If I find documentation proving a customer had a direct pay permit after my sales tax audit already closed, can I still get that sale removed from the assessment?

Plain-English summary

A supplier of industrial, medical, and specialty gases, welding equipment, and related products was audited for the first time and couldn't provide complete and accurate sales or purchase records for the three-year audit period. Because the taxpayer's own records fell short, the auditor used the best information reasonably available to reconstruct the tax liability and assess accordingly -- a standard, lawful response when a dealer's records are inadequate. The taxpayer paid the assessment, then appealed, saying it had since obtained documentation proving one of its sales during the audit period was actually exempt.

Specifically, the taxpayer produced a customer's direct pay permit along with the matching invoice for that transaction. Under Virginia law, a holder of a valid, unrevoked direct payment permit doesn't pay sales tax to the seller at all -- instead, the permit holder pays the tax directly to the Tax Commissioner, and once the seller is properly notified of the customer's permit number, the seller is completely absolved of any duty to collect or remit tax on that sale. Since a dealer's assessment is presumed correct until the taxpayer proves otherwise, the taxpayer bore the burden of showing this particular sale shouldn't have been in the taxable total -- and the direct pay permit plus invoice was exactly the kind of documentation that could meet that burden. Rather than resolving the dispute in the ruling itself, the Department sent the documentation to the field audit staff to verify, with the assessment to be adjusted (and a refund issued) once confirmed.

What this means for you

Dealers whose records were incomplete during an audit

Even if your own recordkeeping fell short and led to an estimated assessment, you're not necessarily stuck with that number -- if you later find documentation (like proof of a customer's exemption) supporting a specific transaction, submitting it on appeal can still get that transaction pulled out of the taxable total, even after the audit itself has closed.

Businesses selling to customers who hold Virginia direct payment permits

Once a customer properly notifies you of their direct pay permit number, you're completely off the hook for collecting or remitting sales tax on that sale -- the customer pays the state directly instead. Keep records identifying which customers and transactions were covered by a direct pay permit, since you may need to reconstruct that proof later, as happened here.

Accountants and tax professionals handling first-generation audits with recordkeeping gaps

Don't treat a "best information available" estimated assessment as final and unchallengeable -- if better documentation for specific transactions surfaces after the fact, raising it through the appeal process is a legitimate path to correct the estimate, transaction by transaction.

Common questions

Q: What happens if my sales tax records are incomplete during an audit?
A: The Department is authorized to reconstruct your liability using the best information reasonably available, and the resulting assessment is presumed correct -- but that's not necessarily the final word if you can later document specific errors.

Q: Can I still fix a specific transaction in the assessment after the audit has closed?
A: Yes, as shown here -- submitting documentation (like a customer's direct pay permit and the matching invoice) on appeal can get the audit staff to review and adjust that specific transaction, even after the fact.

Q: What is a direct pay permit, and how does it affect my sales tax duties as a seller?
A: It's a Virginia Tax Commissioner-issued permit that lets the holder pay sales/use tax directly to the state instead of to the seller. Once the holder notifies you of their permit number, you're absolved of all collection and remittance duties on that sale -- but you must keep records identifying the amount and the customer involved.

Q: Who has the burden of proving an assessment is wrong?
A: The taxpayer. Virginia law presumes a Department assessment is correct, so the burden is on the dealer to produce documentation (like the direct pay permit here) showing a specific transaction shouldn't have been taxed.

Citations and references

• Va. Code § 58.1-205 (assessment prima facie correct)
• Va. Code § 58.1-633; 23 VAC 10-210-470 (recordkeeping requirements)
• Va. Code § 58.1-618 (best information available)
• Va. Code § 58.1-624 D (direct payment permit; seller absolution upon notice)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-59

Original ruling text

May 24, 2023

Re: § 58.1-1821 Application: 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 May 2015 through April 2018. I apologize for the delay in responding to your request.

FACTS

Under this first generation audit, the Taxpayer, a supplier of industrial, medical and specialty gases along with welding equipment and related products to customers in Virginia, was unable to provide complete and accurate records of its sales or purchases. As a result, the auditor used available information to calculate the audit liability. The Taxpayer appealed, contending it received documentation supporting an exempt sale after the audit was closed. The Taxpayer has paid the assessment and requests a refund based on documentation provided with its appeal.

DETERMINATION

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 in error. Additionally, Virginia Code § 58.1-633 and Title 23 of the Virginia Administrative Code (VAC) 10-210-470 provide that every dealer required to make a return and collect sales tax must keep and preserve adequate and complete records to determine the amount of tax liability. This requirement necessarily includes invoices for each individual transaction showing the amount of tax charged or paid and any relevant exemption documentation. 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.

With its appeal, the Taxpayer provided a direct pay permit from one of its customers along with a corresponding invoice. Virginia Code § 58.1-624 D provides that:

Persons who hold a direct payment permit which has not been cancelled shall not be required to pay the tax to the dealer as otherwise herein provided. Such persons shall notify each dealer from whom purchases or leases of tangible personal property are made of their direct payment permit number and that the tax is being paid directly to the Tax Commissioner. Upon receipt of such notice, such dealer shall be absolved from all duties and liabilities imposed by this chapter for the collection and remittance of the tax with respect to sales, distributions, leases, or storage of tangible personal property to such permit holder. Dealers who make sales upon which the tax is not collected by reason of the provisions of this section shall maintain records in such manner that the amount involved and identity of each such purchaser may be ascertained.

The documentation will be referred to the appropriate field audit staff for review. Once the information has been confirmed, the assessment will be adjusted as appropriate and a refund will be issued.

The Code of Virginia sections and regulations 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/4380.Y