08-157 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Use tax on untaxed purchases ,dealer of mobile homes and as a contractor of modular buildings

Topic

Collection of Tax

Computation of Tax

Property Subject to Tax

Records/Returns/Payments

Date Issued

08-29-2008

August 29, 2008

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

Dear *****:

This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit for the period March 2001 through January 2007. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is engaged as a dealer of mobile homes and as a contractor of modular buildings, specifically modular homes. An audit of the Taxpayer's records resulted in the assessment of use tax on untaxed purchases. The audit liability is separated into four groupings: expensed purchases (general items expensed during the audit), assets (fixed assets depreciated during the audit), miscellaneous purchases (modular homes and related charges subject to the 60% rule in Va. Code § 58.1-610.1), and purchases (additional materials taxed at 100% used to complete contracts for modular homes). The Taxpayer raises various issues that are addressed below.

DETERMINATION

Sampling

The Taxpayer contends that the auditor examined almost all of its invoices and further contends that the use of a percentage based on unknown items is unrealistic. The Taxpayer asks why an additional amount is necessary when every year has been checked.

The auditor did not examine all of the Taxpayer's invoices. While the auditor performed a detailed examination of the Taxpayer's assets, modular home contracts, and purchases of additional materials related to those contracts, he performed a sample examination of the invoices related to expensed purchases.

As a general rule, the Department uses sampling techniques to audit expensed purchases, as was done in the Taxpayer's case. Sampling is an audit technique of significant value that is widely used in both the public and private sectors for all types of audits where a detailed audit would not prove beneficial to either the auditor or the client. When sampling techniques are applied, the final result should be within a narrow percentage range of the actual amount that would be determined by a detailed audit. The purpose of the audit sample is to determine a factor for errors within a representative select period. Once the error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid.

The calendar year 2006 was chosen as the sample period for expensed purchases. This sample selection made up ten percent of the total expensed purchases occurring during the audit period. This is a considerable sample - in many audits, sample periods are limited only to a few months, weeks, or sometimes days, depending upon the volume. The Department may expand a sample, such as including another year or months to sample, if the taxpayer establishes that the sample period is not representative. However, no evidence has been submitted that the 2006 sample year was not a representative sample. Accordingly, I find no basis to revise the sample audit applied in this case.

Manufacturer's Payment

The Taxpayer claims that the tax owed as a result of this audit has already been paid to the manufacturer. According to the Taxpayer, it received a payment from a manufacturer for errors charged to it. It is my understanding, however, that this payment was done as a courtesy for the manufacturer's failure to tax certain taxable charges. Accordingly, there was no legal obligation requiring this payment by the manufacturer. Rather, it was only a goodwill gesture. These untaxed charges were picked up in the Taxpayer's audit (rather than the manufacturer's audit) as miscellaneous purchases because the Department was auditing the Taxpayer and the manufacturer at the same time. Accordingly, the tax was not previously paid as claimed.

North Carolina Directive

The Taxpayer relies upon North Carolina Directive SD-03-1 (10/15/03) that sets out changes to the application of the North Carolina sales and use tax that became effective on January 1, 2004. This directive, however, has no application to the Virginia tax liabilities assessed in this audit. Rather, the Taxpayer should review Virginia Tax Bulletin (VTB) 00-3 (6/20/00), which sets out changes to the application of the Virginia retail sales and use tax that became effective on and after July 1, 2000 for modular buildings as defined in Va. Code § 58.1-602.

The Taxpayer points out a part of North Carolina Directive SD-03-1 that states, "Sales of modular homes that are delivered to modular homebuilders at a point outside the State are exempt from tax as sales in interstate commerce." Thus, North Carolina exempts sales made in interstate commerce. I would note, however, that once the modular home is delivered into Virginia to the modular homebuilder, it is no longer in interstate commerce and becomes subject to the tax jurisdiction of Virginia. Accordingly, while a North Carolina sales tax does not apply to retail sales made in North Carolina for interstate delivery into Virginia, a modular home delivered into Virginia becomes subject to the Virginia retail sales or use tax.

Inventory Items

The Taxpayer contends that the Virginia retail sales and use tax should not be imposed on inventory items until the product is sold. The Taxpayer appears to rely upon North Carolina Directive SD-03-1, which treats a modular homebuilder as liable for accruing and remitting North Carolina sales tax on the purchase price when it is withdrawn from an on-site inventory and sold to a buyer after January 1, 2004. However, the Taxpayer's reliance upon the directive is misplaced because it has no application to the Taxpayer's Virginia sales and use tax liabilities.

For Virginia retail sales and use tax purposes, dealers who sell tangible personal property at retail are entitled to the resale exemption and may maintain an exempt inventory of items to be sold at retail. However, persons who are engaged as real property construction contractors are not entitled to the resale exemption and thus are not allowed to maintain a tax-free inventory. Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-210-410 A, every contractor is the taxable user or consumer of all tangible personal property that is furnished to him or by him in connection with real property construction, reconstruction, installation, repair, and similar contracts.

Because the Taxpayer is a contractor of modular homes, it is not entitled to the resale exemption and must pay the Virginia retail sales tax at the time of purchase to the supplier if registered to collect the Virginia retail sales tax. If the supplier does not collect the sales tax or fails to collect all of the sales tax due, the Taxpayer must pay the consumer use tax to the Virginia Department of Taxation.

Invoices Showing Tax Billed

The Taxpayer submits copies of invoices for the purpose of showing that tax was previously paid.

Invoice ***** is from a manufacturer for the sale of a modular home to the Taxpayer. A North Carolina sales tax rate of 7% is invoiced by the manufacturer. Thus, no Virginia retail sales tax was charged and collected by the manufacturer. Because the manufacturer provided no installation of the modular home, the transaction constitutes a sale in interstate commerce that is exempt from North Carolina sales tax. The modular home was delivered to the Taxpayer in Virginia; therefore, it is subject to the Virginia retail sales and use tax. Accordingly, the inclusion of this transaction in the audit is correct. The Taxpayer should seek a refund of the North Carolina sales tax payment from the manufacturer.

In computing the taxable sales price for invoice ***** I understand that the carrier usage fee and carrier deposit fee were not taxed. These fees do not appear to be for the actual delivery of the product to the Taxpayer because a separately stated freight charge is also billed. Accordingly, the carrier usage fee and carrier deposit fee do not qualify as exempt transportation charges. See Title 23 VAC 10-210-6000. I would note, however, that a carrier deposit fee that is refunded in its entirety to the Taxpayer is not taxable. In such instances, if the retailer has charged the sales tax on the carrier deposit fee, the Taxpayer may obtain a refund of the sales tax paid on the carrier deposit fee from the retailer. However, when a carrier deposit fee is not refunded in its entirety, the portion not refunded because of damage to the carrier remains taxable. ¹ Accordingly, the auditor may assess tax on the untaxed carrier usage and carrier deposit fees occurring during the audit period unless the period for assessing this additional tax has expired.

Invoice ***** involves a different manufacturer and was treated as the purchase of a modular home in the audit. However, based on the documentation provided, this transaction is for the sale of a mobile home (i.e., a manufactured home) subject to the 3% motor vehicle sales and use tax administered by the Virginia Department of Motor Vehicles pursuant to Va. Code § 58.1-2402 A. The Taxpayer invoiced such tax to its customer. Accordingly, invoice ***** will be removed from the audit.

Responsibility for Payment of the Tax

The Taxpayer asks who is responsible for payment of the Virginia retail sales and use tax and what amount is subject to the tax. The Virginia retail sales and use tax is imposed upon the consumer, i.e., the person who uses or consumes the tangible personal property purchased at retail. Although the retailer is legally obligated to collect the tax, the ultimate burden for the tax rests with the purchaser who is the consumer of the property. United States v. Forst, 442 F.Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4^th Cir. 1978). Thus, the consumer must ensure that it has paid the tax either to the retailer or the Department. If the full amount of the sales tax is collected by the retailer, then no consumer use tax is owed. However, if the retailer fails to collect the sales tax or does not collect the full amount of the sales tax due, then the consumer who purchased the property at retail is responsible for reporting and paying the consumer use tax on the cost price of the property or on the untaxed portion of the cost price.

Collection of Sales Tax. Dealers registered to collect the Virginia retail sales tax are legally obligated to collect the correct amount of Virginia retail sales tax from the consumer and remit it to the Department. As a general rule, any person who sells modular buildings at retail² is a retailer of such property. Thus, a manufacturer could be a retailer or a non-manufacturer dealer could be a retailer. Even a real property construction contractor could be a retailer. As such, any Virginia retailer that sells modular buildings at retail in Virginia is required to be registered to collect the Virginia retail sales tax on such retail sales. Any out-of-state retailer that is registered for the collection of the Virginia retail sales tax must collect the Virginia retail sales tax on all retail sales of modular buildings that it imports into Virginia.

When a registered retailer sells a modular building to the Taxpayer, the retailer should charge and collect the sales tax from the Taxpayer in accordance with Va. Code § 58.1-610.1. This statute allows a reduced tax treatment for modular buildings sold at retail. As such, the tax applies to sixty percent of the sales price of the modular building.

Remittance of Use Tax. The consumer³ has the ultimate responsibility for payment of the sales or use tax. This means that the consumer must make sure that the sales tax has been correctly charged by the retailer. If the retailer fails to collect the sales tax or fails to collect the full amount of the sales tax, the consumer must report and pay the use tax owed directly to the Department. Example 1: When a retailer charges no sales tax on a book sold for $100, the Taxpayer must report and pay the use tax of $5 ($100 sales price x 5% tax rate) to the Department. Example 2: A retailer mistakenly under charges Virginia sales tax of $5 on a $200 retail sale of office supplies. Although the retailer should have charged and collected sales tax of $10, the Taxpayer must report and pay the remaining $5 of use tax owed on the transaction directly to the Department.

The same rules apply to purchases of modular housing sections, but the 5% tax rate only applies to 60% of the sales price of the modular housing sections as charged by the retailer.⁴ Example 1: The Taxpayer buys a modular building at retail for $60,000.00 but the retailer charges no Virginia retail sales tax. As such, the Taxpayer is responsible for reporting and paying the consumer use tax in the amount of $1,800.00 ($60,000.00 sales price x 60% taxable base x 5% tax rate) directly to the Virginia Department of Taxation. Example 2: The Taxpayer buys a modular building at retail for $60,000.00, but the retailer charges only $1,200.00 in Virginia retail sales tax. This tax charge represents only 40% of the sales price of the item. Because the modular building is subject to taxation at 60% of the sales price, and although the retailer failed to charge the full amount of sales tax, the Taxpayer must report and pay the use tax of $600.00 to the Department so that the full tax liability of $1,800.00 has been paid on the transaction.

Suppliers

The Taxpayer asserts that its suppliers have not been subject to an audit by the Department. As such, the Taxpayer does not know whether the tax has been paid to Virginia. The Taxpayer contends that the Department may not charge tax to the retailer if the manufacturer has paid the tax.

I find no grounds for your contention that is applicable in this case. It must be remembered that the auditor conducted a detailed audit of modular home purchases and materials associated with these homes. Thus, the records reviewed by the auditor showed no Virginia retail sales tax collected on the items held in the audit. Furthermore, the Taxpayer has not furnished any invoices (other than the two invoices previously discussed) with its appeal to establish that modular building manufacturers charged Virginia retail sales tax on modular buildings and other items at issue. Absent such evidence, I find no basis for an adjustment to the audit on this basis.

Income Tax Refund

The Taxpayer contends that it was not proper for the Department to apply an income tax refund to the assessment in this case. Virginia Code § 58.1-1812 requires the remittance of the full assessment within 30 days from the date of assessment. If the assessment is not paid in full after the 30-day period expires, it is considered delinquent and subject to the refund offset provisions of Va. Code § 58.1-1823 A. Because the assessment in this case was not paid in full within 30 days of receipt, and the Taxpayer had not filed an appeal at the time of the offset, the income tax refund was properly applied to the assessment.

Sales Tax Refunds

The Taxpayer plans on contacting other companies to obtain a refund of any taxes paid by them to the State of Virginia or North Carolina. Such action is not justified unless the sales tax is paid in error. As a consuming contractor of modular buildings and other items of tangible personal property for incorporation into realty, the Taxpayer is liable for the payment of the Virginia retail sales or use tax on any tangible personal property that it affixes to the realty in Virginia.⁵

As such, the Taxpayer must pay the Virginia sales tax to its registered suppliers (retailers) or pay the consumer use tax to the Virginia Department of Taxation if the supplier does not collect all of the sales tax due on the transaction. For this reason, a refund request made by the Taxpayer to a registered Virginia retailer (regardless of whether the retailer is a modular building manufacturer or a modular building retailer as defined in Va. Code § 58.1-602) would generally not be valid unless the retailer has over collected the Virginia retail sales tax. In case of an over collection, only the portion of the sales tax paid that is over collected would be refundable.

A refund is also allowable when sales tax is erroneously collected on an exempt transaction. For instance, if the Taxpayer contracts to furnish and install a modular building in North Carolina, and the retailer ⁶ of the modular building delivers it directly to the job site in North Carolina, no Virginia retail sales and use tax applies to the transaction. ⁷ If the Virginia retail sales tax is collected by the retailer in such instance, a refund request is permitted because the transaction is subject to the North Carolina sales and use tax.

Calculation of the Sales Tax

The Taxpayer seeks clarification of how to calculate the sales tax due. Calculation of the reduced sales tax treatment applicable to modular building transactions is explained in VTB 00-3 (P.D. 00-109, 6/20/00).

You ask whether the tax is based on the sales price from the manufacturer or the sales price charged to the customer. Because the Taxpayer is a contractor of modular buildings, it does not collect a sales tax from its customers. The Taxpayer should take the tax into account as it does any other expenses when bidding on a job. As a contractor, the Taxpayer does not pass the sales or use tax on to anyone else as a tax.⁸. Accordingly, the Taxpayer is the one ultimately liable for the tax and should pay the sales tax based on 60% of the sales price of modular buildings when purchased directly from manufacturers. If the Taxpayer buys a modular building at retail directly from a modular building retailer, the Taxpayer must pay the sales tax based on 60% of the sales price as charged by such retailer of the modular building.

The only exclusions from the taxable sales price are those specifically set out in the definition of sales price in Va. Code § 58.1-602.

CONCLUSION

The assessment will be revised to remove invoice *****. A revised bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****. Also, if you are unable to make full payment of the assessment, you may request a payment plan from the Department by contacting *****.

Please note that failure to remit full payment within the 30-day period may result in the imposition of an additional 20% penalty of the tax due⁹ under the terms of Virginia's Amnesty Program. See the enclosure entitled "Important Payment Information."

The Taxpayer claims that upholding the assessment will create a hardship. In this regard, the Taxpayer may submit an offer in compromise to the Department based on doubtful collectibility pursuant to Va. Code § 58.1-105. Such offer must be submitted using the Department's Form OIC-BUS, which is available on-line at www.tax.virginia.gov in the Business Form and Instructions section of the Department's web site. The offer must be accompanied by a current financial information statement. If you have any questions about making an offer, you may contact the Department's Collections Unit at *****.

The Taxpayer claims that upholding the assessment will create a hardship. In this regard, the Taxpayer may submit an offer in compromise to the Department based on doubtful collectibility pursuant to Va. Code § 58.1-105. Such offer must be submitted using the Department's Form OIC-BUS, which is available on-line at www.tax.virginia.gov in the Business Form and Instructions section of the Department's web site. The offer must be accompanied by a current financial information statement. If you have any questions about making an offer, you may contact the Department's Collections Unit at *****.

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 determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-1958969814.R

1Sales price as defined in Va. Code § 58.1-602 includes the total amount paid for the tangible personal properly, including any services that are part of the sale without deduction for any costs or expenses whatsoever.
2Generally, a modular building or modular home sold without installation to the consumer is treated as a retail sale.
3As an example, a consumer is any purchaser buying a modular building and installing it on a permanent foundation. A manufacturer can also be consumer if it contracts to furnish and affix a modular building to a permanent foundation
4Generally, the sales price of tangible personal property is subject to the general 5% retail sales or use tax. However, pursuant to Va. Code § 58.1-610.1, a modular building as defined in § 58.1-602 that is sold at retail is subject to the sales or use tax based upon sixty percent of its sales price.
5The Taxpayer is also liable for the tax when it takes possession of any tangible personal property in Virginia prior to its delivery outside Virginia for incorporation into the realty by the Taxpayer.
6Regardless of whether an in-state or out-of-state dealer.
7Title 23 VAC 10-210-780 requires delivery to the purchaser outside Virginia to be considered an exempt sale in interstate commerce.
8This is consistent with the contractor provisions of Title 23 VAC 10-210-410 A
9For the amnesty eligible periods, the tax due is *****. Accordingly, the 20% post-amnesty penalty would be *****.

Rulings of the Tax Commissioner