Tax Type
Retail Sales and Use Tax
Description
Leases and Rentals; Industrial Materials; Government Transactions; Aviation Services Contractor
Topic
Taxability of Persons and Transactions
Date Issued
09-10-1992
September 10, 1992
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This is in reply to the request for review of contested issues resulting from sales and use tax assessed to your client,*********** and its wholly owned subsidiaries**************(collectively referred to as the Taxpayer).
FACTS
The Taxpayer, as an aviation services company based in Virginia, provides specialized combat readiness training, including electronic warfare simulation, radar surveillance, and target towing to the military. In addition, the Taxpayer provides contract flight services to a civilian instrumentality of the U.S. government and conducts fixed base operations which provide aircraft fueling, maintenance and high-caliber avionics to commercial and private customers. The Taxpayer provides the above services via its Virginia location as well as utilizing facilities under its operation without Virginia. In the performance of its government contracts, the Taxpayer provides trained personnel to operate its aircraft.
The Taxpayer contests the tax assessed to its affiliated corporations concerning the following issues:
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- _ tangible personal property used in the conversion, repair and maintenance of its aircraft provided in the performance of its military contracts;
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- _ tangible personal property used and consumed in the provision of common carrier services to the civilian instrumentality of the U.S. government; and
_ tangible personal property purchased outside Virginia prior to relocation of its headquarters and tangible personal property delivered to Virginia for storage prior to distribution to facilities outside Virginia.
- _ tangible personal property used and consumed in the provision of common carrier services to the civilian instrumentality of the U.S. government; and
DETERMINATION
I will address the major issues presented individually.
Service v. Sale/Government Contractor
The Taxpayer stipulates that the major focus of its government contracts is the leasing of aircraft and as such its purchases of component parts, equipment and materials used in the conversion (manufacture) of aircraft, per contract specifications, are exempt under Va. Code §58.1-608(A) (3) (b)(i). The Taxpayer further stipulates that its primary customer is the federal government and therefore its "leases" to the government are exempt under Va. Code § 58.1-608(A) (1) (e).
Va. Code §58.1-608(A)(3) (b) addresses the manufacturing/processing exemption, and subsection (i) exempts from the sales and use tax the following:
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- Industrial materials for future processing, manufacturing, refining, or conversion into articles of tangible personal property for resale where such industrial materials either enter into the production of or become a component part of the finished product.
- Industrial materials for future processing, manufacturing, refining, or conversion into articles of tangible personal property for resale where such industrial materials either enter into the production of or become a component part of the finished product.
VR 630-10-57 states that the tax generally applies to leases of tangible personal property without operators. Conversely, it is a longstanding policy of the department that the rental or leasing of equipment with an operator is considered a nontaxable service under Va. Code §58.1-608(A)(5)(a). In the instant case, the Taxpayer provides flight crews, which include pilots, to operate its aircraft in the rendition of aviation services, therefore the transaction is not subject to the retail sales tax. However, in rendering such nontaxable service, the Taxpayer as the consumer of all tangible personal property used in converting the aircraft for use in its military contracts is subject to the tax on the cost price of such tangible personal property.
Furthermore, Va. Code §58.1-(608)(A)(1)(e) provides an exemption from the sales tax for "[t]angible personal property for use or consumption by ... the United States." VR 630-10-27(J) explains, however, that this exemption is only available when "the credit of a governmental entity is bound directly and the contractor has been officially designated as the purchasing agent for such government entity."
In addition, VR 630-10-45(E) provides:
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- [p]ersons who contract with the federal government, the State or its political subdivisions to perform a service and in conjunction therewith furnish some tangible personal property are deemed to be the consumers of all such property and are not entitled to exemption on the grounds that a governmental entity is a party to the contract. This is true even though title to the property provided may pass to the government and/or the contractor may be fully and directly reimbursed by the government.
- [p]ersons who contract with the federal government, the State or its political subdivisions to perform a service and in conjunction therewith furnish some tangible personal property are deemed to be the consumers of all such property and are not entitled to exemption on the grounds that a governmental entity is a party to the contract. This is true even though title to the property provided may pass to the government and/or the contractor may be fully and directly reimbursed by the government.
Common Carrier v. Contract Carrier
The Taxpayer asserts that it is performing as a common carrier regarding its contract with the civilian instrumentality of the U.S. government, and as such qualifies for exemption under Va. Code §58.1-608(A)(3)(f) regarding all tangible personal property used directly in the rendition of its common carrier service.
The Taxpayer cites Commonwealth v. United Airlines, 248 S.E.2d 124, 129 (Va. 1978) as the basis for its argument. In that case, the Virginia Supreme Court ruled that an airline's computer reservation system, passenger and baggage servicing equipment and its anti-hijacking equipment were used directly in the provision of its common carrier services and thus, subject to the above exemption.
The Air Carrier Certificate issued to the Taxpayer by the U. 5. Department of Transportation's Federal Aviation Administration, was issued subject to the "the terms, conditions, and limitations contained in the approved operations specifications" While the Taxpayer did not furnish the documents relating to the designation of its specific operations, the department was able to obtain copies of the Taxpayer's Air Taxi Operator Registration forms filed with the U.S. Department of Transportation specifying its carrier operations. This information was obtained for the entire audit period under the Freedom of Information Act. A review of the documents indicates that the Taxpayer registered to conduct "on-demand passenger" and "on-demand cargo" service. However, the information does not indicate that the Taxpayer is providing scheduled passenger operations or "common carrier" service.
The term "airline" describes a company, firm or individual which provides scheduled passenger operations by air. Inherent in that definition are generally recognized standards of service which include the use of internationally accepted ticket stock; the ability to make a reservation through a computerized reservation system from almost any point in the world; schedules and itineraries published in the Official Airline Guide; services published in local airport flight guides; electronic security screening for both passengers and baggage; and a ticket/passenger service counter in the passenger terminal of each airport the airline operates. A review of the operations of the Taxpayer reveals that none of these standards of service are available to the traveling public.
Many airlines provide contract services such as charter services which are incidental to their scheduled passenger operations; however, they are not in the business to provide "on demand" service. The fact that the Taxpayer will transport passengers and/or cargo upon request on any of its scheduled contract flights does not support any argument that its operations are available to the general public. On the contrary, such a service would not be available if a contract did not exist to require the service, thus the true intent is to satisfy the Taxpayer's federal contractual relationship.
Based on the information presented I am not convinced that the operations of the Taxpayer can reasonably be defined as anything other than a contract carrier providing "on demand," for hire service. Accordingly, the Taxpayer does not operate as an airline within the meaning of the exemption under Va. Code § 58.1-608(A)(3)(f) and thus, does not qualify for exemption from the sales and use tax on purchases of tangible personal property used and consumed in the performance of the contract with the civilian instrumentality of the U.S. government.
Use Tax
The Taxpayer cites Va. Code §58.1-607 as the applicable exemption regarding the assessment of use tax upon certain assets (i.e., jet engines, electronic warfare equipment, targeting equipment and related systems) purchased prior to moving its headquarters to Virginia. Thus, the Taxpayer requests the proration of the tax regarding the computation of use tax upon the aforementioned purchases. Additionally, the Taxpayer contends that purchases of parts and supplies held for resale are further exempted from the imposition of the use tax as discussed pursuant to Va. Code § 58.1-604.
Va. Code §58.1-607 has no application since the Taxpayer was performing government contracts in Virginia and maintaining aircraft in Virginia since 1982, prior to relocating its headquarters in 1986. The above activities clearly constitute business operations on a continuing basis in the Commonwealth. It is reasonable to believe that asset purchases would have been made in anticipation of moving the headquarters to Virginia. It should be noted that the Taxpayer has been given an opportunity to provide invoices showing the delivery destinations but has not done so to date.
Va. Code §58.1-604 imposes the use tax on "the use or consumption of tangible personal property in this State..." The term "use" is then defined in Va. Code §58.1-602 as, "the exercise of any right or power over tangible personal property incident to the ownership thereof..." Furthermore, VR 630-10-109(A) provides that "[t]he use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased." (Emphasis added) The term "storage" is then defined in Va. Code §58.1-602 as "any keeping or retention of tangible personal property for use, consumption or distribution in this State, or for any purpose other than sale at retail in the regular course of business."
Va. Code §58.1-604 provides for proration of the use tax based on actual usage in Virginia under extremely limited circumstances, i.e., when "tangible personal property ... has been acquired for use outside this Commonwealth and subsequently becomes subject to the (Virginia) tax." It is the property not purchased "for use" in Virginia, but subsequently used in Virginia that is contemplated within the proration language. For example, proration may apply to construction equipment acquired outside of Virginia for the purpose of performing out of state construction contracts, rather than for any use in Virginia, and subsequently brought into the Commonwealth temporarily. However, proration would not apply to such equipment when at the time of the purchase, the purchaser proposed to store or otherwise use the equipment in the Commonwealth temporarily, notwithstanding that the equipment was acquired outside of the Commonwealth.
Based on the information before me, the jet engines, electronic warfare equipment, etc. were not "acquired for use outside this Commonwealth," within the meaning of Va. Code §58.1-604. In this case, the Taxpayer imports and holds for storage tangible personal property for its own use and consumption in providing a nontaxable service (the provision of aviation services) to its customers located both within and without the state. Therefore, the moment the Taxpayer takes delivery in Virginia of the component items. parts and supplies used and consumed in the conversion process
of its aircraft per contract specifications, it exercises a right or power over that property incident to the ownership thereof, sufficient to subject such property to the tax .
Moreover, even if the Taxpayer intended to deliver such tangible personal property to its other locations outside the state does not preclude the imposition of the sales and use tax on such property, when it is held in Virginia prior to such delivery outside the state. This position is supported by the opinion of the Virginia Supreme Court in Commonwealth v. Miller-Morton, 220 Va. 852, 263 S.E. 2d 413 (1980), copy enclosed, which held taxable the storage of tangible personal property in Virginia, even though the property would ultimately be shipped outside of the state. The tax liability is incurred by the Taxpayer at the moment the property is brought into Virginia and stored for use by the Taxpayer.
Furthermore, the auditors have indicated that resale inventory accounts were not included in the audit findings. However, any items purchased and delivered to Virginia and then forwarded to another facility without Virginia and coded to an account other than a resale inventory account were in fact assessed use tax in the audit. Moreover, the Taxpayer's use tax accrual method was applied inconsistently in that a clerk would manually review hundreds of computerized ledger sheets for certain accounts to determine taxable items. Not only did this method ensure that some taxable items would be omitted by virtue of human error, but also that taxable items coded to seldom used accounts would be overlooked completely. Thus, the auditor included all taxable items for the sample period in the audit exceptions list and provided a credit for the amount of the use tax paid. Notwithstanding, if the Taxpayer can provide convincing evidence that certain items have been incorrectly assessed, then the department would be willing to make the necessary adjustments to the assessment. Otherwise, I find the procedures employed by the auditor to be proper and warranted in this area.
Sampling
Regarding the issue of the audit sample projection basis, the Taxpayer instituted a major change in accounting procedures and company operations effective February 1, 1989. A repair function provided by one affiliate to another was terminated and each affiliate became responsible for its own repair operation.
Accordingly, the auditor chose two purchase sample periods; one prior to February 1, 1989 and the other subsequent to that date for both affiliates. Sales sample periods were also chosen for the affiliate making sales utilizing the same method. However, the figures used for extrapolation of the purchase sample error factors relating to one affiliate represents consolidated figures for the parent company and its affiliates as opposed to computed figures for that affiliate only. The auditor indicates that such figures were not available during the audit process. For future audit purposes, it is incumbent upon the Taxpayer to maintain adequate and complete records necessary to determine proper
compliance with the sales and use tax laws.
Based on the facts, auditor's comments and the availability of records presented in this case, I find no basis for adjustment of the audit assessment at this time.
Given the substantial amount of the assessment at issue and the fact that the Taxpayer may be experiencing financial difficulty, Va. Code §58.1-105 authorizes the Tax Commissioner to accept
offers in compromise of taxes of doubtful liability or doubtful collectibility. If you wish to pursue an offer, please provide information regarding the Taxpayer's financial condition to the department's Office of Tax Policy at P.O. Box 6-L, Richmond, Virginia 23282.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/5822J
Rulings of the Tax Commissioner