Can a contractor get audited purchases removed from a use tax assessment by later producing documents proving sales tax was already paid, and can the interest be waived?

Plain-English summary

A construction company sought reconsideration of a retail sales and use tax audit for July 2009 through June 2015. The auditor had held several purchases subject to use tax because the company had not produced proper documentation showing sales tax was already paid at the time of purchase.

Result: the contested purchases were removed, but the interest was not waived.

• The new documentation carried the day. On reconsideration the company provided additional documentation. The Tax Commissioner found it showed the sales tax was charged, collected, and paid when the contested purchases took place -- satisfying the recordkeeping requirement of Va. Code § 58.1-633 -- so those purchases were removed from the audit.
• Interest is mandatory. The company asked to abate interest because of the delay between its appeal and the determination. Under Va. Code § 58.1-1812, interest applies to any assessment; it is not a penalty but a charge for the use of money over time, and a taxpayer can pay a disputed liability while an appeal is pending to stop interest accruing. The Commissioner found no basis to waive it.

The audit was returned to field staff for revised bills, with no further interest if paid within 30 days.

What this means for you

You can still win back audited purchases with the right proof -- even after the first determination. Documentation that verifies the sales tax was charged and paid at the time of the transaction can remove a purchase from a use tax assessment. Keep vendor invoices that actually show the tax line and its payment.

Don't expect interest relief for appeal delays. Interest is statutory and compensates the Commonwealth for the time value of unpaid tax; the remedy for a slow appeal is to pay under protest while it is pending, not to seek a waiver later.

Quality of documentation matters. Earlier, hardcopies and vendor emails were found insufficient; the reconsideration succeeded only because the new records let the Department verify tax was properly paid.

Common questions

Q: The auditor said I owed use tax -- how do I get the purchase removed?

A: Produce documentation that verifies sales tax was charged, collected, and paid at the time of the purchase, as § 58.1-633 requires. Here that proof removed the contested items.

Q: Can interest be waived because my appeal took a long time?

A: No. Interest is mandatory under § 58.1-1812 and is not a penalty. To avoid it, pay the assessment while the appeal is pending.

Q: What happens next after purchases are removed?

A: The audit goes back to field staff for revised bills; pay within 30 days of the bill to avoid additional interest.

Citations and references

• Va. Code § 58.1-633 -- dealers must keep suitable records of sales, leases, and purchases sufficient to determine the tax due
• Va. Code § 58.1-1812 -- interest applies to any assessment as a charge for the use of money, not a penalty

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-192

Original ruling text

November 30, 2018

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

Dear *:

This is in response to your letter in which you seek reconsideration of the Department’s determination letter issued to * (the “Taxpayer”) on May 4, 2018. The determination letter was issued in response to the Taxpayer’s appeal seeking correction of the retail sales and use tax assessments issued for period July 2009 through June 2015.

FACTS

The Taxpayer operates as a construction company. The Taxpayer requests reconsideration of the determination related to purchases it made during the audit period from * (Line Items 12, 32, 35 and 36) and *** (Line Item 23). The auditor held the purchases at issue subject to the use tax in the audit because the Taxpayer did not have proper documentation to support its contention that the sales tax had been paid on the purchases at the time the transactions occurred. The Taxpayer provided with its appeal hardcopies of the documentation provided during the audit. The Taxpayer also provided emails it received from the vendors related to the contested purchases, which included the electronic versions of the aforementioned hardcopies.

In accordance with Virginia Code § 58.1-633, it was determined that the documentation did not comply with the requirements of the statute. It was further determined that the documentation did not substantiate the purchases made from the vendor, and the documentation did not allow the Department to verify that the sales tax was properly paid on the purchases at the time the transactions were made. Accordingly, the purchases were not removed from the audit.

In its reconsideration, the Taxpayer provides additional documentation related to the contested purchases. The Taxpayer requests that the additional documentation be reviewed, and based on the documentation, the purchases at issue be removed from the audit. The Taxpayer also requests an abatement of the interest due to the amount of time that lapsed between when the original appeal was filed and when the determination letter was issued.

DETERMINATION

Contested Purchases

Virginia Code § 58.1-633 A provides that dealers:

Required to make a return and pay or collect any tax under this chapter 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.

Based upon a review of the additional documentation provided with the Taxpayer’s reconsideration, I find that the documentation supports the Taxpayer’s contention that the sales tax was properly charged and collected at the time the contested purchases took place. The documentation shows the sales tax charged for the purchases, as well as the sales tax being paid by the Taxpayer on the purchases. Accordingly, I find that the documentation provided sufficiently supports removal of the contested purchases from the audit.

Interest

Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it simply represents a fee for the use of money over a period of time. Taxpayers have the option of remitting outstanding liabilities to the Department while the Department reviews pending appeals, to avoid the accrual of additional interest. Therefore, I find no basis to waive the interest assessed as a result of the Department's audit.

CONCLUSION

Based upon this determination, the audit will be returned to the appropriate field audit staff to make the revisions noted above. Once the revisions have been completed, the Taxpayer will receive a revised audit report and revised bills, with interest accrued to date. No further interest will accrue provided the bills are paid within 30 days from the date of the bill. The Taxpayer should remit payment to: Virginia Department of Taxation, 600 E. Main Street, 15 th Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessments, you may contact at **.

The Code of Virginia sections 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 response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1724P