Tax Type
Retail Sales and Use Tax
Description
Assessed tax, compliance and amnesty penalty, interest on fixed asset and expense purchases
Topic
Amnesty
Assessment
Collection of Tax
Date Issued
04-02-2008
April 2, 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 assessments issued to ***** (the "Taxpayer") for the period September 2002 through August 2005. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates hair salons in Virginia and throughout the United States and abroad. The Taxpayer was assessed tax, compliance penalty, amnesty penalty and interest on fixed asset and expense purchases. The Taxpayer contests a number of transactions and provides a schedule itemizing the disputed items that it believes should be removed from the audit. The Taxpayer indicates that supporting documentation is available if necessary. In addition, the Taxpayer claims that the assessment of amnesty penalty in this case is without any statutory support and should be abated.
DETERMINATION
Pursuant to Va. Code § 58.1-633 A, every dealer required to file a retail sales and use tax return and pay or collect such tax must keep and preserve suitable records of the sales, leases, or purchases, as the case may be, subject to the retail sales and use tax. The dealer must also maintain such other books of account as may be necessary to determine the amount of tax due, and "such other pertinent information as may be required by the Tax Commissioner." This record keeping requirement is further explained in Title 23 of the Virginia Administrative Code (VAC) 10-210-470:
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- Every person who is liable for collection of sales tax or remittance of use tax or both is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Such records must include... a daily record of all cash and credit sales, including sales under any type of financing or installment plan in use. . . A record of the amount of all merchandise purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase. . . A record of all tangible property used or consumed in the conduct of the business... Records must be open for inspection and examination... by the Department of Taxation ....
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- I will separately address below the issues raised in your letter.
Sales Tax Paid or Accrued
The Taxpayer claims that sales tax was assessed on various purchases in the audit on which the sales tax was paid or the use tax accrued. The Taxpayer states that much of the supporting documentation has been forwarded to the auditor for review.
According to the audit staff, the Taxpayer provided supporting documentation for several contested items. The additional information was found to be sufficient to warrant removal of these contested items from the exceptions list with the exception of one item. The Taxpayer will need to provide sufficient documentation that the tax was paid or accrued on the remaining contested item before any more revisions can be made.
Sales Tax Regularly Paid to Vendors
The Taxpayer contests the tax assessed on two purchases from separate vendors where no documentation was available to prove that the tax was paid. While the Taxpayer cannot provide invoices for the transactions in question, the Taxpayer states that it can provide other invoices demonstrating that sales tax has consistently been paid on purchases from these vendors.
Your argument that the vendor has consistently collected the tax on other invoices is not sufficient evidence that the tax was paid on the contested items. Lacking the documentation to show that the tax was paid, I find that the auditor was correct in holding these transactions taxable in the audit. However, if the Taxpayer can provide documentation that the tax was paid on the contested items, I will agree to remove them from the audit.
Corporate Credit Card Purchases
The Taxpayer was held liable for untaxed purchases of tangible personal property made by employees with the Taxpayer's credit card. In this instance, the Taxpayer states that it could not provide documentation for the contested items because the corporate policy only required employees to retain credit card receipts for a year. Nevertheless, the Taxpayer maintains that the contested items could not have been consumed in Virginia because: (1) the employee making the purchases was a regional manager with sole responsibilities in a state other than Virginia, and (2) the credit card charges were incurred while the employee was traveling outside Virginia. The Taxpayer specifically notes that one purchase is for a restaurant meal purchased by an employee while outside the country. The Taxpayer believes that the contested items should be removed from the audit.
The Taxpayer's reason for not providing documentation is not a valid basis to remove the contested items. In Public Document (P.D.) 99-231 (8/11/99), the Tax Commissioner discusses record keeping requirements for corporate credit card purchases. The Tax Commissioner ruled that sellers and purchasers must maintain adequate internal records to substantiate all nontaxed credit card purchases. Lacking the documentation to show that the tax was paid or that the purchases were shipped outside Virginia, I find that the auditor was correct in holding such transactions taxable in the audit. Unless the Taxpayer can provide sufficient documentation that the contested items were purchased or shipped outside Virginia, I find no basis to adjust the audit regarding the credit card purchases.
Purchases Outside the Sample Period
The Taxpayer claims tax may have been assessed on items in the sample in which the purchase is recorded during the sample period but the actual purchase was made and paid for in a period outside the sample. The Taxpayer believes these items should be removed from the sample. For example, the lump sum charge for a software license or maintenance agreement may have been paid in a period outside the sample period; however, the payment is spread over a twelve-month period for internal accounting purposes. In these situations, the auditor may have included the journal entry in the sample when the actual transaction occurred in a previous month.
A sample will not be revised unless it is clearly shown that the sample is not representative or is flawed in a manner that would invalidate the sample. The Taxpayer provides no documentation to support its claim that the transactions at issue occurred outside the sample period. Further, the Taxpayer has provided no proof that the tax was paid or accrued on the contested purchases. Therefore, the Taxpayer has not met its burden of proving that the assessment is incorrect with respect to the sampling issue.
Purchases from Vendors Outside Virginia
The Taxpayer claims that tax is assessed on purchases from vendors located outside Virginia where the payment was made directly to the vendor and the goods or services were received outside Virginia. For example, the Taxpayer claims that the auditor assessed tax on the total lease payment for personal computers distributed to the Taxpayer's locations throughout the United States. In this instance, the Taxpayer believes it is more appropriate to prorate the tax based on a comparison between the computers located in Virginia and those distributed outside the state.
The Taxpayer has provided no documentation to support its claim that the contested items were purchased or received outside Virginia. If the Taxpayer can show that to be the case, the items will be removed from the audit. Without documentation, I cannot allow for the removal of these items. Regarding the contested lease payments, if the Taxpayer can furnish documentation to show the distribution of computers in Virginia compared to those distributed outside this state, the Department will prorate the lease payments to reflect only those computers used in Virginia.
Maintenance Agreements
The Taxpayer maintains that the contested items are for maintenance agreements and should be taxed at 50% of the purchase price.
According to the audit report, the Taxpayer did not provide a copy of the contract in order for the auditor to determine the proper application of the tax. To determine if the taxable amount in the audit should be reduced, the Taxpayer must provide the Department with documentation showing that this purchase was a parts and labor maintenance agreement. See Va. Code § 58.1-609.5 9. The audit assessment will be adjusted if warranted based on a review of the documentation provided.
Employee Expense Reimbursements
The auditor assessed the tax on purchases made by employees that were reimbursed by the Taxpayer. The Taxpayer could not provide documentation to show that the tax was paid on these purchases. The Taxpayer believes that these items should be removed from the sample because the legal liability of the tax is with the employee who was the actual purchaser of the items. To support its argument, the Taxpayer refers to the regulation for sales to governments and claims that the Taxpayer's credit was not bound by the employees' purchases and therefore the employees are liable for the tax.
Title 23 VAC 10-210-690 13 addresses purchases of meals, lodging and other accommodations by government employees. The regulation states, "Only credit card purchases for which the credit of the federal government is bound and billings are sent directly to and paid by the government, are exempt from the tax." This regulation is specific to governmental agencies and employee purchases made on behalf of government agencies. Because the Taxpayer is not a government agency, the Department's policy set out in the regulation is not applicable in this case.
To determine who is liable for the tax, the Department looks to see if there is an agency relationship between the Taxpayer and its employee. Black's Law Dictionary 62 (6th Edition) defines "agency" as a relationship between two persons, by agreement, or otherwise, where one (the agent) may act on behalf of the other (the principal) and binds the principal by words and actions. An agency relationship may be inferred by the conduct of the parties and from the surrounding circumstances.
In this instance, the contested purchases would normally be made with the Taxpayer's credit card; however, the employees did not have access to the Taxpayer's credit card at the time of the purchases. The employees purchased the tangible property and were reimbursed by the Taxpayer for the expense. An authority is created for the employee to purchase tangible personal property on the Taxpayer's behalf by the Taxpayer's act of reimbursing the employee for the expense. Thus, I find that this act implies an agency relationship between the Taxpayer and the employees and binds the Taxpayer as the user and consumer of the tangible personal property.
Further, because the charges are on the Taxpayer's books, the Taxpayer has the benefit of the expense write-off. This further supports the fact that the Taxpayer is the user and consumer of the property purchased by the employee on behalf of the Taxpayer. Therefore, unless the Taxpayer provides documentation that the tax was paid on the contested items or that the items were purchased outside Virginia and no use of the property was made in this state, there is no basis to remove the items from the audit.
Service Transactions
The Taxpayer claims the tax was assessed on the provision of bi-weekly payroll services. Because of the service nature of the transaction, the Taxpayer believes it should be removed from the audit. Included in this category is a software maintenance agreement in which the Taxpayer claims that all the software updates were transmitted electronically.
Payroll Services
The Taxpayer's suggestion that the vendor's website confirms that the Taxpayer's intent was to purchase payroll services is insufficient for making such a determination. To determine if the contested item should be removed from the audit, the Taxpayer must provide the Department with documentation showing that this purchase was for the provision of payroll services. The audit assessment will be adjusted if warranted based on a review of any documentation provided.
Software Maintenance Agreement
It is the Department's long-standing policy that the sale of prewritten software delivered electronically to customers does not constitute the sale of tangible personal property and is generally not subject to sales and use taxation. See P.D. 05-44 (4/4/05). This policy is conditioned on the fact that no disc, tape or other tangible medium is provided to the customer before or after the electronic download of the software.
The Taxpayer has provided no documentation to support its claim that the software was delivered to the Taxpayer by electronic download and there was no provision of the software in tangible form. Without documentation, I cannot allow for the removal of these items.
Amnesty Penalty
The assessment issued to the Taxpayer includes a 20% amnesty penalty. The Taxpayer contends that it was erroneously assessed the amnesty penalty in the audit because it was not eligible to participate in the amnesty program. The Taxpayer maintains that under the statute, the time of the assessment, not the time of the contested transaction, determine whether a taxpayer is eligible to participate in the Amnesty Program. Further, the Taxpayer contends that the liabilities resulted from unintentional under collection of the tax in limited circumstances and not from its failure to file a return.
Virginia Code § 58.1-1840.1 established the Virginia Tax Amnesty Program. Virginia Code § 58.1-1840.1 F 1 provides:
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- If any taxpayer eligible for amnesty under this section and under the rules and guidelines established by the Tax Commissioner retains an outstanding balance after the close of the Virginia Tax Amnesty Program because of the nonpayment, no reporting 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.
The statute clearly intends to include not only late filers and nonfilers, but also taxpayers that underpaid or underreported their liabilities during the period covered by the Amnesty Program. Because the Taxpayer's outstanding balance for amnestyeligible periods was due after the close of the Virginia Tax Amnesty Program, the balance is subject to a 20 percent penalty on the unpaid tax.
Further, the statute specifically authorizes the Tax Commissioner to establish tax amnesty guidelines, and specifically states that these guidelines, in addition to the statute, are to be used to administer the program and to determine the eligibility of taxpayers for the Virginia Tax Amnesty Program. According to the Guidelines, a taxpayer registered for the retail sales tax would be eligible to participate in the Virginia Tax Amnesty Program for the period April 2003 and prior. In this instance, the audit covered amnesty eligible periods (taxable periods ending on or before April 30, 2003) in which the Taxpayer underpaid or underreported their liabilities. Therefore, the Taxpayer's argument that it was not eligible to participate in the Tax Amnesty Program because the assessments were issued in October 2006 is not a valid argument.
Accordingly, the amnesty penalty was properly applied in the audit. However, the application of the amnesty penalty will be adjusted should the auditor's review of any additional information result in revisions to the audit.
CONCLUSION
The contested transactions addressed in the Taxpayer's appeal letter involve documentation issues. The Taxpayer has 60 days from the date of this letter to provide to the Department the documentation to support its claims. The Taxpayer should contact the auditor to make arrangements to review any additional documentation.
The audit will be adjusted based on this determination and the Department's review of the any additional documentation provided. The assessments will be considered correct with respect to those issues for which the Taxpayer cannot provide sufficient documentation. Upon completion of the auditor's review, updated bills, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding balances of the bills are paid within 30 days from the bill dates.
The payment should be remitted to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *****. If you have any questions concerning payment of the assessments, you may contact ***** at *****.
The Code of Virginia sections, regulations and public document cited are available on-line at www.tax.virgiiiia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this determination, you may
contact ***** in the Department's Office of Tax Policy, Appeal 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/1-1192138751T
Rulings of the Tax Commissioner