Could a repair business receive an audit credit for sales tax paid to vendors without invoices from the audit period proving the payments?

Subject

Credit in audit for sales tax paid to vendors - the Taxpayer failed to provide adequate documentation.

Plain-English summary

A mobile repair business sold vehicle parts without collecting sales tax and was assessed on those sales. It argued that the assessment should be offset by sales tax it had already paid to vendors when buying the parts for resale.

Virginia said a credit could have been allowed if the tax paid on the audit-period resale purchases could be verified. But the business's computer records had been stolen, and its later submissions consisted of vendor lists, unsupported amounts, and sample invoices from outside the audit period.

Those materials did not prove tax was paid on the specific purchases in the audit. Virginia denied the credit and upheld the assessment as its final determination on that issue. Because the business had closed and claimed hardship, the Department separately invited an offer in compromise based on doubtful collectibility.

What this means for you

• Keep audit-period purchase invoices showing the item, resale purpose, and tax paid.
• A vendor's usual practice does not prove tax on a particular transaction.
• Documents from outside the audit period may not establish the claimed credit.
• Financial hardship may support a collection settlement, but it does not make the assessment incorrect.

Citations and references

• Va. Code §§ 58.1-205 and 58.1-105 B.
• P.D. 15-41, P.D. 16-75, and P.D. 09-45.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-115

Original ruling text

June 29, 2017

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

Dear *:

This will reply to your letter in which you seek reconsideration of the Department's prior determination letter issued as Public Document (P.D.)15-41 (3/18/15) and the Department's determination for reconsideration issued as P.D. 16-75 (5/11/16) to * (the “Taxpayer”) for the period January 2008 through October 2012. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer provides fleet and private service companies with mobile maintenance and 24 hour emergency road service. An audit by the Department resulted in an assessment for untaxed sales made in connection with the repair and maintenance of customer vehicles.

In the Taxpayer's initial appeal, the Taxpayer requested an offset against the assessed tax for sales tax paid to vendors on untaxed tangible personal property for resale held in the audit. The Tax Commissioner's response in P.D. 15-41 explained that the Department prefers to refund the tax through the dealer to prevent misallocation of the 1 local sales tax. Therefore, the Taxpayer was advised to seek a refund from the vendor for sales tax erroneously paid on purchases for resale. I would point out that a credit against the audit assessment for sales tax paid to vendors on purchases for resale would have been allowed had the auditor been able to verify that the sales tax was paid on such purchases. However, the Taxpayer claimed that no records were available because its computer systems were stolen as a result of a break-in. Without documentation to verify that the sales tax was paid to vendors on untaxed purchases for resale, the Taxpayer's only option was to seek a refund from its vendors.

The Taxpayer filed an appeal seeking reconsideration of the Department's determination that denied credit against the audit assessment for sales tax erroneously paid to vendors. In P.D. 16-75, the Tax Commissioner stated that a credit would be allowed against the assessed tax for sales tax paid to vendors in the audit period on tangible personal property purchased for resale provided the tax paid could be verified. Because the Taxpayer did not provide adequate evidence to support its claim that the tax was paid to vendors on tangible personal property for resale, the request for credit was denied.

The Taxpayer files the current reconsideration based on additional documentation that it claims was not previously considered that will verify that the sales tax was paid to its vendors on tangible personal property for resale. Thus, the Taxpayer requests that the prior determinations be reversed, and the Taxpayer be allowed a credit in the audit for sales tax erroneously paid to vendors during the audit period.

DETERMINATION

Prior Audit

In the prior audit, the Taxpayer paid the sales tax on purchases of tangible personal property for resale and failed to collect the tax from the customer. The Taxpayer was assessed the sales tax on untaxed sales; however, a credit for sales tax paid to vendors was denied because the Taxpayer has no documentation to prove the tax was paid. The Taxpayer filed an appeal for reconsideration concerning credit for sales tax paid vendors on tangible personal property for resale and claimed it had corrected its business process and collects the sales tax from its customers. It was also noted in the prior audit that the Taxpayer acknowledged the fact that it should collect the sales tax from its customers on tangible personal property sold in connection with the repair services. I would point out that the Taxpayer did not change its business process as instructed in the prior audit and continued to pay the tax on the purchase of tangible personal property for resale and did not collect the sales tax from its customers.

Credit for Tax Paid

Virginia Code § 58.1-205 sets out that any assessment of a tax by the Department is deemed prima facie correct. This means that the burden of proving that the assessment is erroneous is upon the Taxpayer. Based on the information provided, the Taxpayer has not met this burden. For example, the Taxpayer provides a list of vendors and amounts for purchases during the audit period; however, the Taxpayer provides no documentation to verify that the tax was paid on such purchases. Further, a claim that a vendor charges the tax or a sampling of invoices outside the audit period from the same vendor showing that the tax was charged is not sufficient evidence that the sales tax was paid on purchases in the audit. See P.D. 09-45 (4/27/09). Without the necessary documentation to support the Taxpayer's claim that the tax was paid to vendors on tangible property for resale during the audit period, there is no basis to allow credit in the audit. This response is my final determination with regard to this issue.

Doubtful Collectibility

Virginia Code § 58.1-105 B authorizes the Tax Commissioner to compromise and settle a tax liability of doubtful collectibility. It is my understanding that the Taxpayer's business is closed, and the assessment will cause a financial hardship. As such, the Taxpayer may wish to request an offer in compromise based on doubtful collectibility. The Taxpayer must present evidence of doubtful collectibility to support a claim of financial hardship.

If the Taxpayer wishes to pursue a settlement based on doubtful collectibility, 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, VA 23218-2475. You may also fax the forms to (804) 786-2645. 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 collectibility.

CONCLUSION

Based upon this determination, the assessment is correct as issued. If the Taxpayer's offer in compromise based upon doubtful collectibility is not received within the allotted timeframe, a revised bill, with interest accrued to date, will be mailed to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days of the date of the bill. Payment for the outstanding balance of the assessment should be remitted to: Virginia Department of Taxation, 600 East Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

If you have any questions about this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/728.T