Tax Type
Retail Sales and Use Tax
Description
Selling Call Management Systems used by telemarketing companies
Topic
Accounting Periods and Methods
Appropriateness of Audit Methodology
Computation of Tax
Penalties and Interest
Date Issued
11-03-2003
November 3, 2003
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear **********************:
This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to your client, ************ (the "Taxpayer"), for the audit period May 1998 through March 2001. I apologize for the delay in the Department's response.
FACTS
The Taxpayer sells call management systems to telemarketing companies. At issue in this case is the tax assessed to (i) fixed asset purchases, (ii) computer repairs, and (iii) training services. In addition, the Taxpayer seeks waiver of the assessed penalty.
DETERMINATION
Virginia Code § 58.1-205 deems a tax assessment issued by the Department to be prima facie correct, and the burden is upon the taxpayer to prove that the assessment is incorrect. With this in mind, I will address the contested issues set out in your letter.
Fixed Assets
The auditor reviewed the Taxpayer's fixed asset depreciation schedule and assessed the tax on those items for which the Taxpayer was unable to provide documentation that the tax was charged on the invoice or self-accrued and remitted directly to the Department. The Taxpayer disagrees with the application of the tax on these purchases, contending that the tax on such purchases was remitted to the Commonwealth with the Taxpayer's monthly sales tax returns. The Taxpayer states that it should be given full credit against the assessment for the use tax paid to the Department.
In this instance, the Taxpayer was unable to directly tie the assessed invoices to the monthly sales and use tax returns. Therefore, the auditor was unable to determine whether the tax had been accrued on such invoices and paid. I also note that there are several months in the audit period where no use tax accruals were made; however, the Taxpayer made untaxed fixed asset purchases within those same months.
Based on the information before me, the Taxpayer has not provided evidence that the use tax was paid on the assessed fixed assets. Further, based on the foregoing, the Taxpayer has not demonstrated that it was consistent in its use tax accrual on fixed asset purchases made during the audit period. Accordingly, I find no basis to remove the contested asset purchases from the audit assessment.
Repair Services
The Taxpayer shipped computer equipment to a vendor located outside Virginia for repairs. The vendor billed the Taxpayer a lump sum charge for the repair services. The auditor assessed the tax on the repairs because the vendor charged no sales tax on its invoice to the Taxpayer. The Taxpayer claims that the charges are for exempt labor and any tangible personal property in connection with the repair service is incidental to the transaction and exempt from the tax. Further, the Taxpayer maintains that any repair parts in connection with the out-of-state repairs are subject to sales tax in the state in which the repair services are provided and cites Public Document (P. D.) 89-260 in support of its position.
Virginia Code § 58.1-602 defines "sales price" for purposes of the retail sales and use tax to include the total amount for which tangible personal property or services are sold, including any services that are a part of the sale. Labor charges for repairing tangible personal property, however, are not taxable provided that these repair labor charges are separately stated on the invoice.
In this case, the Taxpayer has provided no documentation to support its claim that the charges are for exempt labor only. If the Taxpayer can provide documentation supporting its claim that the contested sales are for exempt labor only, I will review this issue.
Regarding the out-of-state vendor issue, 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."
Virginia Code § 58.1-604 imposes a use tax on the "use or consumption of tangible personal property in this Commonwealth ...." If the vendor is not required to collect the Virginia sales tax, the customer is responsible for reporting and remitting the use tax to the Department on the cost of the tangible personal property.
P.D. 89-260 addresses the application of the tax to a registered Virginia dealer that performs repair work on equipment that is shipped into Virginia. The ruling states that the taxpayer would be required to collect the Virginia use tax on repair parts to the extent that it is not required to collect a sales tax in the state in which the repairs are made. Further, if the taxpayer does not separately state parts and labor, the use tax would apply to the total charge.
Based on the information provided, the repair charges are subject to Virginia tax. While the Taxpayer claims that the state in which the repairs were made imposes sales tax on repair parts, no sales tax was charged on the invoice. Accordingly, I find that the auditor correctly assessed the tax on the total charge for the contested repair items.
Training
The Taxpayer purchased a software program, technical support and related training services. The entire charge for this transaction was included in the audit assessment. You indicate that the training services are not taxable because they are completely optional and not included in the software agreement.
As addressed in P.D. 03-31 (4/9/03), the tax applies to the total amount for which tangible personal property is sold, including any services that are a part of the sale. The tax does not apply to the charge for training that involves only the provision of a service.
The invoice associated with this transaction indicates that the training is being provided in association with the taxable software. There is no documentation that reflects that the training at issue was a separately contracted item. Consequently, based on the absence of such proof, there is no basis to allow for any adjustment to the audit.
Erroneous Tax Paid
The auditor assessed the Virginia sales tax on the Taxpayer's purchase of software in which the vendor charged a sales tax of 6% on the invoice. The audit also revealed that the out-of-state vendor in question is not registered for the collection of the Virginia sales tax. Accordingly, the Taxpayer paid another state's sales tax. The Taxpayer maintains that it paid the sales tax and relied in good faith that the vendor was registered for Virginia tax. The Taxpayer requests that the purchase be removed from the sample because its action should not be deemed a failure to pay the sales tax.
In P.D. 99-187 (7/15/99), the vendor sold and delivered materials to the taxpayer in Virginia and collected a 5% sales tax and remitted it to the vendor's state. The taxpayer contested the assessment of Virginia tax on the purchase and claimed that it met its obligations to pay the sales tax. The Tax Commissioner upheld the assessment and ruled that the taxpayer did not exercise reasonable care and judgment to ensure that it was properly paying a Virginia retail sales or use tax on the purchase. A similar situation was addressed in P.D. 00-24 (3/28/00). In that case, the auditor included in the sample two purchases on which the taxpayer paid another state's sales tax in error. The taxpayer claimed that the purchases distorted the sample by assuming that other similar purchases were subjected to another state's tax. The Tax Commissioner upheld the assessment ruling that the removal of the transactions would nullify the purpose and validity of the sample. As I find the Taxpayer's current situation to be analogous to those prior decisions, I find no basis to invalidate the auditor's sample calculations.
Penalty
The Taxpayer acquired the business during the audit period. The business had been audited prior to being acquired by the Taxpayer. The auditor treated the current audit as a second-generation audit and, due to a compliance ratio of 29%, assessed audit penalty. The Taxpayer believes that since this is a first-time audit under the current ownership, the current audit should qualify as a first generation audit and the penalty should not apply.
Based on the information furnished by the auditor, the Taxpayer purchased an existing company with an audit history with the Commonwealth. In addition, the business operated in the same manner as prior to the acquisition in July 2001, subsequent to the ending of the audit period.
Title 23 of the Virginia Administrative Code (VAC) 10-210-2032, addresses audit penalty and provides for the following:
The audit of a business which has experienced a change in responsible partners or officers or the addition of new locations, and where the business is conducted in the same manner and for the same purposes as during the prior audit, will not be considered a first audit for purposes of this subsection.
Based on all of the above, I cannot consider the current audit as a first audit for audit penalty purposes. I would also note that the auditor suggested to the Taxpayer the option of the alternative method to compute the use tax compliance ratio. The Taxpayer, however, never provided additional information. Because the Taxpayer did not meet an acceptable use tax compliance ratio for a second or subsequent audit, as established in 23 VAC 10-210-2032, the penalty was properly applied.
Conclusion
I find the assessment is correct and remains due and payable. A consolidated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of this letter. The Taxpayer should remit full payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn:*****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections and regulations cited are available on-line 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 about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/39583T
Rulings of the Tax Commissioner