Did a communications-equipment seller prove that Virginia's three-month audit sample was flawed or that a detailed audit and more customer-use-tax credits were required?

Subject

Communications-equipment seller did not invalidate the audit sample

Plain-English summary

Virginia refused to replace the sampled audit with the taxpayer's proposed limited review. The communications-equipment seller argued that a three-month block sample overstated tax errors and offered to help review transactions for fewer than 75 selected customers.

The Department said a genuine detailed audit would require every transaction and all supporting documentation for the full audit period. The original three-month sample had already taken about a year, and the taxpayer had declined the Department's more comprehensive Invoice Capture Tool procedure in favor of the block sample it later challenged.

To invalidate a sample, the taxpayer had to show that it was unrepresentative or otherwise flawed. Virginia found that it had not done so. The taxpayer also requested credits for customers that had paid use tax directly, but the audit had already allowed credits for all invoices where such payment was established.

What this means for you

• Disliking a projected audit result is not enough to invalidate a sample.
• A proposed review of selected customers is not the same as a transaction-by-transaction detailed audit.
• Choosing a sampling method during the audit can matter when later challenging the methodology.
• Credits for customer-paid use tax require invoice-level support, and duplicate credits are not allowed.

Common questions

Did Virginia order a detailed audit?

No. The taxpayer did not prove the sample was flawed, and its proposed review would not cover all transactions and records.

Why did the taxpayer's earlier sampling choice matter?

The Department had offered a more comprehensive Invoice Capture Tool procedure, but the taxpayer selected the block sample it later disputed.

Were additional customer-paid-tax credits allowed?

No. The audit had already credited every invoice where a customer paid use tax directly to the Department.

Citations and references

• Virginia Public Document 09-118.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-165

Original ruling text

August 10, 2010

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

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer"), requesting a reconsideration of the determination letter issued as Public Document 09-118 (7/31 /09) by the Department. I apologize for the delay in responding to your correspondence.

FACTS

The Taxpayer is in the business of selling communications equipment. In a meeting with Department personnel, the Taxpayer presented additional documentation in support of its request for a detailed audit. The Taxpayer maintains that the sample cannot produce an accurate assessment because no similar errors exist outside the sample period. Additionally, the Taxpayer requests a credit in the audit, contending that there are transactions included in the audit for which its customers have paid the tax to the Department.

DETERMINATION

SampIe/Detailed Audit Request

The Taxpayer contends that the sample used in the audit led to an incorrect assessment and requests that a detailed audit be performed. The Taxpayer further contends that transactions should be reviewed for less than 75 of its customers in order to accurately determine the amount of tax due. Noting that a comprehensive review is not needed, the Taxpayer believes that the detailed audit could be completed in a two-week, full-time work schedule. The Taxpayer states that it has documentation for the 75 customers, and it will provide personnel to work with the Department's auditors to complete the detailed audit.

The Taxpayer has presented alternative methods of calculating the assessment due for the audit period at issue, requesting that a detailed audit be conducted by the Department. However, the Taxpayer contends that only certain specific transactions and customers need to be included in the review. As stated in the previous determination letter, the Department would need to review all of the transactions that occurred during the audit period, and all supporting documentation, in order to conduct a detailed audit of the Taxpayer's records. The audit, which sampled a three month period, took approximately a year to complete. A detailed audit would require a significant amount of time and manpower to complete for both the auditor and the Taxpayer.

Additionally, the Taxpayer was given the opportunity to use the Department's Invoice Capture Tool sample procedure during the performance of the audit. The Invoice Capture Tool provides a more comprehensive approach to reviewing a taxpayer's financial records. The Taxpayer chose not to use this procedure and instead opted to use the block sample that it now contends produced an incorrect assessment.

A taxpayer must demonstrate that a sample used in an audit is not representative of the audit period or flawed in some other manner to invalidate the sample. Based upon the information provided throughout the appeal process, the Taxpayer has not proven that the sample is incorrect, or that a detailed audit is warranted with respect to the audit period at issue.

Credit in the Audit

The Taxpayer requests that it be given credit in the audit for instances where its customers accrued the use tax and remitted the same to the Department. In the audit, the Taxpayer was given a credit for all invoices where customers paid the use tax directly to the Department. Accordingly, no additional credit is warranted with respect to the audit period at issue.

CONCLUSION

Based on this determination, the assessment is correct as issued. It is my understanding that the Taxpayer has filed for federal bankruptcy protection. Accordingly, the enclosed schedule provides the updated liability due with interest accrued to date.

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 response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-3934096514.P