April 6, 2020
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 2012 through October 2015. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a distributor of electrical equipment. The Taxpayer also sells broadband equipment and supplies to the cable, telecommunication and satellite industries through a division owned by the Taxpayer. The auditor determined that the certificates of exemption on file for two customers were not valid to exempt the sales held in the audit. The auditor disallowed certificate of exemption, Form ST-20, provided by one customer on the basis that public service corporations lost their exempt status in 2004, and purchases of tangible personal property used in rendering their services are taxable. The auditor also disallowed the resale certificate of exemption, Form ST-10, provided by another customer on the basis that the name of the supplier listed on the certificate was not the Taxpayer. The auditor assessed the tax on these untaxed sales identified in a one-month sample of sales.
The Taxpayer maintains that it accepted, in good faith, certificates of exemption from the two customers and seeks the removal of the contested sales from the audit. Further, should the Department determine that the exemption certificates are invalid or were not accepted in good faith, the Taxpayer requests the opportunity to provide additional evidence to support the exempt sales. Additionally, the Taxpayer claims it is entitled to an offset for any use tax paid to the Department by its customers on the contested sales. The Taxpayer contends that failing to provide an offset for the use tax paid by the Taxpayer’s customers would render the Department’s sample flawed.
DETERMINATION
Before addressing the contested issues presented on appeal, I would like to explain the Taxpayer's responsibilities under the law regarding the acceptance of exemption certificates in general and the exemption for land based wireless cable television systems.
Exemption Certificates
Virginia Code § 58.1-603 imposes a tax upon every person who engages in the business of selling at retail or distributing tangible personal property in Virginia.
Virginia Code § 58.1-623 A provides that:
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.
Virginia Code § 58.1-623 B then states, in part:
The certificate mentioned in this section shall relieve the person who takes such certificate from any liability for the payment or collection of the tax, except upon notice from the Tax Commissioner that such certificate is no longer acceptable. Such 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, distributed, leased, or stored, or to be sold, distributed, leased, or stored under a blanket exemption certificate; and shall be substantially in such form as the Tax Commissioner may prescribe.
The acceptance of a valid exemption certificate in good faith requiring a dealer to exercise reasonable care and judgment is at issue here. This principle is addressed in International Paper Company v. Virginia Department of Taxation, CL -2009-360, Circuit Court of Fairfax County, July 29, 2010. See Public Document 10-258 (10/25/10). In that case, the court held that a dealer could satisfy the good faith and reasonable care and judgment standards in taking a certificate to the effect that the property purchased is exempt if:
Upon a facial examination of the certificate, a dealer could reasonably conclude that the items purchased could potentially be used for any of the exempt purposes claimed on the certificate of exemption; or
Based upon the actual dealer's knowledge of the business of its purchaser, the dealer could reasonably determine in good faith that the specific purchaser intended to use the items purchased for one or more of the exempt purposes claimed on the certificate of exemption.
Cable Television Systems Exemption
Virginia Code § 58.1-609.6 2 provides that the retail sales and use tax does not apply to:
Broadcasting equipment and parts and accessories thereto and towers used or to be used by commercial radio and television companies, wired or land based wireless cable television systems, common carriers or video programmers using an open video system or other video platform provided by telephone common carriers, or concerns which are under the regulation and supervision of the Federal Communications Commission and amplification, transmission and distribution equipment used or to be used by wired or land based wireless cable television systems, or open video systems or other video systems provided by telephone common carriers.
Title 23 of the Virginia Administrative Code (VAC) 10-210-3030 A states, “The tax does not apply to broadcasting equipment (and parts and accessories to that equipment) and towers used or to be used directly in broadcasting by commercial radio and television companies or concerns which are under the regulation and supervision of the Federal Communications Commission.”
Title 23 VAC 10-210-3030 D further provides that “The tax does not apply to broadcasting, amplification, transmission, and distribution equipment and parts and accessories thereto and towers purchased for use by cable television systems.”
In Winchester TV Cable Co. v. State Tax Commissioner, 216 Va. 286, 217 S.E.2d 885 (1975), the issue before the Virginia Supreme Court was whether the owner of a community antenna television system was entitled to the broadcasting exemption on purchases of certain tangible personal property. The Court defined broadcasting to mean the dissemination, transmission or distribution of a signal into the air. The Court concluded that the exemption only applies to broadcast equipment used directly in disseminating a signal through or into the air. The exemption was denied in this instance because the evidence showed that the taxpayer’s signal was disseminated to its customers through a cable and did not meet the court’s definition of broadcasting.
In WTAR Radio-TV Corporation v. Commonwealth, 217 Va. 877, 234 S.E.2d 245 (1977), the Virginia Supreme Court ruled that the broadcasting exemption only applies to broadcasting equipment and accessories thereto used directly in the act of disseminating a signal into the air, not the equipment and accessories used to create the material which may be disseminated. The Court specifically rejected the proposition that broadcasting encompasses all items of personal property that are necessary and essential to put a program on the air.
In 1980, the Virginia General Assembly enacted an exemption for cable television providers and the broadcast exemption statute was amended to include an exemption for broadcast, amplification, transmission, and distribution equipment used by cable television systems in providing its services to customers. The broadcasting regulation was amended in August 1992 to reflect the exemption extended to cable television providers. While the Court established that broadcasting equipment must be used directly by radio and television broadcasters in the dissemination of a signal into the air, no such requirement extends to cable television providers. Further, the General Assembly did not apply a used directly requirement in the cable television provider exemption statute. Rather, the exemption applies to a cable television provider’s use of four types of equipment – broadcast, amplification, transmission and distribution – as established in Virginia Code § 58.1-609.6 2 and clarified in Title 23 VAC 10-210-3030 D.
The repeal of the public service corporation exemption in 2004 did not include wired or land based wireless cable television systems. The Taxpayer is correct that the exemption for cable television systems was not repealed for broadcasting, amplification, transmission, and distribution equipment and parts and accessories thereto and towers purchased for use by cable television systems. However, this exemption does not exempt all purchases of tangible personal property by the Taxpayer’s cable television customers. Rather, the exemption is based on a certain type of usage and thus limits the scope of the exemption to equipment used to broadcast, amplify, transmit or distribute cable television signals to subscribers.
In this instance, the customer provided the Taxpayer a completed certificate of exemption, Form ST-20, and checked box #4 that purchases of broadcasting, amplification, transmission, and distribution equipment and parts and accessories used by cable television systems are exempt of the tax. Based on the Taxpayer’s knowledge of the business of its customer, the Taxpayer could reasonably determine in good faith that the specific customer intended to use the items purchased for one or more of the exempt purposes claimed on the certificate of exemption. Therefore, such items will be removed from the audit.
This same customer purchased replacement blades, mosquito spray, drill bits, bolts, guy straps, cable tools and other miscellaneous accessories exempt of the tax using the certificate of exemption, Form ST-20. Such items are clearly not within the scope of the exemption and are taxable. Thus, I find that the Taxpayer did not exercise reasonable care and judgement with regard to these items. Accordingly, these items will remain in the audit.
Resale Exemption Certificate
The customer provided the Taxpayer a completed resale certificate of exemption, Form ST-10, and checked box #1 that purchases of tangible personal property are for resale only. The auditor denied the certificate of exemption because the supplier’s name on the certificate was not the Taxpayer’s.
In this instance, the supplier listed on the resale exemption certificate was acquired by the Taxpayer prior to the purchases; however, the certificate did not reflect the new ownership. The Taxpayer accepted the resale exemption certificate from its customer in good faith. The certificate was complete and valid on its face. The customer could not be expected to know that the supplier’s business was now a division of the Taxpayer. Therefore, I find that the Taxpayer accepted the valid exemption certificate in good faith that the property purchased from the Taxpayer qualified for the resale exemption. Accordingly, these sales will be removed from the audit.
Credits
The Taxpayer maintains that it is entitled to an offset for any use tax paid by its customers on the contested sales. The Taxpayer claims that failing to provide an offset for the use tax paid by the Taxpayer’s customers would render the Department’s sample flawed.
The Department has previously addressed the issue of credits included in sample calculations. In those prior cases, sales held taxable in the audit in which the customers accrued the use tax were contested. The Department upheld the sales audit sample techniques and found no basis for recalculating the sales error factors. However, one time credits were applied to the assessment for the taxes that were paid by the customers. See P.D.s 04-75 (8/25/04) and 07-68 (5/10/07).
In this instance, there is no evidence that either customer accrued the use tax on the contested taxable sales. If the Taxpayer provides documentation that the customers paid and remitted the consumer tax to the Department on such sales, a one-time credit will be applied to the assessment. In order for a credit to be applied, detailed documentation must be provided to support the contention that the correct amount of tax has been accrued by the customer and remitted to the Department. The use tax remitted must also correspond with the transactions held taxable in the audit. See P.D. 11-206 (12/20/11) for additional guidance on documentation needed to support a credit claim.
In an unrelated issue to the appeal, the Taxpayer will receive a one-time credit for the tax assessed on line item #64 because the item was taxed on the purchase end of the transaction.
CONCLUSION
Based on this determination, the audit will be returned to the appropriate field audit staff for revision. The audit staff will make the adjustments to the audit assessment as set out in this determination. Once the revisions to the audit 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. Regarding the Taxpayer’s claim for credit, the Taxpayer will have 30 days to provide documentation that use taxes were paid directly to the Department by customers on the contested taxable sales. If the documentation is provided, a one-time credit will be granted. If no additional information is provided by the Taxpayer, the audit and assessment will be considered correct in accordance with this determination.
The Code of Virginia sections, regulation, and public documents cited are available online 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, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1217.T