May 25, 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 July 2015 through December 2016. The assessment at issue has been paid in full. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a project engineering and design contractor with one location in Virginia. An audit resulted in the assessment of tax, penalty, and interest for sales tax collected but not remitted to the Department, and use tax for untaxed expense and fixed asset purchases. The Taxpayer contests part of the assessment and raises various issues it was not able to resolve at the time of audit. These issues are described below.
DETERMINATION
Purchases for Resale
The Taxpayer takes issue with two line items (Line item 116 and 202) on the “non-contested purchases” exceptions list and claims that these items are purchases made for resale. The Taxpayer states that it is principally a real property contractor who fabricates tangible personal property for its own use and consumption. The Taxpayer states that it also makes retail sales. The Taxpayer claims that, as a fabricator who operates in a dual capacity as described in Title 23 of the Virginia Administrative Code (VAC) 10-210-410 E, it made tax exempt purchases in which it knew at the time of purchase that the items would be resold to customers without a real property contract. The Taxpayer provides two invoices and states that these documents show that the sales tax was charged to and paid by its customers.
Because the documentation shows the Taxpayer sold the items at issue and collected the required tax, the audit will be returned to the auditor to revise the purchase exceptions list regarding the two meters for which the Taxpayer was able to provide documentation proving that the purchases were for resale and the appropriate tax was paid by its customer.
Tax Charged on Markup
The Taxpayer invoices customers for time, materials, and lump sum billing. The auditor found that the Taxpayer was charging an average markup of 10% for material costs. The invoices billed customers for tax on the material cost and the markup, however, the amount of tax collected for the markup amount was not remitted to the Department.
The Virginia retail sales and use tax is imposed on the "sales price" of tangible personal property. Virginia Code § 58.1-602 defines "sales price" as
the total amount for which tangible personal property or services are sold, including any services that are a part of the sale, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.
As so defined, sales price includes any amount charged as a markup for overhead expenses and other costs and profit in connection with the sale of tangible personal property. The definition makes it clear that, absent a statutory exemption, labor, service charges, or any other additional expenses are taxable when made in connection with the sale of tangible personal property.
The documentation provided by the Taxpayer (Exhibit B) shows that the Taxpayer collected more tax than it remitted to the Department. No disclosure was included on the documents provided to reference that the tax only applies to materials. Thus, the evidence indicts the tax was collected on both the material costs and the markup. Pursuant to Virginia Code § 58.1-625, the Taxpayer is required to remit all taxes it collects from its customers to the Department, even if such tax is erroneously collected.
Exemption
The Taxpayer claims that various purchases for a contract job qualify for an exemption from tax. The Taxpayer states that most of the contract job for which the purchases were made qualify for an exemption, but does not specifically cite the statutory exemption for which it believes it qualifies. The Department’s records indicate that the Taxpayer requested and received Form ST-11A from the Department on January 29, 2018. However, the contract was completed on December 31, 2016.
The auditor notes that, while some of the contract purchases qualified for a manufacturing exemption pursuant to Virginia Code § 58.1-609.3 2, the Taxpayer failed to prove that the purchases held as exceptions in the audit were used in manufacturing. The auditor notes that the scope of the project, including conduits, brackets, wiring, lighting, receptacles, heat trace, and safety showers, is related to real property construction. The exemption certificate requested by the Taxpayer states that the exemption does not apply to purchases of “materials incorporated into real property construction…” Virginia Code § 58.1-610 A provides the following:
Any person who contracts orally, in writing, or by purchase order, to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property, shall be deemed to have purchased such tangible personal property for use or consumption.
Compliance Penalty
The Taxpayer also requests the waiver of compliance and post-amnesty penalties assessed in the audit. The Taxpayer requests that the current audit period be considered a first audit for penalty calculation purposes because of the length of time between the prior and current audit periods. The Taxpayer also states that it was found to be in sufficient compliance during the previous audit period to avoid the application of penalty. The Taxpayer also states that the post-amnesty penalty should be waived because the Guidelines for the Virginia Tax Amnesty Program state the following: “Assessments issued for additional amounts due on amnesty eligible returns, provided that the liability is paid by November 14, 2017, or within 30 days from the date of assessment, whichever is later.”
Title 23 VAC 10-210-2032 8 provides the following:
Penalty generally will not be applied to audit deficiencies occurring in new areas not covered by prior audit(s), provided the application of the tax is not clearly established under existing law, regulations or other published documents of which the taxpayer reasonably should have had knowledge… The application of penalty to audit deficiencies will not be waived on second and subsequent audits for other than exceptional mitigating circumstances.
The issues in the current audit are the result of long-standing policies by the Department and are clearly established under existing law. The Taxpayer did not reach the required use tax compliance ratio to avoid penalty on this second generation audit and the Taxpayer did not provide documentation for a computation under the alternative method. Regarding the unremitted sales tax assessed and penalized in this audit, penalty is always applied in such instances because the tax was collected but not remitted to the Department. The penalty applies regardless of the generation of the audit. See subsection B 3 b of Title 23 VAC 10-210-2032.
Amnesty Penalty
The 2017 General Assembly enacted legislation establishing a Tax Amnesty program, spanning a 60 to 75 day period that was administered by the Department. The Guidelines for the Virginia Tax Amnesty Program are addressed in Public Document (P.D.) 17-156 (9/5/2017). Taxpayers with delinquent returns for amnesty-eligible periods qualified for amnesty benefits. Any tax liability that was eligible for amnesty benefits but remained unpaid is subject to a 20% amnesty penalty in addition to all other penalties. The amnesty-eligible periods for ongoing field audits is the month of April 2017 and prior. P.D. 17-156 states that the 20% post-amnesty penalty will not apply to the following:
Any assessment generated from a field audit of a business for an amnesty eligible period in cases where the audit is a second or subsequent audit of the taxpayer, provided that the Compliance Ratio is greater than 85 percent for sales tax and greater than 60 percent for use tax, no penalty has been applied to the tax deficiency, any uncontested liability is paid by November 14, 2017, and payment for any contested liability remaining upon resolution of an appeal under Va. Code §§ 58.1-1821 or 58.1-1825 is paid within 30 days from the date of the Tax Commissioner’s or the court’s final determination.
The Taxpayer has failed to meet all of the conditions mentioned above. In this case, the Taxpayer’s use tax compliance did not reach the required level of compliance and penalty was applied to this assessment. The uncontested liability was paid May 1, 2018 and the contested liability was paid July 6, 2018. Accordingly, I do not find cause to waive compliance or amnesty penalties in this instance.
CONCLUSION
The audit will be returned to the appropriate field audit staff to make the adjustments consistent with this determination. The auditor will also issue a refund for any adjustments made, with interest accrued to date, as soon as practicable.
The Code of Virginia sections, regulations and public document 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/1687.G