Tax Type
Retail Sales and Use Tax
Description
Audit situation: fixed asset vs. resale inventory; Telephone system
Topic
Collection of Delinquent Tax
Exemptions
Property Subject to Tax
Date Issued
03-22-1993
March 22, 1993
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear****************
This will reply to your letter in which you seek correction of a sales and use tax assessment for****************(the Taxpayer).
FACTS
The Taxpayer's business involves the sale and service of telephone systems. A sales and use tax audit of the Taxpayer for the period February 1988 through December 1990 resulted in an assessment primarily for its failure to remit the tax on the purchase of fixed assets used in the operation of its business.
The Taxpayer contests the inclusion of three such purchases, noted on the audit report as phone system additions and office phones. The Taxpayer maintains that it mistakenly classified these items as fixed assets instead of resale inventory on company books, but that they for and were used solely for demonstration purposes.
The Taxpayer also requests waiver of assessed penalty charges.
DETERMINATION
Va. Code §58.1-604 imposes the tax on the use or consumption of tangible personal property used in Virginia. Further, Va. Code § 58.1-205 provides that "[a]ny assessment of a tax by the Department shall be deemed prima facie correct."
Pursuant to Va. Code §58.1-623(C), tangible personal property purchased for resale by a dealer may be used for demonstration or display without losing its exempt status. However, in the instant case the Taxpayer's own records, including its federal corporation income tax returns, indicate that the contested property was purchased for the Taxpayer's use and consumption. Therefore, it is incumbent upon the Taxpayer to show that the classification of the contested items to a fixed asset account was erroneous and that such classification has been corrected.
As evidence that the classification of the property as fixed assets was in fact erroneous, the department will accept copies of any amended federal and Virginia income tax returns which may have been filed in order to remove the property from the corporation's depreciation schedule. Further, the Taxpayer must provide evidence that those contested items not Yet reported on corporation income tax returns were removed from a fixed asset account and transferred to an inventory account.
In reference to its request to waive penalty charges. the Taxpayer points to its 100% compliance with taxable sales and also indicates that it paid the tax directly to its vendors on many of its purchases and leases of tangible personal property.
Virginia Regulation (VR) 630-10-80(C) provides for the mandatory application of penalty to second and subsequent audits. Assessments of penalty on audits is determined by the level of compliance exhibited by the taxpayer, and on second generation audits the threshold of compliance necessary to avoid penalty charges on purchases is 50%. The use tax compliance in this case was less than 15%, and even if the contested purchases are totally removed, the compliance ratio is still well below the acceptable level.
VR 630-10-80(C) clearly states "penalty will not be waived on second or subsequent audits for other than exceptional mitigating circumstances." While the Taxpayer showed a 100% compliance for the sales portion of the audit, the purpose of the use tax compliance ratio is to determine how well the taxpayer has complied with Virginia laws in accruing and remitting use tax on untaxed purchases.
Furthermore, to include the tax paid to vendors in computing the use tax compliance ratio would not accurately show compliance with the Virginia use tax laws. This issue has been addressed by the department in the enclosed Public Document 92-100 (6/15/92).
Therefore, lacking the "exceptional mitigating circumstances" as mandated in the regulations, I can find no grounds to waive penalty charges in this case. However, if the contested items are ultimately removed from the assessment, penalty charges will be correspondingly reduced.
Accordingly, collection activity on the outstanding balance of the assessment will remain suspended for an additional sixty days in order for the Taxpayer to submit the documentation noted above. Please submit these records to the department's Office of Tax Policy at P. O. Box 1880, Richmond, Virginia 23282-1880.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/5770I
Rulings of the Tax Commissioner