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Virginia Taxpayer Audit Shows Unreported Overcharges


In a recent letter ruling the Virginia Tax Commissioner upheld statutes that state taxpayers must remit all sales taxes that are collected, whether correct or not.

In a recent case, a doughnut shop audit in Virginia revealed that the shop had been collecting sales tax at a higher rate than they were remitting.

The doughnut shop stated that their “…software incorrectly calculated the amount of tax to be collected from its customers.” Virginia “…imposes a reduced sales tax rate on food purchased for human consumption,” but the software applied the general sales tax rate of 5% instead of the food sales tax rate of 2.5% to all purchases.

The Taxpayer reported and remitted sales tax against the 2.5% rate, not the 5% collected. The law states that regardless of the reason for the overcharging, the taxpayer is still liable to remit that amount collected unless proof is submitted showing that the overage amount was refunded to its customers.

Though the Taxpayer argued that they had remitted the correct amount of tax (2.5%), it was pointed out that Virginia Code § 58.1-625 states:

Any dealer collecting the sales or use tax on transactions exempt or not taxable under this chapter shall transmit to the Tax Commissioner such erroneously or illegally collected tax unless or until he can affirmatively show that the tax has since been refunded to the purchaser or credited to his account.

In addition, Virginia Code § 58.1-16 provides:

Any person responsible for collecting any tax administered by the Department [of Taxation] or the Division of Motor Vehicles who overcollects such tax and fails to account for and pay such overcollection to the appropriate state agency by the time his regular monthly or quarterly return is due shall be liable for the amount of such overcollection, and in addition a penalty of twenty-five percent of such overcollection. The Commissioner administering such tax may waive such penalty for good cause.

According to other documents, the penalties in this statute are “…superseded by Va. Code § 58.1-635, which imposes up to a thirty percent penalty for a failure to account for overcollected sales tax or any other sales tax, as well as, imposes a fraud penalty of fifty percent.”

The Taxpayer was being audited for “…the periods March 2008 through February 2011 and June 2008 through February 2011” when the overcharges were discovered by the auditor. The Tax Commissioner upheld the auditor’s assessment including penalties, fees and interest in this case. The Taxpayer was given 30 days from the date of invoice for the tax due in order to order to not accrue any additional interest.

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Susan McLain
Avalara Author Susan McLain
Susan McLain began her career as a technical writer in technology industries such as satellite networking and medical devices. Her skills encompass technical and marketing writing, usability engineering, verification and validation testing and protocol writing, requirements development, business analysis, technical illustration/graphic design and marketing. She has owned her own business providing service to small to medium sized business and in other positions, she has been in project management, documentation and marketing. She is currently the content specialist for Avalara helping to “make sales tax less taxing.”