The auditor estimated my sales and use tax liability instead of using my actual sales figures — can I get that assessment overturned just by arguing it was based on an estimate?

Plain-English summary

A Virginia retail dealer was audited for February 2021 through January 2024, and the audit resulted in an assessment for untaxed sales, general expense purchases, and fixed asset purchases. The dealer filed an application for correction, arguing that the assessment was based on an estimate rather than actual sales figures.

Records requirements come first. Virginia Code § 58.1-102 requires every taxpayer to retain records substantiating what's on its return for three years, and § 58.1-103 requires those records to be available for Department inspection. For sales and use tax specifically, § 58.1-633 A and 23 VAC 10-210-470 require a dealer to keep and preserve, for three years, adequate and complete records necessary to determine its tax liability. The purpose of a sales tax audit is for the Department to verify a dealer's compliance using those records — and that only works if the dealer actually provides them.

What went wrong here. The Taxpayer gave the auditor only a few months of sales summaries, which couldn't be reconciled to its own filed sales tax returns. When the auditor asked for more information to justify the reported figures, none was provided. As a result, the Department issued an estimated assessment under Virginia Code § 58.1-618, which authorizes an assessment "based upon such information as may be available" when a dealer fails to make a return or refuses to permit examination of its records — and that kind of assessment is "deemed prima facie correct" by statute. Even after the correction application was filed, the Department made multiple further attempts to get documentation to refine the liability, and the Taxpayer missed two more deadlines to provide it.

Burden of proof stayed on the taxpayer — and it wasn't met. Virginia Code § 58.1-205 makes every Department assessment presumptively correct, with the burden on the taxpayer to prove it's wrong. Without adequate records, the Taxpayer couldn't meet that burden. The Department also noted Virginia Code § 58.1-1826, which bars a court from granting relief on an erroneous assessment when the error is attributable to the taxpayer's own willful failure or refusal to provide required information. The assessment was upheld in full, with a revised bill (interest accrued to date) to follow, and no further interest to accrue if paid within 30 days of that bill.

What this means for you

Dealers facing an audit assessment

Calling an assessment "just an estimate" doesn't get you anywhere on its own. If your own records are incomplete, the law affirmatively lets the Department estimate your liability from whatever information is available, and treats that estimate as correct unless you can prove otherwise with your own documentation.

Keeping the records the law requires

Virginia requires three years of adequate sales, purchase, and other business records — not just summaries you can produce on request, but records complete enough to reconcile against what you actually filed. Gaps in that record trail are what let an auditor's estimate stand.

Accountants and tax professionals

If a client is being audited and records are thin, prioritize getting complete, reconcilable documentation to the auditor before or during the correction-application process — missed deadlines for submitting substantiating records (as happened here, twice) only reinforce the "best information available" assessment rather than displace it.

Common questions

Q: Can I overturn an audit assessment just by showing it was based on an estimate?
A: No. If your own records were inadequate, Virginia Code § 58.1-618 lets the Department estimate your liability from the best information available, and that estimate is presumed correct unless you prove otherwise.

Q: How long do I need to keep my sales and use tax records?
A: At least three years, per Virginia Code §§ 58.1-102, 58.1-633 A, and 23 VAC 10-210-470 — adequate and complete enough to determine your actual tax liability, not just a partial summary.

Q: What happens if I miss deadlines to submit records after filing a correction application?
A: Missed deadlines only reinforce the Department's use of the best information available; they don't help you meet your burden of proving the assessment wrong.

Q: Is there any circumstance where a court could still give relief on an assessment tied to incomplete records?
A: Virginia Code § 58.1-1826 specifically bars courts from granting relief when the erroneous assessment is attributable to the taxpayer's own willful failure or refusal to provide required information.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-102 — three-year record retention duty
• Va. Code § 58.1-103 — records must be available for Department inspection
• Va. Code § 58.1-633 A; 23 VAC 10-210-470 — dealer recordkeeping requirements for sales and use tax
• Va. Code § 58.1-618 — best-information-available assessment authority; deemed prima facie correct
• Va. Code § 58.1-205 — assessment presumed correct; burden on the taxpayer
• Va. Code § 58.1-1826 — bars court relief when an erroneous assessment stems from the taxpayer's willful failure to provide information

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-3

Original ruling text

January 10, 2025

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 February 2021 through January 2024.

FACTS

An audit was conducted on the Taxpayer, a Virginia dealer, for the period at issue, resulting in an assessment for untaxed sales, general expense purchases, and fixed asset purchases. The Taxpayer filed an application for correction contending that the assessment was based on an estimate and not actual sales.

DETERMINATION

The general provisions in Chapter 1 of Title 58.1 of the Code of Virginia govern all taxes administered by the Department. Virginia Code § 58.1-102 provides that “[i]t 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, “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.”

Chapter 6 of Title 58.1 of the Code of Virginia specifically addresses the records requirements for the Virginia retail sales and use tax. Under Virginia Code § 58.1-633 A, dealers are required to “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 10-210-470 also provides that a dealer is “required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability.”

The purpose of a sales and use tax audit is for the Department to determine a dealer’s sales and use tax compliance. As provided in the aforementioned authorities, the Taxpayer is required to maintain proper records and to provide them for inspection by the Department, such that the Taxpayer’s sales and use tax compliance can be determined.

In this case, the Taxpayer only provided several months of sales summaries, which the auditor could not reconcile to filed sales tax returns. The auditor asked for additional information to justify sales return figures, but none were provided. An estimated assessment was issued in accordance with Virginia Code § 58.1-618, which provides “[i]f any dealer fails to make any such return or refuses to permit an examination of his books, records, or papers, or to appear and answer questions within the scope of such investigation, the Tax Commissioner is hereby authorized to make the assessment based upon such information as may be available to him and to issue a memorandum of lien under Virginia Code § 58.1-1805 for the collection of any such taxes and penalties so found to be due. The assessment so made shall be deemed prima facie correct.”

After the application for correction was filed, the Department made multiple attempts to communicate with the Taxpayer in order to obtain documents to more accurately calculate the outstanding liability. Further, the Taxpayer missed two deadlines for the submission of substantiating documentation.

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. Without the provision of sufficient records, the Taxpayer has not met the burden of proof requirement. Furthermore, 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 erroneous assessment is attributable to the taxpayers’ willful failure or refusal to provide the Department with necessary information as required by law.

Based on this determination, the assessment is deemed correct. A revised bill, with interest accrued to date will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days of the date of the bill.

The Code of Virginia sections and regulation cited are available online at law.lis.virginia.gov. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy and Legislative Affairs, Tax Adjudication and Resolution Division, at or **.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/4953.Z