My company can't locate original invoices for some equipment purchases -- including purchases from our own parent company -- will Virginia accept purchase orders and a spreadsheet instead to prove a sales tax refund claim?

Plain-English summary

A Virginia telecommunications company (a wholly owned subsidiary of a larger parent company) filed a sales and use tax refund claim for calendar year 2018, arguing it had erroneously accrued and paid tax on exempt internet equipment. It submitted a spreadsheet with purchase orders and transaction data, plus a use tax reconciliation showing the tax had actually been remitted on each transaction. Some of the equipment had been purchased directly from its own corporate parent -- and because those were intercompany transactions, no invoices had ever been issued for them.

The Department's auditor reviewed the claim and issued a partial refund: transactions where the spreadsheet had a working hyperlink to an actual invoice, or where the taxpayer separately supplied one, were credited. Transactions where no invoice could be linked to the claimed accrual were denied. The taxpayer appealed the denied portion, arguing the purchase orders it had submitted were functionally equivalent to invoices -- they showed a description of goods, quantity, and shipping information.

The Department disagreed that a purchase order can substitute for an invoice. A few threads came together in the determination:

• Recordkeeping law requires transaction-level proof. Va. Code § 58.1-633 A requires dealers to keep "suitable records" of sales and purchases, and 23 VAC 10-210-470 spells out what that means: daily sales records, invoices or bills of lading for purchases, and documentation for any claimed exemption. Virginia's sales and use tax is a transactional tax -- each specific transaction has to be individually documented, not just plausibly summarized.
• The Department's own refund-claim guidelines say invoices, specifically. P.D. 17-98, the Department's published Guidelines for Retail Sales and Use Tax Refund Claim Procedures, calls for "copies of all invoices and other documentation" embedded into the refund spreadsheet by line item -- not purchase orders standing alone.
• The burden of proof is on the taxpayer. Under Va. Code § 58.1-205, a Department assessment (which includes a refund denial) is presumed correct; it's up to the taxpayer to prove otherwise with adequate records. Simply asserting that the spreadsheet data was accurate wasn't enough without the underlying invoices.
• Intercompany transactions are still taxable sales. The equipment purchased from the parent company wasn't automatically outside the scope of the audit just because it was an internal transfer. The Department has previously ruled (P.D. 04-134, P.D. 12-159, P.D. 16-84) that when related-but-separate entities record intercompany accounting entries for a transfer of goods, that constitutes "consideration" under Va. Code § 58.1-602's definition of a taxable sale -- so those purchases needed their own supporting documentation like any other transaction, even without a traditional invoice.

The outcome wasn't a final denial. Because the taxpayer insisted the missing records existed, the Department gave it one last chance: 30 days from the date of the letter to contact the assigned Senior Auditor and arrange a review of additional documentation -- printed purchase order documents, transaction data, and proof of payment. If that documentation held up, the auditor could still adjust the refund.

What this means for you

Any business filing a Virginia sales/use tax refund claim

Don't rely on purchase orders, spreadsheets, or transaction summaries alone. Virginia's refund-claim guidelines (P.D. 17-98) specifically call for actual invoices (or equivalent documents like bills of lading, contracts, or credit memos) tied to each line item, plus proof of payment such as cancelled checks. Gather that documentation before filing, not after a denial.

Businesses with intercompany or related-party purchases

Don't assume a transfer between a parent and subsidiary falls outside sales/use tax scrutiny just because no traditional invoice was cut. If accounting entries record a value for the transfer, Virginia treats it as a sale like any other -- keep whatever documentation does exist (accounting entries, transfer records, payment evidence) to substantiate those transactions too.

Taxpayers who receive a partial refund denial for lack of documentation

This ruling shows the Department will sometimes offer one additional, time-limited opportunity to produce missing records rather than treating the first denial as final -- but don't count on that; have the documentation ready the first time.

Common questions

Q: Can a purchase order or a spreadsheet with transaction data substitute for an invoice in a Virginia sales tax refund claim?
A: Not according to this ruling. The Department's published refund-claim guidelines require actual invoices (or comparable documents like bills of lading, contracts, or credit memos) tied to each transaction; a purchase order alone wasn't accepted as equivalent.

Q: We bought equipment from our own parent company and never got an invoice -- is that purchase exempt from sales/use tax scrutiny?
A: No. Virginia has previously ruled that intercompany accounting entries recording a transfer of goods between related entities still constitute "consideration" for a taxable sale, so those purchases need their own supporting documentation just like any other transaction.

Q: What happens if the Department denies part of my refund claim for lack of documentation but I believe the records exist?
A: In this case, the Department gave the taxpayer a final 30-day window to contact the assigned auditor and provide the missing documentation before the denial became final -- but this isn't guaranteed in every case, so it's best to have complete documentation ready when the claim is first filed.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-602 -- defines a taxable "sale" as a transfer of property for consideration
• Va. Code § 58.1-633 A -- dealers must keep suitable records of taxable sales, leases, and purchases
• 23 VAC 10-210-470 -- specifies required records: daily sales records, purchase invoices/bills of lading, exemption documentation, inventory
• Va. Code § 58.1-205 -- a Department assessment is prima facie correct; burden of proof is on the taxpayer

Prior rulings referenced (described here, not linked): P.D. 04-134 (9/16/2004), P.D. 12-159 (10/12/2012), and P.D. 16-84 (5/17/2016) -- intercompany accounting entries between related entities constitute consideration for a taxable sale; P.D. 17-98 (6/12/2017) -- the Department's Guidelines for Retail Sales and Use Tax Refund Claim Procedures, requiring invoices and other documentation embedded into the refund spreadsheet.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-4

Original ruling text

February 21, 2024

Re: § 58.1-1821 Appeal: Retail Sales and Use Tax

Dear *:

This will reply to your letter submitted on behalf of *, Inc. (the “Taxpayer”) in which you dispute the denial of a retail sales and use tax refund for the period January 2018 through December 2018. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer, a regional provider of telecommunication services in Virginia and wholly owned subsidiary of * (the “Parent”), filed a refund claim for the taxable period at issue asserting it erroneously accrued and paid tax on exempt internet equipment. Along with its claim, a spreadsheet was submitted with purchase orders and transaction data associated with each transaction. A use tax reconciliation was also provided to show that use tax was remitted on each transaction. The Taxpayer also purchased equipment from the Parent and invoices were not issued because the transactions were between related entities.

As a result of an audit of the claim, the Department issued a portion of the requested refund and denied the balance on the basis that the Taxpayer had not provided invoices to substantiate the purchases. The Taxpayer filed an application for correction for the denial of the refund claim, contending that the information it submitted on the spreadsheets validated the full amount of the claim.

DETERMINATION

Virginia Code § 58.1-602 defines “sale” as “any transfer of title or possession, or both, exchange, barter, lease or rental, in any manner or by any means whatsoever, of tangible personal property for a consideration ”. The Department has previously ruled in several public documents that intercompany accounting entries to record transactions between related but separate entities constitute a consideration for sales and use tax purposes. As such, an exchange of tangible personal property for a consideration between two related entities is a sale. See Public Document (P.D.) 04-134 (9/16/2004), P.D. 12-159 (10/12/2012), and P.D. 16-84 (5/17/2016).

Virginia Code § 58.1-633 A states that every dealer required to file a retail sales and use tax return and pay or collect such tax must keep and preserve suitable records of the sales, leases, or purchases, as the case may be, subject to the retail sales and use tax. The dealer must also maintain such other books of account as may be necessary to determine the amount of tax due and “such other pertinent information as may be required by the Tax Commissioner.” This record keeping requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-470:

Every person who is liable for collection of sales tax or remittance of use tax or both is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Such records must include:

a) A daily record of all cash and credit sales, including sales under any type of financing or installment plan in use;

b) A record of the amount of all merchandise purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase;

c) A record of all deductions and exemptions claimed in filing sales or use tax returns, including exemption and resale certificates, returned or repossessed goods, and bad debts;

d) A record of all tangible property used or consumed in the conduct of the business;

e) A true and complete inventory of the stock on hand and its value, taken at least once each year.

The Department reviews transactions based on the documentation presented for each transaction. This is consistent with longstanding and established policy that the retail sales and use tax is a transactional tax and that the determination as to the taxation of a specific transaction is based on the underlying documents that support the transaction. Thus, documentation must be provided to prove the tax was paid on each transaction with a vendor.

The Taxpayer contends that the purchase order it provided in the spreadsheet was similar to an invoice in that it provided a description of the goods, quantity purchased, and shipping information. As such, it asserts that the documentation it provided was the “other evidence to substantiate each purchase” as required by Title 23 VAC 10-210-470 b.

The spreadsheet provided with the refund claim purportedly included hyperlinks to the purchase invoices. The Taxpayer provided invoices to the auditor to substantiate some of the transactions. The Department’s auditor allowed a refund credit for those transactions for which invoices were provided or linked. The auditor disallowed the refund credit for transactions in which an invoice could not be linked to an accrual.

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. The Department’s Guidelines for Retail Sales and Use Tax Refund Claim Procedures (the “Guidelines”), issued as P.D. 17-98 (6/12/2017), provides that:

The purchaser also must submit copies of all invoices and other documentation demonstrating that the transactions qualify for an exemption, embedded into the spreadsheet by line item. Examples of documentation the purchaser should provide include, but are not limited to, exemption certificates, contracts, purchase orders, credit memos, and agreements. Documentation provided by the purchaser must establish the validity of the claim and is subject to verification by audit of the purchaser’s accounting books and records for the period involved. The purchaser also should have cancelled checks available to document proof of payment upon request.

The burden is on the Taxpayer to provide adequate documentation to substantiate the transactions at issue. 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. This could include printed copies of purchase order documents, transaction data, and proof of payments for all transactions still at issue. The Taxpayer will be given 30 days from the date of this letter to contact the Senior Auditor, *, who may be contacted at @tax.virginia.gov or (804) ** in order to set up a mutually agreeable time to review the additional documentation.

Once reviewed, the Department’s auditor may request additional information, adjust the audit, and issue a refund, if warranted, based on the information provided. The auditor will send the Taxpayer a written explanation of any adjustments.

The Code of Virginia sections, regulation, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at (804) ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/4057.B

Related Documents

04-134

12-159

16-84

17-98