Tax Type
Retail Sales and Use Tax
Description
Audit penalty; Compliance ratio
Topic
Collection of Delinquent Tax
Penalties and Interest
Date Issued
05-25-2000
May 25, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ***
This is in reply to your letter in which you seek a waiver of the penalty included in the department's retail sales and use tax audit assessment issued to *** (the "Taxpayer"), for the period January 1996 through December 1998. I apologize for the delay in our response.
The Taxpayer is a government contractor providing services to governmental entities. The Taxpayer contends that the purchase of certain tangible personal property for a contract with a governmental agency warrants consideration for the waiver of penalty, as the transactions represent a first time audit issue. In particular, the Taxpayer was required to expedite the purchase of supplies and establish work locations in other states as a part of its contract requirements. The Taxpayer purchased the supplies, and because the work locations had not been established, stored the supplies at its Virginia headquarters. The supplies subsequently were shipped to the out-of-state work locations as they were established.
The Taxpayer contends that the purchase of the supplies at issue was unique and not covered by a previous audit; therefore, the penalty should not be applied. The Taxpayer seeks a waiver of the assessed penalties totaling $*** .
Government Contractors
Code of Virginia § 58.1-609.1(4) provides an exemption from the sales and use tax for tangible personal property purchased for use or consumption by the federal government and state and local governments of Virginia. Title 23 of the Virginia Administrative Code (VAC) 10-210-690 through 10-210-694 provides further guidance on the application of the government exemption.
Title 23 VAC 10-210-693 addresses the application of the tax to government contractors. This regulation states that the appropriate tax treatment of purchases of tangible personal property by persons who contract with the federal government, the state or its political subdivisions, is based upon whether the contract is for the sale of tangible personal property or for the provision of an exempt service. In considering the tax treatment of government contracts, the department applies the true object test to determine whether the contract is for the sale of tangible personal property or whether the contract is for the provision of services to the government.
In this case the Taxpayer does not contest the application of the tax to the items at issue. Its protest is limited to the application of penalty to the audit deficiency.
Penalty
Title 23 VAC 10-210-2032, copy enclosed, provides for the application of penalty based on the level of compliance exhibited by the taxpayer. On a third and subsequent audit, penalty will be applied unless the compliance ratio meets or exceeds 85% for sales tax and for use tax. The current audit, which is the Taxpayer's fourth, reflects a use tax compliance ratio of 56%. Based on this measurement, the penalty was properly applied.
The Taxpayer maintains that the purchases at issue represent a deficiency occurring in an area not covered in a previous audit. However, a review of the department's prior audits of the Taxpayer reveals that the majority of deficiencies were for purchases of tangible personal property for use by the Taxpayer in its performance of services required under government contracts. The Taxpayer had been advised of its responsibility to accrue use tax on tangible personal property purchased for its own use and consumption when providing such services.
Furthermore, comments by the department's auditor provide that the purchases at issue are not unlike other purchases related to other government services contracts. A review of the compliance computation reflects that even if the purchases were not included in the ratio, the Taxpayer's compliance ratio would only improve to 62%, and penalty would continue to apply. As the purchases are properly included in the audit's purchase exception listing, the resulting deficiency for tax, penalty and interest is also proper.
Alternative Compliance Calculation
The Taxpayer has indicated that it seeks to take advantage of the option to compute a separate use tax compliance ratio under the alternative method as outlined in the exposure draft of 23 VAC 10-210-2032 (B) (2), by including the measure upon which sales tax was paid to its vendors. The department is in the process of revising this regulation, and as a part of this revision process, the department must complete certain steps under the Administrative Process Act (APA). While this regulation has not yet completed all of the requirements, l 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, however, that the Taxpayer's assessment was issued on September 23, 1999. Consequently, the alternative method is not available to the Taxpayer.
Based on all of the foregoing, l find no cause to allow for any adjustment to the department's audit. Accordingly, the Taxpayer should return its payment for the remaining balance of the tax, penalty and interest totaling $** to avoid the accrual of any additional interest. Payment should be sent to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 30 days from the date of this letter. If payment is not received within that time, interest will accrue on the balance due from the original date of assessment. If you should have any questions regarding this matter, please contact **** of the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/26349Q
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ***
This is in reply to your letter in which you seek a waiver of the penalty included in the department's retail sales and use tax audit assessment issued to *** (the "Taxpayer"), for the period January 1996 through December 1998. I apologize for the delay in our response.
FACTS
The Taxpayer is a government contractor providing services to governmental entities. The Taxpayer contends that the purchase of certain tangible personal property for a contract with a governmental agency warrants consideration for the waiver of penalty, as the transactions represent a first time audit issue. In particular, the Taxpayer was required to expedite the purchase of supplies and establish work locations in other states as a part of its contract requirements. The Taxpayer purchased the supplies, and because the work locations had not been established, stored the supplies at its Virginia headquarters. The supplies subsequently were shipped to the out-of-state work locations as they were established.
The Taxpayer contends that the purchase of the supplies at issue was unique and not covered by a previous audit; therefore, the penalty should not be applied. The Taxpayer seeks a waiver of the assessed penalties totaling $*** .
DETERMINATION
Government Contractors
Code of Virginia § 58.1-609.1(4) provides an exemption from the sales and use tax for tangible personal property purchased for use or consumption by the federal government and state and local governments of Virginia. Title 23 of the Virginia Administrative Code (VAC) 10-210-690 through 10-210-694 provides further guidance on the application of the government exemption.
Title 23 VAC 10-210-693 addresses the application of the tax to government contractors. This regulation states that the appropriate tax treatment of purchases of tangible personal property by persons who contract with the federal government, the state or its political subdivisions, is based upon whether the contract is for the sale of tangible personal property or for the provision of an exempt service. In considering the tax treatment of government contracts, the department applies the true object test to determine whether the contract is for the sale of tangible personal property or whether the contract is for the provision of services to the government.
In this case the Taxpayer does not contest the application of the tax to the items at issue. Its protest is limited to the application of penalty to the audit deficiency.
Penalty
Title 23 VAC 10-210-2032, copy enclosed, provides for the application of penalty based on the level of compliance exhibited by the taxpayer. On a third and subsequent audit, penalty will be applied unless the compliance ratio meets or exceeds 85% for sales tax and for use tax. The current audit, which is the Taxpayer's fourth, reflects a use tax compliance ratio of 56%. Based on this measurement, the penalty was properly applied.
The Taxpayer maintains that the purchases at issue represent a deficiency occurring in an area not covered in a previous audit. However, a review of the department's prior audits of the Taxpayer reveals that the majority of deficiencies were for purchases of tangible personal property for use by the Taxpayer in its performance of services required under government contracts. The Taxpayer had been advised of its responsibility to accrue use tax on tangible personal property purchased for its own use and consumption when providing such services.
Furthermore, comments by the department's auditor provide that the purchases at issue are not unlike other purchases related to other government services contracts. A review of the compliance computation reflects that even if the purchases were not included in the ratio, the Taxpayer's compliance ratio would only improve to 62%, and penalty would continue to apply. As the purchases are properly included in the audit's purchase exception listing, the resulting deficiency for tax, penalty and interest is also proper.
Alternative Compliance Calculation
The Taxpayer has indicated that it seeks to take advantage of the option to compute a separate use tax compliance ratio under the alternative method as outlined in the exposure draft of 23 VAC 10-210-2032 (B) (2), by including the measure upon which sales tax was paid to its vendors. The department is in the process of revising this regulation, and as a part of this revision process, the department must complete certain steps under the Administrative Process Act (APA). While this regulation has not yet completed all of the requirements, l 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, however, that the Taxpayer's assessment was issued on September 23, 1999. Consequently, the alternative method is not available to the Taxpayer.
Based on all of the foregoing, l find no cause to allow for any adjustment to the department's audit. Accordingly, the Taxpayer should return its payment for the remaining balance of the tax, penalty and interest totaling $** to avoid the accrual of any additional interest. Payment should be sent to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 30 days from the date of this letter. If payment is not received within that time, interest will accrue on the balance due from the original date of assessment. If you should have any questions regarding this matter, please contact **** of the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/26349Q
Rulings of the Tax Commissioner