Document Number
08-110
Tax Type
Retail Sales and Use Tax
Description
Taxpayer provides business and office products and document management services
Topic
Appropriateness of Audit Methodology
Computation of Tax
Records/Returns/Payments
Sale for Resale
Date Issued
06-20-2008



June 20, 2008





Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This is in response to your letters in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period April 1999 through March 2002. I apologize for the delay in responding to your appeal.

FACTS


The Taxpayer provides business and office products and document management services. The Taxpayer's business consists of three product divisions. The IBS Division sells, services and supports office equipment, including copiers, printers, print controllers, imaging systems and fax systems. The IDS Division provides digital printing, binding and finishing, electronic document management, scanning, imaging, coding and conversion services through a network of IDS service centers. The IMS Division contracts to manage its customers' on-site copy centers and on-demand printing facilities. As part of these contracts, the IMS Division also provides delivery and courier services, reception desk staffing, and manages record keeping and supplies on an in-house basis. The Taxpayer represents that it is primarily engaged in printing or photocopying of products for sale or resale.

The Taxpayer contests the tax related to several issues. Each of the issues presented by the Taxpayer will be addressed separately below.

DETERMINATION


IMS Division Service Contracts

The Taxpayer asserts that Public Document (P.D.) 04-199 (11/3/04) applies to sales made by its IMS Division. The Taxpayer contends that payments for management fees and add-on charges for overtime and equipment should be removed from the audit sample because these payments were made pursuant to management contracts under which the Taxpayer provided services to its clients.

In P.D. 04-199, the taxpayer contracted with its clients to provide document management services. These services included the operation, management and maintenance of client copy centers, mailrooms and related services. The taxpayer charged a monthly management fee for its services and collected the tax on a monthly reprographics fee for documents produced. The taxpayer also charged for overtime, equipment and materials and miscellaneous services. After reviewing the taxpayer's contract, the Tax Commissioner determined the true object of the transaction at issue was the acquisition of services. The taxpayer was deemed a service provider and the tax assessed on the contract charges was removed.

The IMS Division manages the copy centers of its customers using the Taxpayer's employees and either its equipment or the customers' equipment. These contract services are similar to the services provided by the taxpayer in P.D. 04-199. As such, the contracts at issue are deemed service contracts. Accordingly, the following line items will be removed from the Non-Contested Sales exceptions list:
    • Line 58: *****
      Lines 110 through 112: *****
      Lines 114 and 115: *****
      Lines 212 through 222: *****
      Line 268: *****

In regard to *****, the contract reviewed is for the period August 20, 2001 through November 20, 2001. However, the ***** transactions in lines 18 through 21 represent transactions that occurred outside of the effective period of the contract. Based on the Taxpayer's representations and its NAICS registration, the Taxpayer is engaged primarily in the printing or photocopying of products for sale or resale. As such, in regard to the ***** transactions, where there was no service contract in place when the transactions occurred, the Taxpayer is liable for the sales tax.

Contested Sales

The Taxpayer asserts that the sales represented by Lines 19 and 21 on the Sales exceptions list should be removed because the Taxpayer received a valid resale exemption certificate in good faith from its customer.

Virginia Code § 58.1-623 A provides that "[a]II sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage 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 under this chapter."

Title 23 of the Virginia Administrative Code (VAC) 10-210-280 B states, "[r]easonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates."

Based on the documentation provided, the Taxpayer received a resale exemption certificate from its customer at the time of the sale. Pursuant to Title 23 VAC 10-210-280, the Taxpayer exercised reasonable care and judgment, and received the exemption certificate in good faith. Accordingly, the two line items at issue will be removed from the Sales exceptions list.

Intracompany Transfer

The Taxpayer asserts that the transaction at issue represents an intracompany transfer. The Taxpayer maintains that the tangible personal property at issue was purchased by its IBS Division and transferred to its IMS Division for use in providing services pursuant to a contract with its customer. Relying on the definitions of "retail sale" and "person" found at Va. Code § 58.1-602, the Taxpayer asserts that the transaction at issue is not subject to the tax.

Virginia Code § 58.1-602 provides, in pertinent part, that "retail sale" or a "sale at retail" means "a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter, and shall include any transactions as the Tax Commissioner upon investigation finds to be in lieu of a sale."

Pursuant to Va. Code § 58.1-602, "'person' includes any individual, firm, copartnership, cooperative, nonprofit membership corporation, joint venture, association, corporation, estate, trust, business trust, trustee in bankruptcy, receiver, auctioneer, syndicate, assignee, club, society, or other group or combination acting as a unit, body politic or political subdivision, whether public or private, or quasi-public, and the plural of such term shall mean the same as the singular."

In accordance with the Va. Code § 58.1-602 definitions of "retail sale," "sale at retail," and "person," the transaction at issue does not represent a taxable retail sale because the divisions are not persons as defined in the statute. However, this fact does not preclude this transaction from being subject to the tax.

The documentation provided by the Taxpayer does not support its contention that the transaction at issue represents an intracompany transfer between its IBS and IMS Divisions. The documentation provided does not demonstrate that the tangible personal property was purchased by the IBS Division. The documentation indicates that the purchase of the tangible personal property was billed to the IMS Division and shipped to the Taxpayer's customer. This suggests that the tangible personal property was purchased by the IMS Division for its use in the provision of services to its customer. Additionally, the Taxpayer has not provided any documentation to demonstrate that there was a transfer of the property between the IBS Division and the IMS Division. Pursuant to Va. Code § 58.1-205, the Taxpayer has not met its burden of proving that the transaction at issue is an intracompany transfer that is not subject to the tax. Accordingly, the tax was properly assessed. However, the Taxpayer is given the opportunity to submit additional documentation to support its contention. Following a review of the documentation, adjustments will be made to the audit as warranted.

High Speed Copiers

Virginia Code § 58.1-609.3 11 provides that the retail sales and use tax does not apply to "high speed electrostatic duplicators or any other duplicators which have a printing capacity of 4,000 impressions or more per hour purchased or leased by persons engaged primarily in the printing or photocopying of products for sale or resale." The exemption focuses on the principal activity of the business and not the principal use of the high speed copier.

As determined earlier in this letter, the Taxpayer is engaged primarily in the printing or photocopying of products for sale or resale. As such, the Taxpayer is not liable for the tax on the purchase of high speed copiers. Accordingly, the contested items will be removed from the audit.

Purchases for Resale

The Taxpayer asserts that the auditor failed to remove from the audit sample certain items that it purchased for resale to its customers. The Taxpayer asserts that the items at issue were purchased by its IMS Division for resale to its customers and are exempt from the tax.

As stated previously, the Taxpayer is primarily engaged in the printing or photocopying of products for sale or resale. As a dealer registered for the Virginia retail sales and use tax, the Taxpayer is entitled to make exempt purchases of tangible personal property for resale to its customers. Pursuant to Va. Code § 58.1-623 A, the Taxpayer is then required to charge, collect and remit the sales tax when reselling the property to its customers, unless it receives a resale exemption certificate from the customers. In order to have these items removed from the Miscellaneous Purchases exceptions list, the Taxpayer must submit documentation demonstrating that the items were resold and the tax was charged and collected.

Purchases of Component Ingredients

Title 23 VAC 10-210-3010 K provides that:
    • The sale of photocopies and Photostats represents the taxable sale of tangible personal property. Quick printers and persons operating photocopy or photostating machines primarily for the reproduction of copy furnished by customers . . . may purchase exempt from the tax only those items, such as paper, that will become ingredient or component parts of the finished products they sell.

The Taxpayer asserts that the auditor failed to remove from the audit sample certain component ingredients that the IMS Division used in creating the photocopies provided to its customers. Relying on P.D. 99-302 (11/17/99), the Taxpayer asserts that it is entitled to the resale exemption for the component ingredients used to provide copies under its IMS Division management contracts.

In accordance with Title 23 VAC 10-210-3010 K, the Taxpayer operates the photocopying machines primarily for the reproduction of copy for its customers. Accordingly, the component ingredients purchased for use in these photocopying machines are not subject to the retail sales and use tax. The contested transactions will be removed from the audit.

Large Corporate Underpayment Interest

The Taxpayer contends that it was assessed interest in the audit in excess of the rate authorized by Va. Code § 58.1-15. The Taxpayer asserts that it was incorrectly assessed interest based on the federal large corporate underpayments rate. The Taxpayer further maintains that the ruling in General Motors Corp. v. Virginia Dept. of Taxation, 62 Va. Cir. 4 (2003) applies in this instance.

The issue presented in the General Motors case was whether the Department of Taxation properly assessed an additional five percent interest above the federal short­term rate by applying 26 U.S.C. § 6621 (c) to the underpayment rate established under 26 U.S.C. § 6621(a)(2). The Court held that Va. Code § 58.1-15 was clear and unambiguous, and that it did not incorporate the federal interest rate applicable to large corporate underpayments set forth in 26 U.S.C. § 6621(c). Accordingly, the large corporate underpayment rate should not have been used to assess interest in the Taxpayer's audit. The interest will be recomputed pursuant to the provisions of Va. Code § 58.1-15 and the holding in the General Motors case.

CONCLUSION


The Taxpayer is given 45 days from the date of this letter to submit to the audit staff additional documentation to support its contentions regarding the intracompany transfer issue and the purchases for resale issue. The audit staff will review the additional documentation and make the adjustments required by this determination and as warranted by the review of the documentation. Upon completion of the review and adjustments to the audit, the Taxpayer will receive an updated bill with interest accrued to date. No further interest will accrue provided the bill is paid within 30 days from the date of the bill.

The Code of Virginia sections, regulations and public documents cited 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 response, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,


Janie E. Bowen
Tax Commissioner


AR/54370P


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46