Tax Type
Retail Sales and Use Tax
Description
Tax on untaxed rentals and set-up charges
Topic
Exemptions
Property Subject to Tax
Statute of Limitations
Tangible Personal Property
Date Issued
09-19-2006
September 19, 2006
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 assessments issued to *************** (collectively referred to herein as the "Taxpayer") for the period July 1999 through May 2005.
FACTS
The Taxpayer rents inflatable amusement games such as moonwalks, slides and obstacle courses. As a result of the Department's audit, the auditor concluded that the Taxpayer is engaged in making taxable rentals of tangible personal property and assessed the tax on untaxed rentals and set-up charges.
The Taxpayer contends that the assessment includes periods outside the statute of limitations provided under Va. Code § 58.1-634. In addition, the Taxpayer disputes: (1) the tax assessed on rentals of games and other property to churches and schools because it accepted exemption certificates; (2) the application of the tax to services provided by booking agents; and (3) the tax assessed on rentals of games with an "operator." The Taxpayer also asserts that it received erroneous advice from the Department regarding the application of the sales tax to its business activities.
DETERMINATION
Statute of Limitations
In addressing the statute of limitations for assessing sales and use tax, Va. Code § 58.1-634 provides that the sales and use tax:
-
shall be assessed within three years from the date on which such taxes became due and payable. In the case of a false or fraudulent return with intent to evade payment of the taxes imposed by this chapter, or a failure to file a return, the taxes may be assessed . . . at any time within six years from such date. The Tax Commissioner shall not examine any person's records beyond the three-year period of limitations unless he has reasonable evidence of fraud, or reasonable cause to believe that such person was required by law to file a return and failed to do so. [Emphasis added.]
Once it is established that a taxpayer failed to file a return for any month in which a return is due, the audit period may be extended to six years. See Public Document (P.D.) 96-86 (05/09/96). In this instance, the Taxpayer failed to file retail sales and use tax returns for the period April 1995 through May 2005. Therefore, the auditor was justified in extending the assessment period beyond the three-year statute of limitations.
Exemption Certificates
The regulation regarding the use of exemption certificates in Title 23 Virginia Administrative Code (VAC) 10-210-280 provides that "reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax-free purchase of any item of tangible personal property not covered by the exact working of the certificate."
It is my understanding that the auditor honored any exemption certificates on file as being accepted in good faith. Other exemption certificates were obtained after the conclusion of the audit. The auditor determined these exemption certificates were invalid and assessed tax on the associated transactions.
The Department has previously ruled in Public Document (P.D.) 98-29 (2/20/98) that an exemption certificate obtained after the start of an audit cannot be accepted "in good faith" and is subject to greater scrutiny by the Department. Accordingly, such certificates are acceptable only if the Department is able to confirm that a customer's use of the certificate was valid and proper for a specific transaction identified during audit. It is my understanding that the Taxpayer requested that the Department not contact the customers listed on the certificates obtained after the conclusion of the audit. Because of this request, the Department cannot confirm the use of the exemption certificates is valid for the contested sales.
Furthermore, it is apparent that the Taxpayer's rentals of games and other property assessed in the audit are clearly outside the scope of the wording of the exemption certificates. For example, the exemption certificate made available to certain nonprofit churches (Form ST-13A) clearly specifies the type of purchases that may be made exempt of the tax. In addition, the certificate states at the bottom, "NOTE: This exemption certificate does not provide exemption for any tangible personal property purchased by a church other than that specified above." The Taxpayer's rentals of games to churches do not fall within the scope of exemption specified on the certificate.
Booking Agents
Pursuant to Va. Code § 58.1-623, all sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt.
Title 23 VAC 10-210-840 provides for the application of the tax on the lease or rental of tangible personal property. Based on prior decisions, the Department may proceed against either the retailer or the purchaser for the payment of the tax liability. In this instance, because the booking agent (purchaser) did not charge sales tax on the rental of the property at issue, the Taxpayer became liable for the accrual and payment of the tax. Furthermore, the booking agent did not present to the Taxpayer a valid resale exemption certificate. Because the Taxpayer did not remit the tax to the Department, the auditor was correct in including such purchases in the audit.
Operator versus Attendant
The Taxpayer contends that it uses both operators and attendants when renting its games. Operators are utilized for certain equipment with "highly sophisticated computer control panels" such as a mechanical bull and the rock-climbing wall. The Taxpayer states this equipment requires a well-trained operator to use. The Taxpayer asserts that, based on Department policy, such rentals with an operator should be exempt from tax.
When the Taxpayer rents its games, the "operator" is more accurately an attendant who primarily monitors the operation and use of the game. In applying the "true object" test, the object of the Taxpayer's customers is the rental of the game and not the skills of the attendant, as in most instances the game can operate with or without the attendant. After reviewing the audit report and the facts presented, I agree with the auditor's conclusion that the Taxpayer is engaged in making taxable rentals, and the tax applies to the gross proceeds derived from such rentals.
The Taxpayer's rental of games with an attendant is quite different from other instances in which the Department has determined that the rental of equipment with an operator constitutes a nontaxable service. For example, a crane rented with an operator is considered a nontaxable service because the "true object" of the transaction is to obtain the operator's skills in using the crane. The operator exerts certain skills and maintains complete control over the crane during its operation. See P.D. 91-19 (2/21/91), which addresses crane rental with and without an operator.
The Taxpayer's rental transaction is more like the balloon rental addressed in P.D. 01-56 (5/14/01). In that instance, hot air parade balloons were determined to be taxable rentals, even though the rental company provided supervision and assistance while the balloons were in usage.
Advice Received from Department
Virginia Code § 58.1-1835 authorizes the Tax Commissioner to abate an assessment or a portion of an assessment that is attributable to erroneous advice furnished to taxpayers in writing by an employee of the Department acting in his official capacity. The Taxpayer has not provided evidence that it received and relied upon written advice from the Department that resulted in the assessment that is under appeal.
My concern with the verbal information the Taxpayer's representative received is that it is often difficult to determine what specific questions were asked and what information regarding the Taxpayer's business activities was presented to the Department.
CONCLUSION
Based on the above determination, the assessment is correct. An updated bill with interest accrued to date will be sent to the Taxpayer. No additional interest will accrue provided the bill is paid within 30 days of the date on the bill. Please remit payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attention: *****. If have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections, regulations and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this determination, you may contact ****** in the Office of Policy and Administration, Appeals and Rulings, at *****.
-
-
-
-
-
-
-
- Sincerely,
-
-
-
-
-
-
-
-
-
-
-
-
-
- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
-
-
-
-
-
-
ARM-476662413i
Rulings of the Tax Commissioner