Tax Type
Retail Sales and Use Tax
Description
Reynolds Metals Company v. Commonwealth of Virginia, Department of Taxation Relief from Erroneous Assessment of Use Taxes
Topic
Accounting Periods and Methods
Collection of Tax
Date Issued
10-19-2001
TWENTY-FIFTH JUDICIAL CIRCUIT OF VIRGINIA
Thomas H. Wood William S. Moffett, Jr., Retired Augusta County Courthouse Augusta County Courthouse
P.O. Box 689 P.O. Box 689
Staunton, Virginia 24402-0689 Staunton, Virginia 24402-0689
March 21, 2000
The Honorable James C. Stuchell Robert A. Warwick, Esquire
Assistant Attorney General Reynolds Metals Company
Office of the Attorney General 6601 West Broad Street
900 East Main Street Richmond, Virginia 23219
Richmond, VA 23219
G. William Watkins, Esquire
Allen & Carwile
P.O. Drawer 1558
Waynesboro, VA 22980
Re: Reynolds Metals Company v. Commonwealth of Virginia, Department of Taxation
Gentlemen:
Now before me for decision is an Application for Relief from Erroneous Assessment of Use Taxes, an action initiated against the Department of Taxation of the Commonwealth of Virginia (hereinafter Department) by Reynolds Metals Company (hereinafter Reynolds).
There are literally no facts in dispute in this case. Prior to the hearing, the parties entered into a written stipulation with a number of exhibits attached which covers virtually every aspect of the case. The only additional evidence consisted of the testimony of Glenda MacMeccan, Senior Auditor for the Department, and Claude Phenix, Director of State Tax Affairs for Reynolds. There was no conflict in the testimony of these two witnesses. As a consequence, it is not necessary to discuss the evidence in this case at any great length.
In 1966, Reynolds registered and obtained a Certification of Registration as a dealer pursuant to Section 58.1-613 of the Code of Virginia (hereinafter Code). As a dealer holding a Certificate of Registration, Reynolds is subject to the sales and use taxes imposed by Sections 58.1-603 and 58.1-604 of the Code of Virginia. Reynolds has a number of business locations throughout the Commonwealth and each of those locations is required to have a Certificate of Registration. One of Reynolds plants holding a Certificate of Registration is located in Augusta County, Virginia. Generally, the sales tax is calculated, collected and paid to the Department by the dealer even though the tax is paid by the consumer. In the case of the use tax, the consumer calculates the tax and pays it to the Department. Section 58.1-622 provides, in part, that each dealer holding a Certificate of Registration "shall be allowed" a discount from the tax due for the purpose of compensating the dealer for its expense in accounting for and paying the tax to the Department. Significantly, the dealer is not entitled to claim the discount if the amount of tax due was delinquent at the time it was paid. Both Reynolds and Reynolds vendors are entitled to claim this discount. On those occasions when Reynolds purchases property upon which a tax should be paid and its vendor, for whatever reason, does not collect and pay the tax, Reynolds must report and pay a use tax. Reynolds was entitled to claim this discount on the use tax.
Prior to January 1, 1994, Reynolds reported its sales and use taxes on Form ST-9, a form prescribed by the Department. Form ST-9 had separate lines for reporting the sales tax and the use tax and also contained a line for reporting the discount.
Effective January 1, 1994, the Department issued a "Direct Pay Permit" to Reynolds pursuant to Section 58.1-624 of the Code. This Permit allows a person subject to the tax to pay that tax directly to the Department instead of to its vendor. Reynolds qualifies for such a Permit because with respect to some of its purchases, it is impossible to determine at the time of purchase how the company will use the property and, therefore, whether a tax will be due on that purchase. According to both Mr. Phenix and Ms. MacMeccan, Reynolds derives benefit from this Direct Pay Permit because the Permit enables Reynolds to delay reporting and paying the tax due on a particular piece of property until it is able to determine, with certainty, whether a tax will be due. This delay can range anywhere from 30 days to six months. According to Mr. Phenix, the delay in payment, and thus the benefit, applies to what he described as a "small percentage" or "minor amount" of items. (T.P. 40). Mr. Phenix further testified that this was "really not much benefit to us." (T.P. 41).
Subsection (B) of Section 58.1-624 provides in part that, on a monthly basis, "... every Permit holder shall make and file with the Tax Commissioner a return for the preceding month in the form prescribed by the Tax Commissioner showing the total value of the tangible personal property so used, the amount of the tax due from the Permit holder, which amount shall be paid to the Tax Commissioner with such return, and such other information as the Tax Commissioner deems necessary." Pursuant to this subsection, the Department has prescribed Form ST-6 for use by holders of Direct Pay Permits in reporting its use tax liability. Form ST-6 does not have a line for reporting a discount and, indeed, the Department takes the position that the taxpayer is not entitled to claim a discount under these circumstances. Ms. MacMeccan testified that there are approximately 100 companies in the Commonwealth with Direct Pay Permits, and none of these companies has ever been allowed to claim a discount. (T.P. 74). Reynolds knew of the Department's position before it was issued a Direct Pay Permit, but, with knowledge of the Department's position, applied for a Permit anyway.
Beginning with the month of January, 1994, Reynolds has used Form ST-6 but has altered that form to claim the discount. This is accomplished by whiting out the line upon which a penalty must be reported, typing in the word "discount" and thus reporting the amount of discount it claims. From that point forward until August of 1994, Reynolds consistently claimed a discount, and the Department has consistently issued an assessment of additional use tax due for each month. The assessment was equal to the discount claimed. Further, Reynolds has consistently protested the Department's position.
Sometime in late 1993, Mr. Phenix struck up a conversation with an employee of the Department at an airport in Los Angeles. According to Mr. Phenix, this individual told him about a "simplified method" for reporting its sales and use tax liability. Pursuant to this method, the taxpayer is allowed to assume that a certain percentage of its transactions will be taxable events and to calculate and pay its tax liability using this percentage or factor. This factor is arrived at by agreement of the parties and is based upon data generated by audits of prior years. The agreement of the parties to use such a procedure is memorialized in a "Front-end Agreement". Discussions between the parties led to the execution of a Front-end Agreement on September 1, 1994. This simplified method results in substantial accounting savings for Reynolds and greatly reduces the time and expense of audits performed by the Department. Ms. MacMeccan testified that the time involved in an audit after the Front-end Agreement took effect was reduced from 2,000 man hours to 500 plan hours. Reynolds did not provide information as to the savings from its end but acknowledges that the savings are substantial.
In Paragraph 5 of the Agreement, the parties recited that the "factor" was an accurate basis upon which to carry out the calculation of Reynolds' tax liability. This paragraph provides further, "[T]herefore, the parties agree that as to the portion of the tax calculated arid remitted using the simplified method, no assessment of additional tax by the Commonwealth or claim for refunds by Reynolds Metals shall be made." Further, in Paragraph 1 of the Agreement, the parties agreed that Reynolds was to continue to utilize the Direct Pay Permit method. Interestingly, given the monthly controversy between the parties as to the discount/assessment, the parties chose to ignore this issue in the Front-end Agreement. It is also interesting to note that the Department ultimately forgave Reynolds for all of the assessments for 1994. Beginning with January, 1995, the discount/assessment dispute began anew. Between January 1, 1995, and the end of the month of November, 1995, the amount of the assessments by the Department totaled $15,568.00. This total had risen to $81,226.46 as of June 15, 1999. Reynolds has paid these assessments under protest, and its protests have been disallowed. On September 1, 1997, the parties entered into a new Front-end Agreement. This Agreement is virtually identical to the prior Agreement. Again, the parties chose to dodge the discount/assessment issue and the Agreement is silent as to this controversy.
As pointed out above, Ms. MacMeccan testified that approximately 100 Virginia companies have a Direct Dealer Permit, and that none of these taxpayers has ever been allowed a discount on its use tax liability. She further testified that Reynolds is the only taxpayer to complain of the Department's policy.
There are no Virginia cases involving the issue involved in the case at bar. There is, however, one Virginia Supreme Court case, Carr v. Forst, 249 Va. 66, 453 S.E.2d 274 (1995), which provides the guidance necessary to resolve the controversy now before this Court. Although the Carr case dealt with a taxpayer claiming an exemption from the payment of the sales tax and thus is not directly in point, it does present the same fundamental issue, i.e., statutory construction.
Summarizing the Carr Court's discussion of the principles applicable to the case at bar, this Court must accord great weight to the Department's construction of the statutes involved, must presume the validity of the Department's ruling and must place upon Reynolds the burden to prove that the Department's ruling is contrary to the law or that the Commissioner has abused his discretion and acted unreasonably. Id. at p. 69. Importantly, the Carr Court also directed this Court to accept the plain meaning of a clear and unambiguous statute. Id. at p. 69.
The Department's position can be summarized as follows. Section 58.1-622 entitles a taxpayer to a discount for the purpose of compensating that taxpayer for accounting for and paying the tax. Section 58.1-624 authorized the Department to prescribe the form upon which holders of direct payment permits were to report their tax liability. Since, in the opinion of the Department, a taxpayer derives a benefit from holding a Direct Payment Permit, that taxpayer ought not to be able to claim the discount provided for in Section 58.1-622. This policy is a long-standing policy and represents the Department's construction of the statute, and, accordingly, the policy is entitled to a presumption of validity. Only holders of Direct Payment Permits are entitled to enter into a Front-end Agreement with the Department. The Front-end Agreement confers a great benefit upon the taxpayer and affords another reason why the taxpayer should not be able to take the statutorily-mandated discount. Lastly, since Reynolds knew of the Department's policy before it ever obtained the Direct Payment Permit and entered into the Front-end Agreement, it has voluntarily relinquished its right to claim the discount.
Other than for the duty to prescribe a form arid its perception of the benefit to the taxpayer, the Department has suggested no other basis for its policy of disallowing the discount even though that policy effectively repeals a statute enacted by the General Assembly. Try as I may, the Court can discern no ambiguity in either Section 58.1-622 or 58.1-624. Further, there is simply no language in Section 58.1-624 which would authorize the Department to deny the discount to a holder of a Direct Payment Permit. Obviously the Direct Payment Permit is of some benefit to Reynolds, despite its assertions to the contrary, or it would not retain it. The Front-end Agreement is of great benefit to both parties to the Agreement. Both Front-end Agreements contain a provision allowing either party to terminate the Agreement upon 90 days' notice. The discount/assessment controversy has raged on for over five and a half years since the execution of the first Front-end Agreement, and neither party has seen fit to terminate it.
In its Memorandum, the Department argued that Reynolds waived its right to claim a refund based upon the discount by virtue of the provisions of Paragraph 5 of the Front-end Agreement. I would suggest that Paragraph 5 doesn't deal with the issues involved in the case at bar. In Paragraph 5, both parties waive their right to second-guess the accuracy of the factor employed in the simplified method. Otherwise, they waived no other rights.
In his motion to strike, (T.P. 64), Mr. Stuchell argued that the calculation of the tax pursuant to the Front-end Agreement was a "simple calculation." He went on to explain as follows:
Let me quote from Paragraph 2: The amount of the purchases that are subject to the tax shall then be multiplied by the appropriate tax rate to determine the tax liability. End of story. Mentions nothing about the discount.
The difficulty with this argument and with the Department's position is that the Department chooses to ignore the fact that Section 58.1-622 is a part of the tax rate. The General Assembly, not the Department, allowed the discount and thus conferred the benefit. The General Assembly, not the Department, possesses the power to take it away.
I would appreciate it if Mr. Warwick would prepare, circulate and submit for entry an appropriate Order.
Sincerely yours,
Thomas H. Wood
THW/ta
Rulings of the Tax Commissioner