Tax Type
Retail Sales and Use Tax
Description
Paging service provider; Revoked "public service' exemption; Lease and maintenance agreements
Topic
Exemptions
Property Subject to Tax
Date Issued
04-09-2001
April 9, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek the correction of a retail sales and use tax assessment issued to your client, ***** (the "Taxpayer"), for the period August 1994 through July 1997. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a provider of paging services and other communications products and services. The Taxpayer was assessed use tax on tangible personal property purchased under the exemption for public service corporations in Code of Virginia § 58.1-609.3(3). Due to federal and state deregulation of radio common carriers and cellular mobile radio communications carriers, the State Corporation Commission ("SCC") stopped issuing certificates of convenience and necessity to paging companies effective July 1, 1995. The SCC also cancelled all existing certificates of convenience and necessity that had been issued to paging companies on October 23, 1995. For this reason, the department no longer recognizes the Taxpayer's public service corporation exemption.
Due to the resulting change in the Taxpayer's exemption status, tangible personal property used to provide paging services and purchased on or after July 1, 1995 was included in the Taxpayer's audit. The Taxpayer maintains that it still qualifies for exemption from sales and use tax based on the definition of a telecommunications company found in Code of Virginia § 58.1-400.1. In addition, the Taxpayer suggests that the assessment of use tax on software license fees is erroneous. The Taxpayer also states that the sampling method used in the audit is invalid, certain purchases were improperly classified as fixed assets, and the use tax compliance penalty should be waived.
DETERMINATION
Telecommunications Exemption
Code of Virginia § 58.1-609.3(3) provides an exemption from the retail sales and use tax for tangible personal property sold or leased to a public service corporation or a "telecommunications company" as defined in Code of Virginia § 58.1-400.1 for use or consumption by such company directly in the rendition of its public service.
Prior to July 1, 1998, a "telecommunications company" was defined in Code of Virginia § 58.1-400.1 as:
A telephone company or other person holding a certificate of convenience and necessity granted by the State Corporation Commission authorizing local exchange telephone service, interexchange service, radio common carrier system or a cellular mobile radio communications system; or a person authorized by the Federal Communications Commission to provide commercial mobile service as defined in § 332(d)(1) of the Communications Act of 1934, as amended, where such service includes cellular mobile radio communications services or personal communications services; or a person holding a certificate issued pursuant to § 214 of the Communications Act of 1934, as amended, authorizing telephone service; or a telegraph company or other person operating the apparatus necessary to communicate by telegraph.
The 1998 Virginia General Assembly amended § 58.1-400.1, and effective July 1, 1998, a "telecommunications company" is defined as:
A telephone company or other person holding a certificate of convenience and necessity granted by the State Corporation Commission authorizing telephone service; or a person authorized by the Federal Communications Commission to provide commercial mobile service as defined in § 332(d)(1) of the Communications Act of 1934, as amended, where such service includes cellular mobile radio communications services or broadband personal communications services; or a person holding a certificate issued pursuant to § 214 of the Communications Act of 1934, as amended, authorizing domestic telephone service and belonging to an affiliated group including a person holding a certificate of convenience and necessity granted by the State Corporation Commission authorizing telephone service; or a telegraph company or other person operating the apparatus necessary to communicate by telegraph. The term "affiliated group" shall have the meaning given in § 58.1-3700.1.
Effective July 1, 1995, the SCC ceased issuing certificates of convenience and necessity to paging companies and, effective October 23, 1995, revoked all existing certificates of convenience and necessity that were held by paging companies. The SCC notified all paging companies affected by this action in writing. Accordingly, the Taxpayer's paging services no longer qualify the Taxpayer as a "public service corporation" for purposes of this sales and use tax exemption. Also, the Taxpayer does not qualify as a "telecommunications company," as defined above, with respect to its paging services. Because the sales and use tax exemption set out in Code of Virginia § 58.1-609.3(3) does not apply to the Taxpayer's paging operations, the Taxpayer's purchase of tangible personal property used to provide paging services is taxable.
The Taxpayer maintains that it qualifies for exemption from sales and use tax based on the definition of a telecommunications company in effect prior to July 1, 1998. The Taxpayer has provided the department with information showing that it holds a certificate issued pursuant to § 214 of the Communications Act of 1934 and that it is authorized by the Federal Communications Commission to provide commercial mobile service as defined in § 332(d)(1) of the Communications Act of 1934, as amended.
I note that the statutory definition of "telecommunications company" contains additional criteria that restrict the application of the exemption. For example, to qualify as a telecommunications company under the definition in Code of Virginia § 58.1-400.1 in effect during most of the audit period, the Taxpayer's provision of mobile communications services must include cellular mobile radio communications service or personal communications services. Under an alternative definition of a telecommunications company in the same statute, the Taxpayer is required to hold a certificate issued under § 214 of the Communications Act of 1934 authorizing telephone service. The Taxpayer must provide evidence (FCC licenses or certificates) that it meets the statutory definition of a telecommunications company in effect during the audit period. The licenses provided to the department do not indicate that the Taxpayer provided cellular mobile radio communications services or personal communications services as required by the statute.
Code of Virginia § 58.1-609.3(ii) provides an exemption for A[t]angible personal property sold or leased to a telecommunications company as defined in § 58.1-400.1 ... for use or consumption by such corporation, company, person ... directly in the rendition of its public service ...." (Emphasis added.) As the statute indicates, the exemption applies only to the lease or purchase by the Taxpayer of tangible personal property used directly in the rendition of the services which qualifies it as a telecommunications company under § 58.1-400.1. Not only does the Taxpayer need to provide evidence of its authorization to provide services that qualify it as a telecommunications company, it must identify those items in the audit that are used directly to provide the services that qualify it for the telecommunications exemption.
The Taxpayer may provide any such documentation to the department for review. The audit will be adjusted based on confirmation by the department that the Taxpayer provided services during the audit period that qualify it as a telecommunications company and based on the identification of property that has been used directly to provide qualifying telecommunications services.
The Taxpayer requests alternate relief in the event the department finds that its paging services do not qualify for exemption. The Taxpayer requests an adjustment to the audit to allow the public service corporation exemption up to the effective date that the certificates of convenience and necessity for paging companies were officially revoked by the SCC. Based on information received from the SCC and the Taxpayer, the Taxpayer's certificate of convenience and necessity was revoked on October 23, 1995. Therefore, all purchase exceptions dated through October 1995 that qualified for exemption prior to the revocation of the Taxpayer's certificate of convenience and necessity will be removed from the audit.
Software License Fees
Prior to the start of this audit period, the Taxpayer entered into a license agreement with a vendor to use the vendor's billing system software. The license agreement was modified during the audit period by a new contract known as a consolidation agreement. Charges for software license fees and software upgrades and maintenance billed to the Taxpayer under the consolidation agreement were held taxable in the audit. The Taxpayer maintains that the consolidation agreement is a separate transaction from the original software license agreement, and the charges billed under the consolidation agreement are for the intangible right to use software already in the Taxpayer's possession. The consolidation agreement provides that the Taxpayer is billed a per-unit charge based on the total number of active paging units that the Taxpayer bills its customers. The per-unit charge includes software license fees, upgrade fees, technical support, ongoing maintenance, etc.
A review of the consolidation agreement indicates that the original software license agreement was made a part of the consolidation agreement. The section in the consolidation agreement referred to as "Term of Program Agreement" states that the Taxpayer will continue to use the vendor's paging software and services. This same section further states that all other terms in the original license shall remain in full force and effect. The original software license agreement represents a lease of tangible personal property, as the agreement granted the Taxpayer the right to use the vendor's paging software. The license agreement states that if it is terminated, the right of the Taxpayer to possess or use the software shall end and, at the vendor's discretion, the Taxpayer must return or destroy all software.
As the consolidation agreement is a continuation of the original license agreement, I cannot agree that the transactions at issue are separate and distinct. Although the consolidation agreement changes the method of billing to a per-unit charge, the charges are still for the license to use an expanded, modified version of the billing software system. I also cannot agree that the consolidation agreement is analogous to the situation referenced in Public Document 95-317 (12/15/95). The charges billed under the consolidation agreement are clearly for the Taxpayer's use of the billing system software and services in connection with the use of the software. The department's longstanding policy with respect to software licenses is that charges for a license to use software in tangible form are a lease or rental of tangible personal property and subject to sales and use tax. Therefore, the assessment of sales tax on charges for the software license fees is proper.
Consolidation Agreement - Charges for Upgrades
The Taxpayer also maintains that the consolidation agreement provides for upgrades and enhancements to the existing billing system, and the milestone charges for the upgrades are analogous to a maintenance agreement. Thus, the charges should be taxed at one-half of the total charge in accordance with Code of Virginia § 58.1-609.5(9). The Taxpayer also suggests that a portion of the per-unit charges billed by the vendor represent nontaxable labor charges, and the audit should be adjusted to remove a percentage of the license fees held taxable in the audit.
The Taxpayer's license to use the billing system software is analogous to a lease of tangible personal property. Title 23 of the Virginia Administrative Code (VAC) 10-210-840 states that the sales and use tax applies to the gross proceeds received for the lease or rental of tangible personal property. The term "gross proceeds" is defined as "charges made or voluntary contributions received for the lease or rental of tangible personal property computed with the same deductions, where applicable, as for sales price in 23 VAC 10-210-4000." "Sales price" is defined in Title 23 VAC 10-210-4000(A) as "the total amount for which tangible personal property or taxable services are sold and includes any services in connection with such sale." This same section explains that no deduction from sales price is allowed for labor or service costs billed in connection with the sale of tangible personal property.
Based on the above, service or labor charges made in connection with the Taxpayer's software license charges and included in the per-unit charges or in milestone charges are considered part of the gross proceeds from the lease of the software and subject to sales and use tax. Notwithstanding the above and due to the confusion over the correct application of the tax on this issue, I will agree to remove 50 percent of the milestone charges from the audit. However, the full amount of milestone charges billed to the Taxpayer subsequent to the audit period are subject to the sales and use tax, as such charges are considered part of the "gross proceeds" of the lease or license agreement.
Other Maintenance Agreements
The Taxpayer states that charges for other maintenance agreements were taxed on the full amount rather than one-half the total charge. Effective January 1, 1996, maintenance contracts that provide for both repair or replacement parts and repair labor are taxed at one-half the total charge for such contracts. The Taxpayer requests that the audit be reviewed to identify and correct any such charges. I will have an auditor review any documentation the Taxpayer can provide with respect to maintenance agreement charges. The audit will be adjusted based on this review.
Audit Methodology: Sample
The Taxpayer states that the department's methodology for determining the use tax liability was incorrect. The auditor extrapolated the results of a one-year sample of purchases using the Taxpayer's gross revenues during the audit period. The Taxpayer maintains that the use of Virginia revenues in the sample extrapolation more accurately reflects the Taxpayer's Virginia use tax liability. The Taxpayer asks that the use tax liability be recalculated using Virginia revenues instead of gross revenues.
Based on a review of the sample methodology used, I agree that the sample may not be representative of the Taxpayer's audit period. The audit sample will be recalculated using the Virginia revenues reported on the Taxpayer's Virginia corporation income tax returns to extrapolate the sample results.
Audit Methodology: Reclassify Purchases as Fixed Assets
The Taxpayer suggests that some of the purchases in the audit sample should be classified as fixed assets and removed from the audit sample. The classification of the Taxpayer's purchases as expense items was based on information provided by the Taxpayer. If the Taxpayer can provide evidence that certain purchases were not expensed but were classified as fixed assets for income tax purposes, the purchases will be removed from the sample and treated as fixed assets. The Taxpayer may provide a depreciation schedule, general ledger information or similar documentation to the department showing those items that are improperly classified as fixed assets in the audit. The audit will be recalculated based on the fixed asset documentation provided by the Taxpayer.
Penalty
The Taxpayer seeks waiver of the use tax compliance penalty. The Taxpayer indicates that representatives of the department informed the Taxpayer in a meeting prior to the issuance of the audit assessment that no penalty would be assessed in the audit. The Taxpayer maintains that the rapid growth of the business and the significant changes in its business operations since the last audit warrant waiver of the penalty. The Taxpayer also purchased a new billing system to accommodate the growth of its subscriber base. If the department does not agree to waive the entire penalty, the Taxpayer asks for waiver of the penalty on purchases related to the billing system on the basis that the purchase of the billing system is a new audit issue.
Code of Virginia § 58.1-105 authorizes the Tax Commissioner to compromise and settle doubtful or disputed claims for taxes and to accept offers in compromise of penalties. The Taxpayer was presented a draft copy of the audit report by the audit staff that states "no penalty applied." Based on this and other information provided to the department, the compliance penalty will be abated in full.
Conclusion
The Taxpayer should note that the change in the definition of a "telecommunications company" effective July 1, 1998, may affect services provided by the Taxpayer that qualify for sales and use tax exemption. The Taxpayer must hold a license from the FCC authorizing the provision of those services specifically included in the definition to qualify for exemption. In addition, the exemption applies to tangible personal property that is used directly to provide qualifying services for which the Taxpayer holds a license from the FCC.
The audit staff will contact the Taxpayer to set up a mutually agreeable time to make the stated revisions to the audit and review any documentation the Taxpayer provides to support its position. If you have any questions concerning this determination, please contact **** in the Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/21735S
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek the correction of a retail sales and use tax assessment issued to your client, ***** (the "Taxpayer"), for the period August 1994 through July 1997. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a provider of paging services and other communications products and services. The Taxpayer was assessed use tax on tangible personal property purchased under the exemption for public service corporations in Code of Virginia § 58.1-609.3(3). Due to federal and state deregulation of radio common carriers and cellular mobile radio communications carriers, the State Corporation Commission ("SCC") stopped issuing certificates of convenience and necessity to paging companies effective July 1, 1995. The SCC also cancelled all existing certificates of convenience and necessity that had been issued to paging companies on October 23, 1995. For this reason, the department no longer recognizes the Taxpayer's public service corporation exemption.
Due to the resulting change in the Taxpayer's exemption status, tangible personal property used to provide paging services and purchased on or after July 1, 1995 was included in the Taxpayer's audit. The Taxpayer maintains that it still qualifies for exemption from sales and use tax based on the definition of a telecommunications company found in Code of Virginia § 58.1-400.1. In addition, the Taxpayer suggests that the assessment of use tax on software license fees is erroneous. The Taxpayer also states that the sampling method used in the audit is invalid, certain purchases were improperly classified as fixed assets, and the use tax compliance penalty should be waived.
DETERMINATION
Telecommunications Exemption
Code of Virginia § 58.1-609.3(3) provides an exemption from the retail sales and use tax for tangible personal property sold or leased to a public service corporation or a "telecommunications company" as defined in Code of Virginia § 58.1-400.1 for use or consumption by such company directly in the rendition of its public service.
Prior to July 1, 1998, a "telecommunications company" was defined in Code of Virginia § 58.1-400.1 as:
A telephone company or other person holding a certificate of convenience and necessity granted by the State Corporation Commission authorizing local exchange telephone service, interexchange service, radio common carrier system or a cellular mobile radio communications system; or a person authorized by the Federal Communications Commission to provide commercial mobile service as defined in § 332(d)(1) of the Communications Act of 1934, as amended, where such service includes cellular mobile radio communications services or personal communications services; or a person holding a certificate issued pursuant to § 214 of the Communications Act of 1934, as amended, authorizing telephone service; or a telegraph company or other person operating the apparatus necessary to communicate by telegraph.
The 1998 Virginia General Assembly amended § 58.1-400.1, and effective July 1, 1998, a "telecommunications company" is defined as:
A telephone company or other person holding a certificate of convenience and necessity granted by the State Corporation Commission authorizing telephone service; or a person authorized by the Federal Communications Commission to provide commercial mobile service as defined in § 332(d)(1) of the Communications Act of 1934, as amended, where such service includes cellular mobile radio communications services or broadband personal communications services; or a person holding a certificate issued pursuant to § 214 of the Communications Act of 1934, as amended, authorizing domestic telephone service and belonging to an affiliated group including a person holding a certificate of convenience and necessity granted by the State Corporation Commission authorizing telephone service; or a telegraph company or other person operating the apparatus necessary to communicate by telegraph. The term "affiliated group" shall have the meaning given in § 58.1-3700.1.
Effective July 1, 1995, the SCC ceased issuing certificates of convenience and necessity to paging companies and, effective October 23, 1995, revoked all existing certificates of convenience and necessity that were held by paging companies. The SCC notified all paging companies affected by this action in writing. Accordingly, the Taxpayer's paging services no longer qualify the Taxpayer as a "public service corporation" for purposes of this sales and use tax exemption. Also, the Taxpayer does not qualify as a "telecommunications company," as defined above, with respect to its paging services. Because the sales and use tax exemption set out in Code of Virginia § 58.1-609.3(3) does not apply to the Taxpayer's paging operations, the Taxpayer's purchase of tangible personal property used to provide paging services is taxable.
The Taxpayer maintains that it qualifies for exemption from sales and use tax based on the definition of a telecommunications company in effect prior to July 1, 1998. The Taxpayer has provided the department with information showing that it holds a certificate issued pursuant to § 214 of the Communications Act of 1934 and that it is authorized by the Federal Communications Commission to provide commercial mobile service as defined in § 332(d)(1) of the Communications Act of 1934, as amended.
I note that the statutory definition of "telecommunications company" contains additional criteria that restrict the application of the exemption. For example, to qualify as a telecommunications company under the definition in Code of Virginia § 58.1-400.1 in effect during most of the audit period, the Taxpayer's provision of mobile communications services must include cellular mobile radio communications service or personal communications services. Under an alternative definition of a telecommunications company in the same statute, the Taxpayer is required to hold a certificate issued under § 214 of the Communications Act of 1934 authorizing telephone service. The Taxpayer must provide evidence (FCC licenses or certificates) that it meets the statutory definition of a telecommunications company in effect during the audit period. The licenses provided to the department do not indicate that the Taxpayer provided cellular mobile radio communications services or personal communications services as required by the statute.
Code of Virginia § 58.1-609.3(ii) provides an exemption for A[t]angible personal property sold or leased to a telecommunications company as defined in § 58.1-400.1 ... for use or consumption by such corporation, company, person ... directly in the rendition of its public service ...." (Emphasis added.) As the statute indicates, the exemption applies only to the lease or purchase by the Taxpayer of tangible personal property used directly in the rendition of the services which qualifies it as a telecommunications company under § 58.1-400.1. Not only does the Taxpayer need to provide evidence of its authorization to provide services that qualify it as a telecommunications company, it must identify those items in the audit that are used directly to provide the services that qualify it for the telecommunications exemption.
The Taxpayer may provide any such documentation to the department for review. The audit will be adjusted based on confirmation by the department that the Taxpayer provided services during the audit period that qualify it as a telecommunications company and based on the identification of property that has been used directly to provide qualifying telecommunications services.
The Taxpayer requests alternate relief in the event the department finds that its paging services do not qualify for exemption. The Taxpayer requests an adjustment to the audit to allow the public service corporation exemption up to the effective date that the certificates of convenience and necessity for paging companies were officially revoked by the SCC. Based on information received from the SCC and the Taxpayer, the Taxpayer's certificate of convenience and necessity was revoked on October 23, 1995. Therefore, all purchase exceptions dated through October 1995 that qualified for exemption prior to the revocation of the Taxpayer's certificate of convenience and necessity will be removed from the audit.
Software License Fees
Prior to the start of this audit period, the Taxpayer entered into a license agreement with a vendor to use the vendor's billing system software. The license agreement was modified during the audit period by a new contract known as a consolidation agreement. Charges for software license fees and software upgrades and maintenance billed to the Taxpayer under the consolidation agreement were held taxable in the audit. The Taxpayer maintains that the consolidation agreement is a separate transaction from the original software license agreement, and the charges billed under the consolidation agreement are for the intangible right to use software already in the Taxpayer's possession. The consolidation agreement provides that the Taxpayer is billed a per-unit charge based on the total number of active paging units that the Taxpayer bills its customers. The per-unit charge includes software license fees, upgrade fees, technical support, ongoing maintenance, etc.
A review of the consolidation agreement indicates that the original software license agreement was made a part of the consolidation agreement. The section in the consolidation agreement referred to as "Term of Program Agreement" states that the Taxpayer will continue to use the vendor's paging software and services. This same section further states that all other terms in the original license shall remain in full force and effect. The original software license agreement represents a lease of tangible personal property, as the agreement granted the Taxpayer the right to use the vendor's paging software. The license agreement states that if it is terminated, the right of the Taxpayer to possess or use the software shall end and, at the vendor's discretion, the Taxpayer must return or destroy all software.
As the consolidation agreement is a continuation of the original license agreement, I cannot agree that the transactions at issue are separate and distinct. Although the consolidation agreement changes the method of billing to a per-unit charge, the charges are still for the license to use an expanded, modified version of the billing software system. I also cannot agree that the consolidation agreement is analogous to the situation referenced in Public Document 95-317 (12/15/95). The charges billed under the consolidation agreement are clearly for the Taxpayer's use of the billing system software and services in connection with the use of the software. The department's longstanding policy with respect to software licenses is that charges for a license to use software in tangible form are a lease or rental of tangible personal property and subject to sales and use tax. Therefore, the assessment of sales tax on charges for the software license fees is proper.
Consolidation Agreement - Charges for Upgrades
The Taxpayer also maintains that the consolidation agreement provides for upgrades and enhancements to the existing billing system, and the milestone charges for the upgrades are analogous to a maintenance agreement. Thus, the charges should be taxed at one-half of the total charge in accordance with Code of Virginia § 58.1-609.5(9). The Taxpayer also suggests that a portion of the per-unit charges billed by the vendor represent nontaxable labor charges, and the audit should be adjusted to remove a percentage of the license fees held taxable in the audit.
The Taxpayer's license to use the billing system software is analogous to a lease of tangible personal property. Title 23 of the Virginia Administrative Code (VAC) 10-210-840 states that the sales and use tax applies to the gross proceeds received for the lease or rental of tangible personal property. The term "gross proceeds" is defined as "charges made or voluntary contributions received for the lease or rental of tangible personal property computed with the same deductions, where applicable, as for sales price in 23 VAC 10-210-4000." "Sales price" is defined in Title 23 VAC 10-210-4000(A) as "the total amount for which tangible personal property or taxable services are sold and includes any services in connection with such sale." This same section explains that no deduction from sales price is allowed for labor or service costs billed in connection with the sale of tangible personal property.
Based on the above, service or labor charges made in connection with the Taxpayer's software license charges and included in the per-unit charges or in milestone charges are considered part of the gross proceeds from the lease of the software and subject to sales and use tax. Notwithstanding the above and due to the confusion over the correct application of the tax on this issue, I will agree to remove 50 percent of the milestone charges from the audit. However, the full amount of milestone charges billed to the Taxpayer subsequent to the audit period are subject to the sales and use tax, as such charges are considered part of the "gross proceeds" of the lease or license agreement.
Other Maintenance Agreements
The Taxpayer states that charges for other maintenance agreements were taxed on the full amount rather than one-half the total charge. Effective January 1, 1996, maintenance contracts that provide for both repair or replacement parts and repair labor are taxed at one-half the total charge for such contracts. The Taxpayer requests that the audit be reviewed to identify and correct any such charges. I will have an auditor review any documentation the Taxpayer can provide with respect to maintenance agreement charges. The audit will be adjusted based on this review.
Audit Methodology: Sample
The Taxpayer states that the department's methodology for determining the use tax liability was incorrect. The auditor extrapolated the results of a one-year sample of purchases using the Taxpayer's gross revenues during the audit period. The Taxpayer maintains that the use of Virginia revenues in the sample extrapolation more accurately reflects the Taxpayer's Virginia use tax liability. The Taxpayer asks that the use tax liability be recalculated using Virginia revenues instead of gross revenues.
Based on a review of the sample methodology used, I agree that the sample may not be representative of the Taxpayer's audit period. The audit sample will be recalculated using the Virginia revenues reported on the Taxpayer's Virginia corporation income tax returns to extrapolate the sample results.
Audit Methodology: Reclassify Purchases as Fixed Assets
The Taxpayer suggests that some of the purchases in the audit sample should be classified as fixed assets and removed from the audit sample. The classification of the Taxpayer's purchases as expense items was based on information provided by the Taxpayer. If the Taxpayer can provide evidence that certain purchases were not expensed but were classified as fixed assets for income tax purposes, the purchases will be removed from the sample and treated as fixed assets. The Taxpayer may provide a depreciation schedule, general ledger information or similar documentation to the department showing those items that are improperly classified as fixed assets in the audit. The audit will be recalculated based on the fixed asset documentation provided by the Taxpayer.
Penalty
The Taxpayer seeks waiver of the use tax compliance penalty. The Taxpayer indicates that representatives of the department informed the Taxpayer in a meeting prior to the issuance of the audit assessment that no penalty would be assessed in the audit. The Taxpayer maintains that the rapid growth of the business and the significant changes in its business operations since the last audit warrant waiver of the penalty. The Taxpayer also purchased a new billing system to accommodate the growth of its subscriber base. If the department does not agree to waive the entire penalty, the Taxpayer asks for waiver of the penalty on purchases related to the billing system on the basis that the purchase of the billing system is a new audit issue.
Code of Virginia § 58.1-105 authorizes the Tax Commissioner to compromise and settle doubtful or disputed claims for taxes and to accept offers in compromise of penalties. The Taxpayer was presented a draft copy of the audit report by the audit staff that states "no penalty applied." Based on this and other information provided to the department, the compliance penalty will be abated in full.
Conclusion
The Taxpayer should note that the change in the definition of a "telecommunications company" effective July 1, 1998, may affect services provided by the Taxpayer that qualify for sales and use tax exemption. The Taxpayer must hold a license from the FCC authorizing the provision of those services specifically included in the definition to qualify for exemption. In addition, the exemption applies to tangible personal property that is used directly to provide qualifying services for which the Taxpayer holds a license from the FCC.
The audit staff will contact the Taxpayer to set up a mutually agreeable time to make the stated revisions to the audit and review any documentation the Taxpayer provides to support its position. If you have any questions concerning this determination, please contact **** in the Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/21735S
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