My restaurant's sales tax audit found that our point-of-sale records didn't match our filed returns, and that we'd collected sales tax from customers but hadn't remitted some of it -- I submitted extra invoices after the audit closed, but the Department says the assessment still stands. Why?

Plain-English summary

A Virginia restaurant and bar was audited for retail sales and use tax covering August 2019 through July 2022. The auditor sampled the business's purchase and sales records (with the business's agreement) and found several problems: the purchase records didn't show whether sales tax had been paid or use tax accrued and remitted on those purchases; the net sales shown in the business's own point-of-sale system didn't reconcile with the sales figures reported on its monthly sales and use tax returns; and the auditor found sales tax the business had actually collected from customers that was never remitted to the Department.

What happened with the "unreviewed" invoices. The business appealed, asserting that additional invoices it had submitted were never reviewed by the auditor. The Department's records told a different story: the auditor had in fact reviewed those additional purchase invoices after the audit closed, removed certain purchases from the assessment as a result, updated the exception list accordingly, and sent the revised list to the business in late December 2023. The business never responded to that update.

The recordkeeping duty, and why it mattered here. Virginia law requires taxpayers to keep records substantiating their returns for three years (Va. Code § 58.1-102), to make those records available for Department inspection (§ 58.1-103), and specifically requires sales/use tax dealers to keep suitable records of taxable sales, leases, and purchases (§ 58.1-633 A). When a taxpayer doesn't provide adequate records, the Department has long estimated assessments based on the best available information (citing several prior rulings on that point). Here, even after reviewing the additional invoices, the fundamental problem remained unaddressed: the business never explained or reconciled the discrepancy between its own point-of-sale sales figures and what it had reported on its tax returns, and never accounted for the collected-but-unremitted sales tax the auditor found.

Outcome. Because a Virginia assessment is presumed correct (Va. Code § 58.1-205) and the burden is on the taxpayer to prove it wrong, and because Virginia law separately bars relief where an erroneous assessment stems from the taxpayer's own willful failure to provide necessary information (§ 58.1-1826), the Department upheld the audit liability as revised (after crediting the additional invoices that had, in fact, already been reviewed).

What this means for you

Businesses whose point-of-sale system doesn't match their filed sales tax returns

That mismatch is a serious audit red flag on its own, regardless of any other documentation issues -- be prepared to reconcile and explain any gap between your internal sales records and what you actually reported and remitted.

Businesses that collect sales tax from customers but don't fully remit it

An auditor who finds tax actually collected but not remitted will include that in the assessment -- this is treated as a straightforward underpayment, not a documentation dispute.

Anyone who submits additional documentation during an appeal and later assumes it was ignored

Confirm what actually happened before assuming your evidence wasn't considered -- here, the Department's own records showed the auditor HAD reviewed the additional invoices and adjusted the assessment accordingly; the taxpayer's assumption that they'd been ignored was simply incorrect.

Common questions

Q: What records does a Virginia sales tax dealer need to keep?
A: Suitable records of taxable sales, leases, and purchases, and enough supporting books/documentation to determine the tax due -- generally for three years from the return's filing due date.

Q: If my point-of-sale system shows different sales figures than my filed tax returns, is that a problem?
A: Yes -- an unreconciled gap between internal sales records and filed returns is something an auditor will flag and assess against, and the burden is on the business to explain the discrepancy.

Q: What happens to sales tax I collected from customers but never sent to the Department?
A: It becomes part of the assessment -- collected-but-unremitted tax is treated as an underpayment regardless of any other documentation issues in the audit.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-102 -- 3-year recordkeeping duty for records substantiating a return
• Va. Code § 58.1-103 -- records must be available for Department inspection
• Va. Code § 58.1-633 A -- sales/use tax dealer recordkeeping requirements
• 23 VAC 10-210-470 -- 3-year sales/use tax recordkeeping requirement
• Va. Code § 58.1-205 -- Department assessment deemed prima facie correct
• Va. Code § 58.1-1826 -- no relief where an erroneous assessment is attributable to the taxpayer's willful failure to provide required information

Prior rulings referenced (described here, not linked): P.D. 98-4 (1/4/1998), P.D. 16-75 (5/11/2016), P.D. 18-83 (5/9/2018), P.D. 20-28 (2/7/2020), and P.D. 22-108 (6/9/2022) -- the Department estimates assessments based on best available information when adequate records aren't provided.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-2

Original ruling text

February 21, 2024

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 August 2019 through July 2022.

FACTS

The Taxpayer operates a restaurant and bar located in Virginia and was held liable for untaxed sales and purchases. Purchase and sales records were sampled by the auditor, in agreement with the Taxpayer. The purchase records provided to the auditor did not demonstrate if sales tax had been paid or use tax accrued and remitted to the Department. Net sales from the Taxpayer’s point of sale records did not reconcile with amounts reported on its sales and use tax returns. Further, the auditor noted sales tax collected on the Taxpayer’s records that was not remitted to the Department.

The Taxpayer filed an application for correction asserting additional invoices that were provided had not been reviewed. It appears the Taxpayer also provided information to the auditor concurrently with the application for correction. The auditor reviewed the invoices submitted after the closure of the audit, removed certain purchases, updated the exception list, and submitted the updated list to the Taxpayer in late December 2023. The auditor has received no response from the Taxpayer after the submission of the updated exception list was sent.

DETERMINATION

Virginia Code § 58.1-102 provides as follows:

It shall be the duty of every taxpayer to retain suitable records and documents substantiating all information contained on any return required by this subtitle and any such other pertinent records or documents as the Tax Commissioner may require by regulation. The records and documents shall be preserved for a period of three years from the required date for filing a return to which such records or documents pertain.

Virginia Code § 58.1-103 further provides that “All records and documents required by this subtitle or by rule or regulation shall be available during regular business hours for inspection by the Tax Commissioner or his duly authorized agents.”

Virginia Code § 58.1-633 A requires that dealers “keep and preserve suitable records of the sales, leases, or purchases, as the case may be, taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.” Title 23 of the Virginia Administrative Code (VAC) 10-210-470 also provides for sales and use tax purposes that the taxpayer is “required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability.”

The Tax Commissioner has previously addressed instances in which taxpayers failed to provide records for review by the Department and, as a result, assessments were estimated based on the best available information. See Public Document (P.D.) 98-4 (1/4/1998), P.D. 16-75 (5/11/2016), P.D. 18-83 (5/9/2018), P.D. 20-28 (2/7/2020), and P.D. 22-108 (6/9/2022).

Contrary to the Taxpayer’s assertion, the auditor has reviewed the additional purchase documentation. Also, the Taxpayer never responded to the auditor or submitted documentation to reconcile the variance in the business’s point of sale records and sales amounts reported on the monthly sales and use tax returns.

Virginia Code § 58.1-205 provides that any assessment of tax by the Department is deemed to be prima facie correct and that the burden is on the taxpayer to prove the assessment is erroneous or incorrect. In addition, 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 assessment was attributable to a taxpayer’s willful failure or refusal to provide the Department with necessary information as required by law.

Because the Department has considered the documentation provided by the Taxpayer and are reflected in the revised audit, the remainder of the assessment is correct. Accordingly, the audit liability as adjusted is upheld. Updated bills, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of this letter.

The Code of Virginia sections and public documents cited are available online 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/4792.Z

Related Documents

98-4

16-75

18-83

20-28

22-108