When would Virginia remove disputed hardware-store transactions from an audit sample or accept a claimed nonprofit exemption?

Subject

Taxability of transactions included in the Sales Exceptions list

Plain-English summary

Virginia granted targeted audit adjustments where the retailer documented that transactions were unusual or nonrecurring, but kept unsupported exemptions taxable. The hardware store challenged several sales-exception items from its May 2010 through March 2013 audit.

An unusually large untaxed truss invoice stayed open for field review under a larger sample because truss sales were part of the store's normal business, even though the invoice size appeared atypical. By contrast, taxable sales billed to a new customer account active for only 44 days were removed from the sample and taxed separately as a documented nonrecurring incident.

Sales claimed exempt because the customer was a nonprofit park remained in the audit because the store supplied no supporting documentation. Another claimed nonprofit sale also remained taxable: the store had no exemption letter, and the Department's search found that the entity did not have an approved Virginia nonprofit exemption.

A line item described as a redeposit of a returned check was not immediately removed. The store received 30 days to prove that it was not a sale of tangible personal property.

What this means for you

Retailers under audit

Specific records can change sample treatment. Account dates, invoice histories, customer statements, and transaction documents helped separate a short-lived incident from recurring sales.

Dealers making nonprofit sales

Do not rely on a customer's general claim of nonprofit status. The dealer bears the burden unless it takes valid exemption documentation showing that the sale qualifies.

Businesses challenging a presumed-correct assessment

Virginia placed the proof burden on the taxpayer. An explanation without records did not remove a transaction.

Common questions

Q: Was the large truss invoice automatically removed from the audit sample?
A: No. The Department directed staff to consider a larger sample and make any warranted adjustment after reviewing the invoices.

Q: Why were the 44-day account's sales removed from the sample?
A: The account records showed a nonrecurring incident, so the exact sales were taxed separately instead of projected across the audit period.

Q: Was a customer's nonprofit status enough?
A: No. The store needed valid exemption support, and one named entity was not approved in the Department's records.

Citations and references

• Va. Code §§ 58.1-205(1), 58.1-609.11, and 58.1-623(A).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-54

Original ruling text

April 23, 2014

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

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer") in which you seek correction of the retail sales and use tax assessment issued for the period May 2010 through March 2013. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates as a building supply and hardware store. The Taxpayer maintains that the transactions included in the Sales Exceptions list are incorrect and should be removed from the audit. The transactions will be addressed separately below.

DETERMINATION

Line Item 41

During the audit period, the Taxpayer sold trusses to a contractor for a cost plus job. The Taxpayer states that the sale was for an uncharacteristically large amount (*), and the Taxpayer rarely has any single invoice for an amount this large. The Taxpayer provides invoices from 2012 that reflect eleven sales of trusses during that year. The Taxpayer asserts that only five of the sales were for an amount greater than $5,000, and all of the invoices are for sales that are for less than the invoice held in the audit. The Taxpayer states that the sales tax was not calculated on this transaction due to an administrative oversight. The Taxpayer maintains that sales of this magnitude for single invoices do not occur on a monthly basis, and that correcting invoices is a rare occurrence. The Taxpayer believes that it is inappropriate to assume that this mistake was made every month of the audit period and to include this transaction in the sample.

The Taxpayer sells trusses as part of its business operations. The Taxpayer provides copies of invoices in support of its contention that it makes sales of trusses at costs lower than the cost of the truss held taxable in the audit. Based upon the information provided, a larger sample will be considered with respect to the sale of trusses by the Taxpayer to its customers. The invoices provided will be forwarded to the appropriate field audit staff for review. Upon completion of the review, adjustments will be made to the audit as warranted.

Line Items 8 through 40

The Taxpayer states that the transactions at issue were billed to a new account requested by an existing customer that operates a farm. The Taxpayer states that the customer has a farming account under another name that has existed for years. The customer requested that the transactions at issue be billed under the new account name. When the new account was established, the Taxpayer assumed that the sales were for the farming operation. The Taxpayer maintains that during the audit it learned that the sales were not for the farming operation and were taxable. The Taxpayer contends that the transactions should not be included in the sample. Rather, the Taxpayer maintains that the sales tax should be calculated on the exact sales billed to the account because the account was only active for 44 days during the audit period.

The Taxpayer provides a statement that reflects a summary of sales (invoices) made to the customer. The Taxpayer also provides a customer summary report which indicates that the account was opened on December 29, 2011. It further indicates that the last sale was made to the customer in February 2012, and the last payment was made in March 2012. Based upon the documentation provided by the Taxpayer, the separate account appears to be a nonrecurring incident. Accordingly, the transactions at issue will be removed from the sample and will be taxed separately in the audit.

Line Items 2 through 6

The Taxpayer maintains that these line items are for sales made to a park. The Taxpayer states that the park is a nonprofit organization, and the transactions at issue should not have been included in the audit.

Virginia Code § 58.1-205 1 states that "Any assessment of a tax by the Department shall be deemed prima facie correct." The Taxpayer has the burden of proving that the tax assessed is incorrect.

In accordance with Va. Code § 58.1-205, the Taxpayer has not met its burden of proving that the tax assessed with respect to the transactions at issue is incorrect. The Taxpayer has not provided documentation to support its contention that the sales at issue were properly made exempt of the tax. Accordingly, these transactions will remain in the audit.

Line Item 7

The Taxpayer asserts that this line item is not for a sale. Rather, the Taxpayer states that this represents a redeposit of a returned check and should not be included in the audit.

The Taxpayer is given 30 days from the date of this letter to provide documentation to the appropriate field audit staff that supports the Taxpayer's contention that this line item is not for a sale of tangible personal property. The Taxpayer will be contacted by the Department to arrange when and how the Taxpayer will provide the required documentation.

Line Item 42

The Taxpayer contends that this transaction represents a sale to a nonprofit entity recognized by the Commonwealth. The Taxpayer states that the director of the entity was unable to provide a copy of the tax exemption letter issued by the Department.

Virginia Code § 58.1-623 A states:

All sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.

Virginia Code § 58.1-609.11 governs retail sales and use tax exemptions for nonprofit organizations.

As a dealer, the Taxpayer is required to charge and collect the sales tax on sales of tangible personal property to its customers. The burden of proving that the sale is not taxable is upon the Taxpayer unless the Taxpayer takes from its customer an

exemption certificate that the property is exempt. In this instance, the Taxpayer has not provided to the Department a copy of the nonprofit entity's exemption letter.

Additionally, based upon the name of the entity provided by the Taxpayer, a search was conducted to determine if the entity has been approved for nonprofit status by the Department and issued a nonprofit exemption letter. The search revealed that this entity does not have an approved exemption with the Department. Thus, the sale made to this entity is subject to the sales tax. Accordingly, the transaction is properly included in the assessment and will not be removed.

CONCLUSION

Based upon this determination, the audit will be returned to the appropriate field audit staff to review the documentation addressed above and to make the required revisions. The remaining portion of the assessment is correct as issued. Once the revisions have been completed, a revised bill, reflecting the Taxpayer's payment and interest accrued to date, will be mailed to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. The Taxpayer should remit payment to: Virginia Department of Taxation, 600 E. Main Street, 23 rd Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5561296928.P