Could an unregistered interior designer avoid estimated tax and penalties after collecting sales tax, keeping it, filing no returns, and preserving no records?

Subject

Keeping collected sales tax supported estimated liability and fraud penalties

Plain-English summary

Virginia upheld the full assessment of tax, fraud penalty, amnesty penalty, and interest. The interior designer sold tangible property, collected sales tax, but never registered, filed returns, remitted the tax, or produced sales records.

With no books available, the auditor estimated taxable sales from monthly bank deposits after backing out sales tax. Virginia allowed best-available-information assessments, and the taxpayer supplied no evidence showing the estimate was wrong.

Collected sales tax was held in trust for Virginia. The taxpayer knew it had not remitted those funds and retained them for its own use, supporting the 50% fraud penalty. Unpaid amnesty-eligible periods ending on or before April 30, 2003 also received the additional 20% amnesty penalty. Interest was mandatory compensation for use of the money.

What this means for you

• Collecting sales tax creates a trust obligation even if the dealer never registers.
• Missing records allow Virginia to estimate liability from bank deposits or other available evidence.
• Willfully keeping collected tax can support a fraud penalty.
• Historical amnesty penalties could stack with other penalties on eligible unpaid periods.
• Interest was not waived as a hardship penalty.

Common questions

Why did Virginia use bank deposits?

The taxpayer had no sales records and no filed returns, so they were the best information available.

Did illness remove the fraud penalty?

No. Virginia focused on the taxpayer's knowledge that collected trust taxes had not been remitted.

Citations and references

• Va. Code §§ 58.1-615, 58.1-618, 58.1-625, 58.1-635, 58.1-1812, and 58.1-1840.1(F).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-72

Original ruling text

May 26, 2009

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 May 2002 through April 2008.

FACTS

The Taxpayer provides interior design services in conjunction with the retail sale of tangible personal property. The Taxpayer made sales of tangible personal property and collected the sales tax, but was not registered for collection of the retail sales tax. In attempting to reconstruct the Taxpayer's sales, the Department's auditor found that the Taxpayer did not have any records available for review. Because the Taxpayer had not filed any returns, the auditor assessed the Taxpayer for tax and interest based on the Taxpayer's bank deposit records. The auditor also assessed fraud penalty on the basis that the Taxpayer did not report any of its sales to the Department. The audit covered an amnesty eligible period for which the Taxpayer failed to remit any of the tax it collected; therefore, amnesty penalty was also applied.

The Taxpayer disagrees with the assessment and contends the failure to file and make payment of the tax was due to an illness. The Taxpayer states it attempted to address its tax issues with the Collections Unit of the Department but did not receive any assistance. Along with disputing the tax, the Taxpayer requests waiver of the penalties and interest.

DETERMINATION

Dealer's Tax Collection Responsibilities

Virginia Code § 58.1-615 provides that every dealer that is required to collect or pay the sales or use tax shall transmit to the Department a sales tax return reflecting the gross sales, gross proceeds, or cost price from all taxable transactions. The dealer is then required to file the return on a monthly basis. In this instance, the Taxpayer was never registered for the collection and payment of the retail sales and use tax and never filed a return with the Department. Because of the lack of records, the auditor used the Taxpayer's monthly bank deposits less any sales taxes that may have been included to calculate the Taxpayer's sales for the audit period. Based on this information, the auditor used the best available information to estimate the tax liability, in accordance with Va. Code § 58.1-618.

The Taxpayer has not provided any evidence to prove the assessment is erroneous. Accordingly, there is no basis to adjust the tax liability.

Fraud Penalty

Virginia Code § 58.1-635 provides, in pertinent part:

When a dealer fails to make any return and pay the full amount of the tax required by this chapter, there shall be imposed, in addition to other penalties provided herein, a specific penalty to be added to the tax . . . In the case of a false or fraudulent return where willful intent exists to defraud the Commonwealth of any tax due under this chapter, or in the case of a willful failure to file a return with the intent to defraud the Commonwealth of any such tax, a specific penalty of fifty percent of the amount of the proper tax shall be assessed.

Based on the information presented, the Taxpayer was aware of the fact that it had not remitted to the Department any of the tax it collected. Pursuant to Va. Code § 58.1-625, the taxes collected by the Taxpayer were held in trust for the Commonwealth. The Taxpayer chose to retain those funds for its own use. The fraud penalty, assessed as a result of the Taxpayer's willful failure to remit all tax collected to the Department, is properly applied and there is no basis to waive it.

Amnesty Penalty

Virginia Code § 58.1-1840.1 established the Virginia Tax Amnesty Program. Virginia Code § 58.1-1840.1 F provides:

If any taxpayer eligible for amnesty under this section and under the rules and guidelines established by the Tax Commissioner retains an outstanding balance after the close of the Virginia Tax Amnesty Program because of the nonpayment, underpayment, nonreporting or underreporting of any tax liability eligible for relief under the Virginia Tax Amnesty Program, then such balance shall be subject to a 20 percent penalty on the unpaid tax. This penalty is in addition to all other penalties that may apply to the Taxpayer.

Because the audit at issue covered Amnesty-eligible periods (taxable periods ending on or before April 30, 2003), and because a fraud penalty was properly applied for the nonpayment of tax, the Amnesty penalty was also properly assessed.

Interest

Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it simply represents a fee for the use of money over a period of time. In this case, the Taxpayer had the use of the money that was properly due the Department. Therefore, I also find no basis for waiver of the interest assessed as a result of the Department's audit.

DETERMINATION

Based on the foregoing reasons, the Department's assessment of tax, penalty and interest is correct. The outstanding balance of the assessment remains due and payable. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the total balance due as shown on the updated bill is paid within 30 days from the date of the bill.

The Code of Virginia sections 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 regarding this response, you may contact * the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3090606700.Q