Tax Type
Retail Sales and Use Tax
Description
Foreign taxes; Mine access roads; Audit penalty
Topic
Penalties and Interest
Property Subject to Tax
Date Issued
01-03-2001
January 3, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ***
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to **** (the "Taxpayer") for the period of January 1996 through December 1998. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer in this case involves one parent corporation and its three separate subsidiaries. The subsidiaries' activities include the mining and manufacturing of sand, gravel, and concrete for sale or resale. The areas of contention include: i) the purchase of a video conference unit by the foreign parent corporation and shipped to the Virginia subsidiary, ii) materials used to prepare passageways to extraction sites, and iii) penalties associated with what the parent corporation considers a first generation audit. The Taxpayer is requesting that these items be removed from the audit findings.
I will address each of the contested areas separately below.
DETERMINATION
Video Conference Unit
Code of Virginia § 58.1-604 imposes a use tax on "each item or article of tangible personal property used or consumed in this Commonwealth." The term "used" is defined in Code of Virginia § 68.1-602 as "the exercise of any right or power over tangible personal property incidental to the ownership thereof." The use tax is required to be paid on untaxed purchases made by a Virginia resident for use in Virginia, regardless of where the purchases are made.
In imposing the use tax, the General Assembly recognized the potential for double taxation. Code of Virginia § 58.1-611 was enacted to provide a credit against Virginia's retail sales and use tax equal to the amount of the tax paid by the purchaser to another state or political subdivision thereof by reason of imposition of a similar tax on the purchase or use of property.
In providing the credit, the General Assembly specifically limited it to tangible personal property purchased in "another state," and the amount of the credit is equal to the tax paid to "another state or political subdivision thereof." While the term "state" is not defined in Title 58.1, it is defined in Title 1, General Provisions.
Code of Virginia § 1-13.26 provides that, unless otherwise provided, the "state," when applied to a part of the United States, "shall be construed to extend to and include the several commonwealths therein, the District of Columbia, and the several territories so-called." There is nothing in the section that would allow a foreign country to fall under the definition. Had the General Assembly intended for the credit to be available for any purchase made outside Virginia and for the tax paid to any government (foreign or domestic), the qualifying language "another state" would not have been included in the statute. Therefore, a tax paid to a foreign country is not paid to "another state" as that term is defined in Code of Virginia § 1-13.26 and does not qualify for the credit under Code of Virginia § 58.1-611. For this reason, I can find no basis for removing the video conference unit from the audit findings.
Material Used to Build Passageways to Extraction Site
The contested item in this area is gravel used to build access roads from public roads to the mine sites. The Taxpayer takes the position that the gravel used to build these roads is eventually processed and resold; therefore, it should be subject to the tax at the time of resale and not when used to build access roads.
Title 23 of the Virginia Administrative Code (VAC) 10-210-960.A(3)(b) provides that the construction and maintenance of roads or other private transportation systems are not a part of the mining process and are subject to the tax. Code of Virginia
§ 58.1623 provides that:
If a taxpayer... makes any use of [resale] property other than an exempt use or retention, demonstration, or display while holding property for resale... such use shall be deemed a taxable sale by the taxpayer as of the time the property... is first used by him, and the cost of the property to him shall be deemed the sales price of such retail sale.
Further, Code of Virginia §58.1-602 defines "use" to mean "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business."
Based on the above, despite the fact that the gravel in question may eventually be resold, the Taxpayer makes first use of the gravel for building taxable access roads to the mine site. For this reason, I find that the gravel was properly held taxable in the audit findings.
Audit Penalty
The Taxpayer acquired its subsidiaries from independently owned sand and gravel companies. The subsidiaries had been audited several times prior to being acquired by the Taxpayer. The auditor treated the current audits as second-generation audits and, due to compliance ratios of 33%, 15%, and 59%, assessed audit penalties. The Taxpayer believes that since these were first-time audits under the current ownership, these qualify as first generation audits and the penalty should not apply.
Based on the information furnished by the auditor, the Taxpayer purchased an existing company with an audit history with the Commonwealth. In addition, the Taxpayer retained most of the employees of the existing company, including the comptroller, operated virtually in the same manner as prior to the acquisition, and maintained all records in and managed from the same office subsequent to the acquisition. Title 23 VAC 10-210-2032,
copy enclosed, addresses audit penalty and provides for the following:
The audit of a business which has experienced a change in responsible partners or officers or the addition of new locations, and where the business is conducted in the same manner and for the same purposes as during the prior audit, will not be considered a first audit for purposes of this subsection.
Based on all of the above, I cannot consider the current audit as a first audit for audit penalty purposes. Due to the fact the Taxpayer did not meet an acceptable use tax compliance ratio for a second or subsequent audit, as established in 23 VAC 10-210-2032, the penalty was properly applied.
Accordingly, there is no basis to revise the assessment. The Taxpayer will receive an updated bill with interest accrued to date. Payment of the outstanding audit liabilities should be made within 30 days from the date of the updated bill.
If you should have any questions regarding this matter, please contact *** of my Office of Tax Policy, at ***.
Sincerely,
Danny M. Payne
Tax Commissioner
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ***
This will reply to your letter in which you seek correction of the retail sales and use tax audit assessment issued to **** (the "Taxpayer") for the period of January 1996 through December 1998. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer in this case involves one parent corporation and its three separate subsidiaries. The subsidiaries' activities include the mining and manufacturing of sand, gravel, and concrete for sale or resale. The areas of contention include: i) the purchase of a video conference unit by the foreign parent corporation and shipped to the Virginia subsidiary, ii) materials used to prepare passageways to extraction sites, and iii) penalties associated with what the parent corporation considers a first generation audit. The Taxpayer is requesting that these items be removed from the audit findings.
I will address each of the contested areas separately below.
DETERMINATION
Video Conference Unit
Code of Virginia § 58.1-604 imposes a use tax on "each item or article of tangible personal property used or consumed in this Commonwealth." The term "used" is defined in Code of Virginia § 68.1-602 as "the exercise of any right or power over tangible personal property incidental to the ownership thereof." The use tax is required to be paid on untaxed purchases made by a Virginia resident for use in Virginia, regardless of where the purchases are made.
In imposing the use tax, the General Assembly recognized the potential for double taxation. Code of Virginia § 58.1-611 was enacted to provide a credit against Virginia's retail sales and use tax equal to the amount of the tax paid by the purchaser to another state or political subdivision thereof by reason of imposition of a similar tax on the purchase or use of property.
In providing the credit, the General Assembly specifically limited it to tangible personal property purchased in "another state," and the amount of the credit is equal to the tax paid to "another state or political subdivision thereof." While the term "state" is not defined in Title 58.1, it is defined in Title 1, General Provisions.
Code of Virginia § 1-13.26 provides that, unless otherwise provided, the "state," when applied to a part of the United States, "shall be construed to extend to and include the several commonwealths therein, the District of Columbia, and the several territories so-called." There is nothing in the section that would allow a foreign country to fall under the definition. Had the General Assembly intended for the credit to be available for any purchase made outside Virginia and for the tax paid to any government (foreign or domestic), the qualifying language "another state" would not have been included in the statute. Therefore, a tax paid to a foreign country is not paid to "another state" as that term is defined in Code of Virginia § 1-13.26 and does not qualify for the credit under Code of Virginia § 58.1-611. For this reason, I can find no basis for removing the video conference unit from the audit findings.
Material Used to Build Passageways to Extraction Site
The contested item in this area is gravel used to build access roads from public roads to the mine sites. The Taxpayer takes the position that the gravel used to build these roads is eventually processed and resold; therefore, it should be subject to the tax at the time of resale and not when used to build access roads.
Title 23 of the Virginia Administrative Code (VAC) 10-210-960.A(3)(b) provides that the construction and maintenance of roads or other private transportation systems are not a part of the mining process and are subject to the tax. Code of Virginia
§ 58.1623 provides that:
If a taxpayer... makes any use of [resale] property other than an exempt use or retention, demonstration, or display while holding property for resale... such use shall be deemed a taxable sale by the taxpayer as of the time the property... is first used by him, and the cost of the property to him shall be deemed the sales price of such retail sale.
Further, Code of Virginia §58.1-602 defines "use" to mean "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business."
Based on the above, despite the fact that the gravel in question may eventually be resold, the Taxpayer makes first use of the gravel for building taxable access roads to the mine site. For this reason, I find that the gravel was properly held taxable in the audit findings.
Audit Penalty
The Taxpayer acquired its subsidiaries from independently owned sand and gravel companies. The subsidiaries had been audited several times prior to being acquired by the Taxpayer. The auditor treated the current audits as second-generation audits and, due to compliance ratios of 33%, 15%, and 59%, assessed audit penalties. The Taxpayer believes that since these were first-time audits under the current ownership, these qualify as first generation audits and the penalty should not apply.
Based on the information furnished by the auditor, the Taxpayer purchased an existing company with an audit history with the Commonwealth. In addition, the Taxpayer retained most of the employees of the existing company, including the comptroller, operated virtually in the same manner as prior to the acquisition, and maintained all records in and managed from the same office subsequent to the acquisition. Title 23 VAC 10-210-2032,
copy enclosed, addresses audit penalty and provides for the following: The audit of a business which has experienced a change in responsible partners or officers or the addition of new locations, and where the business is conducted in the same manner and for the same purposes as during the prior audit, will not be considered a first audit for purposes of this subsection.
Based on all of the above, I cannot consider the current audit as a first audit for audit penalty purposes. Due to the fact the Taxpayer did not meet an acceptable use tax compliance ratio for a second or subsequent audit, as established in 23 VAC 10-210-2032, the penalty was properly applied.
Accordingly, there is no basis to revise the assessment. The Taxpayer will receive an updated bill with interest accrued to date. Payment of the outstanding audit liabilities should be made within 30 days from the date of the updated bill.
If you should have any questions regarding this matter, please contact *** of my Office of Tax Policy, at ***.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner