Which construction-company audit purchases could be removed based on the records supplied?

Plain-English summary

Virginia gave the construction company a mixed result. Records submitted on appeal showed that one transaction was solely for engineering services and another was subcontract labor for which the subcontractor supplied the materials. Those two items were removed from the use-tax audit.

Other purchases remained because the hardcopies, electronic copies, and vendor emails did not substantiate the underlying transactions or allow Virginia to verify that sales tax had been paid when the purchases occurred. The company therefore failed to satisfy its recordkeeping duty for those items.

The audit returned to field staff for the specified revisions and a new bill.

Common questions

Were vendor emails enough to prove tax payment? Not here. Virginia said the records did not substantiate the purchases or verify remittance.

Why were the engineering and labor charges removed? Additional documents showed they were services or labor rather than untaxed material purchases.

Citations and references

• Va. Code § 58.1-633 A
• 23 VAC 10-210-470

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-79

Original ruling text

May 4, 2018

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

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessments issued to * (the “Taxpayer”) for the period July 2009 through June 2015. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates as a construction company. The auditor assessed use tax in the audit on purchases of tangible personal property made by the Taxpayer during the audit period. The Taxpayer contests the inclusion of the some of the transactions in the audit for the reasons stated below. The Taxpayer requests that the transactions at issue be removed from the audit.

DETERMINATION

* (Line Items 12, 32, 35 and 36) and *** (Line Item 23)

The auditor held the purchases at issue subject to the 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 provides with its appeal hardcopies of the documentation provided during the audit. The Taxpayer also provides the emails it received from the vendors related to these transactions, which include the electronic versions of the aforementioned hardcopies.

Virginia Code § 58.1-633 A provides that:

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.

The documentation provided by the Taxpayer, both during the audit and with the appeal, does not comply with the requirements of Virginia Code § 58.1-633. The documentation does not substantiate the purchases made from the vendor, and it does not allow the Department to verify that the sales tax was properly paid on the transactions at the time the transactions were made. Without sufficient documentation, I cannot conclude that the tax was properly remitted at the time the purchases occurred. Accordingly, these transactions will not be removed from the audit.

The Taxpayer is required to maintain proper records as considered in Virginia Code § 58.1-633. Title 23 of the Virginia Administrative Code 10-210-470 provides further guidance on the types of records that the Taxpayer must have available for review by the Department.

* - Line Item 22

The purchase at issue was held taxable in the audit because the information provided to the auditor indicated that the expense was for an untaxed material purchase order. The Taxpayer provides additional documentation with its appeal that was not provided during the audit and contends that the transaction at issue is for engineering services only. Based upon a review of the documentation, I concur with the Taxpayer and find that the transaction at issue is for engineering services. Accordingly, the transaction will be removed from the audit.

* - Line Item 42

The purchase at issue was held taxable in the audit because the information provided to the auditor indicated that the expense was for an untaxed material purchase order. The Taxpayer provides additional documentation and maintains that the transaction at issue was erroneously recorded as a purchase of materials. The Taxpayer states that the transaction is for labor provided pursuant to a contract between the Taxpayer and the subcontractor. The Taxpayer further states that it did not purchase any materials related to the contract and that the subcontractor purchased the required materials. The documentation provided supports the Taxpayer's contention that the transaction is for labor and not the purchase of materials. Accordingly, the transaction will be removed from the audit.

CONCLUSION

The audit will be returned to the appropriate field audit staff to make the adjustments consistent with this determination. Once the revisions are made, a revised bill, with interest accrued to date, will be mailed to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 E. Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

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 web site. 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/743.P