Tax Type
Retail Sales and Use Tax
Description
Holding of tangible personal property in Virginia; Tax paid after start of audit; Maintenance contracts
Topic
Penalties and Interest
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
05-15-2001
May 15, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter of January 29, 2001, requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer"). Copies of cited sources are enclosed.
FACTS
The Taxpayer provides network management services, architectural design, engineering services, and comprehensive support services. The Taxpayer serves government clients as well as commercial clients in various industries.
An audit for the period March 1997 through December 1999 resulted in the assessment of tax on untaxed purchases of tangible personal property. The Taxpayer takes exception to some of the items included in the assessment and maintains that those items are either exempt or not subject to the sales tax.
DETERMINATION
Government Customers
The department has traditionally held that in considering the application of the tax to government contracts, it must be determined whether the true object of the contract is for the sale of tangible personal property or for the provision of services. If a contract is for the provision of services, the contractor is deemed to be the taxable user or consumer of all tangible personal property used in performing those services, even though title to some or all of the property may pass to the government.
Conversely, if the true object of the contract is for the sale of tangible personal property to the government, the contractor may purchase such property exempt from the tax under a resale exemption certificate. The subsequent sale of the property to the government is exempt from the tax under Code of Virginia § 58.1-609.1(4).
The Taxpayer claims that certain equipment and supplies included in the audit are exempt on the basis that the items were sold to the federal government and delivered outside Virginia. However, the Taxpayer's claim is contrary to the sales and use tax laws, if the property is in any way used in Virginia. Code of Virginia § 58.1-604 imposes the tax on the use or consumption of tangible personal property in Virginia. "Use tax" is defined in § 58.1-602 to specifically include storage which is defined to mean "any keeping or retention of tangible personal property for use, consumption or distribution in this Commonwealth, or for any purpose other than sale at retail in the regular course of business." (Emphasis added.)
Therefore, any holding of tangible personal property within Virginia, other than for resale, is generally deemed a taxable use of that property in Virginia. The courts have long held that subsequent delivery outside Virginia does not immunize a taxable event occurring in Virginia. See Commonwealth v. Miller-Morton Co., 220 Va. 852, 263 S.E.2d 413 (1980).
The Taxpayer has the ultimate burden of proving that the tax does not apply to the items at issue. Although you disagree with the audit findings, you have not furnished sufficient documentation to establish an exemption or tax exclusion for the items at issue. Nor have you identified the items at issue in the audit. Absent adequate records to establish an exemption or an exclusion, no adjustment can be made.
For the department to properly consider a possible revision to the audit on this issue, the Taxpayer will need to identify the items at issue in the audit report, furnish copies of the individual records of the transactions at issue, including shipping records, and furnish a copy of the Statement of Work for the contract(s) related to this issue to the department's ***** District Office for consideration.
Annual Maintenance Contract
Although the "ship to" address shown on the Taxpayer's purchase order and the vendor's invoice is a Virginia address, the Taxpayer maintains that the actual location of delivery and use of the 1997 maintenance contract occurred in the District of Columbia, not Virginia. You also indicate that software upgrades included in the purchase of routers and switches were provided electronically over the Internet and that no hardware or software was shipped to the Taxpayer in Virginia. However, the documents provided appear to establish otherwise.
It is my understanding that the maintenance contract relates to items used to monitor the Taxpayer's equipment in Virginia. The vendor's 1997 invoice shows a Virginia ship-to address. The vendor's 1997 equipment list also shows a Virginia customer site address. Although the 1998 vendor invoice shows a ship-to address in the District of Columbia, this invoice was not included in the audit.
Furthermore, you have not furnished the department with a copy of the maintenance contract at issue or any documents showing that the upgrades were downloaded via the Internet. Nor have you established that the Taxpayer never received the routers, or tangible copies of the software upgrades in Virginia.
Unless the Taxpayer is able to establish the initial delivery as in the District of Columbia or establish via documentation an exemption for the transaction, I find no basis to revise the assessment based on the information presented. If you have documentation which has not been previously presented to establish a basis for removal of this item from the audit, such proof should be furnished to the department's **** District Office for consideration.
February 2000 payment
After the start of the audit, it is my understanding that the Taxpayer paid the tax owed on virtually all of the fixed asset measure of **** included in the audit. A review of the work papers reveals that these assets were purchased by the Taxpayer at various times in 1997, 1998 and 1999. As the tax payment was late, penalty and interest generally apply.
The Taxpayer has been given credit for the tax and interest totaling $*** paid in regard to these fixed assets. See the line "Less Tax Paid" on Form ST-48 of the audit report.
Conclusion
The requested information should be sent to the attention of ****, Senior Auditor at the department's ***** District Office, within 60 days of the date of this letter. If such information is not furnished within the time allotted, the assessments will be considered proper as issued, and the outstanding liabilities will become due and payable.
If you have any questions about the documentation, please contact **** at ****. If you have any questions about this response, please contact **** of the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/32806R
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in response to your letter of January 29, 2001, requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer"). Copies of cited sources are enclosed.
FACTS
The Taxpayer provides network management services, architectural design, engineering services, and comprehensive support services. The Taxpayer serves government clients as well as commercial clients in various industries.
An audit for the period March 1997 through December 1999 resulted in the assessment of tax on untaxed purchases of tangible personal property. The Taxpayer takes exception to some of the items included in the assessment and maintains that those items are either exempt or not subject to the sales tax.
DETERMINATION
Government Customers
The department has traditionally held that in considering the application of the tax to government contracts, it must be determined whether the true object of the contract is for the sale of tangible personal property or for the provision of services. If a contract is for the provision of services, the contractor is deemed to be the taxable user or consumer of all tangible personal property used in performing those services, even though title to some or all of the property may pass to the government.
Conversely, if the true object of the contract is for the sale of tangible personal property to the government, the contractor may purchase such property exempt from the tax under a resale exemption certificate. The subsequent sale of the property to the government is exempt from the tax under Code of Virginia § 58.1-609.1(4).
The Taxpayer claims that certain equipment and supplies included in the audit are exempt on the basis that the items were sold to the federal government and delivered outside Virginia. However, the Taxpayer's claim is contrary to the sales and use tax laws, if the property is in any way used in Virginia. Code of Virginia § 58.1-604 imposes the tax on the use or consumption of tangible personal property in Virginia. "Use tax" is defined in § 58.1-602 to specifically include storage which is defined to mean "any keeping or retention of tangible personal property for use, consumption or distribution in this Commonwealth, or for any purpose other than sale at retail in the regular course of business." (Emphasis added.)
Therefore, any holding of tangible personal property within Virginia, other than for resale, is generally deemed a taxable use of that property in Virginia. The courts have long held that subsequent delivery outside Virginia does not immunize a taxable event occurring in Virginia. See Commonwealth v. Miller-Morton Co., 220 Va. 852, 263 S.E.2d 413 (1980).
The Taxpayer has the ultimate burden of proving that the tax does not apply to the items at issue. Although you disagree with the audit findings, you have not furnished sufficient documentation to establish an exemption or tax exclusion for the items at issue. Nor have you identified the items at issue in the audit. Absent adequate records to establish an exemption or an exclusion, no adjustment can be made.
For the department to properly consider a possible revision to the audit on this issue, the Taxpayer will need to identify the items at issue in the audit report, furnish copies of the individual records of the transactions at issue, including shipping records, and furnish a copy of the Statement of Work for the contract(s) related to this issue to the department's ***** District Office for consideration.
Annual Maintenance Contract
Although the "ship to" address shown on the Taxpayer's purchase order and the vendor's invoice is a Virginia address, the Taxpayer maintains that the actual location of delivery and use of the 1997 maintenance contract occurred in the District of Columbia, not Virginia. You also indicate that software upgrades included in the purchase of routers and switches were provided electronically over the Internet and that no hardware or software was shipped to the Taxpayer in Virginia. However, the documents provided appear to establish otherwise.
It is my understanding that the maintenance contract relates to items used to monitor the Taxpayer's equipment in Virginia. The vendor's 1997 invoice shows a Virginia ship-to address. The vendor's 1997 equipment list also shows a Virginia customer site address. Although the 1998 vendor invoice shows a ship-to address in the District of Columbia, this invoice was not included in the audit.
Furthermore, you have not furnished the department with a copy of the maintenance contract at issue or any documents showing that the upgrades were downloaded via the Internet. Nor have you established that the Taxpayer never received the routers, or tangible copies of the software upgrades in Virginia.
Unless the Taxpayer is able to establish the initial delivery as in the District of Columbia or establish via documentation an exemption for the transaction, I find no basis to revise the assessment based on the information presented. If you have documentation which has not been previously presented to establish a basis for removal of this item from the audit, such proof should be furnished to the department's **** District Office for consideration.
February 2000 payment
After the start of the audit, it is my understanding that the Taxpayer paid the tax owed on virtually all of the fixed asset measure of **** included in the audit. A review of the work papers reveals that these assets were purchased by the Taxpayer at various times in 1997, 1998 and 1999. As the tax payment was late, penalty and interest generally apply.
The Taxpayer has been given credit for the tax and interest totaling $*** paid in regard to these fixed assets. See the line "Less Tax Paid" on Form ST-48 of the audit report.
Conclusion
The requested information should be sent to the attention of ****, Senior Auditor at the department's ***** District Office, within 60 days of the date of this letter. If such information is not furnished within the time allotted, the assessments will be considered proper as issued, and the outstanding liabilities will become due and payable.
If you have any questions about the documentation, please contact **** at ****. If you have any questions about this response, please contact **** of the department's Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/32806R
Rulings of the Tax Commissioner