Could a grocery store overturn an estimated sales-tax audit without sales records supporting its claimed exempt-sales percentage?

Subject

The Taxpayer did not file sales and use tax returns for the periods in question.

Plain-English summary

A small grocery store did not file sales-tax returns from June 2012 through August 2013 and gave the auditor no usable sales records for the later audit period. The auditor estimated gross sales from the store's cash-flow statements and added a 25% markup for potential growth, inflation, and comparable local sales.

The store claimed that 65% of gross sales were exempt and asked for more food-stamp credit. But it provided no supporting sales detail, and Form 1099-K combined debit cards, credit cards, and other third-party payments rather than identifying food-stamp transactions. The auditor had already allowed a 2% food-stamp deduction.

Virginia found the best-information methodology acceptable and left the estimated tax and interest in place. It waived the audit penalty because this was the store's first audit and allowed 45 days for records that could establish the actual liability.

Citations and references

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

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-95

Original ruling text

May 20, 2016

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 June 2012 through April 2015. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates as a small independent grocery store with all sales being made on site. The Taxpayer did not file sales and use tax returns for the period June 2012 through August 2013. As a result, non-filer assessments were issued by the Department's Collection Unit for those periods, and an audit was conducted for the subsequent periods through April 2015. The Taxpayer either had no sales records or did not furnish any sales records to the auditor. The auditor estimated gross sales based on cash flow statements provided by the Taxpayer and applied a 25% markup to account for potential sales increases, inflation, and similar sales in the area. The Taxpayer claims that 65% of its monthly gross sales were tax exempt, but could provide no supporting documentation.

The Taxpayer appeals the audit assessment for three reasons: (1) the estimated amount used by the auditor to determine gross sales; (2) the lack of credit for food stamp sales; and (3) the estimate the auditor used for tax exempt sales.

DETERMINATION

Virginia Code § 58.1-633 provides 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 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 record keeping requirements are further explained in Title 23 Virginia Administrative Code 10-210-470.

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 and purchases to determine whether a tax liability exists. As the Taxpayer failed to maintain, or failed to furnish, adequate records to determine the Taxpayer's actual sales during the audit period, the auditor used the best information available (the Taxpayer's cash flow statements for the month in question) to estimate the Taxpayer's retail sales tax liability. Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed to be prima facie correct. The burden is on the taxpayer to prove the assessment is erroneous or incorrect.

In regard to Form 1099-K (Payment Card and Third Party Network Transactions) provided, I am unable to accept this as conclusive documentation of federal food stamp sales. The payments represented on this card contain all third party payment transactions including debit cards, credit cards, and other payments received by the Taxpayer from third parties. It should be noted that the auditor allowed a 2 percent deduction in gross sales to account for food stamp transactions.

Based on all of the foregoing, and absent evidence to the contrary, I find that the audit methodology applied in this case is acceptable. Accordingly, there is no basis to revise the estimated sales figures used to calculate the audit liability. However, based on the fact that this is the first generation audit of the Taxpayer, I will agree to waive the audit penalty assessed. I will also allow the Taxpayer 45 days from the date of this letter to provide documentation to the auditor sufficient to determine the actual sales and use tax liability for the current audit period. If the information is not provided within the time allotted, the audit assessment for tax and interest will be upheld and become due and payable.

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

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6088407078.T