If my store doesn't keep detailed sales records, can I dispute the Department's estimate of my taxable sales just by asserting my own different percentage?

Plain-English summary

A retail store selling both food and non-food items was audited and found to lack adequate records: no purchase invoices for individual transactions, no periodic inventory counts, and no transaction register detailing what was actually sold. The store also charged the wrong tax rate on some transactions, hadn't remitted all the sales tax it had collected, and couldn't document sales it claimed were tax-exempt. The Department issued an estimated assessment for unpaid tax, penalty, and interest, and the store appealed on five separate grounds.

Because the store had no adequate records, Virginia law let the auditor estimate the taxable percentage of sales using the store's own historical sales and use tax returns; that method produced a 25-30% non-food sales estimate. The store pushed back, this time asserting non-food sales were actually under 10%, but provided no invoices, inventory records, or other evidence to back up that new number. Since an estimated assessment is presumed correct and the burden is on the taxpayer to prove it wrong, an unsupported counter-estimate wasn't enough to overturn the auditor's figure. On the claim that the Department double-counted tax already remitted, the Department pointed out the audit report already included a separate credit for taxes the store had actually paid, and the store hadn't identified any actual computational error. On exempt sales, the Department reiterated that a dealer bears the responsibility to document and preserve records supporting any exempt sale; without that documentation, the default rule is that all sales are presumed taxable. On phone cards, the store's specific line-item objections turned out not to relate to phone card sales at all, but instead to transactions where the wrong tax rate had been charged. Finally, on financial hardship, the Department explained that hardship isn't itself grounds to reduce an otherwise-correct assessment on appeal, but the store could separately pursue an "offer in compromise" based on doubtful collectability by submitting specific financial disclosure forms (OIC-Fee, OIC B-3, and FIN B-1) for the Department's review.

Because the store offered no substantive evidence for any of its five objections, the Department upheld the assessment in full.

What this means for you

Retailers selling a mix of taxable and exempt (or differently-taxed) products without detailed records

Keeping actual purchase invoices, periodic inventory counts, and a transaction register that separates categories of sales isn't just good practice -- it's what lets you actually contest an estimated audit assessment. Without it, the Department's estimate, even one drawn indirectly from your own past tax returns, stands unless you can produce real evidence to the contrary.

Anyone disputing a Department estimate with a different number of their own

A bare assertion of a different percentage or figure, without invoices, records, or other documentation behind it, won't meet your burden of proof on appeal. Come prepared with actual evidence, not just a competing estimate.

Businesses facing a large assessment they genuinely cannot afford to pay

Financial hardship isn't a basis to reduce an assessment that's otherwise correct, but it can support a separate settlement request, an offer in compromise based on doubtful collectability, if you complete and submit the required financial disclosure forms within the Department's deadline.

Common questions

Q: Can the Department estimate my sales tax liability if I don't keep adequate records?
A: Yes -- under Va. Code § 58.1-618, the Department may issue an estimated assessment based on the best information available when a dealer fails to maintain the records required by Va. Code § 58.1-633, and that estimate is presumed correct.

Q: Can I overturn an estimated assessment just by claiming a different percentage or figure?
A: Not without supporting evidence -- you need actual documentation like invoices, inventory records, or a transaction register to meet your burden of proving the Department's estimate wrong.

Q: What can I do if I genuinely can't afford to pay an assessment, even if it's otherwise correct?
A: You can request an offer in compromise based on doubtful collectability by submitting the required financial disclosure forms (OIC-Fee, OIC B-3, and FIN B-1); the Department will review your financial situation before responding.

Citations and references

• Va. Code § 58.1-633 (dealer recordkeeping requirement)
• 23 VAC 10-210-470 (recordkeeping regulation)
• Va. Code § 58.1-618 (estimated assessment based on best information available; presumed correct)

Subject

Assessment: Estimated - Best info available Sales : Convenience Store; Non-Food Sales, Credit for Tax Paid, Exempt Sales, Phone Cards Offer in Compromise : Doubtful Collectability

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-160

Original ruling text

December 30, 2022

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

Dear *:

This will respond to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the “Taxpayer”) for the periods October 2015 through September 2018. I apologize for the delay in responding to your request.

FACTS

The Taxpayer operates a retail store that sells various food and non-food items in Virginia. Under first generation audit, the auditor found that the Taxpayer was unable to produce complete and accurate records of its transactions during the audit period, that sample transactions showed the incorrect rate of tax was charged on transactions, that the Taxpayer did not remit the full amount of sales tax collected from its customers, and that the Taxpayer could not substantiate the sales it claimed were exempt. The Department issued an assessment for the unpaid tax liability, penalty, and interest. The Taxpayer appealed, alleging (1) the Department over-estimated the percentage of non-food items sold during the audit period, (2) the Department incorrectly assessed tax due on amounts already remitted, (3) the Department should review and adjust the allowable exempt sales, despite proper records being unavailable, (4) the Department overestimated phone card sales during the audit period, and (5) the Department’s assessment would create hardship for the Taxpayer.

DETERMINATION

Every dealer required to make a return and pay and collect the retail sales tax is also required to keep and preserve suitable records of the transactions to determine the amount of tax due. See Virginia Code § 58.1-633 and Title 23 of the Virginia Administrative Code 10-210-470. When a dealer fails to maintain adequate records, the Department is authorized by Virginia Code § 58.1-618 to issue an estimated assessment of tax based on the best information available. Once an estimated assessment is issued, it is deemed prima facie correct, meaning the burden of proof is on a taxpayer to prove the assessment is incorrect.

Estimated Non-Food Sales

The Taxpayer failed to provide purchase invoices for individual transactions, furnish periodic inventory counts, not retain inventory records, or utilize a transaction register capable of providing details about the inventory or sales. The Taxpayer booked sales of food and non-food items into one account, cost of goods sold. The auditor documented that the Taxpayer’s store contained substantial non-food items, and during the audit, the Taxpayer estimated that 25% to 30% of sales were from non-food items.

Because of the lack of records, the auditor used the Taxpayer’s sales and use tax returns to estimate the percentage of sales from non-food items. The Taxpayer disputes the estimated percentage because it claims food items are the main items in the store and non-food items are available to boost the sales of food items. While the Taxpayer now claims that sales of non-food items are less than 10% of its total sales, the Taxpayer provides no evidence to substantiate its claim.

Credit for Tax Paid

The auditor calculated the total liability on gross sales figures and created a separate measure to credit the Taxpayer for amounts already paid. The Taxpayer asserts that the Department incorrectly assessed tax due on amounts where tax was already charged and remitted. However, the audit report shows credit was granted for taxes paid and the Taxpayer’s analysis fails to account for any error in the auditor’s computation.

Exempt Sales

The Taxpayer requests that the Department adjust the disallowance of exempt sales, despite the absence of proper records. As a Virginia sales and use tax dealer, the Taxpayer was charged with the responsibility of properly documenting any exempt sales and keep and preserve such records for the Department’s inspection. Absent proper documentation, all sales of tangible personal property are presumed taxable.

Phone Cards

The Taxpayer asserts the audit included amounts related to phone card sales and that such amount is overestimated. The items referenced by the Taxpayer, however, were not related to phone card sales. Instead these items showed the Taxpayer was charging and remitting the incorrect rate of tax for various transactions.

Financial Hardship

The Taxpayer indicates that paying the full amount of the assessment could 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 such 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, OIC B-3, and FIN B-1 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 60 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.

CONCLUSION

In this case, the Taxpayer failed to maintain the required records resulting in an estimated assessment based on the best information available. The Taxpayer disputes the Department’s estimates and provides estimates of its own, which it claims are more accurate. However, the Taxpayer provides no substantive evidence for its claims. Accordingly, it has not met its burden of proof and the assessment must be upheld.

The assessment at issue remains due and payable. An updated bill with accrued interest to date will be mailed to the Taxpayer shortly. The Taxpayer should remit payment of the amount due within 60 days of the date on the updated bill to avoid the accrual of additional interest and possible collection action.

The Code of Virginia sections and regulation cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at , or via email at **.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/2204-C