Tax Type
Retail Sales and Use Tax
Description
Business services
Topic
Taxability of Persons and Transactions
Date Issued
02-27-1987
February 27, 1987
Re: Virginia Code §58.1-1821 Application
Retail Sales and Use Tax
Dear ******************
This is in reply to your letter of June 30, 1986 in which you protest the filing of a lien by the department, dated June 20, 1986, against your client,********* (Taxpayer). I apologize for the delay in responding to your letter and to the letter sent by the Taxpayer's accountant, ********** dated April 1, 1985. Apparently the April 1, 1985 letter, applying for the correction of the assessment that resulted from the department's retail sales and use tax audit of the period from December 1978 through November 1984, was never forwarded to this office for a reply. Since a final determination, based upon the above application for correction has not been issued, I will first address the issues raised by ******************.
FACTS
The Taxpayer is in the business of leasing both furnished and unfurnished offices and office space and providing certain business services to its tenants. These business services include, but are not limited to, photocopying, bookkeeping, telephone answering services and secretarial services. The tenants receive a monthly bill for the charge for the rent of the office space and for the business services provided. The charges for these business services are both included within the base rent, and to the extent allocable, separately stated based upon the consumption of the individual tenants.
ISSUES
The application for correction contests the assessment of tax in three areas of the instant audit. Since these are unrelated, independent issues, I will address each separately.
Issue 1
To the extent that the allocable charges for the business services included the furnishing of tangible personal property, the department determined that the Taxpayer was liable for the collection of the Virginia Retail Sales and Use Tax as a dealer and assessed tax accordingly. The Accountant protests the assessment of tax based upon these allocable charges. He contends that the Taxpayer is not making retail sales, but instead, is only seeking reimbursement of expenses incurred in furnishing a service to its tenants.
Issue 2
The department also assessed use tax on the charge made by **************** for the development of an identifying emblem to be used by the Taxpayer. This charge included the furnishing of one set of masters to be used by the Taxpayer in the future. This item is contested on the basis that the set of masters furnished by *********** was an incidental product of the effort expended in arriving at the final product and is substantially identical to an architect producing a master set of plans for someone.
Issue 3
Finally, it is requested that all items relating to ***************** be removed from the audit on the grounds that the charges were only the allocation of intercompany expenses.
DETERMINATION
Issue 1
Section 630-10-97.1 of the Virginia Retail Sales and Use Tax Regulations requires that in making the determination of whether a particular transaction constitutes an exempt service or a taxable sale, the "true object" of the transaction must be examined.
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- If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including services provided, will be taxable.
- If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including services provided, will be taxable.
The Virginia Retail Sales and Use Tax is a broad based tax imposed under Virginia Code §58.1-603 upon "every person who engages in the business of selling at retail or distributing tangible personal property in this State, ... or who leases or rents such property within this State...." This section goes on to impose the tax on "the gross sales price of each item or article of tangible personal property when sold at retail or distributed in this State ... [and on] the gross proceeds derived from the lease or rental of tangible personal property, where the lease or rental of such property is an established business, or part of an established business, or ... is incidental or germane to such business."
Accordingly, the Taxpayer is liable under Virginia Code §58.1-612 for the collection of the tax as a "dealer." Because the Taxpayer is in fact a "dealer" and as such purchases or leases tangible personal property which is ultimately either leased or resold to the ultimate consumer (tenant), such purchases or leases may be made by the Taxpayer exempt from the tax under the proper resale exemption certificate. Since the Taxpayer paid tax at the time that it purchased or leased the property supplied to its tenants, the department will credit the amount of tax paid on such purchases during the audit period against the outstanding tax liability. The appropriate documentation should be sent to the department's Technical Services Section at this address.
Issue 2
As previously discussed above, §630-10-97.1 of the Virginia Retail Sales and Use Tax Regulations requires that in making the determination of whether a particular transaction constitutes an exempt service or a taxable sale, the "true object" of the transaction must be examined. The object that the taxpayer sought when it contracted with Design was an identifying emblem for the company. The furnishing of a set of masters constitutes the transfer of tangible personal property which has been fabricated. Therefore, absent any other statutory exemption, the charge made by ********** for such a set of masters constitutes a sale of tangible personal property. In that the purchase of this set of masters was a purchase of tangible personal property made by the Taxpayer, exclusive of the tax, for use or consumption within this state, the Taxpayer is subject to the use tax on the entire amount paid to Design for the set of masters. This is consistent with the department's regulations and its long-standing position, as evidenced by the copy of the attached determination dated May 21, 1982.
Issue 3
There is no specific exemption available for intercompany transactions. Therefore, allocable charges properly allocated to EAI shall be subject to the tax in the same manner as the charges billed to non-affiliated corporations. However, to the extent that the tangible personal property purchased or leased by the Taxpayer will be leased or resold to EAI, as the ultimate consumer, such purchases or leases may be made by the Taxpayer under a resale exemption certificate. While EAI may be a subsidiary of the Taxpayer, so long as they continue to enjoy the benefits available to them as independent corporations, they must bear the burdens of such entities. As previously stated in the determination of the first issue, the department will credit the amount of tax paid on such purchases during the audit period against the outstanding tax liability. The appropriate documentation should be sent to the department's Technical Services Section at this address.
Based upon all the above, I find no basis for correction of the assessment. After the amount of tax paid to its suppliers for property leased or resold to its tenants has been credited against the assessment, a revised assessment will be issued. Upon receipt of the revised assessment, payment of the full amount will be due within 30 days.
As I have already indicated, the application for correction filed April 1, 1985 apparently was never forwarded to this office for a reply. That is the reason that the lien was filed. If that letter had been received, and it was determined that the collection of the tax was not jeopardized by delay, all collection activities would have ceased.
The difference in the amount of tax due shown on the two copies of the assessments that you attached to your letter is due to the payment submitted by the Taxpayer for the uncontested portion of the audit. The Taxpayer submitted a check in the amount of ********* on March 4, 1985 to pay this portion of the assessment. At that time the department applied that amount to the outstanding state tax liability, accrued additional interest on the revised balance and mailed a revised assessment to the Taxpayer. Because interest continues to accrue on the unpaid balance of an assessment until it is paid, and the lien was not issued until June 20, 1986, the difference in the amount shown as due on the lien is due to the passage of time.
Your final concern is with the statute of limitations on the assessment of additional taxes. You cite the three year statutory period set forth in Virginia Code §58.1-1812. The statutory periods set forth in that section are applicable "[e]xcept as otherwise provided by law." Virginia Code §58.1-634 provides that in regard to the Virginia Retail Sales and Use Tax, "taxes ... shall be assessed ... [i]n the case of ... a failure to file a return, ... at any time within six years...." The Taxpayer was not a registered dealer; therefore, the Taxpayer was not filing returns. Accordingly, the six year statutory period provided under Virginia Code §58.1-634 is applicable.
If you have any further questions, please do not hesitate to contact this office.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner