Tax Type
Retail Sales and Use Tax
Description
Tangible personal property used directly in public utility service
Topic
Exemptions
Date Issued
04-12-2005
April 12, 2005
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to your client, ***** (the "Taxpayer"), for the audit period April 2000 through June 2003. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is engaged in the business of installing, maintaining and repairing various electrical components for its customers. The Department audited the Taxpayer and assessed tax on items of tangible personal property that were purchased in connection with contracts with an electric cooperative and a public water authority. The contract with the electric cooperative was for the construction of an "Ottoman substation." The contract with the water authority was for the construction of an electrical substation. You maintain that the tax assessed on these items is improper, citing the public utility exemption and the government exemption. You further maintain that the audit contains a mathematical error.
DETERMINATION
Mathematical Error
The amount on the invoice at issue was listed incorrectly in the audit. The audit staff will make the appropriate correction.
Public Utility Exemption
During the audit period at issue, Va. Code § 58.1-609.3 3 provided an exemption for public utilities. The statute stated, in pertinent part, that the tax shall not apply to [t]angible personal property sold or leased to . . . a public service corporation subject to a state franchise or license tax upon gross receipts . . . for use or consumption by such corporation . . . directly in the rendition of its public service . . . ."
Title 23 of the Virginia Administrative Code (VAC) 10-210-3020 gives further guidance on the application of the public utility exemption. Specifically, the regulation states:
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- Direct usage refers to those activities that are an integral part of the rendition of a public utility service, including all steps of a utility's production, generation or initiation process as well as a utility's transmission or distribution process, but not including public utility functions such as administration and management.
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- Items of tangible personal property that are used directly in the rendition of a public utility service are those which are both indispensable to the actual provision of a utility service and used or consumed immediately in the performance of such service. The fact that a particular item may be considered essential to the rendering of a public utility service because its use is required either by law or practical necessity does not, of itself, mean that the property is used directly in the rendition of a public utility service.
In this instance, some of the contested items of tangible personal property may be exempt; however, it is not clear from the invoices provided whether all of the tangible personal property listed on the invoices was used directly in the rendition of a public utility service. The fact that an item of tangible personal property used in the construction of the electrical substation or the Ottoman substation may be considered essential to rendering a public utility service does not constitute an exempt use. In order to qualify for the exemption, the item must be used directly in the rendition of the public utility service.
The Taxpayer has not provided the Department with the exemption certificates (Form ST-11A) used to make the exempt purchases. In order for the public utility exemption to apply to the purchases made by the Taxpayer with regard to the public water contract and the electric cooperative contract, the Taxpayer must produce certificates of exemption indicating that the items at issue are used directly in the rendition of the public service. In lieu of certificates of exemption, the Taxpayer has the burden to prove that each of the contested items at issue is used directly in the rendition of the public service. The fact that the items were purchased pursuant to a contract with a public service corporation does not prove the items qualify for exemption. In addition, the invoices provided are not sufficient, by themselves, to prove the items at issue were used directly in the rendition of a public service.
Government Exemption
Title 23 VAC 10-210-693 provides that "[t]he appropriate tax treatment of purchases of tangible personal property by persons who contract with the federal government, the state or its political subdivisions, is based upon whether the contract is for the sale of tangible personal property . . . or for the provision of an exempt service." If a contract is for the sale of tangible personal property, a contractor may purchase such tangible personal property exempt from the tax using a resale exemption certificate, Form ST-10. If a contract is for the provision of services, however, the contractor is deemed to be the taxable user and consumer of all tangible personal property used in performing its service, even though title to the property may pass to the government or the contractor may be fully and directly reimbursed by the government, or both.
Title 23 VAC 10-210-410 further provides that "no sale to a contractor is exempt on the ground that the other party to the contract is a governmental agency, a public service corporation, a nonprofit school, or nonprofit hospital, or on the ground that the contract is a cost-plus contract."
In this instance, the Taxpayer entered into a contract with the water authority for the construction of an electrical substation. The Taxpayer provided the Department with a copy of the Notice to Bidders issued by the water authority. The Taxpayer also submitted a letter from the water authority regarding the construction of the electrical substation. Both documents indicate that the contract at issue is for the construction of the electrical substation. The letter further indicates that the Taxpayer is the prime contractor for the construction of the electrical substation for the water authority. Based on this information, the contract is for services provided by the Taxpayer to the water authority. Accordingly, pursuant to Title 23 VAC 10-210-693, the Taxpayer is deemed to be the taxable user and consumer of tangible personal property purchased for use in performing the real property services contract.
Sample
As an independent ground for appeal, the Taxpayer contends that the inclusion in the sample period of five invoices from jobs that are totally unrelated to its usual business practice and which do not represent recurring transactions is not consistent with the Department's policy. To support your position that the sample is distorted, you have submitted a study done by a public accounting firm that is based on a statistical sample.
For an item to be removed from an audit sample, a taxpayer must show that the transaction is isolated in nature and not a normal part of the taxpayer's business activity. In this case, the Taxpayer purchased electrical supplies for use in performing contracts with a public water authority and an electric cooperative. While the Taxpayer claims that the contested purchases do not represent the Taxpayer's "normal business activity," I cannot agree. The purchase of electrical supplies is an integral part of the Taxpayer's business activity of installing, maintaining and repairing various electrical components for its customers. Although the Taxpayer may not have performed services pursuant to contracts with a public water authority or public service corporation during the audit period, there are likely similar contracts or transactions outside the sample period in which tax was not paid.
Furthermore, I am not persuaded by the study conducted by the public accounting firm. The study is based on a statistical sample. The study failed to find any untaxed invoices in 2002, when the Department's auditors found 1,740 untaxed invoices during the same period. The study's sample of 92 invoices for three years in a total population that appears to average between 10,000 and 20,000 invoices per year appears to be too restrictive to yield dependable results. For these reasons, I find no basis to invalidate the sample used by the auditor.
CONCLUSION
Based on the foregoing, the auditor properly applied the tax to the items at issue. Notwithstanding this determination, I will allow the Taxpayer an opportunity to provide to the audit staff the exemption certificates or other documentation supporting its argument that the contested items of tangible personal property are used directly in the rendition of a public utility service. Based on the documentation provided, the audit staff will make any necessary adjustments to the assessment. The information must be provided within 45 days from the date of this letter. If the requested documentation is not furnished within the time allowed, an updated bill, with interest accrued to date, will be mailed to the Taxpayer and collection action will resume.
While you request a conference in your letter, your request is declined because the Department's policy is well established in the regulations and there is additional documentation that must be reviewed by the audit staff.
The Code of Virginia sections and regulations cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions about this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
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- Tax Commissioner
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- Kenneth W. Thorson
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AR/49050P
Rulings of the Tax Commissioner