08-60 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Assessment on untaxed sales no valid certificates of exemption on file

Topic

Appropriateness of Audit Methodology

Property Subject to Tax

Records/Returns/Payments

Date Issued

05-19-2008

May 19, 2008

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

Dear *****:

This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period March 2002 through February 2005. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer provides screen printing and embroidery of apparel for sale mainly to end users. The Taxpayer's customers include churches, school organizations and other nonprofit organizations. The Taxpayer contests the tax assessed to purchases of equipment used in its business operation. The Taxpayer maintains that such equipment qualifies for the industrial manufacturing exemption. In addition, the Taxpayer believes the audit liability would have been much smaller had the Department audited the Taxpayer within the first few years of business because the error factor would have been extrapolated over a much smaller population.

DETERMINATION

Industrial Manufacturing Classification

Virginia Code § 58.1-609.3 2 provides an exemption from the sales and use tax for machinery, tools, and other items used directly in the manufacture of tangible personal property for sale or resale in the industrial sense. In Golden Skillet Corporation v. Commonwealth, 214 Va. 276, 199 S.E. 2d 511 (1973), the Virginia Supreme Court held that the manufacturing exemption is intended to "provide exemption for machinery and tools used in . . . manufacturing . . . products for sale or resale only in the industrial sense." Also, Va. Code § 58.1-602 provides, in part, that the term "industrial in nature" shall include all businesses classified in codes 10 through 14 and 20 through 39 of the Standard Industrial Classification (SIC) Manual.

The Taxpayer operates a retail business that primarily sells to end users, i.e., retail customers. As provided in the SIC Manual and the manufacturing regulation in Title 23 of the Virginia Administration Code (VAC) 10-210-920, production activities of industrial manufacturers are usually carried on for the wholesale market or to order for industrial users, rather than for direct sale to domestic consumers. In determining whether the equipment used by embroidery and silk screening businesses qualifies for the industrial manufacturing exemption, the Tax Commissioner has previously ruled that the exemption is not available because the predominant activity of such businesses is the sale of products to end users. See Public Documents (P.D.) 96-386 (12/23/96), 94-71 (3/18/94) and 01-35 (4/10/01).

Based on the foregoing and a review of the audit report, it appears that the Taxpayer's operations are most appropriately classified under SIC code #5699, which lists businesses engaged in custom printed tee shirts and apparel under this retail trade classification. As such, the Taxpayer does not fall within those SIC codes prescribed for purposes of being designated as industrial in nature. Accordingly, the auditor properly assessed the tax to the Taxpayer's purchases of equipment used in its business operation.

Information on the Application of the Tax

The Department employs various methods to disseminate information concerning the sales and use tax and other taxes it administers. Under Va. Code § 58.1-204, the Department is required to publish regulations and written rulings or other interpretations of Virginia law that are of interest to taxpayers and practitioners. The Department has published regulations that provide guidance for the registration of dealers and for the application of the tax to rentals, sales and purchases of tangible personal property. In addition, the Department issues tax bulletins and public documents to clarify areas of concern and interest. The Department also publishes an annual legislative summary that provides information to the public concerning tax related legislation passed by the General Assembly. All of these documents are available to the public. Taxpayers can also seek clarification and guidance from the Department's web site or may request written or verbal guidance from the Department's Customer Services unit by phone call, e-mail or by letter whenever there are questions regarding the proper application of the sales and use tax to their business operations. The Department's written policy on the application of the tax for screen printers as cited above is longstanding and consistently applied and was freely available to the Taxpayer.

I would also note that the majority of the audit assessment is for untaxed sales in which the Taxpayer did not have valid certificates of exemption on file. The regulation regarding the acceptance of certificates of exemption is longstanding and is published in the comprehensive set of regulations entitled the Virginia Administrative Code. See Title 23 VAC 10-210-280 B. In addition, the Department has issued numerous public documents regarding this issue. See P.D. 89-309 (11/7/89) and 93-177 (8/4/93).

In regard to the Taxpayer's contention about the timeliness of the Department's audit, the Department is not able to audit every registered dealer because of limited resources. Audits of taxpayer records are conducted based on noncompliance and random selection, and are not always conducted within the first few years of business operation. Moreover, it is the responsibility of every registered dealer to be aware of the law and to keep informed about changes in the law. Until an audit is conducted, the Department assumes the dealer has complied with all statutes and regulations. Ignorance of the law, or changes thereof, is not a valid basis to waive a tax assessment.

CONCLUSION

Based on the foregoing, there is no basis to make any adjustments to the Department's audit assessment. An updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding balance is paid within 30 days from the date of the bill. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attention: *****. If you have any questions concerning payment of the assessment or you would like to establish a payment plan with the Department's Collections Unit, you may contact ***** at *****.

The Code of Virginia sections, regulations and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov. If you have any questions regarding this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-1328468592T

Rulings of the Tax Commissioner