Tax Type
Retail Sales and Use Tax
Description
Communication system; Lump-sum charges for tangible personal property and services
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
04-11-2001
April 11, 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 January 1994 through March 1996. I note that the department's assessment has been paid. I apologize for the delay in our response.
FACTS
The Taxpayer operates a manufacturing facility in the Commonwealth. The department's audit disclosed a deficiency for expense and asset purchases that the auditor deemed were not used directly in the manufacturing process. The Taxpayer contends that certain additional items are exempt from taxation and should be removed from the department's audit.
DETERMINATION
The department's auditor recently completed a revision of the Taxpayer's audit based on certain issues in the Taxpayer's protest letter. As a result of that revision, the auditor found that certain contested items listed as expense purchases were all used directly in the manufacturing process or were a part of certified pollution control equipment. As a result, the auditor removed them from the sample calculation. Additionally, the fixed asset listed on page 2, line 14, was also removed as the item was found to be a part of certified pollution control equipment. Accordingly, the department's assessment has been adjusted to reflect these revisions.
Additional comments by the department's auditor also provide that the remaining assets are not a part of the production process or a part of certified pollution control equipment. I will address these issues in detail.
Page 3, Line 19 - Communication system.
Page 4, Line 9 - Development of broadcast display system.
The communication system charges include (1) interface development charges, and (2) the sale of tangible personal property. The broadcast system is a monitor display system that shows the order of production line assembly and the parts that should be installed in the product. The production line employees refer to the visual display units so they can install the correct part or perform the correct function or process at the proper production point. The Taxpayer contends that charges associated with these items are a mixture of tangible personal property and services related to the engineering, installation, testing and training. The Taxpayer seeks to exclude the service portion of the charges as exempt services.
Code of Virginia § 58.1-609.5.1 provides an exemption for "professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made." In order to determine if a particular transaction, which involves both the rendering of a service and the provision of tangible personal property, constitutes an exempt service or a taxable retail sale, the "true object" of the transaction must be examined. The "true object" test is defined in Title 23 of the Virginia Administrative Code (VAC) 10-210-4040(D) and states that "[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."
Based on the information before me, the communications system and the broadcast display system are critical elements of the transactions at issue, and the services rendered in connection with the sale of these systems are a part of the taxable sale of that property.
Additionally, "Sales price" is defined in Code of Virginia § 58.1-602, as "the total amount for which tangible personal property or taxable services are sold and includes any services in connection with such sale ...." However, separately stated charges for the installation of tangible personal property are not taxable in and of themselves. Installation charges commingled with other charges in lump sum transactions are not separately stated and the lump sum charge would be subject to the tax.
Comments by the auditor indicate that the charges subjected to the tax are lump sum charges for which there was no breakdown. Accordingly, I am unable to accept the Taxpayer's request for revision. However, if the Taxpayer can present verifiable documentation that the installation portion of the services were separately stated, I will consider an adjustment for those charges only.
Page 4, Line 7 - Purchase and install mezzanine.
The Taxpayer asserts that the mezzanine is an improvement to real property and that the contractor is liable for the payment of the tax. Based on the information provided by the auditor, and due to electronic invoicing in place during the audit, there was no breakdown between the charges for tangible personal property and any real property improvements. Accordingly, the auditor properly held this item subject to the tax.
Code of Virginia § 58.1-618 allows the department's auditor to use the best information available to determine whether a tax liability exists. When an assessment is issued under these circumstances, the statute deems such an assessment to be prima facie correct. Accordingly, the burden of proof is upon the Taxpayer to establish through convincing evidence that a tax assessment is erroneous. Based on the foregoing, the Taxpayer clearly has an obligation to substantiate any claim that data used by the department's auditor is in error. I will allow the Taxpayer an opportunity to submit verifiable documentation regarding the costs associated with the real property improvements. This information must be available to the department's auditor within 30 days from the date of this letter.
Conclusion
Based on all of the foregoing, the department's audit revision (Taxpayer copy
enclosed) results in a refund due the Taxpayer of tax, penalty, interest and refund interest (through 2/15/01) owed by the department totaling *******. Additional refund interest, calculated through the date of the refund, will be added. If the additional information to be presented also results in a revision to the department's audit, any additional refund will be issued based on the those additional revisions. 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
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 January 1994 through March 1996. I note that the department's assessment has been paid. I apologize for the delay in our response.
FACTS
The Taxpayer operates a manufacturing facility in the Commonwealth. The department's audit disclosed a deficiency for expense and asset purchases that the auditor deemed were not used directly in the manufacturing process. The Taxpayer contends that certain additional items are exempt from taxation and should be removed from the department's audit.
DETERMINATION
The department's auditor recently completed a revision of the Taxpayer's audit based on certain issues in the Taxpayer's protest letter. As a result of that revision, the auditor found that certain contested items listed as expense purchases were all used directly in the manufacturing process or were a part of certified pollution control equipment. As a result, the auditor removed them from the sample calculation. Additionally, the fixed asset listed on page 2, line 14, was also removed as the item was found to be a part of certified pollution control equipment. Accordingly, the department's assessment has been adjusted to reflect these revisions.
Additional comments by the department's auditor also provide that the remaining assets are not a part of the production process or a part of certified pollution control equipment. I will address these issues in detail.
Page 3, Line 19 - Communication system.
Page 4, Line 9 - Development of broadcast display system.
The communication system charges include (1) interface development charges, and (2) the sale of tangible personal property. The broadcast system is a monitor display system that shows the order of production line assembly and the parts that should be installed in the product. The production line employees refer to the visual display units so they can install the correct part or perform the correct function or process at the proper production point. The Taxpayer contends that charges associated with these items are a mixture of tangible personal property and services related to the engineering, installation, testing and training. The Taxpayer seeks to exclude the service portion of the charges as exempt services.
Code of Virginia § 58.1-609.5.1 provides an exemption for "professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made." In order to determine if a particular transaction, which involves both the rendering of a service and the provision of tangible personal property, constitutes an exempt service or a taxable retail sale, the "true object" of the transaction must be examined. The "true object" test is defined in Title 23 of the Virginia Administrative Code (VAC) 10-210-4040(D) and states that "[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."
Based on the information before me, the communications system and the broadcast display system are critical elements of the transactions at issue, and the services rendered in connection with the sale of these systems are a part of the taxable sale of that property.
Additionally, "Sales price" is defined in Code of Virginia § 58.1-602, as "the total amount for which tangible personal property or taxable services are sold and includes any services in connection with such sale ...." However, separately stated charges for the installation of tangible personal property are not taxable in and of themselves. Installation charges commingled with other charges in lump sum transactions are not separately stated and the lump sum charge would be subject to the tax.
Comments by the auditor indicate that the charges subjected to the tax are lump sum charges for which there was no breakdown. Accordingly, I am unable to accept the Taxpayer's request for revision. However, if the Taxpayer can present verifiable documentation that the installation portion of the services were separately stated, I will consider an adjustment for those charges only.
Page 4, Line 7 - Purchase and install mezzanine.
The Taxpayer asserts that the mezzanine is an improvement to real property and that the contractor is liable for the payment of the tax. Based on the information provided by the auditor, and due to electronic invoicing in place during the audit, there was no breakdown between the charges for tangible personal property and any real property improvements. Accordingly, the auditor properly held this item subject to the tax.
Code of Virginia § 58.1-618 allows the department's auditor to use the best information available to determine whether a tax liability exists. When an assessment is issued under these circumstances, the statute deems such an assessment to be prima facie correct. Accordingly, the burden of proof is upon the Taxpayer to establish through convincing evidence that a tax assessment is erroneous. Based on the foregoing, the Taxpayer clearly has an obligation to substantiate any claim that data used by the department's auditor is in error. I will allow the Taxpayer an opportunity to submit verifiable documentation regarding the costs associated with the real property improvements. This information must be available to the department's auditor within 30 days from the date of this letter.
Conclusion
Based on all of the foregoing, the department's audit revision (Taxpayer copy
enclosed) results in a refund due the Taxpayer of tax, penalty, interest and refund interest (through 2/15/01) owed by the department totaling *******. Additional refund interest, calculated through the date of the refund, will be added. If the additional information to be presented also results in a revision to the department's audit, any additional refund will be issued based on the those additional revisions. 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
Rulings of the Tax Commissioner