May 27, 2020
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request reconsideration of the Department’s prior determination regarding the retail sales and use tax assessment issued to ***** (the “Taxpayer”) for the period of September 2008 through April 2014. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates a medical practice providing obstetric, gynecological and surgical services. The Department’s audit developed an audit sample factor and extrapolated the factor over the entire audit period because the Taxpayer had not filed returns or remitted sales tax or use tax. One transaction that was included in the sample was the exercise of an end of lease option and the purchase of the leased equipment. The Department’s auditor determined that the Taxpayer was liable for the payment of tax on the end of the lease purchase option because it could not identify the equipment purchase as an asset.
The Taxpayer appealed, contending that the lease was exercised for a one-time purchase of computer equipment, which was not representative of normal business purchases and should be removed from the sample. The Tax Commissioner’s determination in Public Document (P.D.) 19-47 (5/3/2019), issued to the Taxpayer, upheld the assessment on the basis that the Taxpayer was unable to identify the property purchased pursuant to the lease/purchase agreement as computer equipment.
The Taxpayer seeks reconsideration of the determination, contending that identifying the equipment purchased at the end of the lease is not relevant because the Department acknowledged that such a purchase was not a representative transaction. In addition, the Taxpayer has provided an invoice that it asserts proves the equipment at issue was computers. Finally, the Taxpayer argues that the parties’ business needs and relationship did not require specific language in the lease/purchase agreement.
DETERMINATION
Isolated Purchase
Pursuant to P.D. 09-46 (4/26/2009), the Department will remove an item from an audit sample if it is shown that the transaction is isolated in nature and not a normal part of a taxpayer’s business activity. In P.D. 19-47, the Tax Commissioner agreed that “. . . the Taxpayer’s exercise of a purchase option at the end of a lease is not representative of its operations given that the Taxpayer’s historical practice has been the leasing of equipment only.” The Taxpayer contends that because the Tax Commissioner acknowledged that the purchase was not representative of its operations, that the transactions should be removed from the auditor’s sample.
The Department agrees that the purchase of equipment at the end of a lease would constitute an isolated transaction that should be removed from the sample, provided that the Taxpayer produce clear evidence that the equipment purchased at the end of the lease was the same equipment that was assessed in the audit. P.D. 19-47 clearly states that the lease/purchase agreement and invoice that the Taxpayer provided as evidence do not identify the specific equipment.
Documentation
Virginia Code § 58.1-633 A provides that every dealer required to make a return and collect sales tax “shall keep and preserve suitable records of the sales, leases, or purchases . . . taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.”
The record keeping requirement is further explained in Title 23 of the Virginia Administrative Code 10-210-470 as follows:
Every person who is liable for collection of sales tax or remittance of use tax or both is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Such records must include… A daily record of all cash and credit sales, including sales under any type of financing or installment plan in use. A record of the amount of all merchandise purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase…A record of all deductions and exemptions claimed in filing sales or use tax returns including exemption and resale certificates, returned or repossessed goods, and bad debts…A record of all tangible property used or consumed in the conduct of the business…A true and complete inventory of the stock on hand and its value, taken at least once each year. Records must be open for inspection and examination at all reasonable hours of the business day by the Department of Taxation.
When a dealer fails to maintain adequate records, the Department is authorized by Virginia Code § 58.1-618 to use the best information available to reconstruct a dealer’s sales or purchases to determine whether a tax liability exists.
In this case, the Taxpayer has provided an additional invoice that it purports to show that the equipment subject to the lease/purchase agreement is computers. This invoice, that lists computers, software, and other peripheries, does show the amount of the monthly payment is the same as the monthly payment required by the lease agreement and includes a charge for sales and use tax. The finance company that the invoice lists as the payee, however, is different than the finance company listed as the payee on the lease/purchase agreement. In addition, the auditor indicates that the computer equipment listed on the invoice is not the same as the equipment on the lease/purchase agreement. The Taxpayer has not provided any evidence that the computers listed on the invoice are the same equipment that is the subject of the lease agreement.
Lease Terms
The Taxpayer contends that the “equipment” named in the lease is the generic language used by the leasing company on all its leases. As such, the use of such term does not mean that the equipment at issue is computers. I agree that the use of the term “equipment” does not automatically mean that such equipment consists of computers. This does not, however, relieve the Taxpayer from its requirement of proving that the equipment referred to in the lease is in fact computer equipment. Virginia Code § 58.1-205.1 provides that any assessment of tax issued by the Department shall be deemed prima facie correct. Therefore, the Taxpayer is still required to provide evidence that the equipment was computers. As stated above, the Taxpayer has not met the burden of proof.
CONCLUSION
Based on the foregoing, I find no basis for removal of the transaction from the audit sample. Accordingly, the contested assessment is upheld. The Taxpayer will receive an updated bill with interest accrued to date. The bill should be paid within 30 days from the date of the bill to avoid the accrual of additional interest.
The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/2097.B