Virginia Administrative Code › Title 23 - TAXATION › Agency 10 - DEPARTMENT OF TAXATION › Chapter 210 - RETAIL SALES AND USE TAX › Section 23VAC10-210-2032 - Penalties and interest; audits

Current through Register Vol. 40, No. 24, July 15, 2024
A. Definitions. The following words and terms
				when used in this section shall have the following meanings unless the context
				clearly indicates otherwise:
"Compliance ratio" means the percentage figure used by the
				  department to determine a taxpayer's effort to comply with the retail sales and
				  use tax laws of the Commonwealth.
"Measure found" means the dollar amounts of additional sales
				  deficiency or dollar amounts of additional use deficiency disclosed by the
				  audit. Separate compliance ratios for sales and use taxes will be necessary if
				  the audit contains deficiencies in both areas.
"Measure paid to vendor" means the dollar amounts of
				  purchases on which the purchaser paid the Virginia sales or use tax to the
				  vendor.
"Measure reported" means the dollar amounts of taxable sales
				  or the dollar amounts of purchases reported on a return for the entire audit
				  period.
"Net underpayment" means use tax deficiency for each month
				  determined by the audit.
"Net understatement" means sales tax deficiency determined by
				  the audit less allowable credits, such as the sales price of tangible personal
				  property returned by the purchaser, repossessed, or charged off as bad debts
				  for each month during the period of the audit.
B. Penalty.
1. The application of penalty to audit
				deficiencies is mandatory and its application is generally based on the
				percentage of compliance determined by computing the dealer's compliance ratio.
				The compliance ratio for the sales or use tax may be computed by using the
				following ratio:
Measure Reported
= Compliance Ratio
Measure Reported + Measure Found
This method is to be used by the auditor in separately
				  computing the compliance ratio on both the sales portion of the audit and the
				  purchases portion of the audit.
2. If the auditor's computation indicates
				that a taxpayer has failed to meet the required compliance ratio for the
				accrual of use tax on the purchases portion of the audit, the taxpayer may, at
				its option, compute a separate compliance ratio by including the measure on
				which tax was paid to its vendors, as follows:
Measure Reported + Measure Paid to Vendors
= Compliance Ratio
Measure Reported + Measure Paid to Vendors + Measure
						  Found
It is the taxpayer's responsibility to compute the above
				  compliance ratio (hereinafter referred to as the "alternative method") and
				  provide the auditor with documentation supporting the computation. The taxpayer
				  must compute the ratio based on a review of purchases for the same period used
				  by the auditor to compute the compliance ratio. Use tax penalty will not be
				  assessed if the taxpayer's tax compliance ratio falls within the required
				  tolerances.
3. First
				generation audits. Generally, penalty will be waived for first generation
				audits. First generation audit penalty cannot be waived if any of the following
				conditions exist:
a. The taxpayer has been
				previously notified in writing by the Department of Taxation to collect tax on
				sales or to pay tax on purchases, but has failed to follow
				instructions;
b. The taxpayer has
				collected the sales tax, but failed to remit it to the Department of Taxation;
				or
c. The taxpayer has willfully
				evaded reporting and remitting the tax to the Department of Taxation and
				indications of fraud exist.
The audit of a business that has experienced a name change, a
				  change in responsible partners or officers or the addition of new locations,
				  and where the business is conducted in the same manner and for the same
				  purposes as during a prior audit, will not be considered a first audit for
				  purposes of this subsection.
Similarly, audits performed for periods subsequent to the
				  institution of reorganization plans, where during such reorganizations, the
				  continuity of the business was not affected and the business entity maintained
				  operations for the purpose of producing the same product(s) or rendering the
				  same service(s), will not qualify for first generation audit status. In
				  addition, audits performed for periods subsequent to business mergers,
				  absorptions and like ventures, where the intent is to diversify or expand, will
				  not qualify for first generation audit status. However, penalty generally will
				  not be applied to audit deficiencies occurring in new areas not covered in
				  prior audit(s) as set forth in subdivision 8 of this subsection.
In the event that a business should undergo a reorganization,
				  restructuring, acquisition, merger, diversification of product line or process,
				  or any other event that would subject the business to a different sales tax
				  application than its normal course of business, it is recommended that the
				  business request a written ruling from the department as to the proper sales
				  and use tax application. See
				  23VAC10-210-20.
4. Second generation audits.
				Penalty will generally be applied unless the taxpayer's compliance ratios meet
				or exceed 85% for sales tax and 60% for use tax, as computed by the auditor or
				under the alternative method.
5.
				All subsequent generation audits. Penalty will generally be applied unless the
				taxpayer's compliance ratios meet or exceed 85% for sales tax and 85% for use
				tax, as computed by the auditor or under the alternative method.
6. Taxable sales. Penalty, based on the
				compliance ratio, will generally be applied to the net understatement of the
				sales tax.
7. Taxable purchases.
				Penalty, based on the compliance ratio calculated by either the auditor or
				under the alternative method, will generally be applied to the net underpayment
				of the use tax on recurring purchases of tangible personal property used
				regularly in the business.
a. Withdrawals from
				inventory. Withdrawals of tangible personal property are subject to the use tax
				on a cost basis (or fabricated cost basis in the case of a
				fabricator/manufacturer) and should be added to taxable recurring purchases for
				purposes of computing the compliance ratio.
b. Fixed assets. The tax applies to purchases
				of fixed assets used in the business and such purchases should be added to
				taxable recurring purchases and taxable withdrawals from inventory for purposes
				of computing the compliance ratio.
8. Exceptions. Penalty generally will not be
				applied to audit deficiencies occurring in new areas not covered by prior
				audit(s), provided the application of the tax is not clearly established under
				existing law, regulations or other published documents of which the taxpayer
				reasonably should have had knowledge, or areas where the taxpayer has relied on
				prior correspondence with the department that has not been superseded by a law
				change, a change in regulations, or other published documents of which the
				taxpayer reasonably should have had knowledge. Deficiencies in these areas will
				not be included in compliance ratio computations. Notwithstanding the above,
				items of like class or similar nature may be subject to penalty even though the
				specific item was not addressed in the previous audit(s) if the general class
				of items was held taxable in previous audit(s). The application of penalty to
				audit deficiencies will not be waived on second and subsequent audits for other
				than exceptional mitigating circumstances.