Virginia – Failure to File Sales Tax Returns and Insufficient Records Led to Assessment

SALT Report 1905 – The Virginia Tax Commissioner issued a ruling regarding a Taxpayer’s appeal of an audit assessment. The Taxpayer operates an independent grocery store and was audited because he had not filed sales tax returns with the Department for more than six years. During the course of the audit, the Department determined that the Taxpayer did not keep sufficient records as he was unable to produce cash register tapes, sales journals, general ledgers, Forms ST-9 or any other accounting records.

Because of the lack of records, the Department conducted an observation test at the Taxpayer’s store. The observation method allowed the auditors to see how the Taxpayer’s sales transactions were handled and helped them develop a sales base to establish a sales estimate for the audit period. The observation revealed that the Taxpayer was selling food and various products and collecting sales tax on those sales, however the Taxpayer was not reporting any of the tax that was being collected.

Upon completion of the audit, an assessment was imposed on the Taxpayer’s non-food sales and sales of prepaid wireless phone cards. The Taxpayer disagreed with the audit results and filed an intent to appeal with the Department. However, once again, the Taxpayer did not provide any documentation or statutory citations to support its appeal.

Virginia Code § 58.1-633 states that every dealer required to make a return and collect sales tax “shall keep and preserve suitable records of the sales, leases, or purchases . . . taxable under this chapter, and other books of account as may be necessary to determine the amount of tax due as required by the Tax Commissioner.”  Essentially, when a Taxpayer fails to maintain its records, the Department is authorized by Virginia law to use the best information available to reconstruct a Taxpayer’s sales or purchases to determine if a tax liability exists.

Therefore, the Commissioner ruled that because the Taxpayer in this case had inadequate records, the auditor had the authority to apply the observation method. Further, although the Taxpayer objected to the audit assessment, the Commissioner ruled that because the Taxpayer had not filed any returns for more than six years, the Department was within their rights to assume that the Taxpayer had underreported its sales during the audit period. Finally, Virginia Code § 58.1-205 provides that any tax assessment imposed by the Department is deemed correct. The burden is on the Taxpayer to prove the assessment is inaccurate, and the Taxpayer could not.

Based on the above facts, the Commissioner ruled that the Taxpayer had not met the burden of proof in this case and the Department’s audit assessment was upheld.

For Further Information:

Virginia Department of Taxation – Ruling of the Tax Commissioner 12-176