Tax Type
Retail Sales and Use Tax
Description
Nonprofit organization; Scientific educational institution
Topic
Exemptions
Property Subject to Tax
Date Issued
12-28-1993
December 28, 1993
Re: §58.1-1821 Determination: Retail Sales & Use Tax
Dear***********
This will reply to your letter of November 16, 1993 requesting total relief for sales and use tax assessed as the result of an audit of ********** (the Taxpayer) for the period of October, 1990 through August, 1993. Your letter also requests a ruling as to the tax exempt status of the Taxpayer with respect to the retail sales and use tax.
FACTS
The Taxpayer is a scientific educational institution exempt from income taxes under IRC §501(c)(3). The Taxpayer is funded in part through federal grants. The Taxpayer publishes classroom textbooks and laboratory manuals for public and private schools and colleges. It was recently audited and found to have failed to pay the use tax on its purchases. It contests the assessment as it maintains that it qualifies for exemption from the tax as either an exempt institution of learning or because its purchases are funded through federal grants.
DETERMINATION
There is no general exemption from the Virginia retail sales and use tax for nonprofit organizations. While the Taxpayer may be a tax exempt organization under IRC §501(c)(3) organized as a scientific education institution, this alone is not sufficient to qualify for the nonprofit institution of learning exemption under subdivision 2 of Va. Code §58.1-609.4. To qualify, Virginia Regulation (VR) 630-10-96(A)(1) provides that an organization must:
-
- (a) employ a professionally trained faculty;
(b) enroll and graduate students on the basis of academic achievement;
(c) prescribe courses of study; and
(d) provide instruction at regular intervals over a reasonable period of time.
- (a) employ a professionally trained faculty;
An organization must meet all of the above criteria to qualify and these criteria have been expressly validated by the Virginia Supreme Court in Commonwealth v. Progressive Community Club, 215 Va. 732, 213 S.E.2d 759 (1975). A review of the Taxpayer's organization reveals that it does not meet these criteria.
With regard to the Taxpayer's contention that its purchases should be exempt because such purchases are funded through federal grants, I call your attention to VR 630-10-45 (copy enclosed). Only sales to the federal government which are pursuant to an official purchase order to be paid out of public funds are exempt from the tax. I have also enclosed a copy of United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), add'd, 569 F.2d 811 (4th Cir., 1978), which sets forth the factors necessary to establish an agency relationship with the federal government for purposes of the sales and use tax. Based upon the court's opinion in Forst, the primary factor in determining whether an agency relationship exists is whose credit is bound by the transaction.
It is my understanding that while the majority of the Taxpayer's funding is the result of federal grants, the Taxpayer's purchase transactions are not made on behalf of the federal government and do not bind the federal government's credit.
In reference to the penalty assessed on this audit liability, VR 630-10-80(C)(1) sets forth a mandatory penalty on all audit deficiencies, however, penalty may be waived at the discretion of the Tax Commissioner. Generally, absent indications of fraud, penalty will be waived on first generation audits. Second and subsequent audits, the Taxpayer must exhibit a level of compliance of 75% or greater in order for penalty to be waived. Due to the fact that this is the third generation audit of the Taxpayer, and compliance was less than 75%, penalty was properly applied.
Based on the above, I find no basis for relief. If you should have any questions, please feel free to contact this office.
Sincerely,
W. H. Forst
Tax Commissioner
OTP//7515K
Rulings of the Tax Commissioner