Document Number
09-52
Tax Type
Retail Sales and Use Tax
Description
Tax on purchases of tangible personal property as used or consumed by the Taxpayer
Topic
Appropriateness of Audit Methodology
Exemptions
Government Contractor
Tangible Personal Property
Date Issued
05-01-2009


May 1, 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 April 2001 through March 2004. I apologize for the delay in responding to your letter.

FACTS


The Taxpayer is a government contractor. An audit resulted in the assessment of use tax on purchases of tangible personal property considered by the auditor as used or consumed by the Taxpayer in the performance of service contracts with the federal government. The Taxpayer takes exception to the audit findings.

The Taxpayer's main contention is that the true object test applies to each Technical Direction Letter (TDL) issued pursuant to a federal government service contract. The Taxpayer also contends that the true object of the other contracts at issue is for the exempt sale of tangible personal property to the government. The Taxpayer claims the resale exemption, the industrial manufacturing and the research and development exemptions for items held in the audit. Because several contracts require the Taxpayer to provide maintenance services and repair parts and equipment, the Taxpayer claims such items should be removed from the audit.

The Taxpayer also makes the following claims: (i) the sample methodology is in error on the belief that it creates a duplicate tax assessment, (ii) double taxation is created for other items on the basis that the tax has already been remitted, (iii) professional service transactions, repair labor and exempt transportation charges are included in the audit assessment, (iv) certain items are exempt because they are shipped out of state by the vendors, and (v) other nontaxable items are included in the audit. The Taxpayer requests waiver of the compliance and amnesty penalties on the basis that it filed its tax returns in a timely manner for the amount believed to be due at the time of filing.

DETERMINATION


The policy in effect during the audit period called for the application of the true object test to the overall contract to determine whether a contract is for the sale of tangible personal property or for the provision of services. Title 23 of the Virginia Administrative Code (VAC) 10­-210-693 sets out the true object test for federal government contracts, as follows:
    • The appropriate tax treatment of purchases of tangible personal property by persons who contract with the federal government, 'the state or its political subdivisions, is based upon whether the contract is for the sale of tangible personal property (e.g., a computerized data system) or for the provision of an exempt service of an exempt service (e.g., facilities management or real property construction). If a contract is for the sale of tangible personal property, a contractor may purchase such tangible personal property exempt from the tax using a resale exemption certificate, Form ST-10. The tangible personal property may be resold to the government exempt of the tax.
    • However, if a contract is for the provision of services, the contractor is deemed to be the taxable user and consumer of all tangible personal property used in performing its services, even though title to the property may pass to the government or the contractor may be fully and directly reimbursed by the government, or both.

An exception to this rule is allowed with respect to Indefinite Delivery, Indefinite Quantity ("ID/IQ") contracts. As set out in Public Document (P.D.) 01-6 (1/4/01), the true object test for ID/IQ contracts is applied to each individual task order rather than to the overall contract. Thus, when the true object of the task order is for the sale of tangible personal property, the purchases relating to such task order are considered resold to the government so that no tax is applicable to either the Taxpayer's purchase of the items or its sale of such items to the government. When the true object of the task order is for the provision of services, the tangible personal property purchased pursuant to the task order is generally taxable unless it can be shown that the property qualifies for a tax exemption.

Technical Direction Letters (TDL)

The purpose of a TDL is for the federal government to give technical direction or clarification to the contractor to accomplish work as generally set out in the contract. In general, this direction seems similar to the specific tasking or direction found in task orders. Both TDLs and task orders derive from contracts that are based on estimates of labor and materials and often include a variety of sponsors, i.e., a customer group of federal agencies. Thus, in TDL and task ordering contracts, the contractor may not know which customer will be purchasing services or goods or to what degree or when. Because the contractor does not know exactly who the customer will be or what the customer will specify, this situation makes it impossible to determine the true object of the overall contract with any degree of accuracy. Because the TDLs are generally more specific in nature as to identifying the customer and the specific needs of the customer, it is reasonable to look to the TDLs for applying the true object test.

Contract #1688

The Taxpayer contends that this contract is an ID/IQ contract because it contains a technical requirements clause that requires the issuance of TDLs to accomplish the work of the contract. The Taxpayer maintains that the resale exemption applies to items purchased pursuant to the TDLs, including repair parts furnished pursuant to maintenance services.

A review of the contract's statement of work ("SOW") shows no indication that the federal government has designated this contract as an ID/IQ contract. Furthermore, the Taxpayer has not provided any evidence to establish this contract as an ID/IQ contract pursuant to Section 16.504 of the Federal Acquisition Regulations. Notwithstanding the lack of an ID/IQ designation, clause 3.0 of the SOW sets out that TDLs will be issued to provide additional technical direction or clarification to accomplish the work specified in the contract.

Furthermore, clause 1.0 of the SOW states that the purpose of the contract is to provide the federal government with technical and engineering services that are essential to mission functions in the field of command, control, communications, computers and intelligence (C4l) communications-electronics. In clause 1.1 of the SOW, the contractor is to provide such services, particularly in the design, development, integration, test and evaluation, installation, fielding, certification, maintenance, and logistic support of such communications-electronics systems. Such systems include shipboard (interior and exterior communication systems), shipboard radio communication systems (RCS), airborne communication system, and shore based (fixed, transportable and ground mobile) systems. The types of services to be provided under the contract are services commonly provided in connection with the development and sale of tangible personal property. Thus, when tangible personal property is to be furnished under the contract, these services could be performed in connection with the furnishing of the tangible personal property to the government.

Clause 1.1 further lists twelve potential sponsors (federal agencies) for which expertise and support services may be required. Thus, notwithstanding the stated purpose of the contract, it is uncertain (at the time of letting this contract) which federal agency will be contracting with the Taxpayer pursuant to this contract or what specific goods and services will be provided to those government agencies that eventually contract with the Taxpayer. It is also uncertain at the time of awarding this contract whether the future objective of each sponsor is mainly for the purchase of tangible personal property or for the receipt of services.

In addition to the services required under this contract, clause 3.12 of the contract requires the Taxpayer to provide hardware acquisition support, including procurement support for certain equipment and materials. It is established from the contract documents reviewed that the Taxpayer furnished tangible personal property to the federal government.

Because of the uncertainties noted above, the close association of the services to the sale of tangible personal property (including the provision of maintenance services), and the fact that tangible personal property was provided to the government, I find that the true object test is more appropriately applied to each TDL rather than to the overall contract.

The Taxpayer has provided copies of the invoices and each TDL that relates to items assessed in the audit. Those TDLs are 1688-01-05, 1688-01-10, 1688-01-12, 1688-01-14, 1688-02-22, 1688-02-29, 1688-02-49, 1688-03-56, 1688-03-63, 1688-03-67, and 1688-03-72. Based on the foregoing and the TDLs at issue, I find that the true object of these TDLs is for the sale of tangible personal property.

Accordingly, pursuant to the resale exemption, the audit will be revised to remove those items furnished to the government. However, any tools, rags, cable (for real property installations), and other items purchased for use or consumption by the Taxpayer will remain in the audit.

Contract #970

Based on the contract documents provided, the purpose of the contract is to provide maintenance, logistics and life cycle support of communication and electronic equipment, systems and subsystems for the federal government. Like Contract #1688, contract performance possibly involves several federal agencies. This contract also utilizes TDLs. Clause 3 of the contract requires the Taxpayer to provide services and supplies as required. Clause 3.3 of the contract requires the Taxpayer to provide support for the procurement of equipment, systems and materials. In addition to other requirements, the Taxpayer is required to fabricate, integrate, test, repair, overhaul, upgrade or otherwise maintain systems and equipment.

Notwithstanding the use of TDLs, I find that Contract #970 is similar to a parts and labor maintenance contract as defined in Section D of Title 23 of VAC 10-210-910. In this regard, the contracted services are provided in connection with tangible personal property fabricated or purchased for resale to the government. Accordingly, I find that the true object of the contract is for the sale of tangible personal property to the government.

Pursuant to the resale exemption, the audit will be revised to remove items furnished to the government. However, any tools, rags, cable (for real property installations), and other items that were purchased for use or consumption by the Taxpayer and that were not transferred to the government will remain in the audit.

Contract #1599

In clause 1.0 of the contract's SOW, the federal government states that the purpose of the contract is to provide the government with technical and engineering services and supplies essential to mission functions for equipment, systems, subsystems, and life cycle support. These services are for maintenance, logistics, and life cycle support of communication-electronic equipment, systems and subsystems. This contract utilizes TDLs.

Notwithstanding the use of TDLs, I find that the contract is similar to a parts and labor maintenance contract as defined in Section D of Title 23 VAC 10-210-910. Accordingly, the true object of this contract is for the sale of tangible personal property. As such, the contract will be treated in the same manner as Contract #970, and the audit will be revised accordingly.

Research and Development Exemption

Classified Contract #1446

The research and development exemption set out in Va. Code § 58.1-609.3 3 is a narrow exemption that is confined to tangible personal property used directly and exclusively in basic research or research and development in the experimental or laboratory sense. Both of these criteria (direct usage and exclusivity) must be satisfied before the exemption may apply. In this regard, Title 23 VAC 10-210-3070 defines "direct use" to mean "those activities which are an integral part of basic research or research and development activities" but does not include "secondary activities such as administration, general maintenance, product marketing, and other activities collateral to the actual research process." This same regulation defines "exclusive use" to mean "items are used solely in basic research or research and development activities."

A redacted SOW has been furnished for the classified contract at issue. This contract is designated as an ID/IQ contract for the provision of engineering support services. Pursuant to clause I.4 of the contract, supplies or services are not purchased by the contract. Rather, delivery or performance is authorized only by the issuance of specific orders. Section B of the contract also expressly requires specific tasks to be ordered by the issuance of a task order.

The Taxpayer contends that a federal government agency issued task orders to the Taxpayer to provide technical expertise in both the design and development of new products or to improve existing products in the areas of electronic surveillance. In this regard, the Taxpayer maintains the contested purchases relate to ten different task orders for research and development services as outlined in six contract clauses set out in the tasking areas of the contract's SOW and four project status reports (PSR).

With respect to the tasking areas, clause 3.1 of the contract's SOW sets out the general tasking areas that are representative of the tasks that may be ordered during the performance of the contract. This contract clause states that specific tasks, comprising one or more functional areas, will be specified in individual task orders. As such, the general tasking areas of the contract's SOW do not constitute the individual task orders issued pursuant to the contract. While each tasking area lists a number of tasks, the contract does not require the Taxpayer to perform all or part of them.

Furthermore, I understand that no individual task orders for this classified contract were furnished to the Department. Without the individual task orders, it is impossible to determine what tasks the federal government specifically ordered from the Taxpayer or whether the task order constituted a retail sale or a service.1

Moreover, the general tasking areas of the contract's SOW set out potential tasks that, for the most part, do not appear to constitute basic research or research and development as those terms are defined in Title 23 VAC 10-210-3070. In other words, it is uncertain whether the Taxpayer performed basic research or research and development as required by the exemption. 2 For instance, contract clause 3.1.5 requires technical, management and logistic support services and lists a number of tasks that do not plainly identify any research activities. For example, assembly, maintenance, configuration, logistic support, and system training are not research tasks and are clearly outside the scope of the exemption. The same applies to the development of test plans and procedures. Further, the contract provides no indication that the design and testing of configurations are done in a laboratory environment or otherwise conducted in an experimental sense as required by the statute. While a task to customize systems may involve some type of research and development activities, it is impossible to determine from the contract as to whether the Taxpayer was actually requested to engage in such activities, what specific equipment (i.e., items held in the audit) was used directly and exclusively for such customization activities, and whether such activities rise to the level of exempt research. Without the actual task orders to provide clarification as to the specific tasks actually performed by the Taxpayer and without verification of equipment usage, I find no basis to apply the exemption.

The same concerns apply to the other five tasking areas at issue. Each one of those tasking areas contains some potential task that does not constitute a research activity. I would note that none of these tasks make any mention of research. For instance, contract clause 3.1.6 includes tasks such as installation, configuration, day-to-day administrative services, maintenance, troubleshooting, repair, development of procedures, preparation of written procedures, and resolution of user questions. None of these tasks involve exempt research by the Taxpayer. Contract clause 3.1.10 includes tasks such as market surveys and other activities outside the scope of the research exemption. This clause also lists a potential task for development and testing of prototypes. Notwithstanding, no evidence has been presented that the Taxpayer actually performed such task or that such task would indeed qualify as an exempt research activity. Contract clause 3.1.11 includes tasks for market surveys and other activities outside the scope of the exemption. This clause also includes a potential task for the design of telecommunications systems and the development of equipment suites. However, no evidence has been presented that the Taxpayer actually performed such tasks or that such tasks would qualify as exempt research activities. Contract clause 3.1.15 is for acoustic laboratory support and includes tasks for upgrades, maintenance, testing, and training on computer hardware and software. None of these potential tasks appear to involve the Taxpayer in an exempt research activity. Contract clause 3.1.18 is for the development of technical and scientific tools. While this tasking area lists potential research efforts, there are some tasks that may not constitute exempt research, such as a task to perform analysis of information and management of systems. Without the task orders and verification of equipment usage, it is impossible to determine what tasks the Taxpayer actually performed, whether such effort actually constituted an exempt research activity, and whether the equipment satisfied the direct usage and exclusivity criteria of the research exemption.

The Taxpayer has also furnished a PSR for each of the following tasks: 3032, 3035, 3036 and 3037. Each PSR serves as a description of the services that may be performed by the Taxpayer. No task orders were presented.

The PSR for Task 3032 lists potential tasks that the Taxpayer may perform but does not provide conclusive evidence as to the specific actual tasks performed by the Taxpayer. While the Taxpayer claims the research exemption for certain computers and software, the PSR for Task 3032 lists administrative or managerial functions that are outside of the scope of the exemption. Moreover, this PSR does not provide convincing evidence that any research activity was tasked.

The PSR for Task 3035 lists potential tasks that the Taxpayer may perform but does not provide conclusive evidence as to the specific actual tasks performed by the Taxpayer. While a couple of the tasks listed in this PSR may constitute a research activity, most all of the tasks listed in the PSR can only be considered collateral to the research process and thus ineligible for the research exemption. For example, potential tasks for training, development of doctrines, policies and procedures, testing systems for operational compliance, installation, integration, developing deployment schedules, troubleshooting, publishing, upgrading, configuration and management of computer network infrastructure, are non-research activities. Because of the potential for multiple tasking in taxable and exempt activities, it appears that the exclusivity criteria of the research exemption cannot be met.

The PSR for Task 3036 lists potential tasks that the Taxpayer may perform but does not provide conclusive evidence as to the specific actual tasks performed by the Taxpayer. According to the PSR for this task, the Taxpayer may be assigned research or development tasks. Because of this uncertainty, this PSR is not helpful in establishing whether any research was performed by the Taxpayer pursuant to this task. I would also note that many of the tasks listed in this PSR can only be considered collateral to the research process and thus ineligible for the research exemption. For example, potential non-research tasks include market surveys, analysis of telecommunication networks, and documentation management. While the Taxpayer claims the research exemption for a router Ethernet module for use in support of an in-house lab test network, the potential taxable tasking shown by this PSR clearly does not satisfy the exclusivity test of the research exemption.

The PSR for Task 3037 lists potential tasks that the Taxpayer may perform but does not provide conclusive evidence as to the specific actual tasks performed by the Taxpayer. While some tasks listed in this PSR may constitute a research activity, some other tasks listed in the PSR can only be considered collateral to the research process and thus ineligible for the research exemption. For example, potential non-research tasks include the development of user manuals, technical documentation, and deployment schedules, configuration of settings, applications, and production systems, testing systems for operational compliance, planning, installation, integration, and training. While the Taxpayer claims the research exemption for multiplatform connectivity software used with laboratory computers, the potential non-research tasking shown by this PSR clearly does not satisfy the exclusivity test of the research exemption.

Pursuant to Va. Code § 58.1-205 1, any assessment of a tax by the Department is deemed prima facie correct. This means that the burden of proof is upon the Taxpayer to establish that the assessment is erroneous. In the absence of the task orders related to the contested purchases and absent convincing evidence to confirm the exempt usage of the equipment, the Taxpayer has not met its burden of proof. Accordingly, I must uphold the tax assessed on the contested items related to this classified contract.

From the other contract documents and facts provided, I find insufficient basis to extend the research and development exemption to any items held in the audit. Other than items related to the classified contract, the Taxpayer has not identified any specific items held in the audit as eligible for this exemption. The Taxpayer has not provided any conclusive evidence of how any individual items were used during the audit period to establish an exemption for any tools, equipment or machinery that may have been held in the audit and used directly and exclusively for research and development purposes in the experimental or laboratory sense.

Exempt Charges Related to Classified Contract #1446

Based on the invoices provided, the audit will be revised to remove separately stated charges for exempt delivery and installation of furniture. Line item #7 (invoice 3426299) will be reduced from ***** to *****. Line item #95 (invoice 3467322) will be reduced from ***** to *****.

Manufacturing Exemption

From the contract documents and facts provided, I find insufficient basis to extend the industrial manufacturing exemption to any items held in the audit. The Taxpayer has not identified any specific items held in the audit as eligible for this exemption. Furthermore, the Taxpayer has not provided any conclusive evidence of how any individual items were used during the audit period to establish an exemption for any tools, equipment or machinery that may have been held in the audit and used directly for industrial manufacturing purposes.

Other Contracts

The Taxpayer provided no contract documentation, invoices or any other documentation related to Contract #964, #1211, #1460 and #1760. Items assessed in connection with those contracts will remain in the audit. As for items assessed in connection with other contracts, the Taxpayer has furnished some additional contract documentation or invoices, which I will address below.

Contract #788

Contract documents show that Contract #788 is an indefinite quantity engineering service contract. The Taxpayer may be requested to provide a variety of tasks, including but not limited to, engineering, development, technical support, fabrication, prototyping, maintenance, repair and acquisition. Classified delivery orders are issued against the contract as required.

Pursuant to the Subpart 16.504 of the Federal Acquisition Regulation, an indefinite quantity contract is a type of indefinite delivery contract. Thus, Contract #788 is an ID/IQ contract. As such, the true object test may be applied to each delivery or task order issued under this contract rather than to the overall contract.

In this case, the Department requested that the Taxpayer furnish copies of the contested invoices as well as the related task or delivery orders issued by the federal government. The Department received copies of the contested invoices and copies of the Taxpayer's accounts payable preprocessor reports; however, no delivery or task orders were furnished. This may be because the delivery or task orders are classified. Whatever the reason for not providing copies of such orders, the tax treatment by applying the true object test to each order cannot be determined. Thus, in the absence of the delivery or task orders that relate to the assessed items, the Department has no alternative but to uphold the assessment of tax on items associated with this contract.

Contract #983

The stated purpose of this contract is to provide technical and engineering services essential to fulfill mission requirements. The services include the design, development, integration, test and evaluation, installation, certification, maintenance, logistic, and life cycle support of shipboard, shore based, airborne and hand held platforms. Several federal agencies are potential sponsors. Pursuant to contract clauses 4.3 and 7.1, it appears that task and delivery orders are utilized under this contract.

Based on my review of this contract, I find that it is similar in many respects to Contract #1688. Thus, provided task and delivery orders are utilized under this contract, the true object test may to apply to the individual task or delivery orders rather than to the overall contract.

For this contract, there appears to be only one contested invoice associated with it. The Taxpayer has furnished copies of the invoice, the Taxpayer's Accounts Payable Preprocessor Report for such invoice, the Taxpayer's Matching Hold Detail Report for the invoice, and the Taxpayer's payment to the vendor. However, the Taxpayer has not furnished a copy of the associated delivery or task order issued by the federal government that relates to this particular purchase. As stated in regard to Contract #788, the true object of the transaction cannot be determined without such task or delivery order. In the absence of such order, the item will remain in the audit.

Contract #1134

This contract is designated by the federal government as a cost plus, fixed fee indefinite-quantity contract. As such, it is an ID/IQ contract in which the true object test is applied to each individual delivery or task order to determine whether the order is for the sale of tangible personal property or for the provision of services. Contract clauses 1.1.2 and 1.3.1 demonstrate that contract work is performed by the government's issuance of individual delivery or task orders. In addition to furnishing a copy of the SOW for the overall contract, the Taxpayer has furnished copies of the contested purchase invoice, the Taxpayer's Account Payable Preprocessor Report for this invoice, the Taxpayer's Matching Hold Detail Report, and the payment made. However, the Taxpayer has not furnished a copy of the delivery or task order that relates to the specific contested purchase. Absent such order, it is not possible to determine the true object of the order and whether such item actually qualifies for the resale exemption. Accordingly, this item will remain in the audit.

Contract #1545

A copy of the SOW for this contract has not been presented. However, the Taxpayer has submitted the task order relating to the contested purchases. Based on this document, the contract is designated a time and material contract that utilizes task orders.

Based on Subpart 16.601 (c) of the Federal Acquisition Regulation, time and material contracts are used only when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence. When there is an inability to anticipate service and material costs within a reasonable degree of accuracy at the time of placing the contract, it is impractical to apply the true object test under such circumstances. Accordingly, the true object test will be applied to the task or delivery orders issued pursuant to this contract.

The Taxpayer has furnished documentation (i.e., Inter-divisional Work Authorization Disclosure forms) that relates to two task orders under this contract but has furnished the SOW for only one task order. The Taxpayer has also furnished a DD Form 1149 (Requisition and Invoice/Shipping Document) that relates to a task order that has not been furnished.

The stated goal of task order #201CJ0056 is to provide a satellite range extension of the tactical Internet on behalf of a client of the General Services Administration. The Taxpayer is to provide non-personal system technical, engineering, project management, quick reaction and prototyping support to the federal government for the integration, testing and fielding of a satellite communication system. Based on the SOW for thus task order, it appears that the true object is for the sale of tangible personal property to the government. Accordingly, items held in the audit and purchased pursuant to this task order for resale to the government will be removed from the Department's audit once those items can be identified as being related to this order. Purchases included in the audit with respect to -the missing task order, however, will remain in the audit.

Contract #1818

The Taxpayer has furnished an intercompany work order or delivery/task order based on an ID/IQ contract. This work order is for products and services requiring the building and installation of vessel subsystems on vessels owned by the federal government. This work order also requires interim crew training for government personnel and supporting the equipment in the field. The government's objective for this acquisition is to modernize and upgrade a communication system.

Based on the information presented, I find that the true object test should be applied to the work order provided. In this instance, the true object is for the sale of tangible personal property that the Taxpayer would resell to the government. Accordingly, the audit will be revised to remove items related to this work order.

Contract #1942

This contract is a time and materials contract for the acquisition of engineering support services for a federal civilian agency. Task orders may be placed at any time during the performance period of the contract. Although the SOW for this contract does not set out a specific task to be accomplished, it does set out general tasking areas. Many of those tasking areas involve the provision of planning, development, evaluation, testing, fabrication, integration, maintenance, installation, and training services in connection with tangible personal property to be furnished to the federal government. However, from a review of this contract, it appears that the Taxpayer would not be able to anticipate future service and material costs within a reasonable degree of accuracy at the time of placing the contract. Accordingly, the true object test may be applied to the task or delivery orders issued pursuant to this contract to determine the general application of the sales and use tax. However, the task or delivery order and invoice that relate to the one contested transaction under this contract have not been furnished. Absent such documentation, the item will remain in the audit.

Contract #1943

This contract is a time and materials contract for engineering support services. It utilizes task ordering and involves the provision of both services and goods. In many respects, this contract is structured similarly to Contract #1942. Accordingly, the true object test will apply to the task or delivery order level of this contract. However, no task or delivery orders as issued pursuant to this contract by the federal government have been presented to the Department, nor have any contested invoices been presented. Absent such documentation, the contested items will remain in the audit.

Other Issues

Sample Methodology

The Taxpayer claims that the sample methodology has produced a duplicate tax assessment causing an overstatement of tax. In this regard, the Taxpayer disputes the gross-­up stratums included in the sample and claims that the sample inadvertently uses two error rates. One error rate is for the direct material purchases, and the other is for the total purchases. The Taxpayer wants the sample to be based on only one error rate.

It is my understanding that the auditor found a discrepancy between the direct material transactions provided by the Taxpayer for the three-month sample versus the total direct material purchases made by the Taxpayer during the sample months. Although the auditor requested more information from the Taxpayer to explain this discrepancy, I understand that the Taxpayer provided no definite answer and suggested, without offering proof, that the data provided represented purchases with Virginia deliveries and the data that was not provided represented out-of-state purchases. Although the auditor made numerous attempts to obtain proof of this claim, the Taxpayer has not provided it. As a result, the auditor reviewed the Taxpayer's 2002, 2003 and 2004 Virginia corporate income! tax returns and found that approximately 17% of the Taxpayer's sales were Virginia sales. The auditor also found that the ratio between the data provided by the Taxpayer on direct material purchases versus the data not provided was 19%. Thus, the gross-up stratums included in the sample represent direct material purchases that the auditor was unable to review and conservatively estimated (at 10% of the estimated measure not reviewed) as the Virginia deliverables. This estimation is reasonable. Based on these circumstances, I find no basis to revise the sample methodology used by the auditor.

Double Taxation

The Taxpayer claims that there are purchases in the audit for which either the sales tax was paid to the vendor or use tax was remitted to the state. However, the auditor found no evidence that the Taxpayer remitted any sales or use tax in connection with the contested items. In instances where the vendor had charged sales tax, the auditor found no evidence that the Taxpayer paid such tax to the vendor. Furthermore, based on all the documentation submitted in connection with the appeal, it is my understanding that the Taxpayer has not furnished any evidence in support of this claim.

Nontaxable Services

Separately stated repair labor is exempted by Va. Code § 58.1-609.5 (2) and further described in Title 23 of VAC 10-210-3050 and VAC 10-210-4040 (C)(2). Separately stated transportation charges are exempted by Va. Code § 58.1- 609.5 (3) and further described in Title 23 of VAC 10-210-6000. Professional service transactions are exempted by Va. Code § 58.1-609.5 (1) and further described in Title 23 of VAC 10-210-4040. As explained by the cited regulations, repair labor and transportation charges are not taxable provided they are separately stated on the invoice. Based on our review of the contested invoices furnished, it appears that no exempt charges were included in the audit, except for such charges on two invoices related to the classified contract as previously addressed.

Items Shipped Out of State

The Taxpayer claims that some items were shipped directly out of state by the vendor to the Taxpayer and should not be held in the audit. Based on our review of the contested invoices presented, it appears that such purchases were shipped to a Virginia destination. Thus, the Taxpayer has provided no basis for this claim.

Other Nontaxable Items

The Taxpayer claims that the audit contains other nontaxable items. However, the Taxpayer has not identified such items. Accordingly, no further tax adjustment is warranted.

Penalties

The Taxpayer requests waiver of the penalties regarding the consumer use tax assessed. Generally on third and subsequent audits, the penalty cannot be waived unless the use tax compliance ratio meets or exceeds 85%. See Title 23 of VAC 10-210-2032 (3). In this fifth audit, the Taxpayer's unadjusted use tax compliance ratio is 8%. Once the audit is revised based on the revisions noted herein, the penalties assessed regarding the removed items will be abated, and the use tax compliance ratio will be recomputed to determine whether any of the remaining penalties can be waived.

The application of the amnesty penalty will be readdressed once the audit revisions are complete. Should the recomputed compliance ratio meet or exceed 85%, the amnesty penalty will be waived.

CONCLUSION


The Taxpayer is given a final opportunity to furnish the missing task or delivery orders as discussed. Such documents should be submitted to the attention of ***** at the Virginia Department of Taxation, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, within 45 days of the date of this letter. At the end of this 45-day period, the audit will be revised in accordance with this determination with or without the requested documentation.

Once the audit is revised, an updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the updated 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 the 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 Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,


                • Janie E. Bowen
                  Tax Commissioner



AR/1-872992444.R
1) If the true object of a task order is for the sale of tangible personal property to the government, then the purchase of such property could be exempt pursuant to the resale exemption rather than the research exemption.
2)Title 23 VAC 10-210-3071 E provides that "[t]angible personal property must be purchased or leased by the person firm, corporation or other entity that actually will perform research activities in order to qualify for the tax exemption for items used directly and exclusively in research. If the research equipment is purchased or leased by a person and is subsequently donated or loaned to another person to perform research for either party, the equipment is taxable to the person making the purchase, even if the other party is a nonprofit organization, governmental entity, or is otherwise exempt from the sales and use tax."

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46