Could a Virginia business remove sales-tax audit items through an appeal without providing invoices, exemption certificates, or other supporting records?

Plain-English summary

The Commissioner could not remove contested sales-and-use-tax audit items because the taxpayer had provided no supporting records during the audit or appeal.

Dealers must keep adequate records of sales, leases, purchases, and property used in the business, including invoices, purchase orders, bills of lading, and similar evidence. An administrative appeal must also be complete, meaning it includes enough facts and essential documentation for an informed decision.

The taxpayer received one additional 30-day period to submit invoices, exemption certificates, or other proof. If nothing sufficient was provided, the assessment would be treated as correct as issued.

What this means for you

An appeal letter alone does not prove that an audit item is exempt or otherwise incorrect. Connect each disputed transaction to contemporaneous records and submit all essential evidence with the appeal.

Common questions

What records did the ruling identify? Invoices, exemption certificates, purchase records, and other evidence supporting the contested transactions.

What is a complete appeal? One with sufficient grounds and essential documentation for the Commissioner to make an informed determination.

Was the assessment finally upheld immediately? The taxpayer first received a final 30-day documentation opportunity.

Citations and references

• Va. Code § 58.1-633 A and 23 VAC 10-210-470 — dealer recordkeeping requirements.
• Va. Code § 58.1-1821 and 23 VAC 10-20-165 A and D — complete administrative appeals and supporting documentation.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-15

Original ruling text

January 21, 2020

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

Dear *:

This will reply to your letter submitted on behalf of * (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessment issued for the period January 2015 through December 2017. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer provides both professional and contracting services. The Taxpayer mainly designs, builds and maintains critical system environments such as radiator and cooling systems, data center equipment, generators, and fire alarm systems. The Department’s audit resulted in the assessment of sales and use tax for sales, purchases, and assets in which the auditor could not verify the taxable nature of the transactions. The Taxpayer takes exception to the tax assessed on several items held in the audit.

DETERMINATION

Taxpayer Records

Virginia Code § 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 (VAC) 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.” The regulation provides examples of the types of records that must be maintained by taxpayers. Records for all tangible personal property used or consumed in the conduct of a business must be maintained. In addition, records must be kept of all merchandise purchased including bills of lading, invoices, purchase orders and other evidence to substantiate each purchase.

In this case, the auditor was not provided suitable records to review, which resulted in many items being included in the audit exceptions list. Additionally, no documentation or evidence was presented with the Taxpayer’s appeal to support the claim that items should be removed from the audit.

Complete Appeal

Virginia Code § 58.1-1821 provides taxpayers the right to appeal tax assessments issued by the Department if the taxpayer believes an assessment is incorrect. Taxpayers are required to file a “complete appeal,” which is defined in Title 23 VAC 10-20-165 A as:

an administrative appeal containing sufficient information, as prescribed in subsection D of this section, so that the grounds upon which the taxpayer relies in contesting an assessment are fully set forth to allow the Tax Commissioner to make an informed final determination.

Title 23 VAC 10-20-165 D provides that all essential documentation that supports the appeal must be furnished to the Department. The Taxpayer has not submitted any documentation or evidence to support the removal of the contested items from the audit. The Department’s auditor has been in contact with the Taxpayer and has requested the documentation to support the Taxpayer’s claim; however, no documentation has been provided.

The Taxpayer will be given an additional 30 days from the date of this letter to submit additional information for the Department’s review, including invoices, exemption certificates, or other information to support the Taxpayer’s claims. Please send the documentation to: Virginia Department of Taxation, Appeals and Rulings Division, P. O. Box 27203, Richmond, Virginia 23261-2703, Attention: *. If additional information is not provided or if the information provided is not sufficient to support the Taxpayer’s claims, the assessment will be considered correct as issued.

The Code of Virginia sections and regulations 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 concerning this determination, please contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1892H