Tax Type
Retail Sales and Use Tax
Description
Hotel Pay-TV revenue
Topic
Taxability of Persons and Transactions
Date Issued
08-31-2000
August 31, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter requesting correction of the sales and use tax audit assessments issued to three locations of ***** (the "Taxpayer"). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates several hotels. An audit for the period October 1994 through September 1997 disclosed unremitted sales tax collected on pay-TV revenue and certain untaxed purchases of tangible personal property used or consumed in the Taxpayer's operations.
The Taxpayer takes exception to the sales tax assessed on pay -TV revenue and maintains that the tax does not apply based on an informal ruling by the department. It is my understanding that the Taxpayer collected the sales tax from hotel guests on these movie rentals and remitted the tax to the movie vendor. The Taxpayer also receives a commission from the movie rentals. The Taxpayer maintains that the movie vendor is registered with Virginia and therefore responsible for remitting the tax to the department. Accordingly, the Taxpayer requests removal of these sales from the audit.
The Taxpayer claims that the expense sample is not representative of the audit period since three consecutive months were used. The sample months are March through May 1996. The Taxpayer requests the removal from the sample of purchases made from one vendor included in the sample exceptions since purchases from this vendor represent 63% to 64% of the total sample measure. The Taxpayer proposes that the purchases from this vendor should be audited in detail separately. At one location, the Taxpayer indicates that it began accruing use tax on this same vendor beginning July 1996.
The Taxpayer contests only one fixed asset. At issue are wet bars that you maintain were installed in hotel rooms by a third party contractor. You indicate that such installations consist of material, electrical, plumbing, and carpentry work furnished by the contractor. The Taxpayer maintains that the contractor, not the Taxpayer, is ultimately liable for the tax.
DETERMINATION
Sales Tax Collections on Pay-TV
Movie rentals by themselves are not taxable. However, since the charge for hotel rooms is a taxable service, the Taxpayer is responsible for collecting and remitting the sales tax to the department, including sales tax collected in connection with additional charges associated with the rental of the hotel room.
The department has not been inconsistent in its treatment of these transactions. The informal ruling to which you refer is based on the enclosed Public Document (P.D.) 86-117 (7/2/86) issued to a movie vendor which states the following:
Nor are the optional programming charges made to hotel customers subject to the sales tax in this case, provided that the charges are separately stated and title to the receipts vests with the taxpayer (and not the hotel) at all times. In such an event, the receipts are not a part of the overall compensation the hotel receives from the rental of rooms; rather, the hotel is merely the collection agent of the taxpayer. (Emphasis added.)
In the instant case, the Taxpayer retains a commission from each charge collected on movie rentals. As title to the receipts does not vest completely with the movie vendor, the procedure set out in P.D. 86-117 is not applicable. Rather, the procedure set out in the enclosed P.D. 96-306 (10/25/96) for collecting the tax on the entire charge for the movie rentals is applicable to the Taxpayer. As a dealer who is responsible for collecting the sales tax, the Taxpayer is also responsible for remitting such tax to the department. In this regard, Code of Virginia § 58.1-616 (copy enclosed) mandates that "the dealer shall remit to the Tax Commissioner the amount of tax due after making appropriate adjustments for purchases returned, repossessions, and accounts uncollectible ...." In this case, it is the Taxpayer that has made the taxable sale, and it is the Taxpayer which is required to remit the tax to the department.
Subsequent to the Taxpayer's audit, the department's audit staff was able to verify that the movie vendor remitted to the department a large portion of the sales tax receipts collected by the Taxpayer. Accordingly, the Taxpayer will be given credit in its audit for the amount of sales tax actually remitted to the department by the movie vendor on behalf of the Taxpayer. The Taxpayer remains liable for the unremitted difference, except for applicable dealer's discount taken by the movie vendor.
Expense Sample
Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial either to the auditor or the client. When sampling techniques are understood and properly applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit.
Although the Taxpayer claims that the sample periods are not representative of the entire audit period, it is my understanding that the Taxpayer's contact person during the audit agreed to the test periods. However, the Taxpayer is not comfortable with the results of the test period and now wants to exclude one vendor from the sample base since the majority of untaxed purchases are from this vendor.
For an item to be removed from the audit sample, the Taxpayer must show that the transaction was isolated in nature and not a normal part of the Taxpayer's operation. In this case, the Taxpayer has not shown that any of the purchases from the one vendor at issue were especially unique as to justify removal from the sample for separate taxation. Rather, the sample demonstrates that the Taxpayer made regular purchases of materials from this vendor. Absent evidence to the contrary, the possibility exists that other periods not sampled would render results similar to the sampled period regardless of whether purchases were made mostly from this vendor or other vendors.
I would also note that credit was given in the audits of two of the Taxpayer's locations for the consumer use tax remitted by the Taxpayer in connection with untaxed purchases from this one vendor. However, in regard to untaxed purchases from this vendor at the Taxpayer's third location, no credit was allowed since the Taxpayer did not begin making consumer use tax payments until after the audit period.
Based on the foregoing and the information presented, I find that the sampling audit technique has been properly applied in this case and, therefore, must conclude there is insufficient basis to allow the adjustment requested by the Taxpayer.
Fixed Asset
Under Virginia law, persons who contract to furnish and install tangible personal property which becomes a part of the realty upon installation are treated as the taxable users or consumers of such property. In order to determine if a person is acting as a contractor or a retailer, it must be determined whether the equipment being installed remains tangible personal property or becomes a part of the real estate. The Virginia Supreme Court, in Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970), has ruled:
Three general tests are applied in order to determine whether an item of personal property placed upon realty becomes itself realty. They are: (1) annexation of the property to the realty, (2) adaptation to the use or purpose to which that part of the realty with which the property is connected is appropriated, and (3) the intention of the parties. The intention of the party making the annexation is the chief test to be considered ....
As provided in the above Virginia Supreme Court ruling, great emphasis is placed on the intention of the parties making the annexation in determining whether the annexed property qualifies as tangible personal property or real property.
I do not currently have enough information to determine whether the transaction was for real property services. The Taxpayer may furnish additional information and documentation to the auditor to more fully describe this transaction and the installations. If it can be shown that a contractor furnished the wet bars and permanently affixed them to the realty, such transaction will be removed from the audit. However, if the wet bars remain tangible personal property upon installation or were sold to the Taxpayer without installation, the transaction is taxable to the Taxpayer.
Conclusion
The three audits and assessments will be revised in accordance with this determination. In addition, the audit may be further revised if the Taxpayer has additional information to establish that the wet bar transaction is for real property services. The requested information should be provided to the auditor within 60 days of the date of this letter. To arrange for the delivery of additional information, please contact Auditor, at *****.
If you have any questions regarding this response, please contact ***** of the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/24517R
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter requesting correction of the sales and use tax audit assessments issued to three locations of ***** (the "Taxpayer"). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates several hotels. An audit for the period October 1994 through September 1997 disclosed unremitted sales tax collected on pay-TV revenue and certain untaxed purchases of tangible personal property used or consumed in the Taxpayer's operations.
The Taxpayer takes exception to the sales tax assessed on pay -TV revenue and maintains that the tax does not apply based on an informal ruling by the department. It is my understanding that the Taxpayer collected the sales tax from hotel guests on these movie rentals and remitted the tax to the movie vendor. The Taxpayer also receives a commission from the movie rentals. The Taxpayer maintains that the movie vendor is registered with Virginia and therefore responsible for remitting the tax to the department. Accordingly, the Taxpayer requests removal of these sales from the audit.
The Taxpayer claims that the expense sample is not representative of the audit period since three consecutive months were used. The sample months are March through May 1996. The Taxpayer requests the removal from the sample of purchases made from one vendor included in the sample exceptions since purchases from this vendor represent 63% to 64% of the total sample measure. The Taxpayer proposes that the purchases from this vendor should be audited in detail separately. At one location, the Taxpayer indicates that it began accruing use tax on this same vendor beginning July 1996.
The Taxpayer contests only one fixed asset. At issue are wet bars that you maintain were installed in hotel rooms by a third party contractor. You indicate that such installations consist of material, electrical, plumbing, and carpentry work furnished by the contractor. The Taxpayer maintains that the contractor, not the Taxpayer, is ultimately liable for the tax.
DETERMINATION
Sales Tax Collections on Pay-TV
Movie rentals by themselves are not taxable. However, since the charge for hotel rooms is a taxable service, the Taxpayer is responsible for collecting and remitting the sales tax to the department, including sales tax collected in connection with additional charges associated with the rental of the hotel room.
The department has not been inconsistent in its treatment of these transactions. The informal ruling to which you refer is based on the enclosed Public Document (P.D.) 86-117 (7/2/86) issued to a movie vendor which states the following:
Nor are the optional programming charges made to hotel customers subject to the sales tax in this case, provided that the charges are separately stated and title to the receipts vests with the taxpayer (and not the hotel) at all times. In such an event, the receipts are not a part of the overall compensation the hotel receives from the rental of rooms; rather, the hotel is merely the collection agent of the taxpayer. (Emphasis added.)
In the instant case, the Taxpayer retains a commission from each charge collected on movie rentals. As title to the receipts does not vest completely with the movie vendor, the procedure set out in P.D. 86-117 is not applicable. Rather, the procedure set out in the enclosed P.D. 96-306 (10/25/96) for collecting the tax on the entire charge for the movie rentals is applicable to the Taxpayer. As a dealer who is responsible for collecting the sales tax, the Taxpayer is also responsible for remitting such tax to the department. In this regard, Code of Virginia § 58.1-616 (copy enclosed) mandates that "the dealer shall remit to the Tax Commissioner the amount of tax due after making appropriate adjustments for purchases returned, repossessions, and accounts uncollectible ...." In this case, it is the Taxpayer that has made the taxable sale, and it is the Taxpayer which is required to remit the tax to the department.
Subsequent to the Taxpayer's audit, the department's audit staff was able to verify that the movie vendor remitted to the department a large portion of the sales tax receipts collected by the Taxpayer. Accordingly, the Taxpayer will be given credit in its audit for the amount of sales tax actually remitted to the department by the movie vendor on behalf of the Taxpayer. The Taxpayer remains liable for the unremitted difference, except for applicable dealer's discount taken by the movie vendor.
Expense Sample
Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial either to the auditor or the client. When sampling techniques are understood and properly applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit.
Although the Taxpayer claims that the sample periods are not representative of the entire audit period, it is my understanding that the Taxpayer's contact person during the audit agreed to the test periods. However, the Taxpayer is not comfortable with the results of the test period and now wants to exclude one vendor from the sample base since the majority of untaxed purchases are from this vendor.
For an item to be removed from the audit sample, the Taxpayer must show that the transaction was isolated in nature and not a normal part of the Taxpayer's operation. In this case, the Taxpayer has not shown that any of the purchases from the one vendor at issue were especially unique as to justify removal from the sample for separate taxation. Rather, the sample demonstrates that the Taxpayer made regular purchases of materials from this vendor. Absent evidence to the contrary, the possibility exists that other periods not sampled would render results similar to the sampled period regardless of whether purchases were made mostly from this vendor or other vendors.
I would also note that credit was given in the audits of two of the Taxpayer's locations for the consumer use tax remitted by the Taxpayer in connection with untaxed purchases from this one vendor. However, in regard to untaxed purchases from this vendor at the Taxpayer's third location, no credit was allowed since the Taxpayer did not begin making consumer use tax payments until after the audit period.
Based on the foregoing and the information presented, I find that the sampling audit technique has been properly applied in this case and, therefore, must conclude there is insufficient basis to allow the adjustment requested by the Taxpayer.
Fixed Asset
Under Virginia law, persons who contract to furnish and install tangible personal property which becomes a part of the realty upon installation are treated as the taxable users or consumers of such property. In order to determine if a person is acting as a contractor or a retailer, it must be determined whether the equipment being installed remains tangible personal property or becomes a part of the real estate. The Virginia Supreme Court, in Transcontinental Gas Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970), has ruled:
Three general tests are applied in order to determine whether an item of personal property placed upon realty becomes itself realty. They are: (1) annexation of the property to the realty, (2) adaptation to the use or purpose to which that part of the realty with which the property is connected is appropriated, and (3) the intention of the parties. The intention of the party making the annexation is the chief test to be considered ....
As provided in the above Virginia Supreme Court ruling, great emphasis is placed on the intention of the parties making the annexation in determining whether the annexed property qualifies as tangible personal property or real property.
I do not currently have enough information to determine whether the transaction was for real property services. The Taxpayer may furnish additional information and documentation to the auditor to more fully describe this transaction and the installations. If it can be shown that a contractor furnished the wet bars and permanently affixed them to the realty, such transaction will be removed from the audit. However, if the wet bars remain tangible personal property upon installation or were sold to the Taxpayer without installation, the transaction is taxable to the Taxpayer.
Conclusion
The three audits and assessments will be revised in accordance with this determination. In addition, the audit may be further revised if the Taxpayer has additional information to establish that the wet bar transaction is for real property services. The requested information should be provided to the auditor within 60 days of the date of this letter. To arrange for the delivery of additional information, please contact Auditor, at *****.
If you have any questions regarding this response, please contact ***** of the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/24517R
Related Documents
Rulings of the Tax Commissioner