VA Case Study – Large MD Mechanical Contractor Working in DC, MD, and VA

VA Total Assessment Amount – $37,293.07
Total Reduction Amount – $5,145.05 – 14%
VA Refund Approved – $15,287.22
DC Refunds Approved – $9,233.50
MD Refund Approved – $89,452.26

Exceptionally large Maryland mechanical contractor working in DC, MD and VA was selected by the Commonwealth of Virginia for a VA sales and use tax audit. This was the Taxpayer’s second VA audit in the past ten years. Marsu had assisted the Taxpayer in the previous audit and was called upon again to help. Because the Taxpayer was so large, Marsu recommended this time that the Taxpayer have VA perform a Stratified Statistical Sampling audit instead of the normal block sample audit because if a big or large error is in the block sample it distorts the projected liability. Stratified Statistical Sampling eliminates this problem. Once VA understood how big the Taxpayer was and the volume of records involved, VA agreed to the Stratified Statistical Sample audit. Marsu assisted the Taxpayer as follows with the Sample and resulting expense schedule:

For the Stratified Statistical Sample, Marsu reviewed the expense accounts and job type selected by the auditor to be included in the audit, what information could be provided in the download given to the auditor, and what information would be provided for the invoices selected. After all the parameters were determined for the download, the Taxpayer had the program written to create the file of all the AP invoices and what data to be included for each invoice in the file. After the audit file was created for the three-year audit period and since the Taxpayer’s AP records were all scanned, the Taxpayer was able to print out all the selected AP invoices by supplier, in date order for the auditor’s review.
For the selected expense invoices, the auditor reviewed 1,190 invoices and only listed 34 invoices where sales or use tax were not paid. This Taxpayer had a great accounting system for properly paying sales and use taxes and Marsu knew that from the last VA audit. Marsu reviewed the 34 lines and was able to reduce the taxable base by $9,981.14. This reduction resulted in the assessment being reduced from $37,293.07 to $31,147.41, a savings of $5,145.66. The savings included interest. Penalty was not assessed by VA, because of how compliant the Taxpayer was.

Main Audit Issue

With this Taxpayer, there is really no issue with the procedures in place to pay sales and use taxes on their real property construction jobs. The Stratified Statistical Sample file for the VA audit had over 25,471 lines in it with a dollar value of $39,343,230.43. The sample itself only had 1,190 invoices in it but represented 61.2% of the dollars. For the top two dollar value ranges in the sample, VA reviewed 100% of the invoices and if any of those invoices had been in the normal block sample audit with no tax being paid, the assessment would have been a lot higher than the Sample assessment of $31,147.41.

Reasons for Success

Unfortunately, states love to audit real property contractors. Real property contractors are considered consuming Taxpayers and owe tax on all the materials incorporated into their jobs and these Taxpayers have been audited so much it has become second nature for some of them to pay use tax on transactions where sales tax is not charged. This is the case with this Taxpayer. After a while, the Taxpayer needs to push back and that what happens when a Taxpayer hires Marsu to assist them with an audit. Not only will Marsu assist the Taxpayer in lowering the assessment to the lowest amount possible, Marsu will document all refunds that the Taxpayer has inadvertently overpaid. Plus I have seen it where Taxpayers who have been audited on a regular basis in the past have had that trend stop after Marsu has gotten involved with the audit to reduce the tax assessed and has filed an offsetting refund with the State Agency involved. In this case, the Taxpayer only owed a net of $15,860.19 after the refund and the auditor spent hundreds of hours doing the review with results that on an hourly basis were very below average. In some cases, the Taxpayer actually got a refund back from the State performing the audit. In this case, the State is really a loser.

For this audit, the Taxpayer actually made money. Marsu had DC, MD and VA refunds approved in the amount of $113,972.98 minus the VA audit of $31,147.41 for a profit of $82,825.57. Marsu did not have a lot of time invested in the VA audit review. Marsu mainly advised the Taxpayer on the Stratified Statistical Sample audit methodology and reviewed only 34 invoices. So for this three-year audit, the Taxpayer saved an average of $27,608 per year and if the Taxpayer instituted all changes, the Taxpayer has saved $220,864 over the past eight years.

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