Could a restaurant overturn reconstructed sales-tax liability with revised figures unsupported by daily sales records?

Subject

Missing restaurant records supported reconstructed sales audit

Plain-English summary

Virginia upheld the reconstructed restaurant sales audit. The taxpayer kept no daily sales logs or register tapes and could not reconcile sales-tax returns with alcoholic-beverage reports.

When records are inadequate, Virginia may use the best information available. The auditor compared beverage reports, menu prices, and cost-of-goods markups. The restaurant's revised figures were unsupported, and explanations about operating days and buffet service did not replace records.

Result: the audit was not revised. Because the business planned to close and claimed hardship, it could apply for an offer in compromise based on doubtful collectability within 30 days.

What this means for you

• Preserve daily sales logs, register tapes, menus, and beverage records.
• Reconcile reports filed with different agencies.
• Unsupported estimates rarely displace a documented audit reconstruction.
• A collectability compromise addresses payment ability, not liability merits.

Common questions

Q: Did Virginia accept the restaurant's revised sales figures?

A: No. They lacked supporting records.

Q: Was the compromise automatic?

A: No. The taxpayer had to submit financial forms for review.

Citations and references

• Va. Code §§ 58.1-105, 58.1-618, and 58.1-633.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-176

Original ruling text

September 23, 2015

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 of November 2012 through May 2014. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates a restaurant and bar. The Taxpayer was assessed tax, penalty, and interest for the underreporting of food and alcoholic beverage sales. The auditor calculated the underreported alcoholic beverage sales by comparing the Taxpayer's gross sales, as reported on the monthly retail sales and use tax returns, to the mixed beverage annual reports (MBAR) the Taxpayer filed with the Department of Alcohol Beverage Control (ABC). The auditor verified the underreporting of alcoholic beverage sales using a cost of goods sold (COGS) calculation based on the restaurant's menu pricing.

Furthermore, the Taxpayer underreported food sales because it reported a portion of its restaurant food sales at the reduced 2.5 percent food tax rate. The Taxpayer maintained no sales records to substantiate either the MBAR reports filed with ABC, or to reconcile the sales and use tax returns filed with the Department.

The Taxpayer maintains that the Department's calculation of underreported sales based on MBAR reports filed with ABC and the COGS calculation based on menu pricing does not truly reflect the actual sales made by the restaurant. The Taxpayer seeks correction of the audit assessment based on revised sales figures submitted by the Taxpayer. The Taxpayer offers no documentation supporting the revised sales figures.

DETERMINATION

Virginia Code § 58.1-633 states that every dealer required to make a return and collect sales tax "shall keep and preserve suitable records of the sales, leases, or purchases... taxable under this chapter, and such other books or 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." When a dealer fails to maintain adequate records, the Department is authorized by Va. Code § 58.1-618 to use the best information available to reconstruct a dealer's sales or purchases to determine whether a tax liability exist.

It is my understanding that the Taxpayer had insufficient or incomplete records in order to determine accurate food and beverage sales. The Taxpayer did not maintain daily sales logs or cash register tapes to verify daily or monthly sales. The Taxpayer's claim of not being open every day and the fact the Taxpayer served a buffet along with the regular menu items is not sufficient justification for adjusting gross sales in the absence of documented sales records. As the Taxpayer failed to maintain adequate records during the audit period to substantiate actual sales tax liabilities, the auditor used the best information available, i.e. , MBAR reports and COGS markups, to estimate the Taxpayer's tax liability. Based on the information provided, I find no basis for revising the audit.

Virginia Code § 58.1-105 grants to the Tax Commissioner the authority to accept offers in compromise to settle claims of disputed or doubtful liability or doubtful collectability. The Taxpayer indicates that they intend to sell their remaining inventory and close their business. This action indicates that payment of the audit assessment would cause an undue financial hardship on the Taxpayer. As such, the Taxpayer may wish to request an offer in compromise based on doubtful collectability.

If the Taxpayer wishes to pursue a settlement based on doubtful collectability, please complete and return the enclosed Offer in Compromise Business Request for Settlement and Financial Information Statement for Businesses forms. These forms will allow the Department to review and analyze the Taxpayer's financial situation. Upon completion of the Department's review, a response will be issued based upon the information provided. The completed forms should be sent to: Tax Commissioner, Virginia Department of Taxation, Attn: CICT, P.O. Box 2475, Richmond, Virginia 23218-2475. If the Department does not receive the completed forms within 30 days of the date of this letter, it will be presumed that the Taxpayer will not submit an offer in compromise based upon doubtful collectability, and the entire audit liability will be due and payable in full.

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

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5830004762.T