If I couldn't produce detailed invoices during a Virginia sales tax audit, can I still get another chance to provide them on appeal?

Plain-English summary

In this taxpayer's first-ever Virginia sales and use tax audit, the auditor found several problems: the business collected but didn't remit sales tax on service calls that involved transferring tangible personal property, couldn't sufficiently document its claimed exempt sales, and hadn't charged sales tax on a lump-sum rental of real estate and equipment. Because the taxpayer couldn't produce a detailed listing of invoices or exemption certificates -- only monthly sales summaries -- the auditor had to estimate the exceptions rather than calculate them transaction-by-transaction. The Department issued an assessment for tax, penalty, and interest. The taxpayer appealed, explaining that extenuating circumstances had prevented its staff from working with the auditor to review the actual business records, and asked for another opportunity to produce them.

The Tax Commissioner explained the legal backdrop first: dealers are required to keep suitable sales tax records (Va. Code § 58.1-633), and when those records aren't available, the Department must estimate the tax due from the best information it has (§ 58.1-618) -- and that estimate is presumed correct, putting the burden on the taxpayer to prove it wrong. Here, the taxpayer still hadn't produced the records even with its appeal, but continued to insist the records existed and would show the assessment was wrong. Rather than close the case on that unsupported assertion, the Department gave the taxpayer one final 60-day window to submit detailed invoices, exemption certificates, and rental records to the assigned auditor. If new information arrives, the auditor will review it, request anything further needed, and adjust the assessment accordingly (with a further 90-day appeal right if the taxpayer still disagrees). If nothing arrives within 60 days, the original estimated assessment becomes final and an updated bill will be sent.

What this means for you

Businesses that couldn't produce complete records during an audit

An appeal isn't necessarily your last chance -- if you genuinely have the records that would change the outcome, say so specifically and be ready to actually produce them promptly. This ruling shows the Department will grant one more defined window (here, 60 days) to submit real documentation, but a vague assertion that records exist, without producing them, won't be enough by itself.

Accountants and tax professionals

Advise clients facing an estimated audit assessment to gather and submit detailed invoices, exemption certificates, and any lease/rental documentation as early as possible -- ideally during the audit itself. If that opportunity was missed, this ruling shows a further chance can be requested on appeal, but it comes with a hard deadline and the burden remains squarely on the taxpayer to prove the estimate wrong.

Anyone with an audit involving service calls that include parts/property transfers

Watch for the specific issue flagged here: sales tax collected but not remitted when a service call involves transferring tangible personal property. That's treated as taxable regardless of how the transaction is otherwise billed.

Common questions

Q: What happens if I can't produce detailed sales records during a Virginia audit?
A: The Department will estimate the tax due based on the best information available, and that estimate is presumed correct -- the burden shifts to you to prove it wrong with actual records.

Q: If I miss the chance to provide records during the audit itself, can I still submit them later?
A: This ruling shows the Department may grant one additional, time-limited window (60 days here) on appeal, but it's not guaranteed and depends on you making a concrete case that records exist and will change the result.

Q: What kind of records does the Department want to see to overturn an estimated sales tax assessment?
A: Detailed invoices for all transactions in the audit period, exemption certificates supporting any exempt sales claimed, and records related to any real property/equipment rentals at issue.

Q: What happens if I still don't provide the records within the window given?
A: The original estimated assessment is treated as correct and becomes final, with an updated bill reflecting accrued interest.

Citations and references

• Va. Code § 58.1-633 (dealer recordkeeping requirement)
• Va. Code § 58.1-618 (Department authority to estimate tax due absent adequate records)
• 23 VAC 10-20-165 D (procedural requirements for appeals)
• Va. Code § 58.1-1821 (application for correction of assessment)

Subject

Administration: Audit - Failure to Provide Records, Documentation Requested

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-52

Original ruling text

May 3, 2023

Re: § 58.1-1821 Application: 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 May 2017 through April 2020. I apologize for the delay in responding to your request.

FACTS

In this first generation audit, the Department’s auditor noted that the Taxpayer provided returns and forms showing sales and exempt sales by month but was unable to provide a detailed listing of invoices or exemption certificates. The auditor found that the Taxpayer collected but failed to remit sales tax when a service call involved the transfer of tangible personal property; did not provide sufficient evidence of the claimed exempt sales; and failed to charge sales tax on the lump-sum rental of real estate and equipment. Due to individual sales records not being available, the audit exceptions were estimated. The Department issued an assessment for tax, penalty, and interest. The Taxpayer timely appealed, contending that extenuating circumstances prevented the audit staff from reviewing the relevant business records and requesting that it be given another opportunity to provide the records to the audit staff for review.

DETERMINATION

Virginia Code § 58.1-633 mandates that every dealer required to make a return and pay or collect the retail sales and use tax must keep and preserve suitable records to determine the amount of tax due. When adequate records are not provided during an audit, the Department is required to estimate the amount due based on the best information available pursuant to Virginia Code § 58.1-618. An estimated assessment issued by the Department is deemed prima facie correct, meaning the burden of proof is on the taxpayer to show that an assessment is incorrect.

In this case, the Taxpayer did not provide the necessary records during the audit or with its appeal. However, the Taxpayer continues to insist that such records are available and show that the assessment is erroneous. The Taxpayer will be given one final opportunity to provide the necessary records and information to the Department’s audit staff. The Taxpayer must provide records definitively showing that the disputed assessment is incorrect. This includes, but is not limited to, detailed invoices of all transactions occurring during the audit period, exemption certificates for any transactions claimed to be exempt during the audit period, and records related to the rental of the Taxpayer’s real property and equipment.

The Taxpayer will be given 60 days from the date of this letter to provide the additional information necessary. The additional information should be sent to the Senior Auditor, *, who may be contacted at or **. Once received, the Department’s auditor will review any new information provided and may request additional information if necessary. The auditor will then adjust the audit and assessment if warranted based on the information provided. The auditor will send the Taxpayer a written explanation of any adjustments. If the Taxpayer continues to disagree with the auditor’s decision, the Taxpayer will be given 90 days from the date of the adjustment or written explanation to appeal pursuant to Virginia Code § 58.1-1821.

If no new information is received within 60 days from the date of this letter, the Department’s assessment will be considered correct as issued, and an updated bill with accrued interest to date will be mailed to the Taxpayer. The Taxpayer should remit payment of the amount due on the updated bill to avoid the accrual of additional interest and possible collection action.

The Code of Virginia sections 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/4357-C