Could a Virginia convenience store overturn an assessment for sales tax collected but not remitted when earlier records were destroyed and no proof of overpayment was supplied?

Plain-English summary

Virginia upheld an assessment for sales tax a convenience store collected but did not remit.

Water damage destroyed the store's records before 2018. For January through March 2018, the auditor compared z-tapes with federal and Virginia returns, bank statements, and vendor invoices. The records showed that the store charged the correct sales-tax rates but underreported both its sales and the tax collected.

The Department could estimate liability using the best available information. Because assessments were presumed correct and the owner provided no documentation proving earlier overpayments or another error, the assessment remained in place.

The owner could submit an offer in compromise based on doubtful collectability by returning the required financial forms within 30 days; that process addressed ability to pay, not whether the assessment was correct.

What this means for you

Sales tax collected from customers must be reconciled to register data and remitted. Record loss does not shift the burden to the Department, so backup z-tapes, returns, bank records, and invoices are critical.

Common questions

Did the store charge the wrong tax rate? No. It charged correct rates but underreported the collected amounts and sales.

Who had to prove the assessment wrong? The taxpayer.

Could financial hardship reduce collection? The owner could request an offer in compromise based on doubtful collectability with supporting financial evidence.

Citations and references

• Va. Code § 58.1-618 — estimated assessment from best available information.
• Va. Code § 58.1-633 A and 23 VAC 10-210-470 — dealer recordkeeping.
• Va. Code § 58.1-205 — assessment presumed correct.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-22

Original ruling text

February 4, 2020

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

Dear *:

This will reply to your letter in which you protest the retail sales and use tax assessment issued to * (the “Taxpayer”), as a result of an audit for the period June 2015 through March 2018. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a sole proprietor that operates a convenience store in Virginia. As a result of the Department’s audit, the Taxpayer was issued an assessment for tax collected but not remitted. The Taxpayer appeals the assessment on the grounds that it correctly remitted the sales taxes based on its calculations, and that excess remittances were made to the Department during previous periods. The auditor requested additional documents from the Taxpayer to substantiate the claim of overpayment, but the Taxpayer did not provide such documents.

DETERMINATION

The Taxpayer alleged and the auditor found that the Taxpayer lost all records prior to 2018 due to water damage. The auditor was able to review the Taxpayer’s z-tapes, tax return records, bank statements and vendor invoices for January through March 2018. The auditor found the Taxpayer collected sales taxes at the correct tax rates, but underreported such taxes, as well as underreported the sales upon which the taxes were computed. This was based on a comparison of z tapes to federal and Virginia tax returns for the period January through March 2018. As such, the auditor correctly concluded the Taxpayer underreported sales and taxes collected but not remitted. In this instance, I find the auditor properly assessed the sales taxes in accordance with Virginia Code § 58.1-618, which authorizes the Department to issue an assessment based on an estimate using the best available information.

Virginia Code § 58.1-633 A requires every dealer that must collect and pay sales tax to keep and preserve suitable records sufficient to determine the amount of tax collected or owed. Title 23 Virginia Administrative Code 10-210-470 is the regulation that interprets the statute and provides additional detail regarding suitable records. Based on these authorities, the Taxpayer is required to maintain adequate records of its retail sales and use tax transactions for review and inspection by the Department in the future. In this instance, the Taxpayer was not able to provide records for periods prior to January 2018.

Virginia Code § 58.1-205 states any assessment of tax from the Department is prima facie correct. Therefore, the burden is on the taxpayer to provide evidence that an assessment is incorrect. The Taxpayer has not met the evidentiary burden proving the assessment is incorrect.

CONCLUSION

Based on the foregoing, and absent evidence to the contrary, I find the assessment is correct as issued.

The Taxpayer indicates that paying the full amount of the assessment may cause a financial burden. As such, the Taxpayer may wish to request an offer in compromise based on doubtful collectability. The Taxpayer must present evidence of doubtful collectability to support a claim of financial hardship. If the Taxpayer wishes to pursue a settlement based on doubtful collectability, please complete and return the enclosed OIC-Fee and OIC B-3 forms to: Tax Commissioner, Virginia Department of Taxation, Post Office Box 2475, Richmond, Virginia 23218-2475. 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. 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 collectability.

The Code of Virginia and regulation sections 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 regarding this determination, please contact * in the Department’s Office of Tax Policy, Appeals, and Rulings at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1766.W