Tax Type
Retail Sales and Use Tax
Description
Audit penalty; Corporate restructuring and employee turnover
Topic
Collection of Delinquent Tax
Penalties and Interest
Date Issued
06-23-2000
June 23, 2000
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter of April 18, 2000, in which you seek correction of the sales and use tax assessment issued to ***** (the "Taxpayer'), for the period January 1996 through December 1998.
FACTS
The Taxpayer is a wholly-owned subsidiary of a health care system ("system') that includes nonprofit hospitals. The Taxpayer serves as the purchasing company for the system. All purchases by the Taxpayer are made with funds transferred to it from the nonprofit hospitals in the system.
The Taxpayer generally purchases fixed assets and inventory items under a resale exemption certificate. Using a system of internal codes, the Taxpayer tracks the assignment of the purchases to the various members of the system. Applicable sales and use taxes are accrued for those purchases assigned to taxable members. Purchases assigned to the nonprofit hospitals are coded exempt, as these members qualify for the exemption provided under Code of Virginia Sec. 58.1-609.7(4).
The Taxpayer protests the assessment of the tax on a number of purchases that were incorrectly coded as used by the Taxpayer or by another taxable entity. The Taxpayer asserts that the purchases were used by the nonprofit hospitals and qualify for the above exemption. The Taxpayer provides documentation to support its position. The Taxpayer also seeks relief of the assessed penalty.
DETERMINATION
Contested Purchases
Code of Virginia Sec. 58.1-609.7(4) provides an exemption from the sales and use tax for tangible personal property purchased for use or consumption by a nonprofit hospital or a nonprofit licensed nursing home.
The Taxpayer provides information that indicates the contested purchases were assigned to a nonprofit hospital asset account. The tax will be removed from the contested purchases based on the above exemption. The Taxpayer acknowledges that the contested ceramic filter ring purchase was properly coded to the Taxpayer. Therefore, the tax was properly assessed on this item.
Waiver of Penalty
Title 23 of the Virginia Administrative Code (VAC) 10-210-2032 provides for the mandatory application of a penalty to an audit assessment based on the level of compliance exhibited by the taxpayer. Penalty is generally applied to use tax on a third or subsequent audit unless the compliance ratio meets or exceeds 85%. This is a third generation audit of the Taxpayer, and the use tax compliance ratio is almost 50%. This figure includes the adjustment for the contested purchases. Based on this measurement, the penalty was properly applied. The regulation provides that the application of penalty to audit deficiencies will not be waived on second and subsequent audits for other than exceptional mitigating circumstances.
During the audit period, the Taxpayer underwent a restructuring of its systems and procedures to enhance efficiency. As a result, the Taxpayer experienced many changes, including high employee turnover and the loss of procedures to ensure sales and use tax compliance. The Taxpayer believes its restructuring efforts represent unusual circumstances that may warrant the waiver of penalty.
Corporate restructuring and employee turnover are considered normal business conditions which are generally within a taxpayer's control and a consequence of a taxpayer's efforts and actions. The circumstances cited in this instance are not unusual, but in fact reflect common business conditions. Therefore, I do not find a basis to waive the penalty.
Alternative Use Tax Compliance Ratio
The Taxpayer expresses concern about advice from the auditor to change its use tax remittance practice. The Taxpayer was instructed to discontinue paying tax to vendors and to accrue and remit the tax on its purchases directly to the department. The Taxpayer believes that its use tax compliance ratio for this audit would be higher if tax payments to vendors were considered in computing the ratio. To support this position, the Taxpayer cites the alternative method for computing the use tax compliance ratio proposed in the department's revised penalty regulation.
It is my understanding that the auditor advised the Taxpayer to make the change based on the Taxpayer's practice of paying tax to out-of-state vendors who may or may not be registered to collect Virginia sales and use taxes. To ensure proper use tax compliance, the Taxpayer was advised to accrue and remit the tax on all untaxed purchase invoices. I find this procedure to be reasonable.
The department is in the process of revising the regulation addressing audit penalty and interest. As a part of the revision process, the department is proposing an alternative method of computing the use tax compliance ratio. While this regulation has not yet completed all requirements under the Administrative Process Act (APA), I have authorized the use of the alternative method effective for all retail sales and use tax audit assessments issued on or after October 1, 1999. I note that the Taxpayer's assessment was issued on August 11, 1999. Therefore, the alternative method is not available to the Taxpayer.
For future audit adjustments, the Taxpayer may exercise the option to compute a separate use tax compliance ratio under the alternative method by including the measure upon which sales tax was paid to its vendors. The alternative method must be computed as follows:
As noted in the regulation, it is the Taxpayer's responsibility to compute the alternative method, with documentation available to support the computation. The Taxpayer must compute the ratio based on a review of the same period used by the auditor to compute the compliance ratio. If the compliance ratio computed under the alternative method meets or exceeds the established threshold (in this case 85%), the penalty will not apply.
The audit assessment will be revised to remove the tax, penalty, and interest attributable to the contested invoices. The Taxpayer should remit payment of the remaining balance of the assessment in the amount of ***** within 30 days from the date of this letter. If payment is not received within the allotted time, additional interest will accrue to present. The Taxpayer may send payment to in the Office of Tax Policy at P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this letter, you may contact ***** at *****. Questions ***** regarding the revisions to the audit should be directed to the auditor ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/28509J
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter of April 18, 2000, in which you seek correction of the sales and use tax assessment issued to ***** (the "Taxpayer'), for the period January 1996 through December 1998.
FACTS
The Taxpayer is a wholly-owned subsidiary of a health care system ("system') that includes nonprofit hospitals. The Taxpayer serves as the purchasing company for the system. All purchases by the Taxpayer are made with funds transferred to it from the nonprofit hospitals in the system.
The Taxpayer generally purchases fixed assets and inventory items under a resale exemption certificate. Using a system of internal codes, the Taxpayer tracks the assignment of the purchases to the various members of the system. Applicable sales and use taxes are accrued for those purchases assigned to taxable members. Purchases assigned to the nonprofit hospitals are coded exempt, as these members qualify for the exemption provided under Code of Virginia Sec. 58.1-609.7(4).
The Taxpayer protests the assessment of the tax on a number of purchases that were incorrectly coded as used by the Taxpayer or by another taxable entity. The Taxpayer asserts that the purchases were used by the nonprofit hospitals and qualify for the above exemption. The Taxpayer provides documentation to support its position. The Taxpayer also seeks relief of the assessed penalty.
DETERMINATION
Contested Purchases
Code of Virginia Sec. 58.1-609.7(4) provides an exemption from the sales and use tax for tangible personal property purchased for use or consumption by a nonprofit hospital or a nonprofit licensed nursing home.
The Taxpayer provides information that indicates the contested purchases were assigned to a nonprofit hospital asset account. The tax will be removed from the contested purchases based on the above exemption. The Taxpayer acknowledges that the contested ceramic filter ring purchase was properly coded to the Taxpayer. Therefore, the tax was properly assessed on this item.
Waiver of Penalty
Title 23 of the Virginia Administrative Code (VAC) 10-210-2032 provides for the mandatory application of a penalty to an audit assessment based on the level of compliance exhibited by the taxpayer. Penalty is generally applied to use tax on a third or subsequent audit unless the compliance ratio meets or exceeds 85%. This is a third generation audit of the Taxpayer, and the use tax compliance ratio is almost 50%. This figure includes the adjustment for the contested purchases. Based on this measurement, the penalty was properly applied. The regulation provides that the application of penalty to audit deficiencies will not be waived on second and subsequent audits for other than exceptional mitigating circumstances.
During the audit period, the Taxpayer underwent a restructuring of its systems and procedures to enhance efficiency. As a result, the Taxpayer experienced many changes, including high employee turnover and the loss of procedures to ensure sales and use tax compliance. The Taxpayer believes its restructuring efforts represent unusual circumstances that may warrant the waiver of penalty.
Corporate restructuring and employee turnover are considered normal business conditions which are generally within a taxpayer's control and a consequence of a taxpayer's efforts and actions. The circumstances cited in this instance are not unusual, but in fact reflect common business conditions. Therefore, I do not find a basis to waive the penalty.
Alternative Use Tax Compliance Ratio
The Taxpayer expresses concern about advice from the auditor to change its use tax remittance practice. The Taxpayer was instructed to discontinue paying tax to vendors and to accrue and remit the tax on its purchases directly to the department. The Taxpayer believes that its use tax compliance ratio for this audit would be higher if tax payments to vendors were considered in computing the ratio. To support this position, the Taxpayer cites the alternative method for computing the use tax compliance ratio proposed in the department's revised penalty regulation.
It is my understanding that the auditor advised the Taxpayer to make the change based on the Taxpayer's practice of paying tax to out-of-state vendors who may or may not be registered to collect Virginia sales and use taxes. To ensure proper use tax compliance, the Taxpayer was advised to accrue and remit the tax on all untaxed purchase invoices. I find this procedure to be reasonable.
The department is in the process of revising the regulation addressing audit penalty and interest. As a part of the revision process, the department is proposing an alternative method of computing the use tax compliance ratio. While this regulation has not yet completed all requirements under the Administrative Process Act (APA), I have authorized the use of the alternative method effective for all retail sales and use tax audit assessments issued on or after October 1, 1999. I note that the Taxpayer's assessment was issued on August 11, 1999. Therefore, the alternative method is not available to the Taxpayer.
For future audit adjustments, the Taxpayer may exercise the option to compute a separate use tax compliance ratio under the alternative method by including the measure upon which sales tax was paid to its vendors. The alternative method must be computed as follows:
- Measure Reported + Measure Paid to Vendors
-------------------------------------------------------------------------------------------------- = Compliance Ratio
Measure Reported + Measure Paid to Vendors + Measure Found
As noted in the regulation, it is the Taxpayer's responsibility to compute the alternative method, with documentation available to support the computation. The Taxpayer must compute the ratio based on a review of the same period used by the auditor to compute the compliance ratio. If the compliance ratio computed under the alternative method meets or exceeds the established threshold (in this case 85%), the penalty will not apply.
The audit assessment will be revised to remove the tax, penalty, and interest attributable to the contested invoices. The Taxpayer should remit payment of the remaining balance of the assessment in the amount of ***** within 30 days from the date of this letter. If payment is not received within the allotted time, additional interest will accrue to present. The Taxpayer may send payment to in the Office of Tax Policy at P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this letter, you may contact ***** at *****. Questions ***** regarding the revisions to the audit should be directed to the auditor ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/28509J
Rulings of the Tax Commissioner