Tax Type
Retail Sales and Use Tax
Description
A contractor engaged in government and commercial contract transactions.
Topic
Appropriateness of Audit Methodology
Penalties and Interest
Tangible Personal Property
Date Issued
12-01-2008
December 1, 2008
Re: § 58.1-1821 Application: Retail Sales and Use -fax
Dear *****:
This is in response to your firm's letter requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit for the period April 2002 through December 2004. I apologize for the delay in the Department's response.
FACTS
The Taxpayer is a contractor engaged in government and commercial contract transactions. In this audit, use tax was assessed on purchases of tangible personal property used or consumed in connection with government contracts. The commercial contract portion of the audit, as well as the assets and expense purchases not related to any specific contract, are still under review.
The Taxpayer raises a number of issues with respect to the assessed tax. The issues relate to the audit methodology, specific purchase exceptions, purchasing agent status, error factor computation, and penalties and interest.
DETERMINATION
Audit Methodology
The Taxpayer purchases all of its materials for use or consumption in government contracts from one supplier. Accordingly, the sample is limited to only those purchases made from the one supplier. The Taxpayer contends that the audit sample is excessively weighted, and thus invalid, because of this fact. The Taxpayer further contends that the sample must test purchases made in connection with its government contracts and purchases made in connection with its commercial contracts. To this end, the Taxpayer requests a revision of the audit sample so that it also tests purchases made in connection with its commercial contracts.
At the time that the government contract portion of the audit was completed, I understand that the Taxpayer had not provided sufficient documentation necessary to complete the auditing of the Taxpayer's commercial contracts. The delay in obtaining such documentation necessitated the bifurcation of the audit. Notwithstanding the bifurcation of the audit, I will allow the sample to be revised as requested by the Taxpayer, provided the Taxpayer makes available the records requested by the Department's audit staff that will allow, them to conclude the commercial contract portion of the audit.
Detailed Exception Line Items
The Taxpayer concedes the tax assessed for line items #51 and #72. The other contested line items are addressed below.
- Line item #4 is keyed incorrectly. Based on the invoice provided, the line item amount will be reduced from ***** to *****.
- Line item #9 includes a separately stated freight charge of *****. Based on the invoice provided, the line item amount will be reduced from ***** to *****.
- Line items #36 and #37 are for the same invoice and erroneously include a maintenance charge on both line items. Based on the invoice provided, line item #37 is correct, but line item #36 will be reduced from ***** to *****.
- Based on the invoice provided for line item #58, this item was shipped to Virginia and Virginia retail sales tax was collected. Accordingly, line item #58 will be removed from the audit.
- Line item #59 relates to a purchase of software that the Taxpayer claims was received in electronic format. The documentation provided shows that the software was electronically delivered. Accordingly, line item #59 will be removed from the audit.
- Line item #60 is for the purchase of taxable software maintenance. Based on the invoice provided, the item was included at the full sales price rather than at 50% of the total charge pursuant to Va. Code § 58.1-609.5 9. Accordingly, the amount of line item #60 will be reduced from ***** to *****.
- Line item #69 is for the purchase of software and software maintenance. The transaction is taxed on the full amount of the sales price. Based on the invoice provided, the tax should apply to the total charge for the software and 50% of the total charge for the software maintenance. Accordingly, line item #69 will be reduced from ***** to *****.
Purchasing Agent Status
Virginia Code § 58.1-609.1 4 provides, in pertinent part, that the retail sales and use tax shall not apply to "[t]angible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States."
Title 23 of the Virginia Administrative Code (VAC) 10-210-410 J states, "[o]nly in instances where the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such governmental entity will such purchases be deemed exempt from the tax." [Emphasis added.] This regulation is consistent with United States v. Forst, 442 F. Supp. 920, 924 (1977) in which the application of the tax to purchases made by a federal contractor was addressed. In Forst, the Court determined that a key factor in determining whether the purchase of tangible personal property by a contractor is for its use or consumption lies in whether the credit of the government entity is bound. The Court also held that the contractor was liable for the tax on purchases of tangible personal property made pursuant to a contract with a government entity because the credit of the government entity was not bound, even though title to the purchased items transferred to the government upon purchase by the contractor.
The Taxpayer requests the removal of line items #2 through #7, #11 through #16, #52 and #53, contending that these line items were purchased pursuant to a purchasing agent agreement with the U.S. government. The Taxpayer furnishes an agency designation letter that references delivery orders awarded against a particular project and signed by a government contracting officer. The letter specifically states in past tense that the Taxpayer "has purchased supplies and/or equipment on behalf of and for the exclusive use of the United States Government." The letter also states that "title to all property purchased pursuant to the contract shall vest with the United States Government upon purchase" and that the Taxpayer "is authorized to act as a purchasing agent on behalf of the United States Government." When placing orders, the letter states that the purchaser will designate each order with the following language: "This order is placed on behalf of the Department of State, in furtherance of United States Government Contract Number .... Title to this property purchased hereunder shall immediately vest to the United States Government." I understand that the contract with the agency is a service contract.
Based on the documentation provided, I find no basis for concluding that a purchasing agent relationship was established for the purchases assessed in the Department's audit. First, the agency's letter is dated well after the audit period and, thus, has no application to any of the purchases held in the audit. Second, the agency's letter is not specifically designed to preclude the use of the Taxpayer's funds in making acquisitions on behalf of the agency. The Tax Commissioner has previously addressed a purchasing agent agreement similar to the one presented in this instance in Public Document (P.D.) 95-97 (5/2/95). In that case, the Tax Commissioner determined that the agreement was sufficient to deem the taxpayer a purchasing agent of the U. S. government. There is a key difference, however, in the circumstances between that case and the instant case. In P.D. 95-97, an agency relationship was established because the contractor was officially designated a purchasing agent of the government and the contract purchases were paid for directly with government funds. In the Taxpayer's case, the agency relationship is incomplete because there is no evidence that the government's credit was bound directly to the purchases from the Taxpayer's supplier. Absent any evidence to the contrary, I must presume that purchases were made using the Taxpayer's funds. As such and pursuant to Title 23 VAC 10-210-4040 E, the Taxpayer is the taxable user and consumer of all of the items purchased pursuant to the service contract at issue.
Error Factor Computation
A review of the sample base amount calculation far September 2004 shows that the amount of ***** was counted twice. Accordingly, the sample base amount for such month will be reduced from ***** to *****. Because of this and other adjustments made to the sample, the error factor will be recalculated and the audit will be revised accordingly.
Penalties and Interest
The Taxpayer requests waiver of all penalties and a reduction in interest. The Taxpayer contends that the purchases in the current audit are not identical to those included in the prior audit. Subsection A 1 of Title 23 VAC 10-210-2032 provides, in part, the following:
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- Penalty generally will not be applied to audit deficiencies occurring in new areas not covered by prior audit(s), provided the application of the tax is not clearly established under existing law, regulations or other published documents of which the taxpayer reasonably should have had knowledge ....
In the current audit, the Taxpayer has been assessed tax on purchases of computer hardware, prewritten software, and software maintenance agreements from the sole supplier. Although the taxability of such items is well documented, I understand that purchases of materials used in government contracts were inadvertently missed in the prior audit. In accordance with the cited regulation, I will treat the assessment of tax in this audit as a new area and waive the assessed penalties.
Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it simply represents a fee for the use of money over a period of time. In this case, the Taxpayer had the use of the money that was properly due the Commonwealth. Furthermore, I understand that the delay in issuing the assessment was attributable to the Taxpayer not furnishing all of the information needed to close the audit in a timely and expeditious manner. Therefore, I find no basis to waive the interest assessed as a result of the Department's audit.
CONCLUSION
The audit will be adjusted in accordance with this determination. 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 *****.
The Code of Virginia sections, regulations and public document 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 *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/1-1589376455.R
Rulings of the Tax Commissioner