Could a textile-services company change its sales-tax sample because a customer proved it had self-assessed and paid use tax?

Plain-English summary

Virginia kept the seller's audit sample intact but allowed a one-time credit against the assessment for use tax a customer proved it had paid. The taxpayer rented and laundered linens and uniforms and distributed hygiene products. Its audits found untaxed sales and purchases.

The seller argued that documented customer use-tax payments should eliminate the corresponding sampled errors. Virginia disagreed. The sample estimated the seller's failure to collect tax across the entire audit period, and similar sales outside the sampled period might remain unpaid. The seller's collection duty was excused only when it held a valid exemption certificate or direct-pay permit—not merely because a customer later paid use tax.

Removing the transactions or changing the error factor would therefore distort the sample. Still, Virginia's prior rulings allowed a credit against the final assessment for tax actually paid by customers on the same transactions.

The Commissioner directed the auditor to determine that one-time credit and revise the audits. The taxpayer would then receive updated bills with interest, and the revised balances had to be paid within 30 days to stop additional interest.

What this means for you

• Customer-paid use tax does not erase the seller's sampled collection error.
• Valid exemption certificates and direct-pay permits protect the seller at the transaction level.
• Documented customer payments may support a one-time credit against the assessment without changing the sample factor.
• Do not assume a partial payment fully resolves an audit until the Department calculates the revised balance.

Common questions

Q: Did Virginia remove the transactions from the sample?
A: No. It kept the sample computation unchanged.

Q: Did the customer payment produce any relief?
A: Yes. Virginia allowed a one-time credit against the assessment for documented tax paid by the customer.

Q: Why preserve the sample?
A: Similar untaxed transactions outside the sampled period might not have been paid, so changing the sample would understate seller noncompliance.

Q: Was the taxpayer's prior payment automatically accepted as full payment?
A: No. The auditor had to calculate the credit and issue revised bills.

Citations and references

• Va. Code § 58.1-205.
• Virginia Public Documents 95-59, 95-93, 97-51, and 06-122.

Subject

Taxpayer assessed tax on untaxed sales to a customer.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-127

Original ruling text

July 3, 2013

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 assessments issued to * (the "Taxpayer") for the audit period April 2009 through March 2012.

FACTS

The Taxpayer operates as a commercial textile services company providing rental and laundry services for linens and uniforms. The Taxpayer is also a distributor of hygiene products. The Department's audits disclosed that the Taxpayer made sales for which the sales tax was not collected, as well as purchases for which tax was not paid to suppliers or accrued and remitted to the Department. The Taxpayer states that one of its customers has provided proof that the use tax on purchases from the Taxpayer was accrued and paid to the Department. Based on the customer's documentation, the Taxpayer has paid that portion of the Department's assessments it believes to be correct. The Taxpayer seeks confirmation from the Department that the amounts paid represent full payment and that the balances should be abated.

DETERMINATION

In Public Document (P.D.) 06-122 (10/17/06), the taxpayer was assessed tax on untaxed sales to a customer. The taxpayer contended that the sales should have been removed from the audit sample because the customer paid the tax on the transactions through its own volition or by audit assessment. The determination provides that the purpose of the audit sample is to determine an error factor for the entire audit period and that there are likely similar transactions outside the sample period on which the Virginia tax had not been paid. Therefore, any removal of the sales in question from the sample base would have caused the sample to be in error. The taxpayer made a number of untaxed sales during the sample period that were not supported by exemption certificates or direct pay permits. The taxpayer's obligation to collect sales tax on sales to its customers was not dependent on whether such customers paid use tax directly to the Department. The only exception to this general rule is when the purchaser provides the seller with a valid exemption certificate or a valid direct pay permit.

There is always the possibility that isolated errors may occur that are not typical of a taxpayer's operations. However, for an item to be removed from an audit sample, the Taxpayer must establish that the transactions at issue are isolated events and not a normal part of the Taxpayer's operations. Virginia Code § 58.1-205 provides that any assessment of a tax by the Department shall be deemed prima facie correct. The burden of proof lies with the Taxpayer to prove the assessment is incorrect.

While the Virginia tax on some of the transactions may have been paid by the customer, there are likely similar transactions outside the sample period on which the Virginia tax has not been paid. Accordingly, I find the audit sample as computed by the auditor to be a valid representation of the Taxpayer's period of audit.

Credits

The Department has previously addressed the issue of credits included in sample calculations. In those prior cases, sales held taxable in the audit in which the customers self-assessed the use tax were contested. The Department upheld the sales audit sample techniques while finding no basis for recalculating the sales error factors. However, credit was given against the assessment for the taxes paid by the customers. See P.D.s 97-51 (2/10/97), 95-93 (4/28/95), and 95-59 (3/27/95).

Based on the foregoing and the longstanding position of the Department, I do not find sufficient cause to allow for any adjustment to the sample computations. I will allow for an adjustment of the audit assessments to include a one-time credit for taxes paid by the Taxpayer's customers.

CONCLUSION

Based on this determination, the Department's auditor will contact the Taxpayer to determine the adjustment and to revise the Department's audits accordingly. Revised bills, with interest accrued to date, will be mailed to the Taxpayer once the adjustments have been made. No additional interest will accrue provided the revised assessments are paid within 30 days of the bill dates.

The Code of Virginia section and public documents 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 * of the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5317184663.Q