I'm a cigarette retailer who got assessed after an audit -- I argued manufacturer incentive payments should reduce it, but my vendors told me they can't produce the underlying records at all. Do I still owe the full assessment?

Plain-English summary

A cigarette retailer went nearly three years (November 2018 through July 2021) without filing sales and use tax returns. Virginia's cigarette compliance program specifically cross-checks wholesale cigarette purchase records against what retailers report selling, and this retailer's tax-free purchases from several wholesale clubs got flagged. The Department audited and assessed tax plus interest on those untaxed purchases. On appeal, the retailer argued that incentive payments it had received from cigarette manufacturers -- which lower the effective, taxable purchase price -- weren't fully factored into the audit.

The Department had already given the retailer credit where it could: the auditor accepted incentive-payment evidence for the periods where it was adequately documented and reduced the liability accordingly. But for the remaining periods, the information the retailer submitted was missing the specific payment dates, dollar amounts, and product descriptions needed to actually verify the claimed incentives. And during the appeal itself, the retailer disclosed something important: it had reached out to its vendors, and the vendors confirmed the documentation the Department was asking for simply could not be produced at all -- not "we'll get it eventually," but genuinely unavailable.

That made the outcome straightforward under Virginia law. A tax assessment is presumed correct, and the burden of disproving it rests on the taxpayer -- a burden that has to be met with the kind of adequate, complete records every dealer is legally required to keep. When the underlying evidence doesn't exist and can't be obtained, even from third parties, there's no way to meet that burden, regardless of whether the retailer's underlying claim about incentive payments was legitimate. The assessment was upheld, with 60 days given to pay in full or arrange a repayment agreement before the Department would consider collection action.

What this means for you

Cigarette retailers and wholesalers under Virginia's cigarette compliance program

Virginia actively cross-checks wholesale cigarette purchase records against retailer sales reporting. Tax-free purchases (for resale) that aren't matched by properly reported and remitted sales tax will likely surface through this program and generate an assessment.

Any business claiming manufacturer rebates or incentive payments reduce its taxable purchase price

Keep your own copies of incentive/rebate documentation -- specific dates, amounts, and product details -- rather than relying on being able to obtain them from a vendor later. If a vendor can't (or won't) produce records years after the fact, you may permanently lose the ability to substantiate a legitimate reduction in your tax liability.

Anyone whose appeal depends on evidence a third party controls

If you need a vendor, manufacturer, or other outside party to produce records to support your position, confirm you can actually get them before relying on that evidence in an appeal. Telling the Department the records simply don't exist doesn't help your case -- the burden of proof doesn't shift just because the missing evidence is a third party's fault, not yours.

Common questions

Q: I received manufacturer incentive or rebate payments that should reduce my taxable purchase price, but my vendor can't produce records years later -- am I stuck?
A: Likely yes, unless you have your own copies. The burden of proving an assessment wrong falls on you, and that requires adequate, complete records -- if the evidence genuinely can't be produced by anyone, the assessment is likely to stand even if your underlying claim has merit.

Q: Does it help my case to tell the Department that a third party (like a vendor) confirmed the records don't exist?
A: Not really -- it actually confirms the evidence can't be obtained, which means you can't meet your burden of proof. The Department's determination doesn't turn on whose fault the missing records are; it turns on whether adequate documentation exists to support your position.

Q: What happens if I can't produce complete records for part of an audit period?
A: The assessment for that portion is likely to stand. An assessment is presumed correct under Virginia law, and disproving it requires the kind of adequate documentation every dealer is legally required to keep.

Q: Does Virginia specifically audit cigarette sales differently from other retail sales?
A: Yes -- Virginia runs a compliance program that cross-checks wholesale cigarette purchase records for resale against a retailer's or wholesale dealer's reported sales, which is how this retailer's unreported purchases were identified.

Citations and references

• Va. Code § 58.1-205 (assessment presumed correct; burden on the taxpayer to prove otherwise)
• Va. Code § 58.1-633 (dealers must keep adequate and complete records to establish their tax liability)
• 23 VAC 10-210-470 (adequate and complete recordkeeping requirement, including for rebate/incentive payments)
• Va. Code § 58.1-618 (Department may use the best information available to reconstruct sales/purchases where records are inadequate)

Subject

Administration: Taxpayer Records - Failure to Retain or Provide Documentation

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-84

Original ruling text

April 28, 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”) as a result of an audit by the Department for the period November 2018 through July 2021.

FACTS

The Taxpayer, a cigarette retailer, failed to file sales and use tax returns for the period at issue. Under a compliance program that verifies compliance regarding cigarette purchases for resale and sales of cigarettes by a retailer or wholesale dealer, the Taxpayer was issued an assessment for tax and interest on untaxed cigarettes purchased from several wholesale clubs. The assessment is based on purchases made by the Taxpayer exempt from the sales tax. The Taxpayer appeals, contending it received incentives from cigarette manufacturers that were not considered in the audit.

DETERMINATION

The Taxpayer alleges that incentive payment reports from * and *** (the “Vendors”), if taken into consideration, would reduce its tax liability and corresponding assessment. During the audit, the auditor accepted evidence of certain incentive payments that applied to certain periods and reduced the Taxpayer’s tax liability. However, the Taxpayer has been unable to provide all of the Vendors’ incentive payment reports and the information it has provided fails to include specific payment details as to date and amounts and missing product descriptions. During this appeal, the Taxpayer informed the Department that it received correspondence from the Vendors that the documentation requested could not be made available.

Pursuant to Virginia Code § 58.1-205, any assessment of tax by the Department is prima facie correct, meaning the burden of proof is upon the Taxpayer to show that the assessment is incorrect. Additionally, Virginia Code § 58.1-633 and Title 23 of the Virginia Administrative Code 10-210-470 provide that every dealer required to make a return and collect sales or use tax must keep and preserve adequate and complete records to determine the amount of tax liability. This requirement necessarily includes records of incentive or rebate payments. 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 and purchases to determine whether tax liability exists.

Because the Taxpayer has not and cannot provide the referenced evidence, it has not met its burden of proof to show that the assessment is incorrect. Accordingly, the assessment is upheld. An updated bill with accrued interest to date will be mailed to the Taxpayer soon. The Taxpayer should remit payment or enter into a repayment agreement with the Department within 60 days of the date on the bill to avoid 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/4048-C