Tax Type
Retail Sales and Use Tax
Description
Sample techniques; Refund of taxes previously paid; "First use" of asset
Topic
Payment and Refund
Property Subject to Tax
Date Issued
05-08-2000
May 12, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter of February 9, 2000, requesting correction of the sales and use tax audit assessment issued to ***** (the "Taxpayer").
FACTS
The Taxpayer is a consultant providing services to commercial and government customers. As a result of an audit for the period July 1995 through March 1999, the Taxpayer was assessed consumer use tax on untaxed purchases of fixed assets and other tangible personal property.
The Taxpayer takes exception to the sampling techniques used for expensed purchases and maintains that several exceptions held in the audit are for non-recurring purchases and should not have been used in the extrapolation of the error factor. The Taxpayer takes exception to the extension of the audit period and maintains that it was done without the Taxpayer's knowledge or approval. The Taxpayer also maintains that it erroneously paid sales tax on purchases in connection with ship repair contracts and takes exception to the fact that such tax was not refunded by the department. In addition, the Taxpayer maintains that the fixed assets held in the audit include items which were exempted from the tax, previously taxed, or purchased for use out-of-state. Furthermore, the Taxpayer takes exception to many of the other purchases held in the audit and maintains that such items qualify for some type of exemption from the tax. Of final importance, the Taxpayer requests waiver of the audit penalty.
DETERMINATION
Sampling
In Public Document (P.D.) 00-62 (copy enclosed), the department sets out its policy on isolated or non-recurring purchases. Accordingly, unless the Taxpayer can prove that certain purchases were unusual to its operations, there is no basis to remove them from the sample for separate taxation.
Although random sampling was not utilized, the department did apply block sampling which utilized a set period for detailed audit. The resulting error factor was then applied to other periods of the audit not sampled. In this case, it is my understanding that the Taxpayer had chosen the year 1997 as the sample period and that the error factor was properly applied to the nonsampled periods. Although the Taxpayer may disagree, the block sampling technique used in this audit is an acceptable auditing technique and is commonly applied by the department.
Audit Period
The Taxpayer believes that the audit period was arbitrarily extended. However, it is my understanding that the former owner of the Taxpayer had requested the auditor to extend the audit period to March 1999 since it was ceasing operations. It is also my understanding that the Taxpayer had needed more time to gather records for the audit. Due to the circumstances, extending the audit period appears justified.
Refund of Taxes Previously Paid
The Taxpayer maintains that it erroneously paid sales tax to vendors on purchases related to its ship repair contracts with the federal government. The Taxpayer requests that the department refund such tax.
It is my understanding that the department's auditor advised the former owner early in the audit (i.e., in July or August 1998) to seek the appropriate refund of erroneously paid sales tax from its vendors. It is also my understanding that the department has no information as to whether the former owner of the Taxpayer ever obtained such refunds from its vendors.
Unless the Taxpayer is able to establish that the former owner did not obtain such refunds from its vendors, the Taxpayer has no right to seek such refunds from vendors or the department. Should the Taxpayer establish that the former owner did not obtain such refunds, the Taxpayer may seek refunds of sales tax erroneously paid from the vendors if requested within the statute of limitations for issuing refunds, i.e., no more than three years from the date of purchase. This procedure would allow the Taxpayer to receive a full refund of the sales tax, if the Taxpayer establishes its right to seek such refunds.
If the vendor refuses to provide the refund, the Taxpayer would be permitted to seek a refund from the department but must explain why the vendor refused to issue such refund and show proof that the former owner did not seek and obtain such refunds. In these instances, the department cannot refund the entire amount of the sales tax because of the dealer's discount kept by the vendors.
Fixed Assets
All items listed as fixed assets are from a report prepared by the Taxpayer. The report lists by voucher number all fixed assets purchased for use in Virginia. Unless the Taxpayer is able to establish otherwise, it is my understanding that the invoices for these assets had no sales tax charged or accrued.
If any of these assets qualify for a specific exemption under the law, the Taxpayer needs to identify the particular asset and furnish the appropriate explanation and proof to the department that an exemption applies before an adjustment can be made to the audit.
As for assets you contend were used outside Virginia, the tax applies if the item is first used in Virginia. Furthermore, "[i]f a taxable event occurs in Virginia, subsequent out of state delivery does not immunize it from tax." Commonwealth v. Miller-Morton, 220 Va. 852, 263 S.E.2d 413 (1980; copy enclosed). Thus, if the item was sold by a Virginia vendor and first shipped to the Taxpayer in Virginia, the item is taxable in Virginia even though the Taxpayer may send it to a location outside Virginia. If an item is purchased from an out-of-state vendor, the item becomes subject to the Virginia use tax when it enters Virginia, regardless of whether it will be re-shipped to other Taxpayer locations outside Virginia. As it now stands, the Taxpayer has not furnished sufficient proof to allow an adjustment for the fixed assets.
Purchase Exceptions
The Taxpayer claims that other purchases held in the audit qualify for an exemption from the tax and should be removed from the audit. However, the Taxpayer has not furnished any evidence of exemption, nor has the Taxpayer identified those purchases at issue. Accordingly, l find no basis to revise the purchase exceptions based on the claims made.
I would note that the comments made in the section entitled "Products Sold to Federal Government" in P.D. 00-62 apply to the Taxpayer in the instant case. Such comments explain that a service contractor is deemed the taxable user of its purchases of tangible personal property. As a consultant, the Taxpayer is generally taxable on all of its purchases, unless it can establish that a statutory exemption applies to specific equipment. In regard to the Taxpayer's claim that the research and development exemption applies, it is my understanding that there is no research and development equipment included in the audit.
In regard to a contract with a Virginia governmental agency, a review of the audit report indicates that master license agreements were included in the audit. Based on the conditions set out in the **** and **** license agreements, the Taxpayer is provided the tangible software and the right to use the prewritten software programs for internal purposes. Such use constitutes a taxable use by the Taxpayer. Even if the Taxpayer had the right to reproduce the software for the government's use, these agreements are still taxable based on the established policy and reasons set out in P.D. 98-39 (3/5/98; copy enclosed). Accordingly, the Taxpayer is subject to the tax based on the sales price charged on such property.
Penalty
The Taxpayer seeks waiver of the audit penalty. Generally, penalty is mandatory unless the Taxpayer has achieved an acceptable level of compliance. On a second audit, penalty will be waived if the use tax compliance ratio is 60% or greater. In this case, the Taxpayer's use tax compliance ratio is 28%. Therefore, penalty was properly applied by the auditor.
Penalty may also be waived if the Taxpayer presents evidence of exceptional mitigating circumstances which caused a low compliance level. In this case, no evidence of exceptional mitigating circumstances has been presented. Therefore, l find no basis for waiving the penalty assessed in this case.
Conclusion
Based on all of the foregoing, l find no basis to revise the assessment. However, l will allow the Taxpayer a final opportunity to provide additional information on the contested fixed assets for possible revision of the audit.
Such information should be furnished to *****, Audit Supervisor, at the department's ***** District Office. His phone number is ****. If a meeting is necessary to discuss any proposed audit revisions, please arrange such meeting with ****. If a meeting is not arranged or additional information is not provided within 30 days from the date of this letter, the outstanding balance of the assessment will become immediately due and payable.
If you have any questions about this response, please contact ***** of my Tax Policy staff at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/27094R
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter of February 9, 2000, requesting correction of the sales and use tax audit assessment issued to ***** (the "Taxpayer").
FACTS
The Taxpayer is a consultant providing services to commercial and government customers. As a result of an audit for the period July 1995 through March 1999, the Taxpayer was assessed consumer use tax on untaxed purchases of fixed assets and other tangible personal property.
The Taxpayer takes exception to the sampling techniques used for expensed purchases and maintains that several exceptions held in the audit are for non-recurring purchases and should not have been used in the extrapolation of the error factor. The Taxpayer takes exception to the extension of the audit period and maintains that it was done without the Taxpayer's knowledge or approval. The Taxpayer also maintains that it erroneously paid sales tax on purchases in connection with ship repair contracts and takes exception to the fact that such tax was not refunded by the department. In addition, the Taxpayer maintains that the fixed assets held in the audit include items which were exempted from the tax, previously taxed, or purchased for use out-of-state. Furthermore, the Taxpayer takes exception to many of the other purchases held in the audit and maintains that such items qualify for some type of exemption from the tax. Of final importance, the Taxpayer requests waiver of the audit penalty.
DETERMINATION
Sampling
In Public Document (P.D.) 00-62 (copy enclosed), the department sets out its policy on isolated or non-recurring purchases. Accordingly, unless the Taxpayer can prove that certain purchases were unusual to its operations, there is no basis to remove them from the sample for separate taxation.
Although random sampling was not utilized, the department did apply block sampling which utilized a set period for detailed audit. The resulting error factor was then applied to other periods of the audit not sampled. In this case, it is my understanding that the Taxpayer had chosen the year 1997 as the sample period and that the error factor was properly applied to the nonsampled periods. Although the Taxpayer may disagree, the block sampling technique used in this audit is an acceptable auditing technique and is commonly applied by the department.
Audit Period
The Taxpayer believes that the audit period was arbitrarily extended. However, it is my understanding that the former owner of the Taxpayer had requested the auditor to extend the audit period to March 1999 since it was ceasing operations. It is also my understanding that the Taxpayer had needed more time to gather records for the audit. Due to the circumstances, extending the audit period appears justified.
Refund of Taxes Previously Paid
The Taxpayer maintains that it erroneously paid sales tax to vendors on purchases related to its ship repair contracts with the federal government. The Taxpayer requests that the department refund such tax.
It is my understanding that the department's auditor advised the former owner early in the audit (i.e., in July or August 1998) to seek the appropriate refund of erroneously paid sales tax from its vendors. It is also my understanding that the department has no information as to whether the former owner of the Taxpayer ever obtained such refunds from its vendors.
Unless the Taxpayer is able to establish that the former owner did not obtain such refunds from its vendors, the Taxpayer has no right to seek such refunds from vendors or the department. Should the Taxpayer establish that the former owner did not obtain such refunds, the Taxpayer may seek refunds of sales tax erroneously paid from the vendors if requested within the statute of limitations for issuing refunds, i.e., no more than three years from the date of purchase. This procedure would allow the Taxpayer to receive a full refund of the sales tax, if the Taxpayer establishes its right to seek such refunds.
If the vendor refuses to provide the refund, the Taxpayer would be permitted to seek a refund from the department but must explain why the vendor refused to issue such refund and show proof that the former owner did not seek and obtain such refunds. In these instances, the department cannot refund the entire amount of the sales tax because of the dealer's discount kept by the vendors.
Fixed Assets
All items listed as fixed assets are from a report prepared by the Taxpayer. The report lists by voucher number all fixed assets purchased for use in Virginia. Unless the Taxpayer is able to establish otherwise, it is my understanding that the invoices for these assets had no sales tax charged or accrued.
If any of these assets qualify for a specific exemption under the law, the Taxpayer needs to identify the particular asset and furnish the appropriate explanation and proof to the department that an exemption applies before an adjustment can be made to the audit.
As for assets you contend were used outside Virginia, the tax applies if the item is first used in Virginia. Furthermore, "[i]f a taxable event occurs in Virginia, subsequent out of state delivery does not immunize it from tax." Commonwealth v. Miller-Morton, 220 Va. 852, 263 S.E.2d 413 (1980; copy enclosed). Thus, if the item was sold by a Virginia vendor and first shipped to the Taxpayer in Virginia, the item is taxable in Virginia even though the Taxpayer may send it to a location outside Virginia. If an item is purchased from an out-of-state vendor, the item becomes subject to the Virginia use tax when it enters Virginia, regardless of whether it will be re-shipped to other Taxpayer locations outside Virginia. As it now stands, the Taxpayer has not furnished sufficient proof to allow an adjustment for the fixed assets.
Purchase Exceptions
The Taxpayer claims that other purchases held in the audit qualify for an exemption from the tax and should be removed from the audit. However, the Taxpayer has not furnished any evidence of exemption, nor has the Taxpayer identified those purchases at issue. Accordingly, l find no basis to revise the purchase exceptions based on the claims made.
I would note that the comments made in the section entitled "Products Sold to Federal Government" in P.D. 00-62 apply to the Taxpayer in the instant case. Such comments explain that a service contractor is deemed the taxable user of its purchases of tangible personal property. As a consultant, the Taxpayer is generally taxable on all of its purchases, unless it can establish that a statutory exemption applies to specific equipment. In regard to the Taxpayer's claim that the research and development exemption applies, it is my understanding that there is no research and development equipment included in the audit.
In regard to a contract with a Virginia governmental agency, a review of the audit report indicates that master license agreements were included in the audit. Based on the conditions set out in the **** and **** license agreements, the Taxpayer is provided the tangible software and the right to use the prewritten software programs for internal purposes. Such use constitutes a taxable use by the Taxpayer. Even if the Taxpayer had the right to reproduce the software for the government's use, these agreements are still taxable based on the established policy and reasons set out in P.D. 98-39 (3/5/98; copy enclosed). Accordingly, the Taxpayer is subject to the tax based on the sales price charged on such property.
Penalty
The Taxpayer seeks waiver of the audit penalty. Generally, penalty is mandatory unless the Taxpayer has achieved an acceptable level of compliance. On a second audit, penalty will be waived if the use tax compliance ratio is 60% or greater. In this case, the Taxpayer's use tax compliance ratio is 28%. Therefore, penalty was properly applied by the auditor.
Penalty may also be waived if the Taxpayer presents evidence of exceptional mitigating circumstances which caused a low compliance level. In this case, no evidence of exceptional mitigating circumstances has been presented. Therefore, l find no basis for waiving the penalty assessed in this case.
Conclusion
Based on all of the foregoing, l find no basis to revise the assessment. However, l will allow the Taxpayer a final opportunity to provide additional information on the contested fixed assets for possible revision of the audit.
Such information should be furnished to *****, Audit Supervisor, at the department's ***** District Office. His phone number is ****. If a meeting is necessary to discuss any proposed audit revisions, please arrange such meeting with ****. If a meeting is not arranged or additional information is not provided within 30 days from the date of this letter, the outstanding balance of the assessment will become immediately due and payable.
If you have any questions about this response, please contact ***** of my Tax Policy staff at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/27094R
Related Documents
Rulings of the Tax Commissioner