Tax Type
Retail Sales and Use Tax
Description
Assessed tax of computer equipment and software.
Topic
Allocation and Apportionment
Basis of Tax
Exemptions
Property Subject to Tax
Date Issued
06-25-2002
June 25, 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 retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period August 1996 through March 1999. I apologize for the delay in the department's response.
FACTS
The Taxpayer is engaged in several computer-related activities, including: (1) sales of computer systems, (2) computer repair services, (3) consulting services to organizations that are planning to buy computer systems, and (4) imaging services. An audit by the department resulted in the assessment of tax for an untaxed sale of computer equipment and software. In addition, tax was assessed on certain services rendered in connection with the sale of equipment. The Taxpayer contends that the services were a minor part of the equipment sale for the customer, and any service was "ancillary" to the sale.
The Taxpayer also contests the assessment of tax on the purchase of a scanner. The Taxpayer maintains that the purchase should qualify for the occasional sales exemption because it was made from a company that was going out of business and liquidating its inventory.
DETERMINATION
Untaxed sale of computer equipment
The Taxpayer maintains that it received an exemption certificate from the customer and should not be responsible for the tax.
In accordance with Title 23 of the Virginia Administrative Code (VAC) 10-210-280, which interprets Code of Virginia § 58.1-623, all sales of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes in good faith from the purchaser a certificate of exemption indicating the property is exempt under the law.
It is my understanding that the Taxpayer received a copy of the purchaser's tax exempt letter from the Internal Revenue Service. This is not sufficient documentation to substantiate an organization's tax exempt status for retail sales and use tax purposes. As noted in Title 23 VAC 10-210-1071, there is no general exemption from the sales and use tax for nonprofit organizations. The majority of nonprofit organizations exempt from federal and state income taxes are not exempt from Virginia retail sales and use tax because they do not qualify for a sales and use tax exemption set out in Code of Virginia §§ 58.1-609.1 through 58.1-609.10. In order for a nonprofit organization to make a purchase exempt of the sales and use tax, it must present a letter issued by the department with a tax exempt number (or in the case of a church, Form ST-13A must be presented).
The Taxpayer was unable to prove that the organization making the purchase is exempt from Virginia sales tax. Furthermore, the Taxpayer did not receive a valid certificate of exemption from the purchaser. Accordingly, there is no basis to remove this sale from the audit assessment.
Services rendered in connection with sales of equipment
Code of Virginia § 58.1-603 imposes a sales tax on "the gross sales price of each item of tangible personal property when sold at retail or distributed in this Commonwealth." The term "sales price" is defined in Code of Virginia § 58.1-602 as:
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- the total amount for which tangible personal property or services are sold, including any services that are a part of the sale . . . and includes any amount for which credit is given to the purchaser . . . without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.
Code of Virginia § 58.1-609.5(2) does exempt from the sales tax an amount separately charged for labor or services rendered in installing, applying, remodeling or repairing property sold. Other amounts charged for services in connection with sales of tangible personal property are taxable. See Public Document (P.D.) 87-217 (10/02/87).
You contend that the charges by the Taxpayer for configuration and integration are part of the installation process and, therefore, are exempt. I cannot agree with your position. First, installation is "labor rendered after the product is complete in order to install it for the customer." See P.D. 86-186 (9/18/96). In this case, it appears that the product (equipment) is not complete, but rather must undergo further steps and processes before it is operational. Second, the labor charges at issue are for configuration and integration services. These services go beyond mere installation, as that term has been defined in prior public documents for purposes of the exemption in Code of Virginia § 58.1-609.5(2). Finally, even if a portion of the service charge is for installation, the department has previously ruled that a single charge for taxable services and installation is taxable. See P.D. 94-351 (11/22/94).
Based on the foregoing, I find the services rendered in connection with sales of equipment are not for installation only. Accordingly, the assessment of tax on such services is proper.
Purchase of scanner
You state that this purchase involved a used piece of equipment. It was the Taxpayer's understanding that the business selling the equipment was going out of business and liquidating its inventory. Therefore, you believe the purchase qualifies for the occasional sale exemption.
Code of Virginia § 58.1-609.10(2) exempts from the retail sales and use tax an "occasional sale" as defined in Code of Virginia § 58.1-602. This latter section defines an "occasional sale" as:
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- a sale of tangible personal property not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration, including the sale or exchange of all or substantially all the assets of any business and the reorganization or liquidation of any business, provided such sale or exchange is not one of a series of sales and exchanges sufficient in number, scope and character to constitute an activity requiring the holding of a certificate of registration.
It is my understanding that while the equipment supplier in this case may have begun the process of liquidating its assets at the time of purchase by the Taxpayer, this process was far from complete. Instead, at all times during and subsequent to the sale of the equipment to the Taxpayer, its supplier continued to operate its retail establishment subject to the department's sales tax registration and reporting requirements. The department's records indicate that the purchase of equipment by the Taxpayer took place in July 1997; however, the supplier retained an open sales tax registration with the department until October 1999. Furthermore, the equipment sold was held by the supplier in the course of an activity for which it was required to hold a certificate of registration. Accordingly, the sale fails to qualify for the occasional sale exemption and was properly held taxable by the auditor.
Interest and penalty
You indicate the Taxpayer would like a waiver of the assessed interest and penalty. You state that the Taxpayer has made all the audit suggestions based on the recommendations presented and believe the Taxpayer is now abiding by Virginia's tax laws.
Interest: The department is bound by the provisions of Code of Virginia § 58.1-1812, which mandates the application of interest to any assessment of tax. Interest is charged at the rate established under Code of Virginia § 58.1-15 for the period from the due date and the date of full payment. Interest cannot be waived unless the associated tax is waived. Based on the information presented, interest was correctly applied to the assessment in this case. There is no basis for a waiver of any portion of the interest.
Penalty: Penalty was assessed for (1) unreported taxed sales, and (2) use tax compliance less than required for a second generation audit.
The Taxpayer sold a computer system and collected sales tax. The sale was not reported by the Taxpayer. In accordance with Title 23 VAC 10-210-2032, penalty cannot be waived if a taxpayer has collected sales tax but failed to remit it to the department. Therefore, this portion of the penalty assessment is correct and will not be waived.
In regard to use tax compliance, Code of Virginia § 58.1-635 mandates the application of penalty to tax deficiencies. Title 23 VAC 10-21-2032 provides that penalty will generally be applied unless the use tax compliance ratio meets or exceeds 60% for a second audit and 85% for all subsequent audits. The current audit, which is the Taxpayer's second, reflects a use tax compliance ratio of 0%. Based on this measurement, penalty was properly applied. Further, the regulation indicates that penalty will not be waived on second and subsequent audits for other than "exceptional mitigating circumstances." No evidence of exceptional mitigating circumstances has been presented.
Summary
Based on all the foregoing, the assessment is correct as issued and there is no basis for relief. The Taxpayer will receive an updated bill with accrued interest. The bill should be paid within 30 days of the date of the bill to avoid the accrual of additional interest.
Copies of the Code of Virginia, regulations and public documents 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. If you have any questions regarding this response, please contact ***** in the department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
AR/35333
Rulings of the Tax Commissioner