Could a medical-supplies retailer remove sampled untaxed sales because the customer later self-assessed and paid Virginia use tax?

Plain-English summary

Virginia refused to remove untaxed sales from a one-month audit sample even though the customer had self-assessed and paid use tax on those transactions. The taxpayer sold medicine and medical supplies and had agreed to sampling because of its transaction volume. The sample found sales for which the retailer lacked valid exemption certificates.

Sampling measures the seller's collection and reporting behavior across the full audit period. A sampled transaction can be removed only when the taxpayer shows it was an isolated error that was not typical of normal operations.

Here, crediting or removing the transactions paid by one customer would distort the sample. Similar untaxed sales outside the sampled month might not have been self-reported by customers. The audit was not intended to measure the combined compliance of both seller and buyers.

The taxpayer did not prove that the sampled errors were isolated or that the assessment was otherwise wrong. Virginia upheld the sample computation, left the paid assessment in place, and denied a refund.

What this means for you

• A customer's later use-tax payment does not necessarily erase a seller's sampled collection error.
• Audit samples test the seller's compliance, not whether all parties collectively paid some tax.
• Removing favorable sampled items can invalidate the extrapolation when comparable outside-sample items remain unknown.
• To remove an item, document why it was isolated and not representative of normal operations.

Common questions

Q: Was the same transaction taxed twice?
A: The ruling focused on preserving the seller-compliance sample and noted that similar outside-sample sales might remain unpaid; it did not order the sampled sales removed.

Q: Why not credit the customer's use-tax payment?
A: Doing so inside the sample would distort the statistical result used to measure the retailer's collection failures.

Q: Could an item ever be removed from a sample?
A: Yes, if the taxpayer proves it was an isolated event not typical of its operations.

Q: What was the result?
A: The assessment was upheld and no refund was due.

Citations and references

• Va. Code § 58.1-205.
• Virginia Public Document 04-99.

Subject

Retailer of medicine and medical supplies.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-133

Original ruling text

July 8, 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 assessment issued to * (the "Taxpayer") for the period June 2007 through May 2010. I note that the Department's assessment has been paid.

FACTS

The Taxpayer is a retailer of medicine and medical supplies. The Taxpayer was audited and assessed sales tax on untaxed sales identified in a one-month sample of sales. The auditor determined that the Taxpayer did not have valid exemption certificates on file to support exempt sales held in the audit. The Taxpayer maintains that the customer to which the sales were made has accrued and paid use tax directly to the Department and seeks the removal of these sales from the audit sample, thereby abating the entire contested assessment. The Taxpayer seeks a refund of the amounts paid.

DETERMINATION

The use of a sampling technique in examining sales provides a snapshot view of a taxpayer's compliance efforts related to sales tax collection and reporting responsibilities. In general, the types of errors found by a sample would be typical of the types of errors that could be found in an audit period if a detailed audit had been performed. Due to the size and scope of the Taxpayer's operations and the volume of transactions in this instance, a sample audit was performed with the concurrence of the Taxpayer.

Notwithstanding, there is always the possibility that isolated errors may occur that are not typical of a taxpayer's operations. For an item to be removed from an audit sample, a taxpayer must establish that a transaction was an isolated event and not a normal part of its operations. Virginia Code § 58.1-205 deems a tax assessment issued by the Department to be prima facie correct with the burden on the Taxpayer to prove that an assessment is incorrect.

In this instance, while the Taxpayer's customer has paid the Virginia tax on transactions included in the sample computation, there are likely similar transactions outside of the sample period on which the Virginia tax has not been paid. The sample's purpose is to address the taxes not charged by the Taxpayer to its customers. Therefore, to include in the sample as credits those transactions where the Taxpayer's customer has paid the tax or to remove the sales transactions altogether from the sample calculations would distort the sample and nullify its statistical validity.

This same issue of accounting for taxes that have been self-accrued and paid by customers was previously addressed in Public Document 04-99 (9/8/04). In that ruling, the taxpayer was assessed sales tax based on sampling results. The taxpayer argued that the measure of error mistakenly included sales made to customers who self-assessed use tax. Based on documentation provided by the taxpayer, the auditor gave the taxpayer a one time credit for the use tax remitted directly to the Department by the taxpayer's customer in the months they occurred in the sample. The taxpayer, however, believed sales related to the remitted use tax should have been removed from the sample. The determination explains that the sample examines the taxpayer's sales tax collection and reporting responsibilities. The use of a sample computation is not intended to determine the combined compliance of a taxpayer and its customers.

Based on this determination, I find no basis for disallowing the sample computations developed by the Department's auditor. The assessment is correct and no refund is due on any portion of the amount that has been paid.

The Code of Virginia section and public document cited, as well as other reference documents, 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/1-5283795449.Q