Document Number
09-46
Tax Type
Retail Sales and Use Tax
Description
Full service banking assessed consumer use tax on purchases of tangible personal property
Topic
Records/Returns/Payments
Tangible Personal Property
Taxable Transactions
Date Issued
04-27-2009


April 27, 2009



Re: § 58.1-1821 Application: Retail 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 August 1999 through March 2003. I apologize for the delay in responding to your letter.

FACTS


The Taxpayer engages in full service banking. An audit resulted in the assessment of consumer use tax on various items of tangible personal property. The Taxpayer contests the assessment on the grounds that the assessment includes the following:
  • Improperly assessed marketing charges,
    Items furnished in connection with real property construction services,
    Items upon which the sales tax was charged and collected by vendors,
    Purchases of custom software,
    Electronically delivered property or services,
    Non-taxable accounting entries,
    Transactions for non-taxable services,
    Isolated items in the sample, and
    Exempt intra-company transfers.

The Taxpayer also requests that the estimated measure for assets be revised after all adjustments are made. Lastly, the Taxpayer requests waiver of all penalties.

DETERMINATION


It is my understanding from the auditor that various records to substantiate the Taxpayer's use tax compliance for the audit period are missing or unavailable. In such instances, Va. Code § 58.1-633 A provides:
    • Every dealer required to make a return and pay or collect any tax under this chapter shall keep and preserve suitable records of the sales, leases, or purchases, as the case may be, taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.

Furthermore, Title 23 of the Virginia Administrative Code (VAC) 10-210-470 states, "If an assessment has been made and an appeal to the Commissioner or to court is pending, all records relating to the period covered by such assessment must be preserved until the final disposition of the appeal."

Moreover, Va. Code § 58.1-618 allows the Department to estimate and assess the amount of unreported tax liabilities when a dealer fails to make a return or has filed an inaccurate return. This statute further authorizes the Tax Commissioner to issue an estimated assessment based upon the best available information whenever "any dealer fails to make any such return or refuses to permit an examination of his books, records, or papers, or to appear and answer questions within the scope of such investigation." Such estimated assessment is deemed by statute to be prima facie correct.

I understand that the Department's auditor made several attempts to request the necessary tax records from the Taxpayer in order to accurately substantiate its use tax liabilities. I also understand the Taxpayer failed to provide all the requested records. For these reasons, I find that the assessments in this case are issued in accordance with the purpose and scope of Va. Code § 58.1-618 and are, therefore, prima facie correct. Pursuant to Va. Code § 58.1-205 1, the burden of proof is upon the Taxpayer to establish any inaccuracies with the estimated assessments.

After the issuance of the assessments in this case, the Taxpayer presented certain documentation to the Department in support of the issues raised in its appeal. The issues are addressed below. Unless otherwise indicated, each issue represents untaxed exceptions from one vendor.

Marketing charges

Contested Purchases: Line 1: This marketing expense issue involves an estimated
measure of *****, which is the sum of ***** and *****. The Taxpayer maintains that this estimation is excessive and thus not representative of its sales and use tax policy. The Taxpayer requests an adjustment after all removals and other adjustments have been made.

I understand that the Department's auditor asked for branch level documentation for five marketing accounts. Although one account (direct mail) had no listed amount, the Taxpayer's general ledger listed the marketing expenses of the four other marketing accounts at *****. Of that total, the Taxpayer furnished documentation in connection with only ***** of those expenses. The difference of ***** was included in the audit. Because of the missing records, I find no basis to remove the ***** amount from the audit.

The remaining amount of ***** held in the audit is the auditor's estimate of marketing expenses for the direct mail account for which no listed amount was provided. The estimated amount is equal to the average of the other four marketing accounts and is calculated by dividing the total ***** by 4. This estimated amount is included in the audit because no records (e.g., general ledger, accounts payable distribution, account numbers, amounts, etc.) were provided for examination of the marketing area at the corporate level. Without these records, it is not possible to know total expenses incurred in the direct mail area or to accurately determine the internal allocations of total marketing expenses attributable to Virginia locations. The additional amount of ***** was used to reasonably represent (in the absence of complete records) the additional marketing expenses for Virginia. It is apparent that the auditor relied upon the best available information to estimate the Taxpayer's Virginia marketing expenses.

Furthermore, during the appeal process, it was revealed to the auditor that the Taxpayer had used various vendors for the marketing area but those vendors were not examined during the course of the audit. Accordingly, I find no basis to remove the ***** amount from the audit.

Real property services

Non-contested Assets: Line 1: The Taxpayer claims that the purchase of fencing from this vendor is for real property installation services. As such, the Taxpayer claims that it is not responsible for the tax. Although the auditor held the fence sale as taxable on the basis of Public Document (P.D.) 85-122, I found no evidence that this in-state vendor was registered to collect the sales tax at the time of the contested transaction or was otherwise acting as a retailer as defined pursuant to Title 23 VAC 10-210-410 G. Based on the invoice presented, it appears that the particular transaction at issue is for the provision of materials and installation labor for permanent fencing. Based on these facts and the fact that this vendor is no longer in business to determine its retailer status, I will treat this transaction as a real property construction contract and remove it from the exceptions list.

Non-contested Assets: Lines 68, 264, 265, 284, 324, 325, and 376-385: The Taxpayer maintains that this vendor is a real property construction contractor with respect to the transactions held in the audit based on the vendor's description found on its webpage and a vendor e-mail claiming that these transactions were for furnishing and permanently installing items into the realty (although the vendor could not locate any of the Taxpayer's invoices to support its claim).

The items held in the audit are described as desks, credenzas, files, drawers, tube systems, drive-in equipment, Kiosk, automatic teller machines (ATMs), signs and several items merely identified as bank equipment. These descriptions are vague and do not establish that the transactions were for real property construction services. Typically, office furniture is not affixed to real property. The other equipment at issue could possibly be installed in a manner as to remain tangible personal property upon installation. For example, the ATMs addressed in P. D. 91-166 (8/7/91) could be installed either in a freestanding manner or as a permanent fixture when placed in the side opening of a bank building. Without more detailed information (e.g., invoices, contracts, blueprints, purchase orders, etc.) describing the manner of installation, it is not possible to conclude that the contested transactions constitute real property installations. The Taxpayer has not met its burden of proof, pursuant to Va. Code § 58.1-205 1, that the tax does not apply. Accordingly, I find no basis to remove these items from the exceptions list.

Non-contested Assets: Lines 182 and 529: The Taxpayer claims that these contested transactions are for retro-fit lighting and therefore constitute sales of exempt real property construction services. The Taxpayer also claims that the contested items are non-taxable transfers from construction in progress (CIP) accounts to fixed assets and, therefore, do not represent actual purchases of tangible personal property.

According to the auditor, the Taxpayer records asset purchases in a CIP account until a project is completed. The auditor reviewed a report of the CIP assets and a report of assets that were not part of the projects in process. The auditor indicates that the two contested items were coded as furniture. I also understand that the specific invoices associated with these CIP entries were not provided. Absent such invoices, it is impossible to know whether the items were somehow mislabeled in the CIP or asset reports. In the absence of documentation for these contested transactions, the auditor used the best information available to determine this liability. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. As such, I find no basis for removing these items from the exceptions list.

Non-contested Assets: Lines 183-189, 255, 256, 276-278, 289-301, 334-360 and 400-­433: The Taxpayer maintains that these items are transactions for either construction or management type services. The Taxpayer provides the vendor's description per its webpage. Such documentation is of a general nature and does not specifically show what occurred in any of the individual transactions at issue.

The Taxpayer also claims that the vendor has determined that the contested items are non-taxable transactions and that all appropriate taxes have been paid. Although the auditor has reviewed the Taxpayer's "invoice received/imaged via EDI" statements (hereinafter, computer transaction statements), I understand that no original invoices, or copies of such, or other original documents (e.g., contracts and purchase orders) were presented to the auditor. The presentation of the original invoices is important because the computer transaction statements lack any mention of installation services. Without a requirement for installation, these transactions cannot be treated as nontaxable sales of real property installation services. Furthermore, the contested items (signs, desks, ATM lamps, storage cabinets, dispensers, etc.) may or may not become realty upon installation. If the original invoice does indicate the provision of installation services but is unclear on the nature of the installation, further descriptive proof, i.e., contract, purchase order, etc., would be necessary to aid in establishing a claim of permanent installation.

The Taxpayer further claims that the vendor has undergone several sales and use tax audits by the Department with only nominal amounts assessed. Virginia Code § 58.1-3 prohibits me from revealing tax information of other taxpayers to the Taxpayer. Regardless of whether the vendor has been audited by the Department, the Taxpayer has a legal obligation to preserve all necessary records to substantiate its tax liability on purchases of tangible personal property and to maintain those records throughout the appeals process. The invoices presented with the appeal have no direct association with any of the items held in the audit. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Accordingly, I find no basis for removing any of the contested items from the exceptions list.

Non-contested Assets: Lines 229 and 449-451: The Taxpayer claims that four
transactions with this vendor were for carpet installations only and therefore not subject to the tax. The Taxpayer provides views of the vendor's website to demonstrate the service nature of the vendor. The Taxpayer also provides a copy of the e-mail from the vendor in which the vendor claims that only one invoice was for work done in Virginia and the rest involved work performed in *****. The vendor's e-mail goes on to state that all invoices were for the installation of carpet at different branches by subcontractors. The vendor's e-mail further states that the vendor would fax copies of all of the invoices in question, as well as the subcontractor invoices to the Taxpayer's consultant. None of those invoices were subsequently furnished to the Department.

The Taxpayer has also presented two computer transaction statements. These statements are not duplicate copies of the original invoices held in the audit. Rather, they are produced by the Taxpayer and merely provide unverifiable and inadequate work descriptions as to the full nature of the two transactions. Furthermore, one of the computer transaction statements does not pertain to any of the invoices held in the audit.

Notwithstanding the vendor claims, the Taxpayer's claims cannot be verified in the absence of the vendor and subcontractor invoices. Absent any of the original documentation to verify the Taxpayer's claim, the Taxpayer has not met its burden of proving that the tax does not apply. Accordingly, I find no basis to remove the contested items from the exceptions list.

In light of the regulation set out in Title 23 VAC 10-210-410 G and P. D. 89-252 (9/21/89), sufficient information has not been provided to establish the true nature of the installations. This is important for determining whether the vendor is deemed a contractor or retailer for Virginia sales and use tax purposes. For example, if the carpet was permanently installed for each installation, the vendor could be treated as a contractor and the vendor's transactions removed from the audit. However, if the carpet was not permanently affixed to realty, the vendor would be considered a retailer if it satisfies the retailer definition set out in subsection G of the above regulation.

Non-contested Assets: Line 302: According to the auditor, this transaction was included in the audit because the computer transaction statement indicates that the transaction was for bank equipment and makes no mention of installation.

The Taxpayer maintains that line item 302 is for real property services based on the vendor's business description found on a website. Such evidence, however, is insufficient as it provides general information of no specific importance to the invoice in question. Based on a discussion with the vendor, the Taxpayer also claims that the vendor operates primarily in the Northeast and only goes as far south as *****. While this may or may not be the case, the Taxpayer has not presented any documentation in support of the vendor's claim. Furthermore, the Taxpayer has not furnished any documentation from the vendor about the specific transaction in question, such as a copy of the actual invoice. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Accordingly, I find no basis to remove this item from the exceptions list.

Non-contested Assets: Line 709: According to the auditor, this item constitutes the sale and installation of a deal drawer that remains tangible property upon installation. The auditor bases his opinion on the treatment in P.D. 94-207 (6/28/94) to hold under counter teller stations and drive-up under counter installations as tangible personal property upon installation. The Taxpayer maintains that this item is for exempt real property services.

The ruling in P.D. 94-207 responds to a ruling request letter in which the taxpayer included deal drawers under the category of drive-up windows, which P.D. 94-207 treats as real property installations. This is consistent with P.D. 91-166 (8/7/91), in which automatic teller machines installed directly in the side of the actual bank building were treated as real property installations.

Provided the deal drawer at issue is used at a drive-up window and mounted to the outside wall of the bank, I find basis to treat the deal drawer as a real property installation. If installed in such manner, the deal drawer at issue will be removed from the exceptions list.

Vendor tax collections and vendor audits

Non-contested Assets: Lines 9-12, 69, 132, 163, 178, 207, 232, 233, 266-270, 286, 330, 331, 470, 543, 561, 630-633, 659-674, 687-699 and 703: The Taxpayer maintains that line item 470 is for equipment shipped to *****. As such, the Taxpayer asserts that such item was not delivered or ultimately used in Virginia. In fact, the invoice submitted is not the one assessed in the audit. Rather, the invoice numbers, dates, and invoiced amounts are completely different. The invoice submitted also does not show any convincing relationship to invoice 470. The handwritten notation "Formally ***** is not convincing evidence of how these two invoices are supposedly linked. Although the invoice submitted shows a delivery address in ***** such evidence does not establish any direct link to the invoice included under line item 470.

The Taxpayer also maintains that this vendor charged and collected the Virginia sales tax on all sales delivered into Virginia. The other invoices presented show that the vendor did not collect the full amount of Virginia sales tax due. Because the tax was not charged correctly, it is my understanding that the auditor only picked up the difference between the tax charged by the vendor and the correct amount of tax that should have been charged by the vendor.

The Taxpayer further maintains that the assessed tax has already been paid via an audit of this vendor. Except in accordance with a proper judicial order or otherwise provided by law, the Department is prohibited by Va. Code § 58.1-3 to divulge any information acquired by the Department with respect to the transactions, property, including personal property, income or business of any person, firm or corporation. Accordingly, the Department may not discuss or otherwise reveal any potential or real audit information about another taxpayer to the Taxpayer.

The Taxpayer's claim of double taxation has no merit. The goal of the Department is to hold a taxpayer for taxes that are due. The Department continuously audits taxpayers, including consumers such as the Taxpayer as well as retailers. In those audits, the Department generally uses sampling techniques to examine the sales tax collections made by retailers. In sampling, a particular period is agreed upon between the retailer and the auditor. Sample periods may consist of one or more months or a lesser period. The chance that one's purchases were picked up on a retailer's audit is minimal because sample periods of different taxpayers often do not coincide. Even if the same item were picked up in two audits, a purchaser would have to do more than merely claim double taxation. A purchaser would have to show a subsequent billing by the retailer for the sales tax owed in specifically identified transactions and that the purchaser paid the tax. Virginia Code § 58.1-625 makes the dealer directly liable for the tax if the dealer neglects, fails, or refuses to collect the sales tax upon every taxable sale or lease of tangible personal property. Until the dealer pays the tax, the dealer is not entitled to sue for or recover in Virginia any part of the purchase price or rental from the purchaser. Without proof showing that the tax recouped by the retailer was directly tied to the same invoice included in the purchaser's audit, double taxation is not an issue.

When no sales tax is charged by the vendor, Va. Code § 58.1-604 imposes a consumer use tax, for which remittance is the responsibility of the purchaser. In this case, no evidence has been presented that the Taxpayer remitted the consumer use tax on the untaxed items. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Absent any evidence of double taxation, I find no basis to remove line item 470 or any of the other line items from the exceptions list.

Non-contested Purchases: Lines 187-195: The Taxpayer requests removal of these items from the audit based on the same reasons that it gave for removal of line item 470. Based on the reasons provided for denying the removal of line item 470, I find no basis to remove these items from the exceptions list.

Non-contested Assets: Lines 391 and 392: According to the auditor, these transactions were included in the audit because copies of the actual invoices were not furnished to show that sales tax was charged. Furthermore, the Taxpayer's computer transaction statement only shows that the transaction was for equipment. No sales tax was charged.

The Taxpayer submits three invoices with its appeal showing that this vendor charged sales tax. Although these three invoices are not the ones in question, the Taxpayer maintains that this vendor properly collected the sales tax on the two invoices in question. This evidence is not directly on point because it does not have any bearing on the two specific transactions at issue. While this vendor may have collected sales tax in the three instances shown, this evidence does not establish that the vendor charged and collected the Virginia sales tax with respect to the two specific invoices held in the audit. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Accordingly, I find no basis for removing these items from the exceptions list.

Non-contested Assets: Lines 455. 469 and 486: Because the auditor previously removed two items from the audit, you maintain that lines 455, 469 and 486 from the same vendor should also be removed from the exceptions list. You present the computer transaction statements for the two removed items and such statements show no indication that sales tax was collected.

For the two items previously removed, I understand that the auditor reviewed the actual vendor invoices and found that sales tax was collected by the vendor. For this reason, those two items were removed. In regard to the three line items remaining in the audit, I understand that no actual invoice was furnished to the auditor. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Absent evidence that sales tax was collected on these three line items, I find no basis for removing them from the exceptions list.

Non-contested Assets: Lines 452-454, 468, 480-484, 491-495 and 514-516: According to the auditor, these transactions were held in the audit because no sales tax was shown paid on these purchases of furniture and workstations. The Taxpayer has not furnished copies of the actual invoices. Also, the Taxpayer's computer transaction statements provide no indications of sales tax charges.

The Taxpayer maintains, however, that the sales tax has been paid by the vendor on these purchases. The Taxpayer furnishes a copy of a vendor letter claiming in general terms that it collects, reports and remits the sales tax to the Commonwealth. In this regard, you indicate that the vendor had researched payment slips and wrote the amount of Virginia sales tax paid in the upper left corner of each slip. The documents submitted with Taxpayer's exhibit 14 contain no such payment slips. Rather, the exhibit appears to contain the Taxpayer's computer transaction statements that have written amounts on them in the upper right area of each statement. The vendor's letter makes no mention of any of this claimed action. Moreover, the Taxpayer has not furnished any copies of the invoices in question to establish the amount of the sales tax charged by the vendor.

The vendor also revealed to the Taxpayer that it had undergone an audit by the Department and that such audit revealed no findings or claims pertaining to the Taxpayer for an audit period closely matching the Taxpayer's period of audit. Thus, even if the vendor furnished a copy of its audit, it would not be known whether any sales made to the Taxpayer were actually reviewed by the auditor of such examination. Detailed information on sales excluded from an audit is typically not recorded in an audit. Notwithstanding, it is the Taxpayer's sole responsibility to preserve records in order to substantiate its sales and use tax liabilities, such as invoices and payment information establishing that the vendor charged and collected the sales tax on the specific invoices at issue. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Accordingly, these items will remain in the audit.

Non-contested Assets: Lines 496-501 and 517: No evidence has been provided to show that sales tax was paid on these items or that they are exempt transactions. The Taxpayer failed to provide copies of the original invoices. Also, the Taxpayer's computer transaction statements provide no indications of sales tax charges made by the vendor.

Based on the vendor's verbal confirmation, the Taxpayer maintains that it paid sales tax to this vendor on the contested transactions. However, the Taxpayer has not furnished any documentation, such as copies of the original invoices, to establish that the vendor charged sales tax on the transactions in question. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Accordingly, these items will remain in the audit.

Non-contested Assets: Line 70: The Taxpayer requests the removal of this item based on the claim that the vendor was audited by the Department and the appropriate taxes were paid by the vendor. As I previously mentioned, the Department may not disclose another taxpayer's tax information to the Taxpayer. For the same reasons provided above and because no proof has been furnished that the Taxpayer paid the sales tax related to this specific contested transaction to the retailer subsequent to the time of the sale, I find no basis for the removal of this item from the exceptions list.

Non-contested Purchases: Lines 201, 202 and 203: The Taxpayer claims that sales tax was paid to Virginia by the vendor. I am not certain, however, that any Virginia retail sales and use tax has been charged and collected by this vendor. In reviewing the invoice summary documentation provided, a tax rate of 6.6% was applied to the sales price including handling/delivery amounts. In the accompanying branch summary information, a 6.6% tax rate was also charged on the amounts that you claim were allocated to Virginia. Accordingly, even if the Virginia allocation amounts are correct, I find no evidence to conclude that Virginia retail sales tax (5.0%) was specifically charged and collected.

The Taxpayer also claims that not all of the items purchased were shipped to or used in Virginia. The documentation provided does not reveal the vendor's location. Also, no shipping documentation has been provided to show whether the vendor shipped all the items to the Taxpayer in Virginia or shipped the items to the Taxpayer in both Virginia and elsewhere as claimed.

If shipped by an out-of-state vendor, the shipment of only the Virginia allocated amounts to Virginia would be taxed by Virginia. However, there is no applicable exemption if the vendor shipped all of its products to the Taxpayer in Virginia and the Taxpayer subsequently re-shipped a portion of it to its branch locations in other states. In such instances, first use is made in Virginia and the tax would apply to the total amount charged and shipped into Virginia.

If shipped by an in-state vendor to various locations of the Taxpayer both within and outside Virginia, the Taxpayer would only be liable for the sales tax on the items shipped to it in Virginia. See Title 23 VAC 10-210-780. However, the documentation presented lacks any shipment information from the vendor and only shows the Taxpayer's breakdown of the allocation by various states. Sufficient records have not been furnished in support of the Taxpayer's allocation.

The Taxpayer further claims that the amounts listed in the audit do not represent the correct amount shipped to or used in Virginia. The Taxpayer maintains that the Virginia amounts listed also include allocations made to ***** the ***** . However, the Taxpayer coded the entire Virginia allocation to CoSub #2611, which I understand is a Virginia expense location. Furthermore, the Taxpayer does not explain how it derived these additional allocations or provide any additional documentation to support its claim. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Accordingly, I find insufficient basis to remove or reduce the three line items at issue.

Non-contested Purchases: Lines 21, 22 and 23: The Taxpayer maintains that these items are for maintenance contracts and that the appropriate sales tax was paid.

I understand that the Taxpayer provided documentation only for line item 21. Based on such documentation that shows payment of the sales tax, line item 21 will be removed from the exceptions list. I understand that the auditor was previously provided the invoice for line item 22 but it showed no charge for sales tax. I also understand that no invoice was provided for line item 23. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply to lines 22 and 23. Accordingly, line items 22 and 23 will remain in the exceptions list.

Non-contested Purchases: Lines 53 and 54: These items are for taxable maintenance charges. The Taxpayer maintains that it was properly paying the sales tax on transactions with this vendor.

The documentation provided does not appear to directly relate to either of the items held in the audit. For example, the documentation presented is for the purchase of a currency counter that is recorded to general ledger account 847501 (supplies and equipment). Whereas, the items held in the audit are maintenance charges that are recorded to general ledger account 848201 (maintenance and RP equipment). Furthermore, the invoice numbers, dates and invoiced amounts in the documentation provided are not the same as the ones held in the audit. While you show that this vendor collected sales tax on the sale of equipment in one instance, you have not provided any direct evidence establishing that this vendor charged and collected the sales tax on the specific items at issue. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Accordingly, these items will remain in the audit.

Non-contested Purchases: Lines 306-315: These are maintenance contract charges. The Taxpayer claims that the vendor charged and collected the sales tax on all ten of these items.

Based on two invoices presented, lines 307 and 308 will be removed from the exceptions list. The Taxpayer also submits two invoices showing that sales tax was correctly charged on two transactions for software licenses that were not included in the exceptions list. Although the vendor correctly charged sales tax in these four instances, this does not establish that the vendor correctly charged sales tax in every instance. Because the Taxpayer has not furnished any invoices for the other eight maintenance contract charges included in the exceptions list and pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Accordingly, the eight remaining items will not be removed from the audit.

Custom Software

Non-contested Assets: Line 53: The Taxpayer claims that this transaction is exempt custom software based on a written statement from the vendor.

Virginia Code § 58.1-609.5 7 provides an exemption from the sales and use tax for custom programs as defined in Va. Code § 58.1-602. A custom program as defined by § 58.1­-602 means "a computer program which is specifically designed and developed only for one customer." This statute states, "The combining of two or more prewritten programs does not constitute a custom computer program." This statute further states, "A prewritten program that is modified to any degree remains a prewritten program and does not become custom."

Based on the information provided, it is not clear as to the basis of the vendor's claim, which merely states that the transaction is for custom software without presenting any supporting information. Moreover, the vendor presents no support to establish how the software program would conform to the statutory definition of custom program noted above. All of this information is important especially because the vendor (according to its website) has long been engaged in producing check fraud prevention software for banks. That is, it appears just as likely that the vendor is engaged in producing prewritten programs (as defined by Va. Code § 58.1-602) for the banking industry. Furthermore, the Taxpayer has not presented all of the available transaction documentation, such as a copy of the license agreement. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Based on the lack of full disclosure of records, the vague vendor claim, and the nature of the vendor's business, I find no basis to remove this item from the exceptions list.

Electronic delivery

Non-contested Assets: Line 228: The Taxpayer claims that this transaction is for electronically delivered software and is exempt from the retail sales and use tax based on Va. Code § 58.1-609.5(1), which provides an exemption for "software, data, content and other information services delivered electronically via the Internet."

The invoice in question states, "See attached forms for shipping information." Such attached forms were not submitted with the appeal or previously furnished to the auditor. Thus, no shipping documentation was furnished.

Although the vendor may indicate that this transaction was for electronically delivered software, no documentation related to the specific transaction has been furnished in support of the vendor's claim. Based on our review of the invoice in question, it appears that software was included in the transaction. Further, the descriptions given on the invoice include tangible equipment, such as call collection devices. Thus, it appears that the software was used in connection with the call collection devices.

As such, it appears that a sale of tangible personal property has occurred. When a taxable sale occurs, the sales price concept set out in Va. Code § 58.1-602 requires the application of the sales tax to all services furnished in connection with the sale. When the charge is for both software and equipment in a lump-sum amount as was done in this instance, the total charge is taxable. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Accordingly, I find no basis for removing this item from the exceptions list.

Accounting entries

Non-contested Assets: Lines 530-532, 635-641, 714, 719 and 720: Because these contested items are accounting entries, the Taxpayer claims that they do not represent the actual purchase of tangible personal property and, therefore, should not be included in the audit.

According to the auditor, the CIP accounts are reviewed because asset purchases are recorded to those accounts until a project is completed. I understand the Taxpayer furnished a copy of the report of all CIP assets to the auditor. The Taxpayer also furnished a copy of the report of assets that were not part of the projects in process. The items listed in these reports should be supported by appropriate invoices. The Taxpayer should also be able to reconcile the two reports showing where the same amount is included on both reports for the same item. Absent copies of the actual invoices in question, there is no way to verify that tax was charged or whether the transaction was exempt. In this case, the auditor used the best available information in order to estimate the liability in this area in the absence of sufficient documentation. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Accordingly, these items will remain in the audit.

Non-contested Purchases: Lines 449-470: The Taxpayer maintains that these line items are not for the purchase of tangible personal property, but represent accounting adjustments used to close a responsibility code (RC) account.

The Taxpayer provides no documentation to support its claim. I understand the auditor included these items in the audit because no invoices or information was furnished for these RC accounts. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Absent detailed information and documentation regarding the makeup of these accounts, I find no basis for removing these items from the exceptions list.

Nontaxable services

Non-contested Assets: Line 580: According to the auditor, this item represents only the tangible personal property installed at Virginia sites. No installation labor is included in such line item. I understand the Taxpayer and the auditor agreed upon the number of Virginia sites and the Virginia cost of the tangible personal property used at those sites.

The Taxpayer maintains that the true object of the transaction with this vendor was for exempt satellite television programming services. The Taxpayer cites P.D. 97-374 (9/17/97) in support of its exemption claim. In this regard, the true object test is set out in Title 23 VAC 10-­210-4040 D:
    • In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the "true object" of the transaction must be examined. If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.

Although you claim to have included a copy of the contract for this line item, no such documentation has been furnished. You provide copies of various invoices, a report of the deposits for this project, a proposal for a second channel of system installations at the Taxpayer's network sites, authorizations for expenditures, financial impact summary by year, a merger integration project form, and a listing of costs for the 700 site satellite system. The merger integration form provides a summary of project information and states that the project consists of installing a complete video satellite system into existing locations. This form also states the scope of the project will cover site surveys, roof dishes, satellite receivers, televisions, video cam recorders, and electrical power. The merger integration form further states that the objective of the network project is to tie the company together by enabling the sharing of quick, clear, first hand information and training. As such, the network will be used for training and implementation of other corporate wide systems and procedures.

Based on the foregoing, it appears that the Taxpayer contracted to receive a satellite system to be installed at 700 sites. There is no indication from the documents received that the system was installed merely for the vendor to provide some type of content or informational services to the Taxpayer. Rather, the vendor services appear to be limited to front-end services needed in developing, designing and installing such a system and possibly in back-end services to provide ongoing maintenance services. If these services are basically the essence of the services provided pursuant to the contract, the true object is clearly for the sale of tangible personal property because the noted services are incidental to the property provided. That is, the services are provided in order to produce or maintain the property.

Public Document 97-374 is not relevant to this transaction because it concerns a transaction in which the true object of the transaction was deemed to be for services. In that transaction, the tangible personal property was needed for the provision of satellite television programming services by the vendor. There is no similar situation shown in the instant case.

Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Accordingly, line item 580 will remain in the audit.

Non-contested Purchases: Line 1: The auditor held this transaction as the sale of custom printing. The Taxpayer maintains that this transaction is for exempt information retrieval services pursuant to a court order.

The invoice presented consists of separate charges for subpoena regulation reproduction and labor, retrieval "no find" labor, and shipping charges. Based on this information, I must conclude that the true object of this transaction is for printed materials. Clearly, the services are furnished in connection with the sale of such materials. Furthermore, there is no statutory exemption applicable to the reproduction charges and associated labor charges for this transaction. However, pursuant to Va. Code § 58.1-609.5 3 and the interpretation given by Title 23 VAC 10-210-6000, I find basis for the removal of the separately stated shipping charges included in this item.

Isolated items in sample

Non-contested Purchases: Line 300: This is a maintenance contract charge. The Taxpayer maintains that this item represents an unusual expense given the dollar amount compared to the majority of the expensed items. The Taxpayer protests the inclusion of this item in the sample extrapolation.

The Department will remove an item from an audit sample if it is shown that the transaction is isolated in nature and not a normal part of a taxpayer's business activity. As determined in P.D. 04-204 (11/23/04), the Department found no basis for removing an item from a sample although it constituted a large percentage of the taxable measure of the sample. In the Taxpayer's case, I understand that there are several other maintenance contracts as well as similar amounts listed in the sample. Accordingly, the contested item is not isolated or unusual in nature and appears to be part of the Taxpayer's normal business activity. Accordingly, I find no basis to remove this transaction from the exceptions list.

Non-contested Purchases: Lines 318 and 322: These are charges for a maintenance contract and forms and supplies. The Taxpayer maintains that these items are unusual expenses and should not be included in the sample for extrapolating the tax deficiency. Based on the reasons set out above for Line 300, I find no basis to remove these transactions from the exceptions list.

Intra-company transfers

Non-contested Purchases: Lines 316, 317 and 322-448: These line items consist of purchases of forms, printing and supplies. The Taxpayer maintains that these items represent intra-company transfers of business supplies and that it paid the sales tax based on the internal documentation created for supplies purchased from six vendors.

The documents presented have no direct bearing on the items held in the sample. All of the internally created invoice documentation presented relates to invoices outside of the sample month of April 2001. Furthermore, the internal computer spreadsheets furnished for account 860101 (printing and supplies - internal) represents all periods occurring in 2001. When the auditor reconciled the printing and supply account to the April 2001 period on the Taxpayer's spreadsheet, he found no evidence that the sample period included purchases from the six vendors listed in the Taxpayer's appeal letter for this issue.

No invoices for these line exceptions were furnished. Rather, the evidence furnished is not directly on point and is incomplete. Such evidence is insufficient for auditing purposes. Pursuant to Va. Code § 58.1-205 1, the Taxpayer has not met its burden of proving that the tax does not apply. Accordingly, these items will remain in the exceptions list.

Additional adjustments

Non-contested Assets: Lines 19-23: Based on the documentation provided, I will agree to remove these line items from the exceptions list.

Non-contested Purchases: Lines 19 and 20: Based on the information presented, these two items will be removed from the exceptions list.

Assets revised

Non-contested Assets: Line 721: This issue represents the agreed upon estimate of the taxable measure for asset invoices not provided because of timing differences. The auditor will re-estimate this line item after all adjustments have been made.

Penalty

The Taxpayer requests waiver of all penalties on the grounds that it exercised reasonable care in complying with its sales and use tax obligations. On seventh audits, Title 23 VAC 10-210-2032 A 3 requires the application of a 30% penalty if the taxpayer's compliance ratio does not meet or exceed 85% for use tax. In this case, the Taxpayer's use tax compliance ratio is computed to be 3%. The audit revisions allowed by this determination will not significantly improve upon this compliance ratio. Accordingly, the penalty cannot be waived based on the level of compliance shown in this audit.

Furthermore, pursuant to Va. Code § 58.1-1840.1 F 1 and section C 4 j of the Virginia Tax Amnesty Guidelines, the 20% amnesty penalty cannot be waived because the 30% compliance penalty was not waived. Finally, the Taxpayer has not submitted any documentation to the Department's auditor to exercise the option to compute a separate use tax compliance ratio under the alternative method for penalty waiver. See P.D. 00-98 (5/25/00) and 00-115 (6/23/00). Accordingly, I find no basis to waive any of the penalties, except in connection with the tax on those items already agreed upon for removal from the exceptions lists.

CONCLUSION


The assessments will be revised in accordance with this determination. Once the revisions are completed, updated bills, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill dates 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 assessments, you may contact ***** at *****.

The Code of Virginia and regulation sections cited, along with the cited public documents, 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 Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,


                • Janie E. Bowen
                  Tax Commissioner





AR/1-964075831.R


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46