this instance.

CONCLUSION

Based on this determination, the assessment is upheld. The Department's records indicate that the Taxpayer has filed a bankruptcy petition that includes the assessment at issue. I have notified the Department's Legal Unit of this decision by copy of this letter.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department of Taxation's web site. If you have questions regarding this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2052901839.Q