Tax Type
Retail Sales and Use Tax
Description
Manufacturer of glass and mirrors, contests the tax assessed on several items
Topic
Property Subject to Tax
Records/Returns/Payments
Taxable Transactions
Date Issued
05-10-2007
May 10, 2007
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment issued for the period January 2002 through December 2004. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer, a manufacturer of glass and mirrors, contests the tax assessed on several purchase transactions held taxable in the Department's audit. The Taxpayer claims that the contested items are exempt from the Virginia sales and use tax. I will separately address each of the contested issues raised by the Taxpayer.
DETERMINATION
Chart Paper
The Taxpayer claims that the chart paper is used as a devise to monitor the water levels for the purpose of abating or preventing pollution in its wastewater treatment systems and, therefore, is not subject to the sales and use tax.
Virginia Code § 58.1-609.3 9 provides that the retail sales and use tax does not apply to "certified pollution control equipment and facilities as defined in § 58.1-3660, except for any equipment that has not been certified to the Department of Taxation by a state certifying authority pursuant to such section."
Title 23 of the Virginia Administrative Code (VAC) 10-210-2090 B provides that "pollution control equipment and facilities means any real or tangible personal property, equipment, facilities or devices used primarily for the purpose of abating or preventing air or water pollution in Virginia. Any property which is certified as used for these purposes is not subject to the tax."
Based on the information provided, the Virginia Department of Environmental Quality (DEQ) certified the Taxpayer's two wastewater pretreatment systems as pollution control equipment. The certification includes replacement parts such as pumps, motors, mixers, rebuild kits and chemical supplies used to treat the wastewater. The chart paper is an administrative item used to record water levels and is not used primarily in the prevention or abatement of pollution. Based on the documentation provided, chart paper is not an item certified by DEQ and does not qualify for exemption. Accordingly, I find no basis to remove the chart paper from the audit.
Machine Casters
The Taxpayer maintains that the contested casters are installed on a production line machine to facilitate the movement of the machine from one production line to another. The Taxpayer further claims that the casters serve as supports for the exempt production line equipment and are not permanently attached to realty. As such, the casters are a component part of exempt machinery and are not subject to the sales and use tax.
Title 23 VAC 10-210-920 C 2 provides that "[s]teel or similar supports which are a component part of exempt production machinery and which do not become permanently affixed to realty are not subject to the tax." Based on the information provided and the cited regulation, I find that the casters constitute component parts of exempt production line machinery and will be removed from the audit.
Rain Suit Apparel
The Taxpayer furnishes rain suits to production line employees to protect them from acids used in the manufacturing process. The Taxpayer claims that the rain suits are safety apparel and qualify for exemption from the sales and use tax.
Title 23 VAC 10-210-920 discusses the manufacturing exemption and states that an exemption from sales and use tax applies to safety apparel furnished by manufacturers gratuitously to production line employees.
It is my understanding that the auditor was not able to verify that the rain suits are used by production line employees to prevent chemical burns from acid used in the manufacturing process. If the Taxpayer can provide evidence that the contested items are protective apparel provided to production personnel, they will be removed from the audit and the assessment will be adjusted accordingly.
Untaxed Purchases
The Taxpayer presents documentation to show that it applied the sales tax on the purchase orders of the contested items. A review of the vendor invoices shows that no sales tax is charged on the invoices. Based on this, the purchase order documentation is not sufficient evidence that the vendor remitted the tax to the Department on the contested purchases. Lacking the documentation to show that the tax was remitted to the Department, I find that the auditor was correct in holding these transactions taxable in the audit.
Notwithstanding the above, it is my understanding that the Taxpayer has requested additional time in order to obtain evidence from its vendors that the tax was remitted to the Department on the contested purchases. I will allow the Taxpayer 45 days from the date of this letter to provide the audit staff with the documentation regarding the tax paid to vendors.
Updates Subscription Service
The Taxpayer claims that it received no updates in connection with the contested updates subscription service. The Taxpayer indicates that all updates were stopped because they are incompatible with the vendor's newer software versions used by the Taxpayer. The Taxpayer maintains it is required to purchase the updates subscription service in order to receive the necessary product support service on the software. Because no updates are received with the subscription service, the Taxpayer claims that the contested purchase is exempt from the tax.
The information provided by the Taxpayer suggests that the purchase at issue is for the receipt of tangible updates and labor in connection with a maintenance agreement. Title 23 VAC 10-210-910 defines a maintenance contract as "any agreement whereby a person agrees to maintain or repair an item of tangible personal property over a specified period of time for a fee which is determined at the time the agreement is entered into." Maintenance contracts for parts and labor represent a sale of tangible personal property and are subject to the tax based on one-half of the total charge. See Va. Code § 58.1-609.5 9. In accordance with the Code section and regulation cited, the charge at issue is subject to the tax upon one-half of the total charge.
The fact that the Taxpayer may not have received the updates has no bearing in this instance because the tax on a maintenance contract is determined at the time the agreement is entered into based on the terms of entitlement. In this case, however, the auditor assessed the updates subscription service at 100% of the purchase price. Therefore, the audit will be revised to reduce the tax assessed to one-half of the charge.
The Taxpayer provides a copy of the purchase order as evidence that the sales tax was paid on the contested item. Because the vendor did not charge sales tax on the invoice, the purchase order is not sufficient documentation that the vendor remitted the sales tax to the Department on the contested purchase. Without proper documentation to support the Taxpayer's claims, the assessment of the tax is proper with respect to this issue.
The Taxpayer requests that the tax assessed on the updates subscription service be removed from the sample and taxed as a fixed asset if the Department determines that the contested purchase is subject to the tax and further rules that the documentation provided is insufficient to prove that the tax was paid on the purchase. I cannot agree to remove the contested purchase from the sample. The Taxpayer has not depreciated the cost of the updates subscription service for federal and state income tax purposes, which is typical of the tax treatment of fixed assets. Based on the information provided, purchase of the updates service subscription is correctly included in the sample.
CONCLUSION
The audit will be revised to remove the tax assessed on the machine casters. The Taxpayer is given 45 days from the date of this letter to provide the audit staff with the documentation regarding the tax paid to vendors and safety apparel issues. If the required documentation is not furnished within the allotted time, the tax assessed on those items will be deemed correct as issued and an updated bill, with interest accrued to date, will be mailed to the Taxpayer. The bill should be paid within 30 days of the bill date to avoid the accrual of additional interest charges.
The Code of Virginia sections and regulations 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 web site. 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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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/55404T
Rulings of the Tax Commissioner