I have a general ledger and trial balance showing my company overpaid sales and use tax due to an accounting error -- is that enough documentation to get a refund?

Plain-English summary

A manufacturer of medical devices and equipment (with no physical Virginia location, filing as an out-of-state dealer) sought a refund of sales and use tax for April through November 2016, contending it had erroneously accrued and remitted tax due to accounting errors after being acquired -- its tax reporting had been moved to the new parent company's shared services division, which prepared returns using state tax summary reports rather than the underlying transaction records. When the taxpayer reconciled its general ledger against its trial balance, it found the summarized amounts on its original returns overstated the actual tax owed, and it sought a refund for the difference. The Department denied the claim, finding the documentation insufficient; the taxpayer appealed.

Virginia's sales and use tax is a transactional tax -- proof has to match, transaction by transaction. Va. Code § 58.1-633 A requires dealers to keep detailed records sufficient to determine the actual tax due, and 23 VAC 10-210-470 spells out specifics: a daily record of cash and credit sales, invoices or purchase orders for every purchase, records of deductions and exemptions claimed (including exemption/resale certificates), records of property used or consumed in the business, and an annual inventory -- all kept for three years. The Department's long-standing policy is that whether tax applies to a SPECIFIC transaction depends on the documents supporting THAT transaction -- a summary number isn't a substitute.

Why the general ledger and trial balance weren't enough. The taxpayer's evidence consisted of summary tax reports, a general ledger, a trial balance reconciliation, and amended returns calculating the claimed refund -- but no detailed, transaction-level schedules. When the auditor asked for the underlying detailed schedules supporting the sample transactions reviewed, the taxpayer declined and instead asked to close the refund claim so it could pursue an appeal instead; the documents ultimately submitted with the appeal were identical to what had already been rejected. The Department has repeatedly held in past cases that general ledger balances can differ from the amount of tax actually required to be remitted, and has denied refund/credit claims in multiple prior rulings where a taxpayer's general ledger didn't (or couldn't be shown to) match the actual transaction-level tax picture -- including one case where a ledger organized by ENTITY rather than by STATE couldn't even isolate the Virginia-specific sales and tax data needed.

The burden is on the taxpayer, and it wasn't met. Under Va. Code § 58.1-205, any Department assessment is presumed correct -- the taxpayer bears the burden of proving it's wrong. Because this taxpayer did not provide the detailed transaction-level schedules the auditor requested to support its claim that sales and use tax was erroneously remitted, the denial of the refund was appropriate.

What this means for you

Any business filing a Virginia sales/use tax refund claim based on an accounting reconciliation

A general ledger and trial balance reconciliation, by themselves, are NOT enough to prove a refund is owed. Be ready to provide transaction-level documentation -- invoices, purchase orders, exemption certificates -- for the specific sales or purchases where you believe tax was over-remitted.

Companies transitioning tax reporting to a parent's shared services function after an acquisition

If your new tax preparer relies on state tax summary reports rather than transaction-level detail, build in a process to reconcile and retain the underlying documents -- a summary-only approach can create exactly the kind of overstatement (or understatement) this taxpayer discovered, and you'll need the detailed records to actually prove and collect a refund.

Taxpayers whose auditor asks for detailed schedules during a refund review

Declining to provide them, or resubmitting the same summary documents on appeal, generally will not succeed -- Virginia's transactional tax framework puts the burden on you to document each specific transaction, not just show an aggregate discrepancy.

Common questions

Q: I have a general ledger and trial balance showing I overpaid sales/use tax -- isn't that enough to get a refund?
A: No. Virginia's sales and use tax is assessed transaction by transaction, so you need detailed, transaction-level documentation (invoices, purchase records, exemption certificates) to support a refund claim -- summary ledger and trial balance data alone has repeatedly been found insufficient.

Q: What specific records am I required to keep to support my sales and use tax position?
A: Under 23 VAC 10-210-470, you must keep (for three years) a daily record of cash/credit sales, invoices or purchase orders for merchandise purchased, records of deductions and exemptions claimed (including exemption certificates), records of property used or consumed in the business, and an annual inventory.

Q: Who has the burden of proof when the Department denies a refund claim or issues an assessment?
A: The taxpayer does. Under Va. Code § 58.1-205, Department assessments are presumed correct, and the taxpayer must prove the assessment (or a claimed refund) is actually justified by the underlying transaction records.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-633 A -- dealers must keep records sufficient to determine tax due
• 23 VAC 10-210-470 -- specific categories of records required to be kept for three years
• Va. Code § 58.1-205 -- Department assessments are prima facie correct; burden of proof on the taxpayer

Prior rulings the Department relied on (described here, not linked): P.D. 96-199 (8/19/1996) -- a dealer's general ledger balances didn't match reported taxable sales, and the dealer failed to document claimed exempt sales; P.D. 05-169 (12/13/2005) -- a general ledger didn't reflect the correct tax rate actually accrued; P.D. 08-113 (6/26/2008) -- a dealer's ledger reconciliation claiming an overstatement lacked supporting documentation; P.D. 19-85 (8/12/2019) -- a general ledger organized by entity rather than by state couldn't isolate Virginia-specific sales/tax data.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-67

Original ruling text

July 9, 2024

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

Dear *:

This will reply to your letters submitted for * (the “Taxpayer”) in which you dispute the denial of a sales tax refund for the period of April 2016 through September 2016 and a use tax refund for the period of April 2016 through November 2016. I apologize for the delay in responding to your request.

FACTS

The Taxpayer, a manufacturer of medical devices and equipment, filed a refund claim for the taxable period at issue asserting it erroneously accrued and paid sales and use tax due to accounting errors. Along with its claim, it provided tax summary reports used to produce the original sales and use tax returns. The Taxpayer also submitted spreadsheets with a sales and use tax general ledger and corresponding trial balance along with amended returns that calculated refund amounts.

The Department reviewed the documentation provided by the Taxpayer and denied the claim on the basis that detailed, rather than summary, schedules were required in order for the claim to be supported. The Taxpayer filed an application for correction, contending that the documentation it sent with its request shows that sales and use tax was erroneously remitted.

DETERMINATION

Under Virginia Code § 58.1-633, 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.” See Virginia Code § 58.1-633 A.

This recordkeeping requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-470 which states that 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 the applicability of the sales and use tax 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.

Because the Taxpayer indicated that it did not have any physical locations in Virginia, it filed its amended returns using Virginia Out-Of-State Dealer’s Sales and Use Tax Returns (currently Form ST-8) instead of Virginia Retail Sales and Use Tax Returns (currently Form ST-9). In addition, the Taxpayer contends that, after it was purchased by * (the “Parent”), its sales and use tax reporting was transitioned to the shared services division of the Parent. The shared services division utilized state tax summary reports to prepare the original sales and use tax returns. Upon review, however, it appeared that sales transactions that were sometimes reported in multiple periods in the summary reports.

To determine the correct amount of tax that should have been remitted, the Taxpayer’s general ledger was reconciled to its trial balance summary. This reconciliation revealed that the summarized amounts reported on original returns overstated the actual tax collected and remitted. The Taxpayer requested a refund for the difference between the tax liability reported on the original and the amended returns.

The Department’s auditor reviewed the documentation sent by the Taxpayer and asked for detailed schedules supporting the sample transactions that were reviewed. The Taxpayer declined and requested that the refund claims be closed so that it could file an application for correction. The documents that were sent with the application were forwarded to the auditor for review. According to the auditor, the documents were identical to those attached to the initial refund claims.

The Department has addressed the use of information included in general ledgers in a number of public documents. In general, the Department has found that general ledger balances can differ from the amount of tax required to be remitted on a sales and use tax return. Thus, the Department requests detailed documentation from taxpayers to support balances included in a general ledger.

For example, in Public Document (P.D.) 96-199 (8/19/1996), the Department increased a dealer’s liability based on discrepancies found between taxable sales accrued in general ledger balances and taxable sales reported on its sales tax returns. The dealer argued that the amount calculated on the return included a reduction for the amount of exempt sales but failed to provide detailed supporting documentation for the exempt sales.

In P.D. 05-169 (12/13/2005), a restaurant provided its general ledger as proof of the amount of tax paid for purchases of menus. The detailed documentation provided, however, did not reflect that the tax was accrued at the 4.5% rate imposed at that time. Thus, the restaurant was unable to show it had paid or accrued the proper amount of tax.

P.D. 08-113 (6/26/2008) addressed an issue where a dealer asserted that a reconciliation with its monthly accrual of tax from its general ledger indicated that it had overstated the amount of use tax remitted with its returns. Again, the dealer was unable to provide any documentation to support its contention.

Finally, in P.D. 19-85 (8/12/2019), the Department ruled that a dealer’s general ledger was insufficient to verify whether the correct amount of tax was remitted on sales made during the audit period. Because the general ledger for accruals was set up by entity, rather than by the states in which it was registered for retail sales and use tax, the dealer’s ledger failed to provide detailed information regarding Virginia sales and Virginia sales tax charged, collected, and remitted to the Department.

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 a taxpayer to show that the assessment is in error. The Taxpayer failed to provide detailed schedules as requested by the auditor to support its contention that it erroneously remitted sales and use tax. Accordingly, the denial of the refund requests was appropriate.

The Code of Virginia sections, regulation and public documents cited are available online 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 ***.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/3248.B

Related Documents

96-199

05-169

08-113

19-85