Could Virginia estimate an auto repair shop's sales from local business-license assessments when the shop filed no sales-tax returns?

Plain-English summary

Virginia accepted the auditor's estimated sales-tax methodology because the auto repair shop filed no returns and did not provide adequate records. The shop had one final 45-day opportunity to prove its actual liability.

The taxpayer said it closed in 2005 and kept its business license active only to preserve commercial zoning. The audit period began in 2006, and the auditor used the municipality's statutory business-license assessments to estimate sales.

Va. Code § 58.1-633 and 23 VAC 10-210-470 required dealers to keep sales, lease, purchase, and other records needed to determine tax. Va. Code § 58.1-618 allowed the Department to reconstruct liability from the best available information when records were inadequate.

The auditor documented repeated efforts to review sales information the taxpayer said it had, but valid data was not supplied. The ruling also said recent inquiries at the business address indicated that the shop was open and operating.

Under Va. Code § 58.1-205, the assessment was presumed correct and the taxpayer had not carried its burden. The business-license-based estimate therefore remained acceptable unless the taxpayer submitted sufficient actual records within 45 days.

What this means for you

• An active license and observable operations can contradict an unsupported closure claim.
• If returns are missing, Virginia can estimate sales from external information.
• Preserve actual invoices, bank records, repair orders, ledgers, and returns to replace an estimate.
• Respond to auditor record requests before the assessment becomes the starting presumption.

Common questions

Q: Did Virginia say business-license assessments always equal taxable sales?
A: No. It accepted them as the best available information because reliable sales records were absent.

Q: Was the assessment immediately final?
A: The taxpayer received 45 days to provide records sufficient to determine actual liability.

Q: Why was the closure claim rejected?
A: It lacked supporting records and conflicted with recent inquiries showing the business open.

Citations and references

• Va. Code §§ 58.1-205, 58.1-618, and 58.1-633.
• 23 VAC 10-210-470.

Subject

Sales tax not reported to the Department

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-213

Original ruling text

December 18, 2012

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 March 2006 through February 2012.

FACTS

The Taxpayer operates an automotive repair business. The Department's audit disclosed that the Taxpayer has not reported any sales to the Department. Accordingly, because sales tax returns had not been filed with the Department, the assessment was issued based on Va. Code § 58.1-618. The Taxpayer disagrees with the assessment, contending that its business was closed in 2005. The Taxpayer states that the auditor's use of the Taxpayer's business license information, rather than returns, as a basis for the assessment is erroneous. The Taxpayer asserts that its business is not operational, and the business license was kept active for purposes of keeping the location zoned for business. The Taxpayer requests that the assessment be abated.

DETERMINATION

Virginia Cod e § 58.1-633 states that every dealer required to make a return "shall keep and preserve suitable records of the sales, leases, or purchases . . . taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner." The record keeping requirement is further explained in Title 23 of the Virginia Administrative Code 10-210-470.

When a dealer fails to maintain adequate records, the Department is authorized by Va. Code § 58.1-618 to use the best information available to reconstruct a dealer's sales or purchases to determine whether a tax liability exists. In this case, the Taxpayer failed to maintain adequate records during the audit period to determine actual tax liabilities. Therefore, the auditor used the best available information. The auditor used statutory business license assessments issued by the municipality in which the Taxpayer's business is located to estimate the Taxpayer's sales tax liability. I note that the Taxpayer was contacted by the auditor several times in an effort to review sales information that the Taxpayer stated it possessed. The auditor documents that the Taxpayer would not supply valid data to complete a current review of the Taxpayer's actual tax liabilities. I also note that while the Taxpayer asserts that its business is not operational, recent inquiries at the Taxpayer's business address reflect that the business is open and operating.

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. Lacking the documentation to support its claim, the Taxpayer has not met the burden of proof in this case.

Based on the foregoing and absent evidence to the contrary, I find that the audit methodology applied in this case is acceptable. Accordingly, there is no basis to revise the audit findings at this time. I will, however, allow the Taxpayer 45 days from the date of this letter to provide documentation to the auditor sufficient to determine the actual tax liability for the audit period at issue. If the information is not provided within the time allotted, the assessment will be upheld and become due and payable.

The Code of Virginia sections and regulation cited are available on-line in the Laws, Rules and Decisions section of the Department's website located at www.tax.virginia.gov. If you have any questions regarding this matter, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5139634134.Q