Document Number
08-115
Tax Type
Retail Sales and Use Tax
Description
Taxpayer is a provider of services to building and industry facilities.
Topic
Appropriateness of Audit Methodology
Penalties
Records/Returns/Payments
Sale for Resale
Taxable Transactions
Date Issued
06-26-2008


June 26, 2008





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

Dear *****:

This is in reply to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period May 2001 through April 2004. I apologize for the delay in responding to your appeal.

FACTS


The Taxpayer is a provider of services to building and industry facilities. The Taxpayer's services include operational maintenance, workplace planning, facility management, food services ranging from employee restaurants and catering to executive dining rooms and convenience stores, ancillary services such as vending and office coffee systems and snacks and light meals. The Department's audit held taxable certain sales and purchases of tangible personal property to which the Taxpayer disagrees. Accordingly, the Taxpayer seeks an adjustment of the Department's assessment.

DETERMINATION


Non-Taxed Sales - Certificates of Exemption/Direct Pay Permit

The Taxpayer sold services or tangible personal property without charging the retail sales and use tax. The Taxpayer contends that it received and accepted in good faith valid certificates of exemption or a copy of the customer's direct payment permit and that the Department's audit erroneously holds these sales subject to the tax. The Taxpayer has recently submitted documentation in support of its position and requests that the Department revise its assessment.

Virginia Code §§ 58.1-623 and 58.1-623.1 and Title 23 of the Virginia Administrative Code (VAC) 10-210-280 set forth the criteria for the proper use of certificates of exemption.
    • All 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 ....

The regulations provide that "an exemption certificate cannot be used to make a tax-free purchase of any item of tangible personal property not covered by the exact wording of the certificate." Therefore, the seller must use reasonable care and judgment in selling tangible personal property exclusive of the tax, even when an exemption certificate from the purchaser is provided. In this instance, the Taxpayer received exemption certificates from the American Red Cross and another organization that is part of the United States government. The Department's auditor initially held these sales taxable because the Taxpayer could not produce sales invoices to support the exempt sale to the customer. However, the Taxpayer has recently provided additional evidence to the Department's auditor, who has verified that these sales are exempt. Accordingly, these sales will be removed from the audit assessment.

Also at issue are three sales in which the Taxpayer's customers provided direct payment permits for the purchase of catered meals. In reviewing the Form ST-21 Direct Payment Permit certificate, the form appears to restrict purchases by the permit holder to tangible personal property. However, the wording of the permit provides that its issuance, under Section 58.1-441.33 of the Virginia Retail Sales and Use Tax Act (now Va. Code § 58.1-624), is subject to the limitations, terms and conditions set out in that section. The statute restricts the issuance of direct payment permits to manufacturers, mine operators, public service corporations, and those persons who store tangible personal property in Virginia for use both within and outside Virginia. This same section further provides that a permit holder shall remit the tax on all sales, distributions, leases, storage of tangible personal property, and sales of taxable services directly to the Tax Commissioner. Accordingly, the sales to these customers will be removed from the Department's assessment.

Non-Taxed Purchases - Tax Remitted to State

The Taxpayer states that it has paid the sales tax to its vendors or accrued the use tax on transactions indicated as missing invoices in the Department's audit.

There are three transactions at issue relating to the purchase of assets. Based on the Taxpayer's documentation that the use tax was self-assessed, line item number 4 will be removed from the asset exception listing. With regard to line items numbered 2 and 3, the Taxpayer provided to the auditor its customer's direct payment permit as proof that the purchases of the assets were not taxable. Based on a review of the direct payment permit, the Taxpayer is not the entity named on the permit but is making the purchases for its own use and consumption. As previously stated, the issuance of a direct payment permit is made to specific organizations. An entity that does not meet the requirements provided in Va. Code § 58.1-624 cannot use the permit or its customer's permit to make exempt purchases. Therefore, the purchases represented in line items 2 and 3 will remain in the Department's audit.

Maintenance and Repair Contracts

During the audit period, the Taxpayer states that it properly paid the tax on contracts with various vendors that provided both maintenance services and repair parts for equipment and software used in various facilities throughout Virginia. The Taxpayer has not presented any documentation to support its contention.

Purchases for Resale

During the audit period, the Taxpayer states that it purchased tangible personal property that was ultimately resold to its customers, but which was held taxable in the Department's audit. The Taxpayer has not presented any documentation to support its contention that the property was purchased for resale.

Separately Stated Delivery Charges

During the audit period, the Taxpayer purchased tangible personal property that included delivery charges from various vendors. The Taxpayer contends that these charges were erroneously held taxable in the Department's audit. The Taxpayer has not presented any documentation to support its contention.

Electronic Delivery of Custom Software

During the audit period, the Taxpayer states that it purchased custom software from various vendors that was delivered in tangible form or was retrieved electronically depending upon the vendor. The Taxpayer has not presented any documentation to support its contention.

Real Property Improvements and Repairs

During the audit period, the Taxpayer utilized the services of real property contractors to repair and restore real property. The Taxpayer contends that it was held liable for the tax on tangible personal property utilized by the contractor in providing its real property construction services. The Taxpayer has not presented any documentation to support its contention.

Non-Taxable Services

During the audit period, the Taxpayer states that tax was imposed on purchase invoices for professional services not subject to the tax under Va. Code § 58.1-609.5. The Taxpayer has not presented any documentation to support its contention.

Items Shipped Out of State

During the audit period, the Taxpayer states that it purchased numerous items from its vendors who shipped the property directly out of the state and is therefore not subject to the tax. The Taxpayer has not presented any documentation to support its contention.

Wrapping and Packaging Supplies

During the audit period, the Taxpayer purchased labels, tags and other supplies used as part of the packaging for food sold to its customers. The Taxpayer states that it also sold containers to customers of the type that restaurants use to package food products for sale or resale. The Taxpayer contends that the Department's audit erroneously held these items subject to the tax. The Taxpayer has not presented any documentation to support its contention.

Other Non-Taxable Items

The Taxpayer contends that it purchased numerous items and services not otherwise listed that are not subject to the tax. The Taxpayer has not presented any documentation to support its contention.

Incorrect Tax Accrual Calculation

The Taxpayer states that it reconciles its monthly accrual of tax on transactions from its general ledger and that it over accrued the amount of use tax remitted with its monthly returns for several monthly filing periods. The Taxpayer has not presented any documentation to support its contention.

Missing Invoices

The Taxpayer disagrees with the assessment of tax on missing invoices. The Taxpayer states that it has submitted such invoices to the auditor for review and has recently provided additional invoices for review that were not available at the time of the Department's audit.

Based on a review of the documentation presented, the Department's audit will be revised to remove all items protested under the purchases exception listing with the exception of the following line items:
    • Lines 67 and 69: The invoices presented reveal that these purchases are for parts that are subject to the tax.
    • Line 253: The audit will be adjusted to remove labor-related charges, leaving only the charge for taxable parts of *****.

Penalty Abatement

The Taxpayer contends that during the audit period all returns were timely filed remitting the full amount of tax believed to be due at the time of filing. The Taxpayer seeks an abatement of the compliance and amnesty penalties assessed in the Department's audit.

Virginia Code § 58.1-635 mandates the application of penalty to tax deficiencies. Title 23 VAC 10-210-2032 A states, "The application of penalty to audit deficiencies is mandatory and its application is generally based on the percentage of compliance determined by computing the dealer's compliance ratio." The purpose of the sales tax and use tax compliance ratio is to determine how well a taxpayer has complied with the Virginia tax laws in the collection and reporting of the sales tax or in the accrual and reporting of the use tax. With regard to third and subsequent generation audits, the regulation provides that penalty will be applied unless a taxpayer's compliance ratios meet or exceed 85% for sales tax and 85% for use tax. This is the Taxpayer's fifth audit and the use tax compliance ratio is 42%. Because the Taxpayer failed to meet the required use tax compliance level, the penalty was properly applied.

The Virginia Tax Amnesty Program was enacted during the 2003 Session of the Virginia General Assembly. Virginia Code § 58.1-1840.1 F 1 provides:
    • If any taxpayer eligible for amnesty under this section and under the rules and guidelines established by the Tax Commissioner retains any outstanding balance after the close of the Virginia Tax Amnesty Program because of the nonpayment, underpayment, nonreporting or underreporting of any tax liability eligible for relief under the Virginia Tax Amnesty Program, then such balance shall be subject to a 20 percent penalty on the unpaid tax. This penalty is in addition to all other penalties that may apply to the taxpayer.

Because the audit at issue covered Amnesty-eligible periods (taxable periods ending on or before April 30, 2003), and a compliance penalty was properly applied, the Amnesty penalty was properly assessed.

CONCLUSION


Based on the foregoing, the assessment will be adjusted as stated. I note that the Taxpayer has submitted payment of the deficiency based on discussions between the Taxpayer, the auditor and a member of the Department's Appeals staff. If there are additional balances due, an updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the updated bill is paid within 30 days from the date indicated on the bill statement.

The Code of Virginia sections and regulations cited 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 regarding this determination, please contact ***** of the Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,

                • Janie E. Bowen
                    • Tax Commissioner



AR/1-1111906669.Q


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46