August 27, 2019
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 November 2013 through October 2016. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is an electrical contractor for both residential and commercial properties. As a result of the Department’s audit, the Taxpayer was assessed use tax on several purchases from vendors on which the tax was not previously paid. The Taxpayer was also assessed use tax on purchases from a subcontractor who completed installation of fire alarm and safety systems.
The Taxpayer contends the purchases from a recycling company constitute the nontaxable provision of services and should be removed from the audit. The Taxpayer also submitted several invoices corresponding to the exceptions held in the audit, contending the tax had already been paid and such purchases should be removed from the audit. Lastly, the Taxpayer believes certain purchases should not be included in the sample because they represent a one-time occurrence.
DETERMINATION
Fire Alarm Systems
Title 23 of the Virginia Administrative Code (VAC) 10-210-230 A defines “monitored systems” as “burglar, security and alarm systems which are furnished, installed and monitored under contract with the person furnishing and installing such system.” The regulation also provides that:
Charges for monitored systems constitute charges for a service which is not subject to the tax. The person selling/leasing and installing the monitored system is deemed to be the consumer of all property used in providing the service and must pay the tax on such property at the time of purchase.
The regulation further states that systems monitored by persons other than the seller who furnishes and installs the system, such as those connected directly to the police or fire department, are not considered to be monitored systems as the term is used in the regulation.
Title 23 VAC 10-210-230 B addresses the retail sales and use tax application to “nonmonitored” systems and provides that:
Persons engaged in the sale or lease and installation of burglar, security or fire alarm systems are engaged in making retail sales, the total charge for which is subject to the tax. Separately stated installation charges are not subject to the tax. Persons engaged in retail sales or leases must register as a dealer and collect and pay the tax with respect to such transactions. All items used by a dealer in installing such a system, for example wiring which remains part of the building, nails and similar items, are taxable to the dealer at the time of purchase.
The Taxpayer subcontracted for the provision and installation of fire safety systems. Nonmonitored systems of this nature are considered the taxable sale of tangible personal property, subjecting the entire charge from the subcontractor to the tax less separately stated installation charges.
The Taxpayer contends the auditor taxed these transactions after determining they were the sale of fire monitoring services, but pursuant to Title 23 VAC 10-210-230 A, monitored systems that include monitoring services would not be taxable. The invoices support the contention that the purchases were for nonmonitored systems. The auditor properly held the sale and installation of nonmonitored fire safety systems as taxable and, therefore, there is no basis for removing the transactions from the audit.
Various Invoices
The auditor held transactions taxable where documentation was not available to determine whether tax had been paid. The Taxpayer has since provided a number of invoices corresponding with the exceptions in question. To the extent these invoices show the tax has been paid on transactions included in the audit, the auditor has agreed to remove the items from the sample.
Audit Sample
The Taxpayer contests the inclusion of untaxed purchases from ***** (“Company A”) in the audit’s purchases sample. The Taxpayer contends there was a glitch in the vendor’s system during the audit period that caused the vendor’s failure to charge the tax to the Taxpayer on a number of invoices and, because of this glitch, the purchases should not be included in the sample as they were a one-time occurrence.
Sampling is an audit technique of significant value that is widely used in both the public and private sectors. The Department uses sampling in sales and use tax audits where a detailed audit would not prove beneficial to either the auditor or the taxpayer. When sampling techniques are properly applied, the final results should be within a narrow percentage range of the actual amount that would have been determined by a detailed audit. When evaluating the validity of an audit sample, the Department will remove an item or items from an audit sample only if it is shown that the transaction is isolated in nature and not a normal part of a taxpayer's business activity.
Virginia Code § 58.1-205 states that an assessment of tax by the Department is deemed to be prima facie correct. The burden of proving that a tax assessment is erroneous is on the Taxpayer. In this case, the Taxpayer has not met its burden of proving that the inclusion of these purchases in the sample resulted in an invalid sample and assessment. The Taxpayer has not demonstrated that the contested transactions are isolated in nature and are not normal purchase transactions for the business, as no further documentation has been provided regarding the nature of the transactions.
Virginia Code § 58.1-633 and Title 23 VAC 10-210-470 require taxpayers to maintain adequate and complete records necessary to determine the proper amount of tax liability. The records must provide sufficient information to confirm that sales or use taxes were paid when due and that the retail sales tax has been properly charged if taxable sales were made for the period being examined. Without sufficient documentation to support the Taxpayer's claim, the removal of these purchases from the audit is not warranted.
CONCLUSION
In accordance with this determination, the audit will be returned to the appropriate field audit staff for revision. The audit staff will adjust the audit assessments based on the determination and after the adjustments are completed, a revised bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days from the date of the revised bill. Please remit payment to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *****, Post Office Box 27203, Richmond, Virginia 23261-7203.
The Code of Virginia sections, regulations, and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions 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 *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1551L