September 7, 2021
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 January 2014 through February 2018. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operated as a seasonal frozen yogurt establishment. The Department’s audit disclosed that the Taxpayer was making purchases for its own use and consumption without payment of the sales tax to suppliers or accrual and payment of the use tax to the Department. The Taxpayer states that the purchases of tangible personal property were exempt under the resale exemption, and payments to vendors were exempt as services not in connection with the sale of tangible personal property. However, the Taxpayer did not have adequate records to support the claimed exemptions. As a result, the Taxpayer was assessed use tax when the auditor could not confirm the items were for resale or were services that did not include the provision of tangible personal property. The Taxpayer appeals, contending such purchases and payments were nontaxable and should be removed from the assessment.
DETERMINATION
The Virginia retail sales and use tax applies to the sale or the use of tangible personal property. Virginia Code § 58.1-603 imposes the sales tax “upon every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth.” Virginia Code § 58.1-604 imposes the use tax “upon the use or consumption of tangible personal property in this Commonwealth, or the storage or such property outside the Commonwealth for use or consumption in this Commonwealth.”
Items Purchased for Resale
Virginia Code § 58.1-602 defines “retail sale” to mean a sale to any person for any purpose other than for resale in the form of tangible personal property or taxable services.
The Taxpayer contends that items purchased under the resale exemption were improperly included in the assessment. During the audit, the Department’s auditor reviewed credit card statements, and ledgers provided by the Taxpayer. The auditor removed items that were listed as resale when reviewing the ledger, but included items coded as office supplies, maintenance and repairs as it was unclear that these items were intended for resale. The auditor requested that the Taxpayer provide copies of receipts or invoices for such expenses to verify that these items could be purchased for resale exempt from the sales tax. No documentation verifying the expenses was provided during the audit and the Taxpayer has not provided any additional documentation with the appeal.
Services Provided by a Third Party
Virginia Code § 58.1-609.5 2 provides that the retail sales and use tax does not apply to “an amount separately charged for labor or services rendered in installing, applying, remodeling, or repairing property sold or rented”. In instances where the sales tax is not collected or paid at the time the transaction takes place, the purchaser becomes liable for the use tax.
The Taxpayer contends that services provided by a third party in which services and no materials (tangible personal property) were included, are therefore exempt from the retail sales and use tax. During the audit, the Taxpayer explained that it purchased all the necessary materials and the third party provided installation.
The auditor also requested documentation that verified the Taxpayer’s purchase of the materials so that the labor only invoices could be verified. The Taxpayer initially provided copies of invoices from the third party, which detailed amounts for a “trip fee” and “parts” in addition to charges for labor. Invoices were later provided a second time to the auditor, in an altered state, showing “labor only” and were not accepted as proof that the transactions were for labor only. No additional documentation was provided by the Taxpayer to support this contention with the appeal.
Dealer Records
Virginia Code § 58.1-633 A requires every dealer “to keep and preserve suitable records of the sales, leases, or purchases… and such other pertinent information as may be required by the Tax Commissioner. This record keeping requirement is further explained in Title 23 of the Virginia Administrative Code 10-210-470:
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 tangible property used or consumed in the conduct of the business… Records must be open for inspection and examination… by the Department of Taxation….
Accordingly, taxpayers are required to maintain accurate books and records of transactions for review by the Department. As indicated above, the documentation, or lack thereof, provided by the Taxpayer does not support its contentions concerning its purchases.
CONCLUSION
Virginia Code § 58.1-205 deems assessments issued by the Department to be prima facie correct. This means that the burden of proving the assessment is incorrect rests upon the Taxpayer. The Taxpayer's records did not contain adequate information to verify whether certain items purchased exempt of the tax were for sale or resale as numerous invoices were missing from the Taxpayer's records, and several items were coded office supplies and repair and maintenance. The provision of adequate records and other documentation is necessary to prove that the tax assessed in the audit is incorrect. In this instance, the Taxpayer has not met the burden of proof.
Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 60 days of the date of this letter.
The Code of Virginia sections and regulation cited, along with other reference documents, 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 response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1748.A