My business's sales tax audit found a compliance ratio just under Virginia's 85% threshold, and we've generally filed and paid on time for years -- can we get the compliance and amnesty penalties waived?

Plain-English summary

A home-furnishings retail chain was audited for sales and use tax covering September 2016 through August 2019 -- its third generation audit (meaning the business had already been through two prior audits). The retailer agreed it actually owed the tax found in the audit, but asked the Department to waive the compliance penalty and a related amnesty penalty, pointing to years of otherwise-timely filings and payments.

Virginia's compliance-penalty regulation ties the penalty to a "compliance ratio" -- essentially, how much of the tax due during the audit period the business actually reported and paid correctly. For a third (or later) generation audit, the regulation requires a compliance ratio of at least 85% for both sales tax and use tax to avoid the penalty entirely. This retailer's use tax compliance ratio came in at 81%, four points under the threshold. Because the statute allows penalty relief only for a failure caused by "providential or other good cause" -- something like a natural disaster, not general business diligence -- and the retailer didn't point to anything of that kind, the compliance penalty was upheld.

The amnesty penalty followed automatically from that result. Virginia ran a Tax Amnesty program in 2017, and any tax liability that was eligible for amnesty benefits but went unpaid is hit with an extra 20% penalty on top of everything else, once a compliance penalty is assessed on the same audit. Since the compliance penalty applied here, so did the 20% amnesty penalty. The full assessment -- tax, both penalties, and interest -- was upheld.

What this means for you

Retailers and other dealers facing a repeat sales/use tax audit

If this is your third (or later) audit, know that the bar to avoid the compliance penalty is a specific, calculated ratio -- 85% or better on both sales and use tax -- not a general sense of having "mostly" filed correctly. A ratio just a few points under the line still triggers the penalty in full; there's no partial credit for being close.

Anyone hoping general good-faith compliance will excuse an audit penalty

"Providential or other good cause" is a narrow, disaster-type standard. Years of otherwise-timely filings, standing alone, did not meet it here. If you're going to argue for abatement on this basis, you'll need to point to something that actually prevented compliance during the specific audit period -- not just a track record in other years.

Businesses that received Virginia's 2017 tax amnesty benefits (or were eligible for them)

If a compliance penalty gets assessed on a liability that was eligible for the 2017 amnesty program but went unpaid at the time, expect an additional 20% amnesty penalty layered on top -- it isn't independently negotiable once the compliance penalty applies.

Common questions

Q: What is a "compliance ratio" in a Virginia sales tax audit?
A: It's the percentage of tax due during the audit period that the dealer actually reported and paid correctly, as computed by the auditor. For third-generation-or-later audits, both the sales tax and use tax ratios must be at least 85% to avoid the compliance penalty.

Q: What counts as "providential or other good cause" to excuse the penalty?
A: The statute points to something like a natural disaster or comparable extraordinary circumstance -- not simply a business's general history of timely filing in years outside the audit period.

Q: Can the 20% amnesty penalty apply even if I wasn't personally aware of the 2017 amnesty program?
A: Yes, as applied in this ruling -- it attaches automatically to amnesty-eligible liability that remained unpaid once a compliance penalty is assessed on the same audit, regardless of the taxpayer's awareness of the program.

Citations and references

• Va. Code § 58.1-635 A (penalty for failure to file/pay, up to 30% in the aggregate, waivable only for "providential or other good cause")
• 23 VAC 10-210-2032 B 1 (compliance penalty on audit deficiencies is mandatory, based on the dealer's compliance ratio)
• 23 VAC 10-210-2032 B 5 (for audits after the second, penalty applies unless the compliance ratio meets or exceeds 85% for both sales tax and use tax)
• P.D. 17-156 (9/5/2017) (Guidelines for the Virginia Tax Amnesty Program)

Subject

Compliance and Amnesty Penalty Abatement

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-24

Original ruling text

February 08, 2022

Re: Offer in Compromise: Retail Sales and Use Tax

Dear *:

This is in response 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 September 2016 through August 2019.

The Taxpayer operates as retail chain that sells home furnishings. The Taxpayer was audited for the period at issue, and issued a sales tax assessment that includes compliance penalty and amnesty penalty assessments. The Taxpayer states that it agrees with the audit findings, and understands that the audit liabilities are in fact owed to the Department. However, the Taxpayer requests that the compliance and amnesty penalties assessed in the audit be abated in full. The Taxpayer maintains that it has made timely sales tax filings and payments for several years.

Compliance Penalty

Title 23 of the Virginia Administrative Code (VAC) 10-210-2032 B 1 provides that “The application of penalty to audit deficiencies is mandatory and its application is generally based on the percentage of compliance determined by computing the dealer’s compliance ratio.”

Title 23 VAC 10-210-2032 B 5 provides that for audits subsequent to second generation audits, “penalty will generally be applied unless the taxpayer’s compliance ratios meet or exceed 85% for sales tax and 85% for use tax, as computed by the auditor or under the alternative method.”

Virginia Code § 58.1-635 A provides that:

When any dealer fails to make any return and pay the full amount of the tax required by this chapter, there shall be imposed, in addition to other penalties provided herein, a specific penalty to be added to the tax in the amount of six percent if the failure is for not more than one month, with an additional six percent for each additional month, or fraction thereof, during which the failure continues, not to exceed 30 percent in the aggregate…. If such failure is due to providential or other good cause shown to the satisfaction of the Tax Commissioner, such return with or without remittance may be accepted exclusive of penalties. [Emphasis added.]

The audit at issue is a third generation audit. The Taxpayer’s use tax compliance ratio as computed in the audit is 81%. In accordance with Title 23 VAC 10-210-2032, the compliance penalty was assessed in the audit because the Taxpayer’s use tax compliance ratio does not meet the ratio required by the regulation of 85%. While I appreciate the Taxpayer’s diligence in filing returns and remitting the tax over the years, the Taxpayer has not demonstrated that the failure to pay the full amount of tax due during the audit period was “due to providential or other good cause” as provided in Virginia Code § 58.1-635. Accordingly, I find that the compliance penalty was properly assessed in the audit, and abatement of the compliance penalty is not warranted.

Amnesty Penalty

The 2017 General Assembly enacted legislation establishing a Tax Amnesty program, spanning a 60-75 day period that was administered by the Department. The Guidelines for the Virginia Tax Amnesty Program are addressed in Public Document 17-156 (9/5/2017). Taxpayers with delinquent returns for amnesty-eligible periods qualified for amnesty benefits. Any tax liability that was eligible for amnesty benefits but remained unpaid is subject to a 20% amnesty penalty in addition to all other penalties. The amnesty-eligible periods for ongoing field audits is the month of April 2017 and prior. In this instance, the amnesty penalty was assessed because the compliance penalty was assessed on the use tax assessment in the audit. Accordingly, the amnesty penalty was properly applied and I do not find cause for abatement in this instance.

CONCLUSION

In accordance with this determination, the audit assessment is correct as issued and the request for abatement of the compliance and amnesty penalties is denied. A revised 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.

The Code of Virginia sections, regulation and public document 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 response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3911P

Related Documents

17-156