Could a residential contractor assume retailers had charged sales tax when invoices were missing?

Plain-English summary

Virginia rejected a siding contractor's argument that sales tax should be presumed paid because ordinary retailers usually charge it. Sales and use tax is transactional, so the contractor needed invoices or other evidence showing tax treatment for each purchase.

The contractor had been registered for consumer use tax but did not file returns, allowing Virginia to extend the audit from three to six years. The auditor reviewed available ledgers, invoices, and credit-card statements and assessed potential taxable purchases.

Invoices later supplied on appeal supported removal of some items. The remaining purchases stayed in the audit because the contractor did not provide transaction-specific proof that sales or use tax had been paid.

Common questions

Did proof that a vendor usually charges tax establish every purchase? No. Virginia required documentation for the individual transaction.

Was the entire assessment upheld unchanged? No. Audit staff had to remove the purchases supported by invoices submitted on appeal.

Citations and references

• Va. Code §§ 58.1-634, 58.1-633 A, and 58.1-205
• 23 VAC 10-210-470
• P.D. 08-29

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-65

Original ruling text

May 2, 2018

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

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”), in which you seek correction of a consumer use tax assessment for the period March 2010 through February 2016. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a residential contractor specializing in siding installation services. As a result of the Department's audit, the Taxpayer was assessed the use tax on various purchases made by the Taxpayer during the period audited. The Taxpayer was registered for the consumer use tax and did not file tax returns to report sales or use tax liability for the initial three-year audit period. In accordance with Virginia Code § 58.1-634, the audit period was extended to six years as reasonable cause was evident that the Taxpayer was required by law to file a return and failed to do so.

The Taxpayer contends the liability includes purchase transactions on which sales tax was collected. The Taxpayer argues that the collection of the tax should be assumed because it does not have tax-exempt accounts with retailers, and office stores and retail establishments collect sales tax on all sales.

DETERMINATION

Taxpayer Records

Virginia Cod e § 58.1-633 A states:

Every dealer 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.

Title 23 of the Virginia Administrative Code 10-210-470, which interprets Virginia Code § 58.1-633, states “[e]very person who is liable for the collection of sales tax or 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.” Such documentation includes records for all tangible personal property used or consumed in the conduct of business and records for all merchandise purchased including bills of lading, invoices, purchase orders, and other evidence to substantiate each purchase.

The Taxpayer's records did not contain adequate information to verify whether sales or use taxes were paid on purchase transactions that occurred during the audit period, as numerous invoices were missing from the Taxpayer's records. The auditor reviewed the Taxpayer's general ledger, all available invoices, and business credit card statements and included transactions that were identified as potential purchases of tangible personal property or taxable services in the audit. The Taxpayer was then given the opportunity to provide additional documentation and invoices, but failed to do so.

In this instance, the Taxpayer did not provide documentation to verify payment of sales or use tax on purchases of tangible personal property. The Taxpayer subsequently provided invoices that support the removal of certain purchase exceptions from the audit. The audit liability will be revised accordingly. The Taxpayer has not, however, provided documentation to support removal of the remaining contested purchases. Absent documentation, the remaining items will remain in the audit.

Public Document 08-29 (4/2/08) addresses the Department's recordkeeping policy and notes that the presentation of invoices demonstrating sales tax regularly paid to vendors is not sufficient evidence to remove multiple transactions with the same vendor from an audit. The Department reviews transactions based on the documentation presented for each transaction. This is consistent with longstanding and established policy that the retail sales and use tax is a transactional tax, and the determination as to the taxation of a specific transaction is based on the underlying documents that support the transaction. Thus, documentation must be provided to prove the tax was paid on each transaction with a vendor.

Virginia Code § 58.1-205 deems assessments issued by the Department to be prima facie correct. This means that the burden of proving the assessment is incorrect rests upon the Taxpayer. The provision of adequate records and other documentation is necessary to prove that the tax assessed on the audit is incorrect. In this instance, the Taxpayer has not met the burden of proof.

CONCLUSION

In accordance with this determination, the audit will be returned to the appropriate field audit staff for revision. The audit staff will adjust the audit assessments based on the documentation provided with the Taxpayer's appeal. After the adjustments are completed, a revised bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days from the date of the revised bill. Please remit payment to: Virginia Department of Taxation, 600 E. 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, regulation, and public document cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have any questions about this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1250.L