92-169 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Transformers Used in Ship Repair; Tax collected but not remitted

Topic

Taxability of Persons and Transactions

Date Issued

09-02-1992

September 2, 1992

Re: §58.1-1821 Application: Retail Sales and Use Tax

Dear**************

This will reply to your letter dated May 18, 1992 seeking the correction of a sales and use tax assessment for****************(the Taxpayer").

FACTS

The Taxpayer, a repairer of ships and vessels, was audited for the period January 1989 through December 1991. There are three areas in the audit which the Taxpayer wishes to appeal. First, the Taxpayer purchased transformers which were used to step down the voltage of electricity received from an outside power company. The Taxpayer contends that transformers are exempt pursuant to Va. Code § 58.1-608(A)(3)(d) in that they are used directly for the purpose of powering equipment for use in its repair work.

Secondly, the Taxpayer was assessed for taxes collected in April 1989 on the total sales price for a repair, including repair labor, but not remitted to the department. The Taxpayer states it can demonstrate that the sales tax collected erroneously on the repair labor has been credited to the purchaser's account. Therefore, since it has paid the audit assessment, the Taxpayer seeks a refund of tax, penalty and interest pursuant to Virginia Code §58.1-625.

Lastly, the Taxpayer states the interest rate applied to the audit assessment is excessive when measured against Va. Code §58.1-15 and should be reevaluated for correctness.

DETERMINATION

Transformers

Virginia Code §58.1-608(A)(3)(d) provides, in pertinent part, an exemption from sales and use tax for:

- Ships or vessels used or to be use exclusively or principally in interstate or foreign commerce, or repairs and alterations thereof;...or tangible personal property used directly in the building, conversion or repair of the ships or vessels covered by this subdivision. (Emphasis added.)

To qualify for this exemption, tangible personal property must be used directly in the building, conversion or repair of a ship or vessel used exclusively or principally in interstate or foreign commerce. In the case of Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973), the term "used directly" refers to items which are an indispensable part of the actual production or repair activity, and which are used as an immediate part of such activities.

In this case, the Taxpayer must receive the appropriate voltage of electricity so that the repair equipment and tools can be used to repair the vessels. In that the transformers are indispensable in stepping down the voltage of electricity for use in such equipment and tools, they are used directly in the repair of the vessels. Therefore, the transformers are exempt and will be removed from the audit.

Tax Erroneously Collected But Not Remitted

Va. Code §58.1-625 concerning the erroneous collection of tax provides that:

- Any dealer collecting the sales or use tax on transactions exempt or not taxable under this chapter shall transmit to the Tax Commissioner such erroneously or illegally collected tax unless or until he can affirmatively show that the tax has since been refunded to the purchaser or credited to his account.

In addition, Virginia Regulation 630-10-89 addresses the Statute of Limitations for the issuance of refunds and provides that:

- The dealer must show that the tax erroneously or illegally collected was paid by him and not passed on to the consumer, or the tax was collected from the consumer as tax and subsequently refunded to the consumer.
  
  Refunds cannot be authorized unless the request is made within three years from the due date of the return (Emphasis added.)

For the items shown in the audit, if the Taxpayer can provide documentation to demonstrate that within three years from the due date of the April 1989 sales and use tax return, (1) tax was erroneously collected from the customer, (2) the tax was remitted to the department and (3) the tax was subsequently refunded to the purchaser or credited to their account, the audit will adjusted and the amount erroneously paid will be refunded. Such documentation should be provided to our Norfolk District Office for verification within the next thirty (30) days.

Interest

Va. Code §58.1-15 concerning interest provides that:

- The rate of interest on omitted taxes and assessments under this title shall be the "Underpayment Rate" established pursuant to §6621(a)(2) of the Internal Revenue Code plus two percent. (Emphasis added.)

Therefore, the interest rate on assessments for Virginia purposes is two percent higher than the interest rate on assessments for federal purposes. In addition, tax rates for federal purposes may fluctuate quarterly thereby affecting the quarterly Virginia tax rate. Lastly, the interest rate on the Taxpayer's Sales and Use Tax Field Audit Report reflects the cumulative rate computed for each filing period. The interest computation for each filing period begins with the twentieth of the month following the filing period and ends on the date the audit assessment is issued. Therefore, the interest rates shown on the audit report are accurate. For your information, I have enclosed a Virginia Tax Bulletin dated June 15, 1992, which will provide more detail on the interest rates used.

If you have any further questions, please contact the department.

Sincerely,

W. H. Forst
Tax Commissioner

OTP/6354N

Rulings of the Tax Commissioner