Virginia – Disputed Sample Method Audit Results

SALT Report 2807 – The Virginia Tax Commissioner issued a ruling regarding a Taxpayer’s exempt sales of medicine and medical supplies. In 2011, the Taxpayer was audited.  The audit resulted in an assessment of sales tax on several untaxed sales because the Taxpayer did not have valid exemption certificates on file.  The Taxpayer filed an appeal requesting that the disputed amounts be removed from the audit, as the customer to whom the sales were made was responsible for accruing and paying use tax directly to the Department.

In its response the Commissioner stated that for an item to be removed from an audit sample, the Taxpayer must establish that the specific transaction was an isolated event and not a normal part of the business operations. Additionally, under the provisions of Virginia Code § 58.1-205 a tax assessment issued by the Department is deemed prima facie correct with the burden on the Taxpayer to prove that an assessment is incorrect.

In this particular case, the Taxpayer’s customer had accrued and paid use tax on the transactions that were included in the sample computation.  However, the Commissioner stated that there were likely other transactions that were not included in the sample period to which Virginia tax had not been paid.  Therefore, to provide a credit for those transactions in which the Taxpayer’s customer had in fact paid use tax, or to remove the disputed sales transactions completely from the sample calculations would misrepresent and invalidate the entire sample.

Additionally, the Commissioner stated that an audit sample is designed to examine a Taxpayer’s sales tax collection and reporting habits, it is not intended to determine the combined compliance of a taxpayer and its customers.

As a result, the Commissioner found no basis for disallowing the sample computations that had been determined by the auditor. Further, the Commissioner found that the assessment was correct and no refund was due the Taxpayer on any portion of the amount that had been paid by its customer.

For Further Information

Virginia Department of Taxation – Rulings of the Tax Commissioner # 13-133