Did a subcontract stating that the subcontractor would pay tax prove Virginia tax was paid on a contractor's purchases?

Plain-English summary

Virginia upheld the tax and penalties because the contractor did not prove that sales tax had been paid on the disputed purchases. The contractor argued that the purchases were subcontract work and that its agreement made the subcontractor responsible for tax.

The Department had already given the contractor another opportunity to provide documentation. On reconsideration, the contractor admitted it could not reconcile the tax amounts to the purchases. The subcontractor's quote and agreement did not include the original invoices needed to show actual tax payment.

The assessment was presumed correct, and contractual responsibility alone did not satisfy the taxpayer's burden. Virginia also kept the penalty because the contractor's use-tax compliance ratio remained below the 85% regulatory threshold and no other waiver basis was established.

What this means for you

• A contract allocating tax responsibility does not prove the vendor or subcontractor paid the tax.
• Keep original invoices showing the taxable measure and separately stated tax.
• Reconcile invoice-level tax to the precise audit exceptions under appeal.
• Penalty relief may depend on the audit compliance ratio, not merely good-faith contract language.

Common questions

Q: Was the subcontract agreement enough evidence?
A: No. It showed who was supposed to pay, not that tax was actually paid.

Q: What documentation was missing?
A: Original invoices and a reconciliation tying tax amounts to the disputed purchases.

Q: Why did the penalty remain?
A: The use-tax compliance ratio did not reach the 85% threshold for waiver.

Q: Was further reconsideration available?
A: The letter described itself as the Department's final determination for the audit period.

Citations and references

• Va. Code §§ 58.1-1821 and 58.1-205.
• 23 VAC 10-210-2032.
• Virginia Public Document 13-45, the prior determination under reconsideration.

Subject

Assessment for untaxed purchases

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-197

Original ruling text

October 29, 2013

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

Dear *:

This will reply to your letter in which you seek reconsideration of the Department's determination letter issued as Public Document (P.D.) 13-45 (3/29/13) to * (the "Taxpayer") for the period March 2008 through January 2011.

FACTS

The Taxpayer is a construction contractor. An audit by the Department resulted in an assessment for untaxed purchases. In the initial appeal to the Department, the Taxpayer contended that several purchases held taxable in the audit were for subcontract work and the subcontractor was responsible for the tax. The Taxpayer did not provide supporting documentation to prove that the tax had been paid on the purchases at issue and the assessed tax was upheld. Notwithstanding, the Taxpayer was given an opportunity to present documentation to support its claim that the subcontractor paid the tax on the purchases at issue.

In the reconsideration request, the Taxpayer admits that it is unable to reconcile the tax amounts to the purchases at issue. It is the Taxpayer's position that in the subcontract agreement it was stated that the subcontractor was responsible for the payment of the tax on the purchases at issue, and the agreement supports that such taxes were paid. The Taxpayer continues to seek an adjustment of the Department's assessment for the purchases at issue.

DETERMINATION

The subcontractor's quote (submitted by the Taxpayer) and the subcontractor's agreement do not include the original invoices that would be the basis for proof that the tax has been paid.

Virginia Code § 58.1-205 provides that an assessment by the Department is prima facie correct and that the burden is on the Taxpayer to prove that an assessment is erroneous. In this case, the Taxpayer has not provided the required documentation to prove the assessment is incorrect. Accordingly, there is no basis for a revision and the assessment is correct as issued. With regard to the Department's assessment of penalties, I continue to find no basis for their waiver.

While I understand the Taxpayer's continuing disagreement with the Department's position, this letter represents the Department's final determination with regard to the tax assessment for the audit period at issue. As explained in my prior determination, the Taxpayer's use tax compliance ratio does not meet or exceed the 85% threshold required in Title 23 of the Virginia Administrative Code 10-210-2032 to avoid penalty.

CONCLUSION

The balance of the Department's assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer shortly. No additional interest will accrue provided the updated bill is paid within 30 days from the date indicated on the bill statement. If the bill is not paid within the 30 days, collection action will commence.

The Code of Virginia section, regulation and public document cited are available on­line 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/1-5400149939.Q