Tax Type
Retail Sales and Use Tax
Description
Government contractor; Audit sampling
Topic
Collection of Delinquent Tax
Property Subject to Tax
Date Issued
04-26-2000
April 26, 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 assessment issued to ****** (the "Taxpayer"). I apologize for the delay in responding to your letter. Copies of cited sources are enclosed.
FACTS
The Taxpayer is a government contractor providing systems integration services. The Taxpayer was audited for the period August 1992 through July 1995 and assessed use tax on untaxed purchases of tangible personal property.
The Taxpayer takes exception to several purchases included in the audit. The Taxpayer maintains that several items listed as expensed purchases were one-time, nonrecurring purchases and, therefore, should be removed from the sample extrapolation and taxed separately. The Taxpayer also maintains that many of the invoices listed as "not found" have tax included on the invoice by the vendor, or are for nontaxable services. The Taxpayer indicates that several items were sold to the federal government and maintains that such items should be exempt from taxation. Finally, the Taxpayer maintains that five vendors were previously audited for the same period as the Taxpayer and thereby infers that certain purchases should not be included in its audit.
DETERMINATION
I would note that Code of Virginia § 58.1-205 deems a tax assessment issued by the department to be prima facie correct. Consequently, the courts have held that the burden is upon the taxpayer to prove that the assessment is incorrect. With this in mind, I will address the concerns set out in your letter.
Fixed Asset v. General Expense Purchases
Generally, fixed asset purchases are those purchases which are capitalized by the Taxpayer. The classification of tangible personal property as a fixed asset generally involves booking the item as a fixed asset and depreciating it. On the other hand, expensed costs of particular jobs are generally classified as expensed purchases.
The Taxpayer has not submitted evidence that it treated the contested items as fixed assets for accounting and income tax purposes. Without such evidence, there is no basis to treat such items as fixed assets.
Sampling
In this case, the Taxpayer has identified a number of purchases made during the sample period which were assessed and used to extrapolate an assessment for the entire audit period. The Taxpayer does not dispute that these purchases are taxable, but maintains that they are one-time, non-recurring purchases.
For any of these items to be removed from the audit sample and taxed separately, the Taxpayer must be able to prove that each purchase in question is isolated in nature and not a normal part of the taxpayer's course of business. It may well be that the purchases at issue are infrequent, but such purchases appear to be an integral and normal part of the Taxpayer's activity.
Based on the information before me, the Taxpayer has not proven that these purchases are unusual to its operations. Therefore, despite the Taxpayer's contentions, I can find no basis for the removal of these items from the audit sample.
Missing Invoices
The Taxpayer claims that many of the invoices listed as "not found" have had tax included on the invoice by the vendor, or are for nontaxable services.
It is my understanding that the Taxpayer has not submitted copies of these invoices and associated invoice payments to establish that (i) the sales tax was charged and paid in connection with these missing invoices, or (ii) exempt services were purchased. As the Taxpayer has not met its burden of proof, I find no basis to revise the audit without such evidence.
Products Sold to Federal Government
The Taxpayer claims that several purchases held taxable in the audit were sold to the federal government and should be exempt on this basis.
The appropriate tax treatment for taxpayers that contract to perform services for the government is based upon whether the contract is for the sale of tangible personal property or for the provision of exempt services. In this regard, Title 23 of the Virginia Administrative Code (VAC) 10-210-693 sets out the following:
If a contract is for the sale of tangible personal property, a contractor may purchase such tangible personal property exempt from the tax using a resale exemption certificate, Form ST-10. The tangible personal property may be resold to the government exempt of the tax.
However, if a contract is for the provision of services, the contractor is deemed to be the taxable user and consumer of all tangible personal property used in performing its services, even though title to the property provided may pass to the government or the contractor may be fully and directly reimbursed by the government, or both.
Thus, the application of the tax will depend upon the true object of the contract. In this case, it is my understanding that the contested items were purchased by the Taxpayer in connection with service contracts with the federal government. Although title to the property provided may have passed to the government or the Taxpayer may have been fully and directly reimbursed by the government, or both, the Taxpayer is deemed the taxable user and consumer of all tangible personal property used in performing services for the government.
This position is consistent with the ruling in United States v. Forst, 442 F. Supp. 920 (W.D. Va.1977), aff=d 569 F.2nd 881 (4th Cir.1978), in which the court held that the resale exemption was inapplicable to a government contractor, which was the final consumer of the items. Even though the contractor never had legal title to such items and was reimbursed by the United States for the cost thereof, the items were not "resold" to the United States.
The Taxpayer has not established that the items at issue were furnished to the government under a contract for the sale of tangible personal property. Therefore, based on the foregoing, there is no basis to remove these items from the department's audit.
Vendor Audits
The Taxpayer maintains that five vendors were previously audited for the same period as the Taxpayer. However, the department's records do not support this conclusion. Rather, some vendors' audits fall within the Taxpayer's audit period but do not necessarily encompass all of the same periods as the Taxpayer's audit.
The Taxpayer's contention seems to infer that it should not be held liable for the tax on purchases made from vendors previously audited by the department. However, l respectfully disagree. The statute does not preclude the department from auditing and assessing both the purchaser and the seller. As the responsible authority for administering the retail sales and use tax laws of this state, the department must regularly perform audits on both types of taxpayers to ensure compliance with such laws.
Furthermore, due to different audit periods, sample periods, and records, it is unlikely that the same invoice would be selected for two separate and distinct audits. In this case, the Taxpayer has not furnished any evidence that the same item was included in a vendor's audit. Absent proof that the exact same purchase (i.e., same invoice number and date) was included in an audit of one of its vendors, l find no basis for removing any of the purchases in the Taxpayer's audit on this basis.
Conclusion
Based on the foregoing, l find that the assessment is proper. However, the Taxpayer may submit additional documentation to ****, Audit Supervisor, ****** District Office, ******, Virginia, to support a revision to the audit findings, within 60 days of the date of this letter. ****'s phone number is ****. If such documentation is not sent within the allotted time, the current balance of $**** is due and payable.
If you should have any question about this response, please contact **** of my Tax Policy Staff at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/16018R
TO WHOM IT MAY CONCERN
Under the authority of Section 58.1-1 of the Code of Virginia, l hereby delegate to Janie E. Bowen, Assistant Tax Commissioner, the authority to sign for me any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and the Treasury Board.
This authority will continue until revoked. The delegation of authority dated June 3, 1994, is hereby revoked and replaced.
Done at Richmond, Virginia this tenth day of September. 1999.
Danny M. Payne
Tax Commissioner
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 assessment issued to ****** (the "Taxpayer"). I apologize for the delay in responding to your letter. Copies of cited sources are enclosed.
FACTS
The Taxpayer is a government contractor providing systems integration services. The Taxpayer was audited for the period August 1992 through July 1995 and assessed use tax on untaxed purchases of tangible personal property.
The Taxpayer takes exception to several purchases included in the audit. The Taxpayer maintains that several items listed as expensed purchases were one-time, nonrecurring purchases and, therefore, should be removed from the sample extrapolation and taxed separately. The Taxpayer also maintains that many of the invoices listed as "not found" have tax included on the invoice by the vendor, or are for nontaxable services. The Taxpayer indicates that several items were sold to the federal government and maintains that such items should be exempt from taxation. Finally, the Taxpayer maintains that five vendors were previously audited for the same period as the Taxpayer and thereby infers that certain purchases should not be included in its audit.
DETERMINATION
I would note that Code of Virginia § 58.1-205 deems a tax assessment issued by the department to be prima facie correct. Consequently, the courts have held that the burden is upon the taxpayer to prove that the assessment is incorrect. With this in mind, I will address the concerns set out in your letter.
Fixed Asset v. General Expense Purchases
Generally, fixed asset purchases are those purchases which are capitalized by the Taxpayer. The classification of tangible personal property as a fixed asset generally involves booking the item as a fixed asset and depreciating it. On the other hand, expensed costs of particular jobs are generally classified as expensed purchases.
The Taxpayer has not submitted evidence that it treated the contested items as fixed assets for accounting and income tax purposes. Without such evidence, there is no basis to treat such items as fixed assets.
Sampling
In this case, the Taxpayer has identified a number of purchases made during the sample period which were assessed and used to extrapolate an assessment for the entire audit period. The Taxpayer does not dispute that these purchases are taxable, but maintains that they are one-time, non-recurring purchases.
For any of these items to be removed from the audit sample and taxed separately, the Taxpayer must be able to prove that each purchase in question is isolated in nature and not a normal part of the taxpayer's course of business. It may well be that the purchases at issue are infrequent, but such purchases appear to be an integral and normal part of the Taxpayer's activity.
Based on the information before me, the Taxpayer has not proven that these purchases are unusual to its operations. Therefore, despite the Taxpayer's contentions, I can find no basis for the removal of these items from the audit sample.
Missing Invoices
The Taxpayer claims that many of the invoices listed as "not found" have had tax included on the invoice by the vendor, or are for nontaxable services.
It is my understanding that the Taxpayer has not submitted copies of these invoices and associated invoice payments to establish that (i) the sales tax was charged and paid in connection with these missing invoices, or (ii) exempt services were purchased. As the Taxpayer has not met its burden of proof, I find no basis to revise the audit without such evidence.
Products Sold to Federal Government
The Taxpayer claims that several purchases held taxable in the audit were sold to the federal government and should be exempt on this basis.
The appropriate tax treatment for taxpayers that contract to perform services for the government is based upon whether the contract is for the sale of tangible personal property or for the provision of exempt services. In this regard, Title 23 of the Virginia Administrative Code (VAC) 10-210-693 sets out the following:
If a contract is for the sale of tangible personal property, a contractor may purchase such tangible personal property exempt from the tax using a resale exemption certificate, Form ST-10. The tangible personal property may be resold to the government exempt of the tax.
However, if a contract is for the provision of services, the contractor is deemed to be the taxable user and consumer of all tangible personal property used in performing its services, even though title to the property provided may pass to the government or the contractor may be fully and directly reimbursed by the government, or both.
Thus, the application of the tax will depend upon the true object of the contract. In this case, it is my understanding that the contested items were purchased by the Taxpayer in connection with service contracts with the federal government. Although title to the property provided may have passed to the government or the Taxpayer may have been fully and directly reimbursed by the government, or both, the Taxpayer is deemed the taxable user and consumer of all tangible personal property used in performing services for the government.
This position is consistent with the ruling in United States v. Forst, 442 F. Supp. 920 (W.D. Va.1977), aff=d 569 F.2nd 881 (4th Cir.1978), in which the court held that the resale exemption was inapplicable to a government contractor, which was the final consumer of the items. Even though the contractor never had legal title to such items and was reimbursed by the United States for the cost thereof, the items were not "resold" to the United States.
The Taxpayer has not established that the items at issue were furnished to the government under a contract for the sale of tangible personal property. Therefore, based on the foregoing, there is no basis to remove these items from the department's audit.
Vendor Audits
The Taxpayer maintains that five vendors were previously audited for the same period as the Taxpayer. However, the department's records do not support this conclusion. Rather, some vendors' audits fall within the Taxpayer's audit period but do not necessarily encompass all of the same periods as the Taxpayer's audit.
The Taxpayer's contention seems to infer that it should not be held liable for the tax on purchases made from vendors previously audited by the department. However, l respectfully disagree. The statute does not preclude the department from auditing and assessing both the purchaser and the seller. As the responsible authority for administering the retail sales and use tax laws of this state, the department must regularly perform audits on both types of taxpayers to ensure compliance with such laws.
Furthermore, due to different audit periods, sample periods, and records, it is unlikely that the same invoice would be selected for two separate and distinct audits. In this case, the Taxpayer has not furnished any evidence that the same item was included in a vendor's audit. Absent proof that the exact same purchase (i.e., same invoice number and date) was included in an audit of one of its vendors, l find no basis for removing any of the purchases in the Taxpayer's audit on this basis.
Conclusion
Based on the foregoing, l find that the assessment is proper. However, the Taxpayer may submit additional documentation to ****, Audit Supervisor, ****** District Office, ******, Virginia, to support a revision to the audit findings, within 60 days of the date of this letter. ****'s phone number is ****. If such documentation is not sent within the allotted time, the current balance of $**** is due and payable.
If you should have any question about this response, please contact **** of my Tax Policy Staff at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/16018R
TO WHOM IT MAY CONCERN
Under the authority of Section 58.1-1 of the Code of Virginia, l hereby delegate to Janie E. Bowen, Assistant Tax Commissioner, the authority to sign for me any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and the Treasury Board.
This authority will continue until revoked. The delegation of authority dated June 3, 1994, is hereby revoked and replaced.
Done at Richmond, Virginia this tenth day of September. 1999.
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner