Could a retailer overturn an estimated Virginia sales-tax assessment without keeping sales, invoice, bank, or register records?

Subject

Missing records supported revised estimated sales-tax assessment

Plain-English summary

Virginia upheld the retailer's revised estimated assessment because the business did not preserve records needed to verify its sales-tax liability. The audit covered January 2008 through April 2011 and included non-food sales on which tax had been collected but not remitted, plus underreported sales.

The retailer disposed of sales records after a few months and lacked register tapes, sales journals, most invoices, bank records, and federal returns for comparison. Filing sales-tax returns did not replace the duty to keep the records supporting them for three years.

The retailer offered explanations involving increased meat costs, gradual growth, a nearby store's closure, and purchase invoices. But it supplied no reliable evidence for the audited periods. During a two-day observation, the auditor also saw register cash used to pay a vendor without an internal record, undermining the reported-sales trail.

Virginia law allowed an estimate when returns were inaccurate. The auditor had already reduced the original estimate by 20% to reflect higher cost of goods sold and fewer sales exceptions. The Commissioner found that revised estimate proper and upheld the assessment.

What this means for you

• Keep complete sales, purchase, register, bank, and supporting tax records for at least three years.
• Tax collected from customers remains payable to Virginia even if business records are poor.
• Unsupported explanations cannot overcome an estimate built after records were discarded.
• Cash payments need an audit trail just like checks and electronic payments.

Citations and references

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

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-82

Original ruling text

May 30, 2014

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

Dear *:

This is in response to your letter in which you request correction of the retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for

the period January 2008 through April 2011.

FACTS

The Taxpayer sells food and non-food items. An audit resulted in the assessment of sales tax on sales of non-food items in which sales tax was collected but not remitted to the Department. The audit also assessed sales tax on underreported sales. The Taxpayer contests the assessment and maintains that the tax has been over assessed.

DETERMINATION

Records

Prior to the audit, the Taxpayer kept sales records for a few months and would then dispose of them. Such actions are not in compliance with Virginia Code § 58.1-633. The statute specifically provides the following:

Every dealer required to make a return and pay or collect any tax under this chapter [ i.e. , the Virginia Retail Sales and Use Tax Act] 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. [Insert added.]

Furthermore, pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-210­-470, every person who is liable for the collection of sales tax or the remittance of use tax or both is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Title 23 VAC 10-210-470 also provides some general examples of the type of records that are required to be kept and maintained. For the future, the Taxpayer must fully comply with the cited record keeping law and regulation.

Issues

In the appeal, the Taxpayer provides four explanations as to why the assessment is over assessed. I will address each issue as follows:

Contention 1: Cost of Meat Increased in 2011

The Taxpayer contends that there was a sharp increase in the cost of meat products which was the most sold item in the store.

Response: No independent or Taxpayer documentation has been presented to show the increase in meat costs from 2010 to 2011. Furthermore, in the absence of records for 2008 through 2010, the Department has no basis to determine the amount of meat sales versus overall sales for such periods in question.

Contention 2: Gradual Increase in Sales

The Taxpayer contends that it only experienced a gradual increase in sales prior to 2010.

Response: While the Taxpayer's contention may be correct, the problem is that no records were kept for the periods that were assessed. This means that the Department has no basis to verify the Taxpayer's contention. Although the Taxpayer filed Virginia retail sales and use returns, this does not relieve the Taxpayer from maintaining the sales tax records that support the data on the returns. Records must be kept to clearly prove the correct amount of tax liability incurred.

Contention 3: Neighborhood Store Closed in 2011

The Taxpayer contends that there was an increase in customer base as one of the neighboring stores was closed in 2011 and gave the Taxpayer a boost in sales.

Response: The Taxpayer provides no evidence in support of its claim. While the Taxpayer claims that the significant increase in 2011 sales was the result of another nearby grocer closing its business, the Taxpayer offers no information about such grocer that may be of use in deciding this matter. Accordingly, I cannot take such claimed circumstances into consideration in the absence of any reliable information that supports the Taxpayer's contention.

Contention 4: The Taxpayer Provided Invoices

The Taxpayer contends that it produced invoices supporting the increase in purchases and the purchase prices.

Response: Despite the Taxpayer's contention, it is my understanding from the auditor that invoices were requested from the Taxpayer but none were received for the 36 taxable periods occurring in the years 2008 through 2010. I also understand that the Taxpayer had no register tapes, sales journals or bank statements.

Observation of Sales

I understand that the auditor conducted a two day observation of sales. During that time, the auditor observed a vendor being paid with cash from a cash register without a written internal record being made of such payment. In other words, an employee of the Taxpayer took cash to pay for a purchase. This action suggests that such practice is or was a common practice of the Taxpayer. This practice would cause reported sales to be lower than reported in regards to the observation period and periods covered by the audit. Such practices are clearly inconsistent with proper record keeping procedures and do not provide a paper trail for documentation purposes.

Sales Made in 2011

I understand that sales in calendar year 2011 jumped by 50% over the prior calendar year of 2010. The Taxpayer has no records to prove that the amount of sales reported to the Department was accurate. Furthermore, I understand that the Taxpayer has not provided a copy of its federal returns to the Department's auditor and may not have filed its federal income tax returns for the annual periods in question. As such, the Department has no basis to compare what was reported to the Internal Revenue Service versus what was reported to the Department.

Banking Records

It is my understanding that the Taxpayer did not present any banking records except in regard to certain credit sales. As such, the Department cannot verify the amount of money deposited as a result of all sales. I must presume in the absence of bank deposits that the Taxpayer paid most of its debts with vendors, employees, owners, etc., with cash. Such actions are not in compliance with good accounting procedures.

Estimated Assessment

In the case of inaccurate returns, Va. Code § 58.1-618 A allows the Department to make an estimate of the taxable sales for the taxable periods in question. While the auditor made an estimated assessment, it is my understanding that the original estimated assessment was reduced by 20% to account for an increase in the cost of goods sold and to reduce the amount of sales exceptions. Based on my review of this matter, I find that such estimated assessment as revised is proper.

CONCLUSION

Based on the circumstances presented in this case, the Taxpayer has not provided valid reasons for its failure to maintain proper sales tax records and other records of business. The lack of records and the payment of debts with cash point to a failure to correctly report sales to the Department and to establish beyond doubt that such reported sales are correct.

Based on this determination, the assessment is correct as revised. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East 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 regulation 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, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5561296940.R