RD398 - Review of Retail Sales and Use Tax Collection and Distribution Processes - November 2011


Executive Summary:
The Commonwealth collects almost $5 billion in retail sales and use taxes annually and distributes approximately $1 billion of these revenues to localities as a one percent local option tax. The Code of Virginia requires the Virginia Department of Taxation (Taxation) to collect all retail sales and use tax revenues in the Commonwealth and determine proper local allocations. For years, Virginia localities have experienced inaccuracies in their local retail sales and use tax distributions, and progressively, Taxation and localities have worked together to improve the accuracy of local distributions.

We performed this review pursuant to Section 30-133.2 of the Code of Virginia, which requires the Auditor of Public Accounts to perform a review of the collection and distribution of the Retail Sales and Use Tax with an important focus on the collection and distribution of local retail sales and use taxes.

This interim report provides background information on the collection and distribution process and discusses current practices employed by Taxation and localities to ensure accurate local distributions. We make the following observations based on this interim phase of our review.

• Retail sales and use tax collection and distribution is an evolving process that requires active participation by Taxation, localities, and taxpayers to ensure accurate distributions. Communication and coordination between the entities is critical to ensure the process is effective in minimizing distribution errors.

• In recent years, Taxation has implemented a number of internal controls and procedures to address and help reduce both business and agency errors in the business registration process, as well as the tax collection and distribution processes. Based on available data, both the number and dollar amount of adjustments required to correct erroneous local distributions has steadily decreased over the last three fiscal years. In fiscal year 2011, adjustments to correct erroneous distributions totaled $8.6 million, which is less than 1 percent of total local distributions of over $1 billion.

• Sales tax distribution errors do not impact all localities equally; therefore, any recommendations for improvements must undergo an evaluation of the cost effectiveness of the change.

We recognize that any recommendations for improvement must consider their potential impact on businesses. Suggested improvements that could result in increased costs for businesses or complicate the business registration process may not be cost effective solutions.

We identified several areas for further evaluation in the next phase of our review, focusing on the business registration process, and communication and coordination of information between Taxation and localities. Our evaluation in the next phase will also include recommendations for benchmarks to assess the effectiveness of Taxation’s local retail sales and use tax collection and distribution process.