Tax Type
Retail Sales and Use Tax
Description
Computer system operations, recurring purchases and fixed asset purchases.
Topic
Appropriateness of Audit Methodology
Date Issued
05-12-1994
May 12, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear****************
This is in response to your letter of March 17, 1994 in which you seek correction of a sales and use tax assessment issued to *******(the "Taxpayer").
FACTS
The Taxpayer, located outside of Virginia, provides computer system operations. An audit for the period January 1989 through December 1991 produced an assessment for the Taxpayer's failure to pay the tax on certain recurring purchases and fixed asset purchases. The Taxpayer contests the tax on the purchase of fixed assets from********** (the "Seller") and on the purchase of data processing assets from *********(the "Bank"). The Taxpayer also requests waiver of assessed penalty charges.
DETERMINATION
Each of the issues raised in your correspondence will be addressed separately as follows:
Purchase of Assets: The Taxpayer entered into an agreement with the Seller whereby the Seller supplied equipment to the Taxpayer pursuant to government contracts. Because some items would be purchased exempt for resale, but others for the Taxpayer's own use and consumption, you indicate that the agreement provided that invoices would include any applicable tax. You further indicate that a certificate of exemption was issued to the Seller stating that the application of the tax to each purchase would be indicated on the Taxpayer's purchase order.
Thus, if a particular item was for the Taxpayer's own use, the purchase order would indicate that the sales tax should be added. Conversely, if the item was for resale, the purchase order would indicate that no sales tax should apply.
During the course of the audit it was found that the Seller did not separately charge the tax on any of the Taxpayer's purchases. Therefore, the Taxpayer was held liable for the tax on those items purchased for its own use and consumption.
You maintain that any tax due on these purchases should be assessed to the seller since the agreement specified that applicable taxes would be charged and because the Seller failed to remit the applicable sales taxes to the Commonwealth. You further maintain that the certificate of exemption tendered by the Taxpayer cannot be construed to be a blanket exemption since it directed the Seller to refer to each purchase order to determine the taxability of each item.
Va. Code §58.1-604 imposes the tax upon the use or consumption of each item or article of tangible personal property used in Virginia. Further, Va. Code §58.1-625 provides that:
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- The tax levied by [the Sales and Use Tax Act] shall be paid by the dealer, but the dealer shall separately state the amount of the tax and add such tax to the sales price or charge. Thereafter, such tax shall be a debt from the purchaser ... to the dealer until paid and shall be recoverable at law in the same manner as other debts. (emphasis added)
In addressing this statute, the federal courts have held that the legal incidence of the Virginia sales or use tax is on the purchaser and specified that "although the seller is legally obligated to collect the tax from the purchaser, the statute makes the tax the legal debt of the purchaser." United States v. Forst, 442 F Supp. 920 (W.D. Va 1977).
In the instant case the Taxpayer purchased equipment for its own use or consumption, and the incidence of the tax on the use of that equipment is undisputed. It is also clear that no tax on the contested purchases was separately stated; nor is there any evidence that the Seller remitted the tax to the department. Therefore, notwithstanding any agreement between the Taxpayer and the Seller, the assessment issued to the Taxpayer is correct as assessed since the legal incidence of the tax is on the Taxpayer.
Purchase of Data Processing Assets: The Taxpayer agreed to provide services previously provided by the Bank's Information Services Division. Under the terms of the agreement, many items of data processing equipment previously used by the Information Services Division were sold at the same time by the Bank to the Taxpayer. The Taxpayer maintains that the sale of data processing equipment is an exempt occasional sale.
Va. Code §58.1-602 defines an exempt occasional sale to mean:
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- a sale of tangible personal property not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration, including the sale or exchange of all or substantially all the assets of any business ... provided such sale or exchange is not one of a series of sales and exchanges sufficient in number, scope and character to constitute an activity requiring the holding of a certificate of registration.
In the instant case the Bank holds a certificate of registration for the sale of checks, checkbooks and reclaimed property as well as for certain other retail activities. However, the operation of the Bank's Information Services Division is not an activity for which the Bank was required to hold a certificate of registration. Further, sales of data processing equipment in this case were not sufficient in number, scope and character requiring the Bank to hold a certificate of registration for this activity.
Accordingly, the sale of data processing equipment in this case is deemed to be an occasional sale, and the tax, penalty and interest charges made in connection with this issue will be removed from the assessment.
Penalty Charges: The Taxpayer maintains that its overall error rate in less than 4%. However, it appears that this calculation is based on both the tax paid to vendors on taxable purchases as well as the tax accrued by the Taxpayer on those purchases for which the vendor did not charge the sales tax.
Virginia Regulation (VR) 630-10-80 provides that the application of penalty charges to audit deficiencies is mandatory and further provides that the Tax Commissioner may waive penalty:
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- based upon the extent of a dealer's compliance with requirements for collection and payment of sales tax and requirements for payment of use tax or good cause. (emphasis added)
It is apparent that the Taxpayer paid the sales tax to vendors on the preponderance of its taxable purchases. However, the Taxpayer failed to demonstrate an acceptable use tax compliance in those instances wherein vendors did not charge the tax.
The department's policy in regard to this issue is based on a clear distinction between a sales tax and a use tax, and that policy has been consistently applied as addressed in the enclosed Public Document 92-100 (6/15/92). As noted therein, the purpose of the use tax compliance ratio is to measure how well a taxpayer complied with the Virginia tax laws requiring accruing and remitting the tax on untaxed purchases.
Even with the removal of those purchases associated with the exempt occasional sale, the Taxpayer's compliance for use tax is well below the accepted level required on a third generation audit therefore, the remaining penalty charges will not be waived.
Consequently, the assessment will be revised in accordance with this determination. As shown on the attached calculations, the current balance of the outstanding assessment is This balance must be paid within 30 days to avoid the accrual of additional interest.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/7779I
Rulings of the Tax Commissioner