Rulings of the Tax Commissioner

June 23, 2023

Re:    § 58.1-1821 Application:  Retail Sales and Use Tax
    
Dear *****:

This is in response to your letter submitted on behalf of ***** (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessment issued for the period October 2013 through March 2021. I apologize for the delay in responding to your request. 

FACTS

The Taxpayer operates a venue that rents its facility and tangible personal property to its customers for events, such as weddings, corporate retreats, birthday parties, and alcohol tastings. As a result of an audit by the Department, the Taxpayer was issued an assessment for tax and interest due on untaxed sales and untaxed fixed asset and general expense purchases. The assessment also includes compliance and amnesty penalties. During the audit, the auditor requested to review tax returns, bank statements, and executed sales contracts. The Taxpayer did not provide the necessary documentation for the auditor to accurately determine its tax liability. 

In its appeal, the Taxpayer alleges various issues concerning the assessment. First, the Taxpayer asserts that the assessment was not issued to the proper entity. The Taxpayer also states the audit period was improperly extended beyond the six-year audit period indicated on the signed waiver. Next, relying on Virginia Code § 58.1-603 4, the Taxpayer contends that its sales are not subject to tax because it does not provide overnight rentals. Alternatively, the Taxpayer claims that, if the Department determines that its sale are taxable, it believes the estimated assessment is overstated and the penalties were improperly assessed on tax collected but not remitted because it did not collect tax on its sales. The Taxpayer states that it is still working to provide documentation to the auditor. 

DETERMINATION

Assessment Issuance

The Taxpayer claims that the assessment was erroneously issued to *****, instead of *****. After a review of the information before me, I find that the assessment was issued based on the information made available to the auditor during the performance of the audit and is correct in this regard. 

Audit Period

The Taxpayer notes that the Extension of Time Limitation Agreement indicates a six-year audit period from October 2013 through September 2019. The Taxpayer states that the audit period should be limited to the period indicated on the waiver. 

In the instant case, the auditor brought the audit forward to include 2020 and 2021. However, the audit report does not include an agreement between the Taxpayer and the Department regarding an extension of the audit period to include periods after September 2019. Absent documentation as evidence that the Taxpayer and auditor mutually agreed to bring the audit period current, the audit must be limited to only include the six-year period agreed upon in the waiver. See Public Document (P.D.) 21-141 (11/9/2021). 

Accommodations

Virginia Code § 58.1-603 4 provides that the sales tax applies to “gross proceeds derived from the sale or charges for accommodations furnished to transients as set out in the definition of ‘retail sale’ in Virginia Code § 58.1-602.” The Department has interpreted the definitions of “retail sale,” “accommodations,” and “transient” found in Virginia Code § 58.1-602 to require an overnight stay for tax to apply to the rental of venue space without the transfer of tangible personal property. See Public Document (P.D.) 87-69 (2/27/1987) and P.D. 89-257 (9/25/1989).

Similarly, the 2022 Virginia General Assembly passed legislation that clarified the definition of “accommodations” in Virginia Code § 58.1-602. Senate Bill 432 (2022 Acts of Assembly, Chapter 154) provides that the term accommodations “does not include rooms or space offered by a person in the business of providing conference rooms, meeting space, or event space if the person does not also offer rooms available for overnight sleeping.” The legislation further provides that nothing in the definitions of “retail sale” and “sale at retail” require, or have required, in any taxable year prior to the effective date of the law change, the collection of any tax for the offering of rooms or space by a person in the business of providing conference rooms, meeting space, or event space if that person does not also offer rooms available for overnight sleeping. 

Based on the information available, it is unclear whether the Taxpayer provides overnight accommodations. The Taxpayer’s website indicates that it has cabins on its property and it has not presented any evidence to show that it did not provide overnight accommodations during the audit period. Virginia Code §  58.1-205 provides that any assessment of tax by the Department is deemed to be prima facie correct. The burden is on the taxpayer to prove the assessment is erroneous or incorrect. 

Taxable Sales

Even if the Taxpayer does not offer overnight accommodations, the available evidence indicates that the Taxpayer offers tangible personal property, such as tables, chairs, linens, tableware, and other items, available for rent in addition to the event space. The Taxpayer also offers optional “add-ons” that the guests can rent for an additional fee during an event. Virginia Code § 58.1-603 imposes the retail sales tax on the sale or rental of tangible personal property in Virginia. The tax is imposed on the gross proceeds derived from a lease or rental of tangible personal property. “Gross Proceeds” includes the total amount charged for tangible personal property. See Virginia Code § 58.1-602. 

The Department’s policy has been that when a dealer charges a lump sum amount for both taxable and nontaxable items in a transaction, the tax is applied to the entire transaction. See P.D. 94-142 (4/29/1994), P.D. 95-223 (8/29/1995), and P.D. 09-2 (2/4/2009). Conversely, the Department has ruled that fees charged for the use of real property, for which an overnight stay is not provided, are not taxable provided that no tangible personal property is included in the total amount charged. P.D. 87-69 and P.D. 89-257. 

Estimated Assessment

Virginia Code § 58.1-633 provides that every dealer required to make a return and collect sales tax “shall keep and preserve suitable records of the sales, leases, or purchase taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due here under, and such other pertinent information as may be required by the Tax Commissioner.”  The record keeping requirements are set out in Title 23 Virginia Administrative Code (VAC) 10-210-470. When a dealer fails to maintain adequate records, the Department is authorized by Virginia Code § 58-1-618 to use the best information available to reconstruct a dealer's sales and purchases to determine whether a tax liability exists. 

The Taxpayer claims the estimated tax liability assessed in the audit is overstated. However, it has not provided the necessary documentation to accurately determine its liability. In its appeal, the Taxpayer states it will provide additional documentation to the auditor for consideration. Accordingly, the audit will be returned to the audit staff in order to address the Taxpayer’s concerns related to the estimation of the audit assessment and other documentation issues mentioned in its appeal. 

Penalties

Virginia Code § 58.1-635 mandates the application of penalty to tax deficiencies. Title 23 VAC 10-210-2032 generally provides that a penalty will not be assessed in first generation audits. However, the regulation sets out an exception to this rule that when an audit by the Department discloses that the sales tax has been collected but not remitted, the penalty will apply.

In this first audit of the Taxpayer, the auditor's computation of the compliance penalty for tax collected but not remitted was based on an estimation of the Taxpayer's sales rather than actual sales reflecting taxes collected but not remitted. An estimate, while authorized to determine a tax liability, does not provide a basis of proof that the Taxpayer actually collected the sales tax and failed to remit such tax to the Department. Accordingly, I find cause for waiver of the assessed compliance penalty. In addition, in accordance with the 2017 Amnesty Guidelines, the amnesty penalty will be abated if the outstanding assessment, after revision adjustments, is paid within 30 days from the date of the bill. 

CONCLUSION

While you request a conference in your letter, your request is declined because the Department’s policy is well established and there is additional documentation that must be reviewed by the audit staff. 

The audit will be adjusted in accordance with this determination. The Taxpayer must provide all requested records and documentation to the audit staff within 60 days from the date of contact with the auditor. Once the review is completed by the auditor, additional revisions to the audit and the audit assessment will be made if warranted and an updated bill will be issued.

The Code of Virginia sections, regulations, and public documents cited, along with other reference documents, are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s website. If you have any questions about this response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at (804) *****.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/3902.G