Tax Type
Retail Sales and Use Tax
Description
Film processing charges; Bad debt calculation; Statute of limitations
Topic
Returns/Payments/Records
Statute of Limitations
Taxability of Persons and Transactions
Date Issued
04-09-2001
April 9, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you seek a correction of the department's retail sales and use tax audit assessment issued to ***** (the "Taxpayer"), for the period April 1996 through February 1999. I apologize for the delay in the department's response.
FACTS
The Taxpayer sells a variety of merchandise though membership type retail outlets. The department's audit disclosed that the Taxpayer did not charge or collect the tax on separately stated charges for processing a member's film. The Taxpayer contends that the charges are for a nontaxable service and that the audit should be revised to remove the representative measure.
The Taxpayer also disagrees with the audit adjustment of its bad debt deduction. In this regard, the Taxpayer claims it has no mechanism to compare each bad debt to the corresponding original sale. Absent the ability to make such a comparison, the Taxpayer contends that its proration of the deduction through a ratio of taxable versus nontaxable sales should be acceptable when the volume of sales made by the Taxpayer is considered.
Lastly, the Taxpayer seeks a waiver of the assessment for all of the audit period prior to February 1, 1997. The Taxpayer contends that the assessment was not mailed until March 17, 2000, which was after the expiration of the extended statute of limitations on February 29, 2000.
DETERMINATION
Film Processing
"Sale" is defined in Code of Virginia § 58.1-602, as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration ...." This same section defines "Sales price" as "the total amount for which tangible personal property or taxable services are sold and includes any services in connection with such sale ...." (Emphasis added.)
Code of Virginia § 58.1-609.5(1) exempts from the sales and use tax professional and personal service transactions which involve sales as inconsequential elements for which no separate charges are made. When determining whether a particular transaction involving both the sale of tangible personal property and the provision of a service represents a sale of tangible personal property or an exempt service, the "true object" test is used. Title 23 of the Virginia Administrative Code (VAC) 10-210-4040(D) states "[i]f the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service." (Emphasis added.)
Title 23 VAC 10-210-2050 addresses two separate and distinct transactions. This first part of the regulation provides that the tax applies to sales of tangible personal property, such as photographs, portraits, prints, etc. The second part states that the tax does not apply to charges for developing film. If a customer seeks to have film developed and there is no production of prints in conjunction with the film development, the charges for the developed film to the customer is a nontaxable service (because no tangible personal property is provided to the customer).
However, this same section states that the tax applies to the total charge to the customer for a photograph, including any component of the charged regardless of whether such charges are separately stated.
This issue, as also set out in Public Document 85-224 (12/13/85), specifically states that charges for labor and other services (film developing) are not taxable in and of themselves, but become taxable when included in the price charged to a customer for prints.
Accordingly, when the Taxpayer charges for developing the customer's film, and also charges for the prints from that film, a sale of tangible personal property has taken place. In this instance, film development is a service in connection with the sale of the prints, and the total charge is subject to the tax, regardless that charges for film developing are separately stated. Consequently, I do not find cause to adjust the department's audit for film processing charges. However, if the Taxpayer can provide proof that the film developing charges are purely service transactions, and that such charges are not in connection with any sale of tangible personal property, I will allow for a further review of those charges.
Bad Debt Calculation
The Taxpayer has stated that it is aware that the deduction must be determined on the original debt owed, but that it has no mechanism in place to compare bad debts to the corresponding original sale. The Taxpayer states that the volume of its retail operations is a cause of its efficiency in distributing products to retailers and customers, and that such efficiency would be compromised if it was required to track a de minimis number of bad debts against the volume of its sales transactions. The Taxpayer contends that its bad debt deduction through a ratio of taxable versus nontaxable sales should be allowed.
It has been the department's position, based on established law and as interpreted by published regulations, that the deduction for bad debts is computed on each bad debt and not on the aggregate of all bad debts for a particular period. As the deduction taken by the Taxpayer is inconsistent with the established laws and regulations, I must concur with the auditor's adjustment. I have enclosed copies Public Documents 85-29 (02/22/85) and 86-160 (04/31/86), which further detail the department's longstanding position.
Statute of Limitations
Generally, the Code of Virginia provides that a tax must be assessed within three years from the date it became due and payable. The Taxpayer and the department both signed a waiver of time limitation extending the time for an assessment of taxes to February 29, 2000. Code of Virginia § 58.1-1820 provides that:
Assessments made by the Department of Taxation shall be deemed to be made when a written notice of assessment is delivered to the taxpayer by an employee of the Department of Taxation, or mailed to the taxpayer at his last known address.
The photocopy of the assessment the Taxpayer refers to was postmarked March 17, 2000. However, the photocopy is not the original assessment. The photocopy presented by the Taxpayer is a "demand" assessment generated by an employee in the department's Interstate audit unit, and was generated based on a request by the Taxpayer for a secondary copy of the original assessment. This bill was printed by the department and mailed to the Taxpayer on March 17, 2000. However, there is no evidence to suggest that the original assessment was not mailed to the Taxpayer's last known address by the February 29, 2000 expiration date.
The department has in place procedures regarding the mailing of assessments to taxpayers, and the department maintains that these procedures were followed in the instant case. Accordingly, the conditions set out in Code of Virginia § 58.1-1820 have been met, and I do not find cause to allow for any waiver of the assessment prior to February 1, 1997.
Summary
Based on all of the foregoing, and unless the Taxpayer can present the requested information, there is insufficient cause to allow for any adjustment to the department's audit. I will allow an additional 30 days from the date of this letter for the information regarding the film processing to be made available. If the information is not presented by the time allowed, the assessment will become due and the Taxpayer must return its payment for tax, interest and accrued interest totaling $*** to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 60 days from the date of this letter. If payment is not received within the extended time, interest will continue to accrue on the balance due. If you have any questions regarding this matter, please contact **** of the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you seek a correction of the department's retail sales and use tax audit assessment issued to ***** (the "Taxpayer"), for the period April 1996 through February 1999. I apologize for the delay in the department's response.
FACTS
The Taxpayer sells a variety of merchandise though membership type retail outlets. The department's audit disclosed that the Taxpayer did not charge or collect the tax on separately stated charges for processing a member's film. The Taxpayer contends that the charges are for a nontaxable service and that the audit should be revised to remove the representative measure.
The Taxpayer also disagrees with the audit adjustment of its bad debt deduction. In this regard, the Taxpayer claims it has no mechanism to compare each bad debt to the corresponding original sale. Absent the ability to make such a comparison, the Taxpayer contends that its proration of the deduction through a ratio of taxable versus nontaxable sales should be acceptable when the volume of sales made by the Taxpayer is considered.
Lastly, the Taxpayer seeks a waiver of the assessment for all of the audit period prior to February 1, 1997. The Taxpayer contends that the assessment was not mailed until March 17, 2000, which was after the expiration of the extended statute of limitations on February 29, 2000.
DETERMINATION
Film Processing
"Sale" is defined in Code of Virginia § 58.1-602, as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration ...." This same section defines "Sales price" as "the total amount for which tangible personal property or taxable services are sold and includes any services in connection with such sale ...." (Emphasis added.)
Code of Virginia § 58.1-609.5(1) exempts from the sales and use tax professional and personal service transactions which involve sales as inconsequential elements for which no separate charges are made. When determining whether a particular transaction involving both the sale of tangible personal property and the provision of a service represents a sale of tangible personal property or an exempt service, the "true object" test is used. Title 23 of the Virginia Administrative Code (VAC) 10-210-4040(D) states "[i]f the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service." (Emphasis added.)
Title 23 VAC 10-210-2050 addresses two separate and distinct transactions. This first part of the regulation provides that the tax applies to sales of tangible personal property, such as photographs, portraits, prints, etc. The second part states that the tax does not apply to charges for developing film. If a customer seeks to have film developed and there is no production of prints in conjunction with the film development, the charges for the developed film to the customer is a nontaxable service (because no tangible personal property is provided to the customer).
However, this same section states that the tax applies to the total charge to the customer for a photograph, including any component of the charged regardless of whether such charges are separately stated.
This issue, as also set out in Public Document 85-224 (12/13/85), specifically states that charges for labor and other services (film developing) are not taxable in and of themselves, but become taxable when included in the price charged to a customer for prints.
Accordingly, when the Taxpayer charges for developing the customer's film, and also charges for the prints from that film, a sale of tangible personal property has taken place. In this instance, film development is a service in connection with the sale of the prints, and the total charge is subject to the tax, regardless that charges for film developing are separately stated. Consequently, I do not find cause to adjust the department's audit for film processing charges. However, if the Taxpayer can provide proof that the film developing charges are purely service transactions, and that such charges are not in connection with any sale of tangible personal property, I will allow for a further review of those charges.
Bad Debt Calculation
The Taxpayer has stated that it is aware that the deduction must be determined on the original debt owed, but that it has no mechanism in place to compare bad debts to the corresponding original sale. The Taxpayer states that the volume of its retail operations is a cause of its efficiency in distributing products to retailers and customers, and that such efficiency would be compromised if it was required to track a de minimis number of bad debts against the volume of its sales transactions. The Taxpayer contends that its bad debt deduction through a ratio of taxable versus nontaxable sales should be allowed.
It has been the department's position, based on established law and as interpreted by published regulations, that the deduction for bad debts is computed on each bad debt and not on the aggregate of all bad debts for a particular period. As the deduction taken by the Taxpayer is inconsistent with the established laws and regulations, I must concur with the auditor's adjustment. I have enclosed copies Public Documents 85-29 (02/22/85) and 86-160 (04/31/86), which further detail the department's longstanding position.
Statute of Limitations
Generally, the Code of Virginia provides that a tax must be assessed within three years from the date it became due and payable. The Taxpayer and the department both signed a waiver of time limitation extending the time for an assessment of taxes to February 29, 2000. Code of Virginia § 58.1-1820 provides that:
Assessments made by the Department of Taxation shall be deemed to be made when a written notice of assessment is delivered to the taxpayer by an employee of the Department of Taxation, or mailed to the taxpayer at his last known address.
The photocopy of the assessment the Taxpayer refers to was postmarked March 17, 2000. However, the photocopy is not the original assessment. The photocopy presented by the Taxpayer is a "demand" assessment generated by an employee in the department's Interstate audit unit, and was generated based on a request by the Taxpayer for a secondary copy of the original assessment. This bill was printed by the department and mailed to the Taxpayer on March 17, 2000. However, there is no evidence to suggest that the original assessment was not mailed to the Taxpayer's last known address by the February 29, 2000 expiration date.
The department has in place procedures regarding the mailing of assessments to taxpayers, and the department maintains that these procedures were followed in the instant case. Accordingly, the conditions set out in Code of Virginia § 58.1-1820 have been met, and I do not find cause to allow for any waiver of the assessment prior to February 1, 1997.
Summary
Based on all of the foregoing, and unless the Taxpayer can present the requested information, there is insufficient cause to allow for any adjustment to the department's audit. I will allow an additional 30 days from the date of this letter for the information regarding the film processing to be made available. If the information is not presented by the time allowed, the assessment will become due and the Taxpayer must return its payment for tax, interest and accrued interest totaling $*** to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 60 days from the date of this letter. If payment is not received within the extended time, interest will continue to accrue on the balance due. If you have any questions regarding this matter, please contact **** of the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner