Tax Type
Retail Sales and Use Tax
Description
Tax on sales of maintenance contracts and use tax on incorrectly taxed purchase
Topic
Exemptions
Tangible Personal Property
Date Issued
08-17-2011
August 17, 2011
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to the letter submitted on behalf of ***** (the Taxpayer), requesting correction of the retail sales and use tax assessment issued for the period April 2006 through March 2009. I apologize for tree delay in the Department's response.
FACTS
The Taxpayer is a provider of business solutions. An audit resulted in the assessment of sales tax on sales of maintenance contracts and other tangible personal property and use tax on incorrectly taxed purchases.
The Taxpayer contests several sales held in the audit. The Taxpayer contends that only a portion of the charge for a maintenance contract is subject to taxation in Virginia because the contract covers equipment used at a customer's locations in Virginia and nationwide. The Taxpayer contends that sales made to two customers are exempt of the tax based on the exemption certificates received. The Taxpayer also contends that sales made to another customer are for exempt professional services. Lastly, the Taxpayer requests abatement of the post-amnesty penalties.
DETERMINATION
***** (Customer 1)
The Taxpayer was assessed tax on a parts and labor maintenance contract (support contract) that provides service coverage for equipment used both within and outside Virginia. The taxpayer requests removal of the portion of the maintenance contract that is applicable to equipment located and used solely outside Virginia.
This support contract lists all of the site names. A considerable portion of the contract is dedicated to listing covered property at a Virginia location. The entire remainder of the contract lists covered property at 26 separate out-of-states locations. The support contract has several pages listing contact persons at various nationwide locations of the Taxpayer. These facts demonstrate that such contract covered computer equipment and computer software used either within or outside Virginia.
Based on all of the documentation and information presented, I find basis to revise the audit to remove that portion of the contested maintenance charges that provide repair or replacement parts and service coverage for personal property (computer hardware and software) that is permanently located outside Virginia. The portion of the contested maintenance charges related to equipment located in Virginia will remain in the audit.
***** (Customer 2)
The Taxpayer claims that the sales made to Customer 2 are not taxable based on the exemption certificate, Form ST-20, dated March 10, 2010 in which the exemption for certain Internet service providers (ISP) is claimed. The month of sale of the contested transactions is December 2007.
Title 23 of the Virginia Administrative Code (VAC) 10-210-280 provides that the burden of proving that the tax does not apply rests with the dealer unless the dealer takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under Virginia law. When an exemption certificate is submitted well after the date of sale for claiming the exemption, it cannot be deemed accepted in good faith for transactions occurring well before its receipt. In such instances, an exemptions claim is subject to closer scrutiny. See Public Document (P.D.) 10-201 (8/31/10), P.D. 04-75 (8/25/04), and P.D. 98-29 (2/20/98).
As support for claiming the ISP exemption, the Taxpayer cites the following sentence from P. D. 10-12 (2/9/10):
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- Under the doctrine of strict construction, I find that this exemption is limited to certain tangible personal property used or to be used by ISPs that provide Internet access to end-user subscribers.
However, the sentence that followed the above sentence was not included. Such missing sentence lends further clarity to the criteria of the ISP exemption. Such sentence states the following:
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- The exemption is further limited to those ISPs that, in addition to Internet access, provide access to a package of specific services including proprietary information and electronic mail sold to end-users. [Emphasis added.]
This exemption criteria is derived from the definition of Internet service set out in Va. Code § 58.1-602. Such statute defines "Internet service" as "a service that enables users to access proprietary and other content, information electronic mail, and the Internet as part of a package of services sold to end-user subscribers."
Based on information obtained from Customer 2's website and the quarterly report (Form 10-Q) that it filed with the Securities and Exchange Commission (SEC) for the quarterly period ending June 30, 2010, Customer 2 provides high bandwidth connectivity solutions for commercial users and delivers network and Internet protocol (IP) transit services including Internet connectivity. It also leases dark fiber. Notwithstanding, no conclusive evidence could be found from the information provided on such website and in the SEC report that Customer 2 provides access to proprietary and other content and information electronic mail. Absent convincing proof that Customer 2 satisfies all of the criteria of the ISP exemption, the Form ST-20 presented by Customer 2 is denied for the audit period, as well as for all subsequent periods.
***** (Customer 3)
The Taxpayer claims that the contested sales made to Customer 3 are professional or personal services exempted by Va. Code § 58.1-609.5 1. Based on the documentation provided, I agree and will remove line items 17, 18, and 19 from the audit's sales exception list.
***** (Customer 4)
The Taxpayer claims that the sale made to Customer 4 is not taxable based on the exemption certificate, Form ST-10, dated March 25, 2010 for which the resale exemption is claimed. The contested sale occurred in June 2008. Because this certificate was presented well after the sale, it cannot be deemed accepted in good faith and is thus subject to closer scrutiny. As held in P.D. 09-184 (12/11/09), a certificate is acceptable only if the Department is able to confirm that a customer's use of the certificate was valid and proper for the specific transaction identified during the audit.
As such, my staff has verified that the certificate of registration number shown on the certificate is not a registration for the collection of the sales or use tax. Well before the date of the contested sale, this customer cancelled its use tax collection registration and reregistered for reporting and remitting consumer use tax only. Under the consumer use tax registration, Customer 4 is not allowed to buy any tangible personal property exempt of the tax for resale purposes. Thus, this certificate is invalid.
I would also note that the certificate is incomplete as no information has been furnished describing the kind of business engaged in by Customer 4 as required when using this certificate. Because the certificate is incomplete and invalid, it is not acceptable for the audit period or any subsequent period. Accordingly, line item 21 will remain in the audit.
Post-Amnesty Penalty
In this first audit, the Taxpayer requests the abatement of the 20% posit-amnesty penalty applied to tax that was timely paid. The notice of assessment was issued on February 23, 2010. On March 23, 2010, the Department confirmed by e-mail that a partial tax payment may be remitted by March 26, 2010 without incurring a post-amnesty penalty. On March 26, the payment of the uncontested tax was remitted, although delivery by the U.S. Post Office was not actually completed until April 19, 2010. On April 15, 2010, a post-amnesty penalty was applied to the total tax assessed (i.e., the contested and uncontested tax). Based on these facts, the Taxpayer paid the uncontested tax within 31 days of the date of assessment.
Virginia Code § 58.1-1840.1 establishes the Virginia Tax Amnesty Program as applicable to any tax liability eligible for relief under such program. Although the Taxpayer claims that it was not eligible to participate in amnesty while under audit, it was indeed eligible to participate in and benefit from amnesty by amending its affected returns and remitting the additional tax owed plus one-half of the interest by the end of the amnesty period. At the conclusion of amnesty, any tax liability that was eligible for amnesty benefits, but remained unpaid, became subject to a 20% post-amnesty penalty. See subsection F. 1 of Va. Code § 58.1-1840.1.
Pursuant to the statutory authority granted the Tax Commissioner under such program, the Tax Commissioner established the Virginia Tax Amnesty Guidelines, as set out in P.D. 09-140 (9/28/09). Section III of these guidelines sets out that all periods prior to June 1, 2009 are amnesty-eligible periods for retail sales and use tax assessments. As such, all periods in the audit are amnesty eligible periods for which the post-amnesty penalty may apply. However, subsection VI 6 of these guidelines provides an exception to the application of the post-amnesty penalty when all of the following conditions are met: (1) the Department's audit is the first audit of the Taxpayer, (2) no penalty is applied to the tax deficiency, (3) any uncontested liability is paid within 30 days from the date of assessment, and (4) payment for any contested liability remaining upon resolution of an appeal is made within 30 days from the date of the Tax Commissioner's final determination.
While the Taxpayer satisfies conditions (1) and (2), it failed to satisfy condition (3) because it did not pay all of the uncontested liability (i.e., tax and associated interest) within the required 30-day deadline. Under these circumstances, the assessment of the post-amnesty penalty is permitted based on the amnesty guidelines cited above. However, I must recognize that the Department erroneously advised the Taxpayer to submit only the uncontested tax liability within 31 days rather than the entire uncontested liability (tax and interest) within the 30-day deadline required by the guidelines. Because of the erroneous advice provided by the Department, I will waive the post-amnesty penalty applied to the uncontested tax.
In regard to condition (4), I will also waive the post-amnesty penalty applied to the contested tax, provided the Taxpayer remits all of the upheld contested tax and the associated interest to the Department within 30 days of the date of the revised bill.
CONCLUSION
The assessment will be revised in accordance with this determination. Once the audit is revised, a revised bill with interest accrued to date will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to receive the penalty waiver noted above and to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
Please note that failure to remit full payment within the 30-day period will result in upholding the 20% post-amnesty penalty on the contested tax due as stipulated in the Post-Amnesty Penalty section of this determination.
The Code of Virginia sections, regulation and public documents 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 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/1-4455409762.R
Rulings of the Tax Commissioner