Tax Type
Retail Sales and Use Tax
Description
Erroneous asessments of a nonprofit organization
Topic
Appropriateness of Audit Methodology
Computation of Tax
Date Issued
05-12-2004
May 12, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ***********:
This will reply to your letter in which you seek the correction of the retail sales and use tax assessment issued to the *************** (the "Taxpayer") for the period September 1997 through August 2000. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a nonprofit organization that operates a retail outlet store, catalogue warehouse, and printing operation in Virginia. The Taxpayer was audited by the Department and appeals the assessment of use tax on various purchases. The Taxpayer states that use tax was incorrectly assessed on royalty fees for photographs and license fees for computer software, both of which the Taxpayer states were delivered to it electronically. The Taxpayer asserts that use tax on maintenance contracts was assessed in error on 100% of the cost of the contracts. The Taxpayer contests use tax assessed on printed materials that were resold or delivered for use outside Virginia and disputes use tax assessed on inventory samples. The Taxpayer also requests waiver of the compliance penalty assessed in the audit.
DETERMINATION
Software License Fees
The Taxpayer states that computer software was received from vendors electronically. Because the license fees at issue were not for tangible personal property, the Taxpayer believes the fees do not meet the definition of a retail sale and are not taxable. The Taxpayer further suggests that other assessed purchases were for custom software and are exempt under Va. Code § 58.1-602.
The Taxpayer has not provided documentation to support its claims that the software in question was delivered to it electronically. The Taxpayer has not provided evidence that charges for custom software were assessed in the audit. The Taxpayer has not indicated which transactions in the audit it is disputing in this appeal. Moreover, the audit comments indicate that the Taxpayer was in agreement with the final audit findings with respect to this issue because the auditors used information provided by the Taxpayer to remove exempt software license fees from the audit. Without proper documentation to support the Taxpayer's claims, I must consider the assessment correct with respect to this issue.
Maintenance Contracts
The Taxpayer maintains that use tax was assessed on charges for maintenance contracts at 100% of their cost rather than 50% of cost, as required under Va. Code § 58.1-609.5(9). A review of the audit report shows that the total cost of the maintenance contracts was listed and that 50% of the cost was shown as the taxable amount. If the Taxpayer has documentation showing that the charges listed in the audit are incorrect, the assessment will be adjusted.
Inventory Samples
The Taxpayer suggests that use tax was assessed on purchases that were maintained in inventory and were for resale to customers. The Taxpayer states that it did not withdraw the samples from inventory for its own use. The audit staff indicates, however, that the items in question were not charged to an inventory account but were expensed by the Taxpayer. The audit staff indicates that the Taxpayer evaluated the samples to determine if they were suitable for sale. Based on the Taxpayer's accounting treatment for the purchase of these items, it does not appear the items were in the Taxpayer's inventory.
The Department has ruled in Public Document (P.D.) 96-336 (11/14/96) that the testing and evaluation of products for possible inclusion in a retailer's sales catalog constitutes "taxable use" of the property for sales and use tax purposes. This position is supported by Va. Code § 58.1-623(C), which provides that:
-
- If a taxpayer who gives a certificate under this section makes any use of the property other than an exempt use or retention, demonstration, or display while holding the property for resale... in the regular course of business, such use shall be deemed a taxable sale by the taxpayer as of the time the property or service is first used by him .... (Emphasis added.)
In this case, the Taxpayer's purchase and subsequent evaluation of the samples resulted in a taxable use of the samples. The fact that the Taxpayer expensed the samples instead of charging the items to an inventory account further supports the Department's position. The sale of the samples is considered a separate and distinct transaction and does not negate the taxable use of the samples prior to their sale. For this reason, the samples were properly held taxable. If the Taxpayer can provide evidence that samples in the audit were charged to an inventory account and were not used by the Taxpayer in a taxable manner, I will agree to remove them from the audit.
Photography Rights
The Taxpayer states that use tax was assessed in error on license or royalty fees charged for the use of photographs that were received electronically. Other photographs were delivered outside of Virginia and were not used in Virginia. Some photographs were incorporated in catalogs or other direct mail pieces that the Taxpayer believes qualify for exemption under Title 23 of the Virginia Administrative Code (VAC) 10-210-40 and P.D. 89-342 as media advertising.
The Department's auditors worked extensively with the Taxpayer to review all purchases of photographs and removed those purchases that were exempt from sales and use tax. The photograph purchases that remained in the audit were photographs purchased by the Taxpayer in tangible form and for its own use in Virginia.
The Taxpayer has not specified which purchases of photographs it believes qualify for exemption. If the Taxpayer can provide documentation that exempt purchases of photographs still remain in the audit, they will be removed.
Printed Materials
The Taxpayer maintains that assessed purchases of posters were not subject to use tax because the posters were resold or given away and shipped outside Virginia. The Taxpayer has not provided documentation to support its claim. If the Taxpayer can provide documentation that the posters were placed in inventory at the time of purchase, and no taxable use of the posters occurred prior to their sale, the appropriate items will be removed from the audit and the assessment will be adjusted.
Penalty
Penalty was assessed in accordance with Title 23 VAC 10-210-2032, which provides for the application of penalty based on the level of compliance exhibited by the taxpayer. On a third or subsequent audit, penalty will be applied unless the compliance ratio meets or exceeds 85% for sales tax and for use tax. The current audit is the Taxpayer's fifth audit and reflects a use tax compliance ratio of 49%. The Taxpayer requests relief from the compliance penalty for good cause under Title 23 VAC 10-210-2030. This regulation, however, addresses penalty assessed on delinquent returns and has no application to audit assessments. Based on the Taxpayer's compliance ratio, the penalty was properly applied.
I understand the Department's auditors advised the Taxpayer that it could apply for penalty relief using the alternative method of computing use tax compliance. The alternative method allows taxpayers to include the measure upon which sales tax was paid to vendors in the compliance ratio calculation. The Department has authorized the use of the alternative method for assessments issued on or after October 1, 1999.
Based on the above, the penalty is correct as assessed. If adjustments are made to the audit that increase the Taxpayer's compliance ratio to the required level of at least 85%, the penalty will be abated. The Taxpayer may also wish to use the alternative method of computing use tax compliance to determine if it qualifies for waiver of penalty under this method.
The Taxpayer should contact********** of the Department's audit staff within 30 days from the date of this letter to set up a time to review any documentation the Taxpayer would like to provide in support of adjustments to the audit.******** may be contacted at *****. If the Taxpayer does not contact the Department within 30 days, the assessment will be considered due and payable and collection will resume.
The Taxpayer currently has an outstanding balance of ***** which includes interest computed through June 20, 2001, the date of the Taxpayer's appeal. I would encourage the Taxpayer to pay any portion of the assessment that is not contested within 30 days from the date of this letter. After this time, interest will accrue from the date of the Taxpayer's appeal until the present on any outstanding balance remaining on this assessment. Payment may be mailed to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P. O. Box 1880, Richmond, Virginia 23218-1880, Attention:*****.
The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department's web site at www.tax.state.va.us. If you have any questions concerning this determination, please contact ***** at *****.
-
-
-
-
-
-
-
- Sincerely,
-
-
-
-
-
-
-
-
-
-
-
-
-
- Kenneth W. Thorson
-
- Tax Commissioner
- Tax Commissioner
-
- Kenneth W. Thorson
-
-
-
-
-
-
AR/35270S
Rulings of the Tax Commissioner