Tax Type
Retail Sales and Use Tax
Description
Service contractor, provides services to event sponsors/individual exhibitors
Topic
Appropriateness of Audit Methodology
Penalties and Interest
Property Subject to Tax
Date Issued
01-14-2002
January 14, 2002
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ***************
This is in reply to the letter of October 17, 2001, from ***** in regard to a request for correction of the sales and use tax assessed to ***** (the "Taxpayer"), for the period January 1997 through October 1998.
FACTS
The Taxpayer is a full service contractor for conventions, expositions, trade shows and special events. The Taxpayer provides a broad range of services and products including decorating and furnishings, exhibit design and set-up, transportation, management, and audiovisual services. The Taxpayer provides services to both event sponsors and individual exhibitors. During the audit period, the Taxpayer maintained an office and warehouse facility in Virginia that serviced events held in Virginia, Maryland, Washington, D.C., Pennsylvania, and New Jersey.
The department previously determined that the Taxpayer is engaged in the provision of services and is the user and consumer of all tangible personal property in connection with services rendered at Virginia events. In accordance with that prior determination, the current auditor assessed the tax on purchases and rentals invoiced to the Taxpayer at its Virginia office for use at events held in Virginia. The Taxpayer disagrees with the assessment of tax and maintains that it is engaged in the rental of tangible personal property and that it properly collected the tax on such rentals from Virginia customers. Accordingly, the Taxpayer contends that the items it rents to customers may be purchased exempt of the tax under Code of Virginia § 58.1-609.10(3). In addition, the Taxpayer requests waiver of the audit penalty.
DETERMINATION
Services vs. Rentals
Code of Virginia § 58.1-609.10(3) provides an exemption from the sales and use tax for "tangible personal property for future use by a person for taxable lease or rental as an established business or part of an established business, or incidental or germane to such business, ...." (Emphasis added.)
This exemption does not apply in this case. According to the contracts I have seen, the Taxpayer enters into an agreement with the event sponsor to provide a number of services that may include the provision of products to both the event sponsor and the participating exhibitors in a single contract. Based on the contracts, the Taxpayer does not provide the rental of equipment independent of its services. Because the Taxpayer is engaged in both the rendering of services and the provision of tangible personal property under a single contract, the "true object" test provided in Title 23 of the Virginia Administrative Code (VAC) 10-210-4040(D) must be applied.
As stated in the department's prior determination, the "true object" sought by event sponsors and exhibitors is the Taxpayer's expertise in coordinating services that may include the provision of products to ensure a successful event. This goes beyond the mere rental of property. Therefore, the Taxpayer is deemed to provide a nontaxable service when it provides its exposition services to event sponsors and exhibitors. The Taxpayer must pay the tax to its vendors on all tangible personal property and taxable services purchased based on the cost price. This includes tangible personal property purchased for rental by the Taxpayer.
Waiver of Penalty
Title 23 VAC 10-210-2032 provides that the application of penalty to audit deficiencies is mandatory and will not be waived on second and subsequent audits for other than exceptional mitigating circumstances. The Taxpayer has failed to provide evidence of any unusual circumstances that would explain its failure to comply. Therefore, I find no basis to waive the penalty in this instance.
It is my understanding from the auditor that the Taxpayer failed to comply with the prior determination because of its disagreement with the application of the sales and use tax. The Taxpayer is advised that it must comply with the Virginia application of the sales and use tax when it provides services and products to Virginia customers. To do otherwise ensures that the Taxpayer will be assessed penalty in future audits.
Improper Collection of the Tax
The Taxpayer incorrectly collected the tax on sales/rentals to customers during the entire audit period. The Taxpayer may refund the sales tax for this period to its customers and request from the department a reimbursement of the sales tax refunded, less the dealer's discount. Code of Virginia § 58.1-1823 limits the refund of tax to a three-year period from the due date of the return.
I have enclosed a copy of the department's prior determination for your review. Based on the foregoing, the department's assessment is correct and is due and payable. The Taxpayer will shortly receive an updated bill including accrued interest. The bill must be paid within 30 days of the bill date to avoid the accrual of additional interest charges.
If you have questions concerning this letter, you may contact ***** in the department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/37373J
Rulings of the Tax Commissioner