A distributor's records show untaxed cigarette purchases under my business's name, but I deny ever making them or opening any account, and I've filed a complaint with the FTC -- is that enough to stop the assessment?

Plain-English summary

Another entry in the same series of cigarette-compliance-program rulings issued the same day: the Department's cigarette compliance program flagged a retailer whose distributor sales records showed tax-exempt cigarette purchases for resale that didn't match its reported taxable sales. The Department sent a summary of findings with a 14-day response window; the retailer didn't respond within that time, and the assessment issued.

On appeal, the retailer simply denied any responsibility -- for the cigarette purchases OR for opening any business account with the distributor in the first place -- without offering the kind of detailed fraud narrative seen in some companion cases. After receiving the assessment, the retailer filed a complaint with the Federal Trade Commission and asked the Department to abate the assessment based on that complaint alone.

The Tax Commissioner upheld the assessment on the same reasoning applied throughout this series: Virginia law presumes all sales taxable absent proof otherwise, requires dealers to keep detailed records, and lets the Department reconstruct liability from the best information available (here, the distributor's own sales documentation) when the dealer's own records aren't produced. A denial of responsibility, without supporting documentation contradicting the distributor's records, doesn't meet the taxpayer's burden -- and neither does filing a complaint with a federal consumer-protection agency, since the FTC complaint process doesn't generate evidence relevant to a Virginia state tax appeal, and the Department separately has no authority to investigate or resolve the underlying fraud allegation itself.

What this means for you

Retailers who deny responsibility for purchases shown in a distributor's records

A bare denial isn't enough -- provide actual documentation (account records, signatures, correspondence) contradicting the distributor's own sales records if you want the Department to reconsider an assessment based on them.

Businesses considering filing a complaint with the FTC or similar federal agency over suspected fraud

Filing that complaint may be a reasonable step to protect yourself going forward and create a record, but it doesn't function as evidence in a Virginia tax appeal, and the existence of the complaint alone won't cause the Department to abate an assessment.

Anyone facing a cigarette-compliance-program assessment based on distributor records

Respond within the initial response window with whatever documentation you have -- these rulings consistently show that missing that window, then relying on general denials or complaints filed elsewhere, doesn't reverse the outcome.

Common questions

Q: I deny ever authorizing the purchases a distributor's records show under my business's name -- is that enough to overturn an assessment?
A: Not by itself. You need actual documentation contradicting the distributor's records; a bare denial doesn't meet your burden of proving the assessment wrong.

Q: Does filing a complaint with the Federal Trade Commission help get a Virginia tax assessment abated?
A: No -- an FTC complaint doesn't provide evidence relevant to the Virginia tax appeal, and the Department has no authority to resolve the underlying fraud dispute regardless of where else it's been reported.

Citations and references

• Public Document 18-184 (10/30/2018), P.D. 20-140 (8/18/2020), and P.D. 20-172 (9/29/2020) -- prior Department determinations addressing similar business-identity-theft/fraud defenses to cigarette-purchase compliance assessments, all reaching the same result

Subject

Purchases/Sales of Cigarettes - Business Fraud, ID Theft

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-83

Original ruling text

July 13, 2021

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 of July 2015 through August 2016. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a retailer of cigarettes. The Department utilizes a compliance program that verifies retail sales and use tax compliance regarding cigarettes purchased for resale and sales of cigarettes by a retailer or wholesale dealer. As a result of the compliance program, the Taxpayer was issued an assessment for tax and interest on untaxed cigarettes purchased from * (the “Distributor”) for the Taxpayer’s business location. The assessment is based on sales information provided by the Distributor, identifying the Taxpayer’s purchase of cigarettes exempt of the tax for resale.

It is the Department’s position that the cigarettes purchased by the Taxpayer for resale would have been sold to the Taxpayer’s customers and, therefore, the sales tax should have been collected and remitted to the Department on such sales. Based on the sales information provided by the Distributor, it was determined that the Taxpayer underreported sales of cigarettes by the amount of the cigarettes purchased from the Distributor for resale.

On August 26, 2016, the Department sent the Taxpayer a summary of the findings and the proposed tax liability. The Taxpayer was allowed 14 days to provide documentation to substantiate whether the Taxpayer’s purchases from the Distributor qualified for the resale exemption or whether the Taxpayer collected and remitted the sales tax on the sale of those purchases. The Taxpayer failed to respond to the Department’s request for documentation within the allotted time and the assessment was issued.

The Taxpayer contests the sales and use tax assessments and claims no responsibility for the purchase of the cigarettes from the Distributor or the opening of any businesses. After receiving the assessments from the Department, the Taxpayer filed a complaint with the Federal Trade Commission and requests the assessments be abated based on these circumstances.

DETERMINATION

Purchases/Sales

The resale exemption provided under the Virginia retail sales and use tax is found in Virginia Code § 58.1-602. This code section excludes a sale for resale from the definition of a “retail sale,” which is defined as “a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter.”

Virginia Code § 58.1-623 sets forth the requirements for the proper use of exemption certificates and, in section A, provides that “[a]ll sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.”

Title 23 of the Virginia Administrative Code (VAC) 10-210-280 provides further explanation of the proper use of exemption certificates. Subsection A states that a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.

Virginia Code § 58.1-633 A provides that every dealer required to make a return and collect sales tax "shall keep and preserve suitable records of the sales, leases, or purchases…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 record keeping requirement is further explained in Title 23 VAC 10-210-470 as follows:

Every person who is liable for 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 records must include…a daily record of all cash and credit sales, including sales under any type of financing or installment plan in use. A record of the amount of all merchandise purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase...a record of all deductions and exemptions claimed in filing sales or use tax returns., including exemption and resale certificates, returned or repossessed goods, and bad debts…a record of all tangible property used or consumed in the conduct of the business… a true and complete inventory of the stock on hand and its value, taken at least once each year. Records must be open for inspection and examination at all reasonable hours of the business day by the Department of Taxation.

When a dealer fails to maintain adequate records, the Department is authorized by Virginia Code § 58.1-618 to use the best information available to reconstruct a dealer's sales or purchases to determine whether a tax liability exists.

In this instance, the documentation provided by the Distributor showed that the Taxpayer purchased cigarettes exempt of the tax for resale. The cigarette sales records provided by the Distributor showed that the Taxpayer made cigarette purchases totaling $* exempt of the tax that are not supported by any resale exemption or tax reporting documentation.

The assessment is calculated on the cost price of the cigarettes based on the sales documentation provided by the Distributor, as this was the best information available. The Taxpayer was provided the opportunity to provide documentation to substantiate the exempt purchase or exempt resale regarding the cigarettes at issue, and failed to do so. While the Taxpayer denies responsibility for the purchase of such cigarettes, the information provided by the Distributor shows that the Taxpayer purchased the contested cigarettes exempt of the tax for resale from the Distributor. Lacking supporting documentation that the contested cigarettes were purchased fraudulently, I find that the audit assessment is correct. This determination is consistent with previous determinations regarding business identity theft cases including Public Documents 18-184 (10/30/2018), 20-140 (8/18/2020), and 20-172 (9/29/2020).

Virginia Code § 58.1-205 sets out that any assessment of a tax by the Department is deemed prima facie correct. This means that the burden of proving the assessments erroneous is upon the Taxpayer. Based on the foregoing, the Taxpayer has not met this burden.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of this letter. If the Taxpayer has questions concerning payment of the assessment or bill, the Taxpayer may contact the Delinquent Collections Unit at *.

The Code of Virginia sections and regulations cited, along with other reference documents, 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/1084L

Related Documents

18-184

20-140

20-172