Tax Type
Retail Sales and Use Tax
Description
Transfer of business assets, Rail car lease; Manufacturing equipment
Topic
Exemptions
Property Subject to Tax
Date Issued
06-05-1992
June 5, 1992
Re: §58.1-1821 Appeal: Retail Sales and Use Tax
Dear****************
This will reply to your letter in which you seek correction of a retail sales and use tax assessment for **************("Taxpayer 1") and ***************("Taxpayer 2").
FACTS
Taxpayer 1 was audited for the period February 1989 through December 1989 and Taxpayer 2 was audited for the period January 1987 through January 1989. The Taxpayers contest the assessment of the tax on various purchases of equipment and services.
DETERMINATION
Each of the contested areas raised by the Taxpayers will be addressed separately below in the same order as set forth in the letter of protest.
Transfer of Business Assets. The Taxpayers contend that certain business assets are exempt from tax as they were transferred in exchange for an interest in a partnership and not pursuant to a taxable sale. The Taxpayers also contend that the purchaser of the assets, Taxpayer 1, was erroneously assessed the tax.
While sellers are legally required to collect and remit the sales tax on all sales or leases of tangible personal property, Va. Code §58.1-625 makes the tax the legal debt of the purchaser. This has been recognized by the federal courts, which have held that "the legal incidence of the Virginia sales and use tax is on the purchaser." United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir 1978). As such, the department may proceed against either the seller or the purchaser in instances where the tax has not been collected or paid.
Additionally, while the Taxpayers contend that there was no sale and the assets were contributed to the partnership, they have failed to provide any documentation regarding the agreements for the partnership, nor have they provided evidence to prove that the assets were transferred to the partnership only as a contribution of capital to the partnership and qualify for a statutory exclusion from the tax.
The sale by a business of tangible personal property used in an activity for which no certificate of registration is required may be exempt under the occasional sales exemption. However, the Taxpayers have not refuted the auditor's claim that the assets were held in the course of an activity for which the Taxpayers were required to hold a certificate of registration. The Taxpayers have also failed to show that the partnership represents a tax exempt reorganization.
If the Taxpayers can provide the department with documentation to support its contentions, the audit will be revised accordingly.
Self-Manufactured Products. The Taxpayers contend that the auditor erroneously applied the tax to the "selling price" rather than the "cost price" of certain self-manufactured products as provided in Virginia Regulation (VR) 630-10-37.
VR 630-10-37 provides that a fabricator of tangible personal property for sale or resale is subject to the tax based upon the fabricated cost of any items used or consumed by him. In this instance, property was transferred from a separately incorporated division to the Taxpayers. The items were invoiced and paid by the Taxpayers at their full sales price and capitalized at full price paid and not discounted to cost. As such, the items do not represent items consumed or used by the fabricator of the property, but are sales to the Taxpayers and the tax is due on the total sales price of the property. Thus, no adjustment is necessary in this instance.
Equipment Used Directly in Manufacturing. The Taxpayers assert that several items were in fact used directly in the manufacturing process and thus are exempt from the tax. I will address each of these items individually below.
a) Wash booth enclosure. This is a freestanding enclosure used to contain spray washing of transformers. The enclosure serves only to contain the overspray from affecting nearby machinery and other items. The enclosure is similar to test cells which were held taxable in PD 88-70 (May 21, 1988), as the enclosure is not an immediate part of the production process, and thus no adjustment is warranted.
b) Test floor controller. The test floor controller is a fiber optic cable link from a taxable mainframe computer to the test floor computer. The controller only serves to up and download information between the two computers and is not used directly in the manufacturing process. Thus, no adjustment is necessary.
c) Self-produced custom software. The self-produced custom software is a program which translates the incompatible data from the mainframe to the production test floor computer; once the testing is complete the data is translated back to the mainframe by way of the software program. If the Taxpayers can provide documentation indicating that the custom software program translates the incompatible data between the two computers, then it would be considered an exempt item for use in production testing and an adjustment may be necessary.
d) Equipment used in a plant in another country. The equipment in question was purchased and stored in Virginia for subsequent shipment to Mexico. Since first use of the property is made in Virginia, although the property in question is to be used in another country, the Virginia tax applies. However, if the property was purchased for resale and the Taxpayers can provide documentation to substantiate this claim, the audit will be adjusted accordingly.
CAD Graphic Terminals. The Taxpayers contend that certain computer aided design graphic terminals were used in research and development and exempt from the tax as provided in VR 630-10-49.2. However, this same area was addressed in a ruling letter to the Taxpayers, PD 88-95 (May 10, 1988), in which it was determined that the items were not used exclusively in manufacturing. It was determined during this audit that the terminals are still being used in an administrative function. Thus, since the terminals are not used exclusively in research and development, they do not qualify for an exemption from the tax.
Expense Items. The Taxpayers contest the assessment of tax on certain expense items as follows:
a) Self-manufactured products. This issue was discussed earlier in this determination and as such, no adjustment is needed.
b) Out-of-state purchases shipped to other states. The Taxpayers only provided limited documentation to the auditors regarding the shipment of these items -- only 1 purchase of 46 was removed. If the Taxpayers can provide proper documentation regarding the shipment of these items, they will be removed from the audit.
c) Modem lease charges. The Taxpayers contend that certain modem lease charges are for nontaxable services and that Virginia tax has been paid to the lessor on taxable charges. There are two modem leases located in Virginia, however, one is being assessed Virginia tax and the other is being assessed North Carolina tax in error. Additionally, the lease charges are included in a lump sum charge and no breakdown for nontaxable technical support has been provided. Thus, the amounts were properly included in the audit unless documentation can be provided to reflect that nontaxable services were provided.
Rail Car Leases. The Taxpayers contend that the auditor erroneously determined that charges for the lease of property used outside the state of Virginia were subject to the tax. While the Taxpayers have indicated to the auditor that the charges were in fact demurrage charges, no documentation has been provided to date to support this position. Therefore, I see no basis for a revision in this instance unless the Taxpayers can provide adequate documentation to support their position.
The audit will be revised in accordance with the policies set forth in this determination, provided the Taxpayers can provide the documentation as requested above within 60 days of the date of this letter. Please forward any information to the department's Office Services Division, Technical Services Section, P. O. Box 6-L, Richmond, Virginia 23282. If the requested information is not received within the allotted time period, the assessment will be payable in full.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/4417D
Rulings of the Tax Commissioner