I'm a cigarette retailer who got assessed after an audit -- I say manufacturer incentive payments should reduce what I owe, but I can't produce complete records of them. Do I still owe the full assessment?

Plain-English summary

A cigarette retailer went nearly three years (November 2018 through July 2021) without filing any sales and use tax returns. Virginia runs a compliance program specifically for cigarettes that cross-checks wholesale purchase records against retail sales, and that program flagged this retailer's tax-free purchases from several wholesale clubs. The Department audited and assessed tax plus interest on those untaxed purchases. The retailer appealed, arguing that incentive payments it had received from cigarette manufacturers -- rebates that effectively lower the taxable purchase price of the cigarettes -- weren't fully credited in the audit.

The Department's response distinguished between what the retailer could and couldn't back up. For some periods, the auditor had already accepted the retailer's incentive-payment evidence and reduced its liability accordingly. But for the remaining periods, the retailer simply couldn't produce the manufacturers' complete incentive payment reports, and the partial records it did submit lacked the specific dates and dollar amounts needed to verify the claimed payments, plus contained payee names that didn't match up correctly. Virginia law makes a tax assessment presumptively correct, putting the burden squarely on the taxpayer to prove otherwise -- and that proof has to rest on the adequate, complete records every dealer is legally required to keep. Because the retailer's remaining incentive-payment claims weren't backed by records that could actually establish the amounts, it hadn't met that burden, and the assessment was upheld as to those periods. The assessment had already been paid in full, so no further action was needed.

What this means for you

Cigarette retailers and wholesalers under Virginia's cigarette compliance program

Virginia actively cross-checks wholesale cigarette purchase records against what retailers report selling. If you buy cigarettes tax-free (e.g., for resale) and don't properly report and remit the corresponding sales tax, expect the compliance program to catch the gap and generate an assessment.

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

You need the manufacturer's actual payment records -- specific dates, specific amounts, and correct payee information -- not just a general assertion that incentives existed. Partial or garbled documentation (missing details, wrong payee names) isn't enough to meet your burden of proving an assessment wrong.

Any dealer facing an audit where some periods were resolved in your favor and others weren't

Don't assume that because the auditor accepted your evidence for part of the audit period, the rest will automatically follow the same way. Each period's liability turns on whether YOU can produce adequate supporting records for that specific period -- the Department isn't required to extrapolate favorable treatment to periods where the documentation is genuinely missing or unusable.

Common questions

Q: I received incentive or rebate payments from a manufacturer that should reduce my taxable purchase price -- how do I prove that in an audit?
A: You need the manufacturer's actual payment records showing specific dates, dollar amounts, and correct payee information. Vague assertions or incomplete/garbled reports generally won't meet your burden of proving the assessment wrong.

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 the burden of disproving it -- with adequate documentation, which dealers are legally required to keep -- falls on you.

Q: What if the Department can't verify my sales and purchase records at all?
A: Virginia Code § 58.1-618 lets the Department use the "best information available" to reconstruct your sales and purchases and determine your tax liability when your own records are inadequate.

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: Documentation - Unavailable Evidence

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-89

Original ruling text

May 5, 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 that was provided fails to include specific payment details as to date and amounts and contains inaccurate payee descriptions.

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. Because the assessment has been paid in full, no further action is required.

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/4046-C