Tax Type
Retail Sales and Use Tax
Description
Tax on unreported sales of prepaid telephone access cards: tax on fixed assets, food and software licensing purchases.
Topic
Records/Returns/Payments
Tangible Personal Property
Taxability of Persons and Transactions
Date Issued
08-12-2011
August 12, 2011
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This reply is in response to your letter submitted on behalf of ***** (the "Taxpayer"), in which you request correction of the retail sales and use tax assessment issued for the period March 2009 through September 2009. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates an Internet cafe. The Taxpayer was assessed sales tax on unreported sales of prepaid telephone access cards. The Taxpayer was also assessed use tax on fixed assets, food and software licensing purchases. The Taxpayer protests the assessed amounts as unrepresentative of its business activity.
DETERMINATION
Virginia Code § 58.1-633 and Title 23 of the Virginia Administrative Code (VAC) 10-210-470 provide that every dealer liable for the collection and remittance of sales and use tax is required to keep and preserve for at least three years adequate and complete records necessary to determine its sales and use tax liability. Virginia Code § 58.1-618 authorizes the Department to estimate a taxpayer's liability and assess the estimated amounts "[i]f the dealer fails to file a return or keep adequate records of their business activities."
The Taxpayer failed to present complete records during the audit review and the appeal. In accordance with the foregoing authorities, when complete records are not available for examination during the audit review, the auditor is authorized to use other methods to determine the tax liability. Virginia Code § 58.1-618 deems such estimates to be prima facie correct.
Prepaid Access Cards
The Taxpayer argues that the cards are being sold for Internet access only and cites Va. Code § 58.1-609.5, which provides an exemption from the sales and use tax for "[s]ervices not involving an exchange of tangible personal property which provide access to or use of the Internet ...." The Taxpayer also cites Public Document (P.D.) 03-25 (3/26/03), which concludes that the true object of the purchase of prepaid Internet cards is the purchase of exempt Internet access services.
However, the auditor observed signage on the Taxpayer's premises that advertised the access cards as providing access to both the Internet and telephone. The back of the access card states that it "provides an account number for either ... prepaid phone line or Internet access." Additionally, the auditor also observed a computer on the Taxpayer's premises with attached signage stating that it was set up to provide "phone card" balances.
Virginia Code § 58.1-602 defines tangible personal property to include "telephone calling cards upon their initial sale." The Commonwealth treats all sales of tangible personal property as taxable unless specifically exempted by law. The Taxpayer has not provided documentation to support its contention that the access cards were for Internet services only. The evidence indicates the cards provide access to telephone services. Pursuant to Va. Code § 58.1-602, such cards are deemed tangible personal property. Accordingly, the tax assessed on the sales of the cards is upheld.
Food Purchases
The Taxpayer purchased food that it states is provided on a complimentary basis to its customers. Purchase invoices reviewed during the audit indicated that the Taxpayer's food purchases were taxed at the reduced food sales and use tax rate of 2.5%. During the test period reviewed, the Taxpayer received a refund of the sales tax it paid to its vendor for one food purchase. The auditor used the purchase for which tax was refunded to estimate unreported food sales. The purchase was marked up by 2.5% and assessed the full sales tax rate of 5%.
The Taxpayer cites Va. Code § 58.1-602, which defines the term "sale" to mean "any, transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property ...for a consideration ...." The Taxpayer argues that there is no consideration for the food provided to its customers. The Taxpayer concludes that because no sale has taken place, there is no obligation to collect the retail sales tax.
There are a number of points to consider in addressing this issue. First, the Taxpayer argues that because it provides food to its customers free of charge, there is no sales tax due. However, Virginia Code § 58.1-604 imposes "a tax upon the use or consumption of tangible personal property in this Commonwealth." The use tax is assessed for tangible personal property used within Virginia which was not taxed at the time of purchase. The purchases that were the subject of the refund received by the Taxpayer are subject to the use tax because they were used by the Taxpayer to provide complimentary food to its customers.
Second, other purchase invoices reviewed indicated food being taxed at the reduced sales and use tax rate of 2.5%. In accordance with Virginia Code § 58.1-611.1, the reduced sales and use tax rated applies to food and beverages that qualify as "food for home consumption." See Virginia Tax Bulletin 05-7 (5/31/05).
Although the Taxpayer received a refund of sales tax on one of its food purchases, it does not qualify to purchase food for resale because it provides the food free of charge to its customers. The Taxpayer is liable for the use tax as stated above. Because the food purchases qualify as "food for home consumption," the Taxpayer is subject to the reduced tax rate on such purchases. Therefore, the audit will be adjusted by removing the 2.5% markup from the assessed purchases and applying the 2.5% reduced tax rate.
Assets
The Taxpayer protests the assessment of use tax on computer and furniture purchases. The Taxpayer states that the auditor's estimated purchase amounts are incorrect and presents an estimate of the purchases from its vendor.
The document presented by the Taxpayer estimates the terminal costs to be *****. However, your letter states that the purchase amount is *****. Also, the estimate does not address the furniture costs included in the audit assessment.
As the Taxpayer has failed to present a purchase invoice to substantiate the actual terminal and furniture costs, the Department is authorized to use all available information to arrive at an estimate of the Taxpayer's liabilities. The Taxpayer has not presented sufficient evidence to justify the revision of the assessed assets. Therefore I find no basis to adjust the auditor's findings.
Software Fees
The Taxpayer protests the assessment of sales tax on software fees. The Taxpayer states it is not in the business of selling tangible personal and is leasing the software from a third party for its own use.
The Taxpayer has an operating agreement that is defined as a lease in the body of the contract. The agreement states, "Whereas, vendor and Customer, for and in consideration of the covenants and agreements contained herein, desire to enter into this Agreement for the use of licensed software and equipment for the operation a Sweepstakes..." Additionally, under the heading "Annual License Software," the contract instructs, "Customer is granted exemption of annual license fee for each video game terminal and annual license fee for Sweepstakes Management Software."
The agreement goes on to state, "Customer hereby agrees to buy from Vendor the following equipment for each location: Server and POS computers and recharge units, Software will be installed and is part of the Sweepstakes Management Software License, Approved routers and switches and Sweepstakes game video hardware." The agreement further declares that the Taxpayer agrees to pay a management fee equal to a percentage of all profits after winnings are paid.
The auditor assessed use tax on the fees as "PC/Software fees." The Taxpayer mistakenly states in its protest that it was assessed the sales tax. Additionally, although the Taxpayer was assessed use tax in the audit on fees for both software and hardware, the contract states that the Taxpayer is not being charged for software licensing.
In P.D. 05-44 (4/4/05), the taxpayer presented several scenarios involving the delivery of software and asked how they affect the software's taxability. In one example, the software was downloaded on equipment owned by the taxpayer prior to the taxpayer's sale of the equipment. The Tax Commissioner determined that when computer equipment is sold with the software installed, the sale of the equipment and the installed software constitutes the sale of tangible personal property and is subject to the tax.
As cited earlier, Virginia Code § 58.1-604 imposes a tax upon the use or consumption of tangible personal property in Virginia. Based on the contractual language, the Taxpayer is being charged for the use of the equipment only. As the Taxpayer has presented no evidence to document the payment of use tax on the leased equipment, I find no basis to remove the assessed use tax.
The Taxpayer should note that it is the Department's longstanding policy that the sale of prewritten software delivered in tangible form such as a disc or tape is the sale of taxable tangible personal property. See P.D. 01-61 (5/15/01). Therefore, any subsequent upgrade to the software that is delivered to the Taxpayer in tangible form is also subject to the sales and use tax.
This matter will be referred to the audit staff to make the appropriate adjustments consistent with this determination. A revised audit report and bill will be provided to the Taxpayer. The Taxpayer should pay the revised bill within 30 days of the bill date to avoid the accrual of any additional interest charges.
The Code of Virginia sections, regulation, tax bulletin and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-4350742731.M
Rulings of the Tax Commissioner