A restaurant audit estimated my unreported cash sales using my credit card sales data because I didn't keep adequate records, and it also taxed sales I say were exempt -- can I fight both parts of the assessment without producing my own records?

Plain-English summary

Cash-intensive businesses like restaurants face a particular audit risk: without solid records, the Department can reconstruct sales using whatever reliable information IS available -- including a business's own credit card processing data. This ruling upholds exactly that kind of estimate, plus rejects a separate exemption-certificate argument for lack of proof.

The restaurant was audited and assessed tax for unreported cash sales and uncollected sales tax because it hadn't maintained sufficient sales records for the audit period. Under Va. Code § 58.1-618, when a dealer fails to keep adequate records, the Department may use the "best information available" to reconstruct sales and determine liability. Here, the auditor used the restaurant's own credit card sales, as reported on its bank statements, as the reliable baseline, and extrapolated the likely unreported cash sales from that data -- a specific technique the Department pointed to as already approved in a prior ruling (P.D. 10-143) addressing the same credit-card-based method. Several other prior rulings (P.D. 98-4, P.D. 16-75) likewise upheld estimated assessments where a dealer failed to provide records and didn't rebut the estimate with evidence of its own.

The restaurant separately argued that some of the disputed sales were to tax-exempt customers. But Virginia law presumes all sales taxable unless the dealer can show it took a valid exemption certificate in good faith at the time of the sale (Va. Code § 58.1-623; 23 VAC 10-210-280 A). The Department's settled policy (citing P.D. 98-29) is that the absence of a certificate at the time of the transaction shows it was never accepted in good faith -- and a certificate produced only after an audit has already begun faces much closer scrutiny, acceptable only if the Department can independently confirm the customer's exempt use was valid for that specific transaction. The restaurant never produced any exemption certificates, either during the audit or with its appeal, so the disputed sales stayed taxable.

Because Virginia assessments are presumed correct (Va. Code § 58.1-205) and the burden is on the taxpayer to disprove them with real evidence -- and because the law bars relief where an erroneous assessment results from the taxpayer's own willful failure to provide required information (Va. Code § 58.1-1826) -- the Department found the audit methodology reasonable and upheld the assessment in full.

What this means for you

Cash-intensive businesses (restaurants, retail, service businesses) facing a records-inadequate audit

If you don't keep adequate sales records, expect the Department to reconstruct your cash sales using whatever reliable data IS available -- your own credit card processing statements are a recognized, previously-approved basis for that kind of estimate. Keeping your own complete point-of-sale and cash records is the only real way to avoid or contest that kind of extrapolation.

Any business claiming certain sales were exempt

Get a valid exemption certificate from the customer at the time of the sale, not after. A certificate produced only once an audit has started gets much closer scrutiny and generally won't be accepted unless the Department can independently verify that specific transaction was properly exempt.

Anyone appealing an estimated assessment based on inadequate records

You need to bring your own evidence to rebut the estimate -- simply disputing the auditor's numbers, without producing records or exemption certificates, won't meet your burden of proving the assessment incorrect.

Common questions

Q: My restaurant didn't keep complete sales records -- can the Department estimate my cash sales using my credit card processing data?
A: Yes. When a dealer lacks adequate records, Virginia law authorizes the Department to use the best available information -- including a business's own reported credit card sales -- to reconstruct and estimate unreported cash sales, a method the Department has upheld in prior rulings.

Q: Can I still claim certain sales were exempt if I don't have exemption certificates on file from the time of the sale?
A: It's very difficult. The absence of a certificate at the time of the transaction indicates it was never accepted in good faith, and a certificate produced only after an audit begins is scrutinized much more closely -- generally accepted only if the Department can independently confirm that specific exempt transaction was valid.

Q: What do I need to do to successfully challenge an estimated assessment?
A: Produce actual evidence -- sales records, exemption certificates, or other documentation -- showing the estimate is wrong. Virginia assessments are presumed correct, and simply disagreeing with the auditor's methodology isn't enough to meet your burden of proof.

Q: Is there any relief if my own recordkeeping failure caused the estimate to be inaccurate?
A: No -- Virginia law specifically bars relief where an erroneous assessment stems from the taxpayer's own willful failure or refusal to provide the Department with required information.

Citations and references

• Va. Code § 58.1-618 (Department may use best information available to reconstruct a dealer's sales/purchases when records are inadequate)
• P.D. 98-4 (1/4/1998), P.D. 10-143 (7/26/2010), P.D. 16-75 (5/11/2016) (estimated assessments upheld where dealers failed to provide adequate audit records; P.D. 10-143 specifically approved using credit card sales data to calculate underreported cash sales)
• Va. Code § 58.1-623 (all sales presumed taxable unless the dealer takes a good-faith exemption certificate)
• 23 VAC 10-210-280 A (certificate must be taken in good faith from the purchaser to relieve the dealer's tax liability)
• P.D. 98-29 (2/20/1998) (absence of a certificate at the time of sale shows it was never accepted in good faith; post-audit certificates face greater scrutiny)
• Va. Code § 58.1-205 (Department assessments are prima facie correct; burden of proof is on the taxpayer)
• Va. Code § 58.1-1826 (no judicial relief where an erroneous assessment stems from the taxpayer's willful failure to provide required information)

Subject

Administration : Records or Audits - Estimated Sales : Under Reported - Cash Exemption : Certificates

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-62

Original ruling text

April 5, 2022

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

Dear *:

This is in response 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 from April 2015 through January 2019. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer, a restaurant located in Virginia was audited by the Department resulting in an assessment for unreported cash sales and uncollected sale tax. The assessment was based on estimations because the Taxpayer failed to maintain sufficient sales records during the audit period. The Taxpayer appeals, contending the audit overstated the Taxpayer’s cash sales, and includes exempt sales.

DETERMINATION

Unreported Cash Sales

The estimated assessment was issued to the Taxpayer in accordance with Virginia Code § 58.1-618. Pursuant the statute, the Department is authorized 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 Taxpayer failed to provide sufficient records during the performance of the audit for review by the auditor. Accordingly, the auditor used the best information available to estimate the Taxpayer’s liability.

In Public Document P.D. 98-4 (1/4/1998), P.D. 10-143 (7/26/2010), and (P.D.) 16-75 (5/11/2016), dealers failed to provide records during the audits to determine the taxpayers sales and use tax liabilities. In each instance, the dealers did not provide evidence to refute the estimated assessments. Specifically, in P.D. 10-143, the Department found it permissible for an auditor to use credit card sales as reported on the dealer’s bank statements to calculate underreported cash sales, as is the situation in the present case.

Exemption Certificates

The Taxpayer argues the it made sales to tax exempt customers. Virginia Code § 58.1-623 provides that all sales or leases of tangible personal property are presumed to be subject to tax until the contrary is established. Title 23 of the Virginia Administrative Code (VAC) 10-210-280 A interprets Virginia Code § 58.1-623 and states:

All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a Certificate of Exemption indicating that the property is exempt under the law.

The Department has previously ruled in P.D. 98-29 (2/20/1998) that the absence of an exemption certificate at the time of a sales transaction indicates that the certificate was never accepted in good faith. Thus, exemption certificates obtained after the start of an audit cannot be accepted “in good faith” and are subject to greater scrutiny by the Department. Accordingly, such certificates are acceptable only if the Department is able to confirm that a customer's use of the certificate was valid and proper for a specific transaction identified during the audit.

Here, the Taxpayer has failed to provide valid certificates of exemption from its customers during the audit and has not provided exemption certificates during the pending appeal. The absence of the certificates indicates that they were never accepted in good faith.

CONCLUSION

The Taxpayer has not provided the records as addressed in its appeal. Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed prima facie correct. The Taxpayer has the burden of proving that the assessment is incorrect. In this instance, the Taxpayer has not provided records or evidence to refute the assessment, and therefore, has not met its burden of proof. Furthermore, Virginia Code § 58.1-1826 precludes a court from granting relief to taxpayers seeking correction of erroneous state tax assessments in cases in which the erroneous assessment is attributable to the taxpayers’ willful failure or refusal to provide the Department with necessary information as required by law.

Based on the foregoing and absent evidence to the contrary, the audit methodology was reasonable with regard to the calculation of cash sales and that the exempt sales were correctly held taxable in the audit. Accordingly, I find no basis to revise the audit. The Taxpayer will receive an updated bill with interest accrued to date. No additional interest will accrue provided the outstanding assessment is paid within 60 days of the date of the bill.

The Code of Virginia sections, regulation, and public documents 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 about this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/2041.A

Related Documents

98-4

10-143

16-75

98-29