Retail Sales and Use Tax
Untaxed sales of materials and purchases; Delivery charges; Out of state transactions
Appropriateness of Audit Methodology
Statute of Limitations
Taxability of Persons and Transactions
January 20, 2011
Re: § 58.1-1821 Application: Retail Sales and Use Tax
This is in response to your letter submitted on behalf of ***** (the "Taxpayer") in which you seek correction of the retail sales and use tax assessment issued for the period August 2004 through July 2007. I apologizes for the delay in responding to your letter.
The Taxpayer operates a rock quarry and produces aggregate, asphalt mix and ready mix concrete. An audit resulted in the assessment of sales tax on untaxed sales of materials and use tax on untaxed purchases of assets and other purchases used in its operations.
In its appeal, the Taxpayer contests the assessment and raises several issues. I will address each issue individually. The Taxpayer also recently submitted an offer in compromise based on a claim of doubtful liability. Before responding to the Taxpayer's offer, it is necessary to respond to the issues presented in the appeal and make the necessary adjustments to the audit.
Before addressing the specific issues presented on appeal, I would like to explain the Taxpayer's responsibilities under the law and regulations.
Burden of Proof
Pursuant to Va. Code § 58.1-205 1, any assessment issued by the Department is deemed prima facie correct. This means that the burden of proving an error in the assessment is upon the Taxpayer. In regard to the issues raised in the appeal, the Taxpayer has the burden of proving an exemption from the tax regardless of whether the transaction is for the sale or purchase of tangible personal property. Convincing evidence must be provided to the Department in support of any exemption claim.
Subsection A of Title 23 of the Virginia Administrative Code (VAC) 10-210-280 provides the following:
- All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. The certificate will remain in effect except upon notice from the Department of Taxation that it is no longer acceptable. However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.
Subsection B of Title 23 VAC 10-210-280 requires legitimate use of an exemption certificate. This regulation also provides the following:
- Reasonable care and judgment must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates. An exemption certificate cannot be used to make a tax free purchase of any item of tangible personal property not covered by the exact wording of the certificate.
Subsection B of Va. Code § 58.1-623 provides that "[s]uch certificate shall be signed by and bear the name and address of the taxpayer; shall indicate the number of the certificate of registration, if any, issued to the taxpayer; shall indicate the general character of the tangible personal property sold . . . or to be sold . . . under a blanket exemption certificate; and shall be substantially in such form as the Tax Commissioner may prescribe."
Thus, incomplete exemption certificates are not acceptable. For instance, a missing date provides no indication of when the certificate was submitted to the dealer for determining whether it was taken prior to or at the time of sale. A certificate with a missing date provides no evidence of good faith acceptance. If a certificate is dated well after the sales transaction, the exemption certificate generally cannot be deemed accepted in good faith for transactions occurring before its receipt. In such instances, an exemption 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).
The Taxpayer claims it erroneously accrued use tax on transactions that included a tax payment to the vendor, and the assessment includes items for which the Taxpayer has self accrued the tax. Taxpayer's Exhibit III identifies these items.
Based on the documentation presented, line item 108 of the non-contested purchases exception list in the amount of ***** will be removed from the audit. Based on the documentation presented for line items 66 and 67 of the non-contested assets, I find no basis for their removal. In both instances, the invoice indicates a delivery charge made by a North Carolina vendor and a 6.75% sales tax applied. Based on this evidence, it appears that the equipment was delivered by the vendor or a carrier hired by the vendor for delivery to the Taxpayer in Virginia. Accordingly, the sales would appear to constitute sales made in interstate commerce with title and possession transferring to the Taxpayer in Virginia. These transactions are subject to the Virginia retail sales and use tax. The North Carolina sales tax appears to be erroneously charged on these two transactions.
As for the remainder of the items claimed as being taxed twice, no evidence of such was presented with the appeal. The Taxpayer has not met its burden of proof on such items. In order to make further revisions, the Taxpayer will need to furnish documentary evidence (invoices, contracts, internal transaction records, etc.) as needed to support its claim. Such evidence must be furnished to the auditor.
Dust Treating Devices
The Taxpayer requests the removal of dust treating devices assessed in the audit based on the exempt items listed in Title 23 VAC 10-210-960 B 6, among which include dust treating devices used in the processing plant. The Taxpayer identifies line items 53, 78, 98, 99, 100, 115, 116, 117, 128 and 132 of the non-contested assets as dust treating devices.
Pursuant to P.D. 95-231 (9/12/95), the Tax Commissioner made a distinction between dusting equipment used in deep mining operations and water trucks used in surface mining operations. The Tax Commissioner found that dusting equipment used in deep mining was used directly in exempt mining activities because mining could not occur in a deep shaft without adequate rock dust control. In contrast, surface mining could occur with or without dust control. As such, water trucks were held taxable. This determination is applicable to the dust control equipment used in an open quarry. As such, the mining exemption would not apply to dust control equipment used in the Taxpayer's quarries.
Notwithstanding, the Taxpayer's dust control equipment may qualify for the certified pollution control exemption set out by Va. Code § 58.1-609.3 9 (i), provided the Department has received certification from the Virginia Department of Environmental Quality (DEQ) that such equipment was constructed, reconstructed, erected or acquired in conformity with the state program or requirements for the abatement or control of water or air pollution. See Title 23 VAC 10-210-2090. In December 2007, the Department received such certification from DEQ for dust suppression equipment installed at the Taxpayer's ***** (the "yard"). Line 78 of the audit's non-contested assets exceptions list indicates a purchase of a dust suppression system for the yard project. Accordingly, the auditor will confirm whether the dust suppression system for Line 78 is part of the pollution control project certified by DEQ. If confirmed, then Line 78 will be removed from the audit. As for the remainder of the dust control items held in the audit, the Taxpayer has furnished no specific facts with its appeal to support an exemption claim. While DEQ has certified other pollution control equipment used by the Taxpayer, it is unknown whether such certifications apply to any of the other dust control equipment assessed in the audit. For such items, the Taxpayer has not met its burden of proof.
The Taxpayer contends that the exemption set out in Va. Code § 58.1-609.3 4 applies to certain vessels, or parts for such vessels, held in the audit. This statute exempts:
- Ships or vessels, or repairs and alterations thereof, used or to be used exclusively or principally in interstate or foreign commerce:.
Other than the Taxpayer's claim for exemption, the Taxpayer has furnished no facts or supporting documentation to establish this exemption for any of the barges assessed in the audit. For instance, the Taxpayer has not explained how any of the barges were used exclusively or principally in interstate commerce during the audit period. Generally, records that track each barge's use (identifying the port of departure to the port of destination for each trip) and waterways used would be helpful in establishing the extent of use in interstate commerce. It is also helpful to include invoices, associated purchase orders, contracts and any other evidence indicating how the barges were used. In addition, no facts and supporting documentation were provided for the parts claimed to be purchased in connection with the exempt vessels. Absent such evidence, the Taxpayer has not met its burden of proof for this issue.
Exemption Certificates and Direct Payment Permits
The Taxpayer indicates that certain exemption certificates were deemed invalid by the auditor on the basis that the specific exemption was not marked (checked) on the certificate. The Taxpayer maintains that the general character and exempt status of the purchaser were properly completed on the original certificates and thus should relieve the Taxpayer of the requirement to collect sales tax from such customer. The Taxpayer submits several such exemption certificates for review.
***** (Customer 1) furnished an exemption certificate, Form ST-11. The certificate is not addressed to the Taxpayer but to another entity. This exemption certificate requires the customer to check the proper box to indicate which of the exemptions (i.e., industrial manufacturing, agricultural or seafood commodities, research and development, certified pollution control equipment, packaging, publication production, or high speed electrostatic duplicator) is applicable. None of the boxes are checked. Further, no purchaser's name is provided on the certificate. Because this certificate is incomplete, it cannot be deemed accepted in good faith by the Taxpayer. This certificate is also inconsistent on its face because it is not addressed to the Taxpayer. Furthermore, while the Taxpayer claims that the certificate relates to line item 3 of the non-contested sales, there is no information to tie the purchaser (i.e., ***** the individual who is named on the invoice) to Customer 1. Accordingly, line item 3 will remain in the audit.
***** (Customer 2) furnished a letter of exemption issued by the Department that allows such organization to purchase all tangible personal property for its use or consumption exempt of the tax. The Taxpayer previously furnished two invoices showing the sale and delivery of sand to this customer. As it appears that: this customer purchased sand for its use, line items 4 and 5 will be removed from the audit.
***** (Customer 3) submitted an exemption certificate, Form ST-18. This certificate allows farmers to buy tax-exempt agricultural supplies for use in agricultural production for market. A Virginia registration number is not required to be entered on Form ST-18 unless one has been issued by the Department. Customer 3 has no sales or use tax registration with the Department. Accordingly, Customer 3 ways not required to enter a registration number on the certificate. In its place, the customer entered its federal employer identification number (FEIN), which is indicative that the customer operates a business. This FEIN is valid. It was confirmed that this customer engaged in dairy cattle and milk production before April 2007 (the sales sample used). As such, I would consider such customer to be a farmer engaged in agricultural production. While the date on the certificate is incomplete as it shows the date "5-12-198," it is reasonable to believe that the certificate predates the sales in question. As such, I find sufficient basis to remove line items 26 and 27 from the sales exceptions list.
***** (Customer 4) submitted a resale exemption certificate, Form ST-10, that had been faxed to the Taxpayer. Some important information is cut off, such as the certificate's date and the last two digits of the certificate of registration number1. Other required information is also missing, e.g., no description is furnished in the space provided for describing the kind of business engaged in by the purchaser. Also, the purpose for making the exemption claim is not indicated, i.e., no boxes are checked. Based on the dealer's name, it would appear that the customer is engaged in construction work. This certificate specifically states on its face that it "may not be used by a using or consuming contractor as defined in the Regulations." 2 For these reasons, I find that this exemption certificate is incomplete and invalid and thus not acceptable on its face. Furthermore, no sales tax registration number matches to the dealer's name shown on the certificate. Accordingly, line items 32 - 39 will remain in the sales exception list.
***** (Customer 5) submitted an exemption certificate, Form ST-11A, dated August 17, 2007. The project was certified by DEQ to the Department on July 27, 2007. We have no information as to the beginning date of the project. The Taxpayer invoiced this customer in April 2007, which predates the DEQ certification by three months. On the surface, it appears that the sale predates the exemption date and thus may not be eligible for the exemption. Absent documentation from Customer 5 indicating that the project was in effect in April 2007, line item 47 will remain in the audit.
***** (Customer 6) presented an exemption certificate, Form E-595E, which is not a Virginia issued exemption certificate. 3 The certificate has no description of the customer's business. Also, Customer 6 claims to have a direct payment permit but did not furnish any permit number. Accordingly, on its face, this exemption certificate is invalid for Virginia retail sales and use tax purposes. Further investigation indicates that Customer 6 has a consumer use tax registration, which does not allow it to purchase any tangible personal property exempt of the tax. Pursuant to Va. Code § 58.1-624, only a manufacturer, mine operator, or public service corporation is authorized to use a direct payment permit. Customer 6 is none of these types of entities. Rather, our records indicate that this customer is engaged in heavy construction. Accordingly, line items 48 - 51 will remain in the audit.
For *****(Customer 7), invoice ***** is presented but no exemption certificate is furnished. The invoice indicates that Customer 7 was charged for 20 tons of product and hauling. The invoice also indicates a ship-to name but does not indicate the address. I understand that the Taxpayer claims that delivery was made in North Carolina. No shipping manifest or other evidence was presented to establish that materials were shipped to a North Carolina destination. However, based on information furnished by the Taxpayer to the auditor, the North Carolina location of the customer was confirmed. Accordingly, line item 59 will be removed from the audit.
***** (Customer 8) presented an exemption certificate, Form ST-10, dated April 29, 2010. Because such certificate is dated well after the audit period, it cannot be deemed taken in good faith for any of the sales held taxable in the audit. This customer also furnished an exemption certificate, Form ST-18, dated in 2002. Because the certificate is complete and valid on its face, I find that it was accepted in good faith by the Taxpayer. I would note, however that the agricultural exemption does not apply to structural construction materials to be affixed to real property owned or leased by a farmer. While the Taxpayer is engaged in the sale of materials that are generally used for construction purposes, Customer 8 certified that its purchases were for use in agricultural production purposes. Because of the Taxpayer's good faith reliance on this certificate, line items 71 - 73 will be removed from the sales exceptions list. I understand that the auditor previously contacted Customer 8 and learned that the gravel was not purchased for resale purposes. This fact does not alter the Taxpayer's good faith reliance on the certificate. In such instances, the Department is justified in assessing the tax directly to the customer.
***** (Customer 9) presented an exemption certificate, Form ST-12, dated April 16, 2007. At the heading on the face of this certificate appears the following statement: "for use by the Commonwealth of Virginia, a political subdivision of the Commonwealth of Virginia, or the United States." A private contractor is not one of these government entities. Furthermore, a contractor is not permitted to use the Form ST-12, unless it has been officially designated a purchasing agent on behalf of the United States and the credit of the governmental entity is bound directly to the purchase.4 Absent such evidence, this certificate is not valid for use by Customer 9. Alternatively, the sales at issue may qualify for the resale exemption if Customer 9 has a contract with the United States in which the true object of the transaction is for the sale of tangible personal property. In such an event, Customer 9 would need to furnish a copy of the contract for the Department's review as well as a resale exemption certificate, Form ST-10, provided it is registered with the Department for sales tax collection purposes. At present, the Department has no record of this Taxpayer being registered for such purposes. Furthermore, if Customer 9 has a contract with the United States in which the true object of the transaction is to furnish services, it is liable for the tax on all tangible personal property purchased for use in such contract. Absent valid evidence of an applicable exemption, line items 76 - 80 will remain in the sales exception list.
***** (Customer 10) presented an exemption certificate, Form ST-18, dated November 2, 2006, which is prior to the date of the contested sales. Based on the similar circumstances as with Customer 3, I find basis for removing line items 81 - 84 from the sales exception list.
***** (Customer 11) furnished a resale exemption certificate, Form ST-10, dated July 11, 2006. Such certificate is incomplete because no box is checked and a nine-digit FEIN is used in place of the ten-digit certificate of registration number.5 The FEIN is not appropriate for use on the Virginia Form ST-10. Accordingly, the certificate is not valid on its face and thus requires closer scrutiny to determine if valid. Further investigation indicates that Customer 11 is not registered with the Department to collect Virginia sales tax. Accordingly, this certificate is not acceptable for any purchases occurring during the audit period. Furthermore, the Taxpayer presents another resale exemption certificate, Form ST-10. This certificate is dated April 1, 2010, but is not acceptable for use in the audit period or the current period because the customer is still not registered with the Department to collect sales tax.6 Accordingly, line item 85 will remain in the audit.
Expiration of Statute of Limitations
The Taxpayer alleges to have identified items assessed in the sample months that occurred prior to the applicable audit period and requests their removal from the audit. The audit period is from August 2004 through July 2007. It is my understanding that the test or sample periods used in the audit are as follows:
- → Purchase cards were audited using a three-month sample of December 2005, September 2006 and April 2007;
→ Sales were audited using a one-month sample of April 2007;
→ Assets were audited in detail; and
→ Expensed purchases were downloaded in detail for the audit and Invoice Capture Tool software was used to select items for review.
No evidence has been presented to identify which items, if any, constitute items purchased prior to the audit period in question. No invoices have been provided to demonstrate that particular purchases were made prior to the audit period in question. In reviewing the dates for each line item listed in the audit, no item was found to be purchased or sold prior to the audit period. Absent evidence in support of the Taxpayer's claims, the Taxpayer has not met its burden of proof.
Out-of-State Use of Property
The Taxpayer alleges that it paid, accrued or was assessed tax in error on items used out-of-state for more than six months. The Taxpayer cites the provision of Va. Code § 58.1-604 relating to tangible personal property brought into Virginia six months or more after its acquisition. In such instances, the statute requires the property to be taxed on its current market value (but not in excess of its cost price) of such property at the time of its first use within this Commonwealth. Such tax is based on the proportion of the cost price or current market value as the duration of time of use within Virginia bears to the total useful life of such property. The statute presumes in all cases that such property will remain within Virginia for the remainder of its useful life unless convincing evidence is provided to the contrary.
Taxpayer's Exhibit III describes the barges listed in line items 14, 20, 21, 32 and 33 of the non-contested assets as exempt vessels used out-of-state. These are the only items identified as used outside Virginia.
In P.D. 84-44 (4/11/84), the Tax Commissioner noted that the Department has traditionally interpreted the current market value provisions of Va. Code § 58.1-604 as applying in cases in which property is brought to Virginia for only a short period or a fixed period of time and is then removed from Virginia permanently. No records are presented that the barges were used in this manner.
Moreover, if the barges were brought into Virginia six months or more after their acquisition, no evidence is provided to establish the current market values of the barges at the time they were brought into Virginia for use in Virginia. There is also no evidence that another state's sales tax was paid on the original cost price of the barges used outside of Virginia before being imported into Virginia. Thus, the credit for sales or use taxes paid in another state set out in Va. Code § 58.1-611 is not applicable. Based on all of the foregoing, the Taxpayer has not met its burden of proof for this issue.
The Taxpayer claims that certain items assessed in the audit were delivered to locations outside Virginia and should be exempt from the tax pursuant to Va. Code § 58.1-609.10 4. This statute provides an exemption, in part, for:
- Delivery of tangible personal property outside the Commonwealth for use or consumption outside of the Commonwealth.
In its Exhibit III, the Taxpayer describes line item 59 of the non-contested sales as an item shipped out-of-state. The Taxpayer provides a copy of the invoice indicating that the item was shipped to a customer in Virginia. No proof (shipping manifest, shipping terms of sale, etc.) has been provided that the shipment was for delivery outside Virginia. Accordingly, the Taxpayer has not met its burden of proof.
Items Claimed Not Constituting a Sale or Purchase
The Taxpayer indicates that it allocated asset costs for items that were used between Virginia plant locations. The Taxpayer claims that such allocation did not constitute a sale or purchase of such assets for first use in Virginia during the audit period. As support, the Taxpayer cites the definition of sale as that term is defined for aircraft sales and use tax purposes by Va. Code § 58.1-1501. The statutory terms defined in the Virginia Aircraft Sales and Use Tax Act are specifically for aircraft sales and use tax purposes. Whereas, for retail sales and use tax issues, we must rely upon the definition of "sale" as that term is defined in Va. Code § 58.1-602 of the Virginia Retail Sales and Use Tax Act.
The long-standing policy of the Department is to tax any transfer of tangible personal property when title or possession to such property is transferred between different persons for a consideration. Generally, a transfer for consideration between separate legal entities is a transfer subject to the retail sales and use tax.
Line items 3 (excavator) and 134 (cat loader) of the non-contested assets are described as asset transfers in the audit. The Taxpayer claims that these line items do not constitute a sale or purchase of tangible personal property. Notwithstanding, no proof has been furnished to support a nontaxable basis. While first use may be made elsewhere, Virginia is within its jurisdictional rights to assess a use tax on the cost price (or market value, if applicable) of personal property brought into Virginia for use by the Taxpayer. If sales or use tax was legitimately paid to another state on the same property, a credit may be applied for such tax paid against the Virginia use tax owed. See Va. Code § 58.1-611 and Title 23 VAC 10-210-450.
Based on its Exhibit III, the Taxpayer claims a large number of items are eligible for the manufacturing exemption. In its appeal letter, the Taxpayer only raises the issue of conveyor steel supports. The Taxpayer indicates that the main function of the conveyor steel supports is to serve as the legs of the conveyor systems for sustaining the conveyor system above ground level. The Taxpayer claims that the conveyor systems could not function without the steel supports and are thus an integral part of the conveyor system. The Taxpayer indicates the steel was purchased along with the conveyor systems. The Taxpayer claims the steel supports are not affixed to realty. Instead, they merely rest upon foundations that are anchored to the ground.
Title 23 VAC 10-210-920 C 2 exempts supports or legs that are a component part of exempt production machinery and do not become affixed to realty. In addition, Title 23 VAC 10-210-960 A 3 f exempts steel or similar supports that are a component part of exempt processing equipment or machinery and that do not become permanently affixed to realty.
The facts presented are similar to the factual situation considered in P.D. 82-183 (12/14/82). In that ruling, the Tax Commissioner determined that a conveyor system and the steel legs (set in corrugated steel sleeves) for such system constituted machinery and tools used directly in exempt processing. The steel sleeves were driven into the ground to prevent shifting in the event of soil settlement and thus functioned as the taxable foundation and support for the conveyor system.
Accordingly, the conveyor steel supports at issue will be removed from the audit, provided the auditor is able to verify the factual claims made. As for other items claimed to be used directly in manufacturing or mineral processing, the Taxpayer will need to provide sufficient facts describing how each, contested item is used directly in the production process and the legal basis for exempting such items.
Pollution Control Equipment Exemption
The items at issue here appear to be line items 9, 13, 95 and 96, which are for water trucks or accessories for such trucks. The Taxpayer claims these items to be manufacturing equipment but does not explain how their use qualifies for the manufacturing exemption. If these trucks are used in the same manner as the water trucks deemed taxable in P.D. 95-231 (discussed in the Dust Treating Devices section of this response), then these trucks do not qualify for the manufacturing or processing exemption.
Notwithstanding, such water trucks may qualify for the certified pollution control
exemption set out in Va. Code § 58.1-609.3 9 (i). The Taxpayer provides two general
operating permits issued by DEQ for its ***** locations. These permits, however, are not certifications by DEQ to the Department of Taxation pursuant to Va. Code § 58.1-3660 that requires the water trucks to be constructed, reconstructed, erected or acquired in conformity with the state program or requirements for the abatement or control of water or air pollution. Absent such certification, these water trucks are taxable.
The Taxpayer contends that certain items assessed in the audit are nontaxable services. The Taxpayer makes reference to the statutory exemptions set out in subsections 1 through 7 of Va. Code § 58.1-609.5. These are exemptions from the retail sales and use tax for professional, insurance, and personal service transactions, separately charged services rendered by repairmen, separately charged labor for installation, separately stated transportation charges, separately stated charges for alterations, charges for gift wrapping services performed by a nonprofit organization, separately charged labor for modification of prewritten software, and custom programs.
In its Exhibit III, the Taxpayer appears to identify these items as NT services. If this is correct, then the nontaxable service issue consists of line items 42, 98, 133, 283, 301, 460, 557, 582, and 583 of the non-contested purchase cards and line item 26 of the contested purchase cards. The Taxpayer has not furnished any evidence (invoices, contracts, etc.) to support its contention. Furthermore, the Taxpayer has not furnished a specific explanation of its contention for each item in question. Accordingly, the Taxpayer has not met its burden of proof.
Penalty and Interest Offsets Requested
The Taxpayer requests that overpayments identified in the audit months be used to offset the underpayments identified by the Department for purposes of computing "any additional" penalty and interest. In this audit, the penalty applicable to audit deficiencies was not assessed because a sufficient tax compliance level was met on thus sixth audit. 7 However, interest was assessed in connection with the tax deficiencies held in the audit. In accordance with Va. Code § 58.1-1812, interest accrues on the unpaid balance of the assessment until paid in full.
To the extent that valid tax overpayments are identified in the sampled or detailed periods covered by the audit, the Department will agree to apply such overpayments as credits against the audit deficiencies. Several credits have already been identified by the auditor and included in the appropriate schedules.
Real Property Services
The Taxpayer contends that certain items assessed in the audit are for real property construction services in accordance with Va. Code § 58.1-610. In its Exhibit III, the Taxpayer identifies these items as line items 2, 45, 49 and 120 of the non-contested assets. The Taxpayer has not furnished any evidence (invoices, contracts, etc.) to establish its contention. The Taxpayer has not yet met its burden of proof.
The Taxpayer claims that some items are exempt of the tax based on the rolling stock exemption. Virginia Code § 58.1-609.3 16 provides an exemption from the retail sales and use tax for "[r]ailroad rolling stock when sold or leased by the manufacturer thereof." Virginia Code § 58.1-602 defines railroad rolling stock to mean "locomotives, of whatever motive power, autocars, railroad cars of every kind and description, and all other equipment determined by the Tax Commissioner to constitute railroad rolling stock." This exemption became effective on and after July 1, 2007, and has no retroactive application.
In its Exhibit III, the Taxpayer identifies line items 6, 7, 29, 58, 63, 97, and 102 of the non-contested assets as rolling stock. The Taxpayer describes these items as railroad cars purchased in October 2004, a locomotive purchased in October 2005, rolling stock purchased in September 2006, a railcar mover purchased in December 2006, a railroad car purchased in December 2005, and rolling stock purchased in March 2007. While the locomotive, railroad cars and railcar mover satisfy the definition of rolling stock, all of these contested items were purchased prior to the effective date of the exemption. Accordingly, the rolling stock exemption is not available for such items.
In its Exhibit III, the Taxpayer also claims that the rolling stock exemption applies to line items 26, 102, 388-390, 420, 445, 527, and 558 of the non-contested purchase card exceptions. Because of the low cost for these items and absent a sufficient description, they appear to constitute purchases of supplies, materials or parts for rolling stock. The rolling stock exemption does not extend to replacement or repair parts used for installation on rolling stock. Such parts, by themselves, do not constitute railroad rolling stock. For this reason and the fact that all of these purchases pre-date the effective date of the exemption, the rolling stock exemption is not available for such items.
The Taxpayer contends that the Department may have applied flawed sampling and detailed audit procedures. The Taxpayer indicates that evidence will be presented if the sampling procedures are found not to be applied in accordance with generally recognized sampling techniques. In its Exhibit III, the Taxpayer lists this potential issue as consisting of line items 9 - 20 of the non-contested purchases, which are described as "ICT gross up" amounts. Notwithstanding the Taxpayer's general contention, no specific grounds for contention were submitted with the appeal. As such, the Taxpayer has not met its burden of proving the sampling technique invalid.
Tax Erroneously Paid to Vendors
The Taxpayer requests an offset against the assessed tax for sales tax erroneously paid to vendors during the audit period on exempt transportation and other exempt charges. In P.D. 10-117 (7/1/10), the Department sets out its long-standing policy on vendor refunds. Generally, a consumer should comply with the regulation as set out in Title 23 VAC 10-20-180 A 2 b.8 The consumer should first seek a tax refund of erroneously collected sales tax directly from the dealer that sold the item. If such dealer refuses to issue a refund, then the consumer may apply directly to the Department for the refund. No information has been presented that the Taxpayer complied with such regulation.
Notwithstanding the foregoing, the statute of limitations for seeking refunds from vendors for retail sales tax erroneously paid during the audit period has expired. Under these circumstances, and provided the Taxpayer has not received or requested a refund of erroneously collected sales tax from such vendors, I will allow a credit against the audit liability for the tax erroneously paid to vendors within the statute of limitations established by the filing of this appeal. For such vendor refunds, the dealer's discount taken by the vendor is not refundable because the Department never received such funds. See Title 23 VAC 10-210-3040. The Taxpayer has the burden of proving the erroneous tax payments (e.g., submitting invoices with tax charges, proof of payment, description of the article and how used by the Taxpayer, and the basis for exemption), as well as, developing a schedule listing all of the information needed to process such a refund [such as the vendor name and address, the FEIN (if known), purchase measure, tax charge paid, dealer's discount taken by vendor (if known), and interest computation].
Transportation or Delivery Charges
The Taxpayer contends that it paid, accrued or was assessed tax in error on separately stated transportation charges that are exempt pursuant to Va. Code § 58.1-609.5 3. This repeats the Taxpayer's nontaxable services contention set out in a prior section of this determination. This contention is not identified in the Taxpayer's Exhibit III. The Taxpayer has not furnished any evidence in support of its claim. Accordingly, the Taxpayer has not met its burden of proof.
The Taxpayer contends to have erroneously paid, accrued, or was assessed tax on various other nontaxable transactions. The Taxpayer requests that a refund of such overpaid tax or an adjustment to the audit. The Taxpayer has not identified any other items in its appeal that would fall into this category. Accordingly, the Department may only consider the exemption claims that the Taxpayer has identified in its Exhibit III. It is the Taxpayer's responsibility to furnish the required proof to support its claims.
In the introduction part of the appeal, you claim the Taxpayer was not provided with final schedules of the auditor's conclusions. If you are still missing schedules in connection with the final audit report, please contact the auditor, ***** at ***** to obtain such documentation.
Extension Request to Submit Remaining Documentation
As for the remainder of your appeal, you indicate that the Taxpayer is in the process of gathering and compiling additional information to support its position with respect to certain specific items scheduled in the audit report. The Taxpayer requests that it be allowed to work directly with the auditor that performed the audit in an attempt to resolve some of the discrepancies that remain in the finial report. You further indicate that the documentation related to the Taxpayer's contentions has either been submitted with the appeal or is available for review by the auditor upon request.
Accordingly, I am referring this matter back to the audit staff for further review and resolution of the issues that require further documentary support. Because of the extensive number of issues being raised in this matter, I will grant an extension of 90 days from the date of this letter for the Taxpayer to submit final documentation to the Department in support of the issues raised in this matter. Such documentation should be submitted directly to the Department's audit staff or made available to them at an agreed upon location. The auditor will contact you within ten (10) business days of the date of this letter to arrange for the receipt of additional documentation. No further extension will be granted.
At the conclusion of the 90-day extension period for submitting additional documentation, the assessment will be revised in accordance with this determination and may be further revised based on additional documentation provided within the allotted time. When the final revisions are made to the audit, updated and revised bills, 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 avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, Attn: ***** 600 East Main Street, 15th Floor Security, Richmond, Virginia 23219. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
In accordance with Va. Code § 58.1-1840.1 F 1, an additional 20% penalty may be applied to any tax liability that was eligible for amnesty benefits and that is not paid within 30 days from the date of assessment. Because the contested assessments were unpaid after 30 days from the date of assessment, a post-amnesty penalty was applied before the appeal was filed. Notwithstanding, such penalty may be waived if the Taxpayer remits full payment of the revised tax and interest liabilities within 30 days of the bill date.
Once the revised bills are issued, the Taxpayer may amend its offer in compromise, if necessary. If the Department does not receive an amended offer in compromise, the Department will presume it is not forthcoming and proceed with its consideration of the original offer in compromise.
The Code of Virginia sections, regulations and public documents cited are available online 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 *****.
- Craig M. Burns
- Craig M. Burns
1 The faxing date is clearly shown, however.
2 This statement is intended for those contractors who are not engaged in making wholesale or retail sales and are not registered with the Department to collect sales tax.
3 For a listing of Virginia issued exemption certificates, go to the business forms page on the Department's website at http://tax.virginia.gov/.
4 See Title 23 VAC 10-210-410 J.
5 The current certificate of registration number consists of fifteen (15) digits.
6 Also, a resale exemption certificate indicating a lease or rental purpose is not acceptable in the Taxpayer's case because the building materials are not items that would be leased or rented.
7 See Title 23 VAC 10-210-2032 B 5.
8 Similar provisions are set out in the administrative appeal provisions of Title 23 VAC 10-20-165 D 3 2