Document Number
16-124
Tax Type
Retail Sales and Use Tax
Description
The documentation provided by the Taxpayer, both in the audit and with its appeal was insufficient to prove its statements.
Topic
Exemptions
Returns/Payments/Records
Date Issued
06-22-2016

June 22, 2016

Re:    § 58.1-1821 Application:  Retail Sales and Use Tax

Dear *****:

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 2010 through June 2013.  I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a wholesale distributor of residential and commercial plumbing supplies, as well as a distributor of waterworks, HVAC and industrial products.  The Taxpayer is contesting certain portions of the audit assessment that are addressed separately below.

DETERMINATION

Resale Exemption Certificate

During the audit period, the Taxpayer made sales to its customer, ***** (“Customer A”).  Customer A presented the Taxpayer with a resale exemption certificate, and Customer A was not charged sales tax on the sale.  In the audit, the auditor determined that the sale should not have been made exempt of the tax because the customer is not a retailer and the resale exemption certificate is thus invalid.  Relying on Public Document (P.D.) 13-132 (7/8/13), the Taxpayer maintains that the exemption certificate is valid and the sale was properly made exempt of the tax.

Virginia Code § 58.1-603 imposes the sales tax upon every person who engages in the business of selling at retail in Virginia.

In accordance with Virginia Code § 58.1-623:

All sales or leases are subject to the tax until the contrary is established.  The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.

Title 23 of the Virginia Administrative Code (VAC) 10-210-280 B provides that:

Legitimate use of exemption certificates is vital.  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.

Based upon a review of the resale exemption certificate at issue, I find that the exemption certificate was accepted in good faith by the Taxpayer.  The exemption certificate is filled out completely by Customer A.  While the number provided in the registration number section is a federal employer identification number, the Department does not provide a way for the Taxpayer to confirm whether the number listed by Customer A on the exemption certificate is valid.  Additionally, the Department does not provide a way for the Taxpayer to verify whether Customer A is registered for the sales tax.  The resale exemption certificate at issue was valid on its face when accepted by the Taxpayer, and the Taxpayer could not be expected to know that it did not include a valid registration number or that Customer A was not registered for the sales tax.  Accordingly, the sales exceptions for Customer A will be removed from the audit.

Maintenance Contract

During the audit, the auditor concluded that the documentation provided by the Taxpayer was insufficient to make a determination that the software originally purchased was downloaded over the Internet.  It was also unclear during the audit if any tangible property was furnished with the original purchase.  The charges associated with the maintenance contract were held taxable in the audit because the taxability of the maintenance contract follows the taxability of the software that is covered by the maintenance contract.

The Taxpayer states that the transactions at issue are for a labor-only software maintenance contract.  The Taxpayer states that the software related to this contract was delivered electronically to the Taxpayer by the vendor.  On appeal, the Taxpayer provides a copy of the invoice and an e-mail from the vendor that states the vendor does not deliver its media in tangible form and that its media is delivered electronically. Relying on Title 23 VAC 10-310-910 B 1, the Taxpayer maintains that the assessment is erroneous.

During the audit, the documentation provided was insufficient to make a determination that the software originally purchased was downloaded over the Internet. It was also unclear during the audit if any tangible property was furnished with the original purchase.  The tax was assessed in the audit on 50% of the charges associated with the maintenance contract because the taxability of the maintenance contract follows the taxability of the software that is covered by the maintenance contract, as considered in P.D. 05-44 (4/4/05).

Virginia Code § 58.1-609.5 1 provides, in pertinent part, that the retail sales and use tax shall not apply to “services not involving an exchange of tangible personal property which provide access to or use of the Internet and any other related electronic communication service, including software, data, content and other information services  delivered electronically via the Internet.”  [Emphasis added.]

During the performance of the audit, the Taxpayer did not provide the original contract or invoice showing that the software originally purchased was delivered electronically to the Taxpayer.  Additionally, it is unknown if any tangible property was furnished to the Taxpayer with the software at the time it was purchased.  The maintenance contract at issue is for maintenance coverage on the original software.

The e-mail provided by the Taxpayer does not specifically mention the transaction at issue, but states generally that the vendor delivers media to its customers electronically. The documentation that has been provided by the Taxpayer, both in the audit and with its appeal, is insufficient to prove that the software at issue was delivered electronically. Because the taxability of the maintenance contract follows the taxability of the software originally purchased, the documentation provided by the Taxpayer would have to specifically state the software at issue was delivered electronically as required in Va. Code § 58.1-609.5 1, in order for the maintenance contract to be exempt of the tax.  Accordingly, the transactions were properly held taxable in the audit, and no changes to the audit are warranted.  This decision is consistent with the determinations in P.D. 05-44 and P.D. 05-114 (7/18/05), which set forth the documentation requirements to establish that the software was delivered electronically.

P.D. 05-44 and P.D. 05-114 address the minimum documentation requirements necessary to prove that software is delivered electronically.  In P.D. 05-44, it was determined that at a minimum, a sales invoice, contract or other sales agreement must expressly certify the electronic delivery of the software and that no tangible medium for the software was provided to the taxpayer.  In P.D. 05-114, the letter provided by the taxpayer stating that the software was delivered electronically was deemed insufficient to prove that the software was delivered electronically.

Use Tax

The Taxpayer states that ***** (“Customer B”) was assessed use tax on purchases from the Taxpayer for the period January 2010 through December 2012. Relying on P.D. 11-206 (12/20/11), the Taxpayer states that it should be given a credit in the audit for the use tax that Customer B paid directly to the Department.  The Taxpayer provides a schedule indicating the transactions at issue and the amount of use tax paid by the Customer B to the Department.  Three invoices were held taxable in the audit because the tax was not paid at the time the purchases were made by Customer B.  These three invoices are not included on the schedule provided by Customer B.

In P.D. 11-206, the taxpayer was given credits in the audit for its customers identified in the audit that had paid use taxes directly to the Department.  On appeal, the taxpayer requested additional credits for other customers that the taxpayer states had paid the use tax directly to the Department.  The taxpayer was denied the additional credits because the documentation provided did not include sufficient detail to determine that uses taxes were paid by the taxpayer's customers on the sales held taxable in the audit.  It was determined that return information from the customers should have been provided that showed the periods for which the tax was reported and paid, a schedule of the purchase amounts that made up the total measure for the use taxes reported on the return, the related sales invoices and any information that would have allowed the Department to confirm that the customers paid the use taxes due on the transactions at issue.

In accordance with P.D. 11-206, credits can be given in an audit in instances where a taxpayer's customers pay the use tax directly to the Department on sales held taxable in the audit.  However, in order for those credits to be applied, detailed documentation must be provided to support the contention that the correct amount of tax has been accrued by the customers and remitted to the Department.  Additionally, the use tax remitted must correspond with the transactions held taxable in the audit.  In this instance, the documentation provided by the Taxpayer lacks sufficient detail to verify that the correct amount of use tax has been accrued and remitted by Customer B. Additionally, the documentation provided by the Taxpayer is not for transactions that are included in the audit.  Accordingly, the Taxpayer's request for credits in the audit is denied.

CONCLUSION

Based upon this determination, the audit will be returned to the appropriate field audit staff to make the revisions as noted above.  Once the revisions have been made, a revised bill, with interest accrued to date, will be mailed to the Taxpayer.  No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill.  Please remit payment to: Virginia Department of Taxation, 600 E. Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *****.  If you have any questions concerning payment of the assessment, you may contact ***** at *****.  The portion of the assessment that has been remitted to the Department by the Taxpayer will not be refunded.

The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions 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 *****.

Sincerely,

Craig M. Burns
Tax Commissioner

 

 

AR/1-5996298823.P

Rulings of the Tax Commissioner

Last Updated 07/18/2016 08:48