Could a grocery store replace Virginia's two-day estimated sales-tax audit with revised EBT schedules when it lacked records of gross food sales?

Subject

Two-day grocery sales estimate stood without gross-sales records

Plain-English summary

Virginia left the grocery store's estimated assessment unchanged because the store still had not substantiated its gross food sales. Inadequate records had prevented the auditor from calculating actual taxable sales, so the Department observed two days of activity—days the store agreed to—and used that information to reconstruct the liability.

The store later produced EBT-based schedules that reduced the exempt-sales amounts it had originally overstated. Those records could support exemptions, but the revised calculation kept the store's originally reported gross food sales. The store had no documentation proving those gross figures or showing that the observed two days overstated normal sales.

Virginia gave the store 45 days to provide cash-register tapes, daily sales logs, bank statements, income-tax returns, inventory purchase records, and supporting EBT records. Without sufficient documentation, the estimated assessment would stand.

The ruling also rejected a rate objection: the audit used the historical 4% state rate. A summary schedule showed 5% only because it combined the 4% state and 1% local rates.

What this means for you

• Missing sales records allow Virginia to reconstruct liability from the best information available.
• Exemption records do not necessarily prove total gross sales.
• Agreeing to observation dates can make it harder to later attack the sample as unrepresentative without stronger evidence.
• Read audit schedules carefully when state and local rates are combined.

Citations and references

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

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-116

Original ruling text

July 22, 2014

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

Dear *:

This will reply to your letter in which you seek the correction of a retail sales and use tax assessment issued to * (the "Taxpayer") for the period August 2010 through June 2013.

FACTS

The Taxpayer operates a grocery store. The Department audited and assessed the Taxpayer retail sales tax on underreported taxable sales. The Taxpayer did not have adequate records to support the gross and exempt sales amounts reported on the sales tax returns that were filed during the audit period. For this reason, the auditor observed the Taxpayer's sales activity for two days and then computed the audit liability using the sales data for the two-day observation period. The Taxpayer agreed to the days chosen for the observation period.

The Taxpayer maintains that the gross food sales for the two-day period are higher than normal and are not representative of the sales made during the entire audit period. The Taxpayer concedes that the exempt sales claimed on returns filed during the audit period are overstated and claims to now have records to support revised exempt sales amounts. The revised exempt sales amounts are included in computation schedules provided with the Taxpayer's appeal. The computation schedules support the Taxpayer's proposed revision to the calculation of taxable sales and the resulting decrease in the audit liability. The Taxpayer accepts the audit calculation of nonfood and phone card sales as determined by the auditor's two-day observation of sales.

DETERMINATION

Taxable Sales Measure

The Taxpayer has provided schedules to support the recalculation of the retail sales tax liability determined in the audit. The gross food sales amounts on the computation schedules remain unchanged from the amounts originally reported on the Taxpayer's monthly sales tax returns. However, the exempt sales amounts claimed on the same sales tax returns have been reduced based on Electronic Benefits Transfer ("EBT") documentation obtained by the Taxpayer. The Taxpayer's calculations result in a lower tax liability than that determined in the Department's audit.

Virginia Code § 58.1-633 A states that:

Every dealer required to make a return and pay or collect any tax under this chapter shall keep and preserve suitable records of the sales, leases, or purchases, as the case may be, 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 Department's record keeping requirements are further explained in Title 23 of the Virginia Administrative Code 10-210-470. This regulation states that adequate and complete records should be kept and preserved for at least three years. Examples of such records include a daily record of all cash and credit sales, records of all deductions and exemptions claimed in filing sales tax returns and a true and complete inventory of the dealer's stock on hand and its value, taken at least once a year.

When a dealer fails to maintain adequate records, Va. Code § 58.1-618 authorizes the Department 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 allow the Department to determine an actual retail sales tax liability. Therefore, the auditor used the best available information, which was obtained by observing the Taxpayer's sales for 2 days. The Taxpayer's audit liability was estimated based on this information.

The Taxpayer maintains that it has EBT records to support the exempt sales amounts in the computation schedules it has provided. The Taxpayer does not indicate that documentation exists to support the gross food sales amounts that were reported to the Department during the audit period and used to compute the revised audit liability. The audit assessment is based, in part, on the underreporting of gross food sales as determined by the 2-day observation of the Taxpayer's sales activity.

Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed prima facie correct. This means that the burden is on the Taxpayer to prove the assessment is erroneous. The Taxpayer has not met the burden of proving that the gross food sales reported on the sales tax returns are correct and that gross sales are overstated in the audit. I will allow the Taxpayer 45 days to provide documentation that the gross food sales reported on its original sales tax returns are accurate. The gross food sales documentation may consist of cash register tapes, daily sales logs, bank statements, income tax returns and inventory purchase records.

Incorrect Sales Tax Rate

The Taxpayer states that the audit's tax liability was calculated using a 5% state rate that became effective July 1, 2013 for its business location. The Taxpayer contends that a 4% rate was in effect during the audit period. A review of the audit report shows that this is not the case. The 4% state rate was applied to the taxable sales measure for each period assessed in the audit. The Taxpayer may have reviewed a summary computation schedule in the audit report that combines the state and 1% local rates into one total rate, which was 5% during the audit period.

CONCLUSION

There is no basis to revise the audit findings at this time. However, the Taxpayer has 45 days from the date of this letter to provide food sales documentation to the auditor that is sufficient to determine the actual tax liability for the audit period. The Taxpayer should also be prepared to provide the supporting EBT records, if requested. If the information is not sufficient or is not provided within the time allotted, the assessment will be considered correct and will be due and payable.

The Code of Virginia sections and regulation cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions concerning this response or wish to provide the requested documentation, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5627410020S