02-156 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Interior Design, resale exemption

Topic

Appropriateness of Audit Methodology

Date Issued

12-17-2002

December 17, 2002

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This is in reply to your letter in which you seek correction of the sales and use tax assessment issued to ***** (the "Taxpayer"), for the period October 1998 through December 1999. I apologize for the Department's delay in responding to your letter.

FACTS

The Taxpayer is an interior design business that sold office furniture and artwork to a purchaser associated with the Taxpayer's principal officer. As a result of the Department's audit, the auditor assessed the tax on these sales. You protest the tax and raise a number of issues.

First, you contend the tax is not due on an audit entry for furniture labeled "unknown." Second, you contend the Taxpayer paid the tax to its vendors, and the resale exemption applies in accordance with United States v. Forst 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F. 2nd 811 (4th Cir. 1978). Third, you maintain that the Taxpayer acted as an agent for the purchaser and that the transactions do not constitute sales as defined in Va. Code § 58.1-602. Lastly, you request waiver of the penalty.

DETERMINATION

Furniture Entry

Based on a review of the audit work papers, the invoice in question will be removed from the audit.

Application of the Tax

Va. Code § 58.1-612 defines a dealer as every person who "sells at retail, or who offers for sale at retail ...tangible personal property." Further Va. Code § 58.1-603 imposes the sales tax on "every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth."

In this instance, the Taxpayer's principal officer agreed to sell the furniture and artwork to the purchaser. The items were purchased from vendors in the name of the Taxpayer and resold by the Taxpayer to the purchaser. In accordance with the above statutes, the Taxpayer, as a registered dealer, was required to collect the sales tax on its sales to the purchaser. Therefore, the tax was properly assessed in the audit.

I do not agree that the resale exemption and the case law you cite apply as you suggest. In United States v. Forst, the Supreme Court of Virginia indicated that the resale exemption is designed only to prevent multiple sales tax incidence for the same tangible personal property. In this instance, the resale exemption applied to the Taxpayer's purchases from its vendors and not to the sale of the items to the purchaser. You maintain that the Taxpayer paid the tax to its vendors. If that is so, the Taxpayer incorrectly paid the tax and should seek refunds from its vendors.

Further, I do not agree with your position that the Taxpayer acted as an agent for the purchaser and the transactions at issue do not constitute sales. Va. Code § 58.1-602 defines a sale to mean "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise ...for a consideration ...." The invoices clearly indicate the Taxpayer is the seller and property is being transferred to the purchaser for a consideration. Thus, the transactions constitute sales in accordance with the statutory definition. In addition, you present no evidence that the Taxpayer and the purchaser were engaged in an agency relationship.

Penalty Waiver

You request a waiver of the penalty because the Taxpayer did not display any negligence or intent in failing to collect and remit the tax.

Generally, the Department does not apply the penalty to tax assessed in first generation audits such as this one. However, Title 23 of the Virginia Administrative Code (VAC) 10-210-2032 provides that penalty cannot be waived with regard to first generation audits if "[t]he taxpayer has collected the sales tax, but failed to remit it to the Department of Taxation." The audit liability includes tax that was collected and not remitted. Therefore, the penalty must be applied to this portion of the tax.

Title 23 VAC 10-210-2030 provides that penalty shall be applied at a rate of 6% of the tax due and unpaid for each month not to exceed 30%. In this instance, the auditor applied penalty to the unremitted tax at a rate of 50%. In addition, the penalty was applied to the uncollected tax. In accordance with the regulations, the penalty applied to the unremitted tax will be reduced to a rate of 30%, and the penalty applied to the uncollected tax will be removed. The Taxpayer should note that the penalty will apply in second and subsequent audits if the required levels of compliance as set out in Title 23 VAC 10-210-2032 are not achieved.

Conclusion

The auditor will make the adjustments to the audit as discussed. The Taxpayer will receive a revised bill, including updated interest, which should be paid within 30 days to avoid the accrual of additional interest charges. If you have questions regarding the audit revisions, please contact the auditor, ***** extension *****. Questions concerning this letter should be directed to ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.

The Code of Virginia and regulations cited are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/35263J

Rulings of the Tax Commissioner