Tax Type
Retail Sales and Use Tax
Description
Penalties and Interest; Second audit deficiency penalty
Topic
Collection of Delinquent Tax
Date Issued
05-24-1995
May 24, 1995
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This will respond to your letter of August 2,1994 seeking correction of the sales and use tax assessment issued to***********( the "Taxpayer").
FACTS
The Taxpayer is a nonprofit association providing many benefits to dues-paying members through its numerous programs, from public relations to governmental relations to individual member benefits like professional publications, discounts on various services, life insurance, and other professional services. An audit for the period February 1991 through January 1994 resulted in an assessment for not remitting use tax on untaxed purchases of tangible personal property used in its operation.
The Taxpayer protests the tax assessed on membership cards, pins and badges and on maintenance agreements. The Taxpayer maintains that membership cards, pins and badges included with the cost of membership in the Taxpayer's association should not be taxable since membership dues are not taxed. The Taxpayer maintains that computer software update and support service agreements, and other maintenance agreements are exempt since no tangible personal property has been furnished under these contracts. The Taxpayer also requests waiver of the penalty.
DETERMINATION
Membership Cards and Pins: Virginia Regulation (VR) 630-10-97.1 (copy enclosed) provides an exemption for services which involve sales as inconsequential elements for which no separate charge is made. A "true object" test is used to determine whether a particular transaction which involves both the rendition of a service and the provision of property constitutes an exempt service. In applying the true object test in this instance, the true object sought by the dues-paying member is the rendition of a service. The provision of the membership cards, pins and badges is incidental in nature when furnished to a member in connection with a service transaction, and therefore such items are nontaxable to the member.
However, as the provider of the service, the Taxpayer is subject to the tax on all tangible personal property purchased to provide the exempt service. Thus, the membership cards, pins, and badges in this instance are subject to the tax at the time of purchase from the vendors. I have enclosed a copy of a previous ruling by the department, PD 86-86 (4129186), which addresses the application of the tax to membership cards, pins, and other materials distributed to dues-paying members.
Maintenance Agreements: As demonstrated by VR 630-10-62.1 and numerous rulings of the department [e.g., see PD's 91-102 (6128191), 92-196 (9130192), and 91-20 (2122191), copies enclosed], the department has consistently held that the total charge for a computer software maintenance contract which provides for the furnishing of tangible enhancements or updates or any other tangible replacement property is taxable at the time of purchase. On the other hand, a maintenance contract providing only for the provision of labor would be exempt.
The computer software update and support agreements and the computer maintenance agreements furnished to the department indicate that the Taxpayer is entitled to receive updated computer software in tangible form, such as magnetic tapes which replace the prior version. The facsimile equipment maintenance agreement also provides coverage of all parts. Accordingly, the tax applies to the total charge for these maintenance agreements.
However, since sales tax was charged and paid on the computer software maintenance agreement purchased from ************* , this item will be removed from the audit. For the remaining maintenance agreements at issue, the Taxpayer has the burden of proving that the tax does not apply. Although a member of my staff has requested that the Taxpayer furnish copies of those agreements, the Taxpayer has indicated that it is unable to provide them. Accordingly, in the absence of such documentation, we have no choice but to assume that these remaining agreements are subject to the tax.
You should note that 1994 General Assembly passed legislation (SB 28), beginning on January 1, 1996, to exempt from the sales and use tax one-half of the total charge for maintenance contracts when such contracts provide for both repair or replacement parts and repair labor. The department will be required to revise its regulations to reflect this change. We anticipate working with affected industries to ensure a smooth transition with respect to this change.
Penalty: On second and subsequent audits, penalty is mandatory for tax deficiencies unless an acceptable level of compliance is achieved or exceptional mitigating circumstances are shown to have caused the deficiency. For second audits, VR 630-10-80 (copy enclosed) provides that penalty may be waived if use tax compliance is 60% or greater. As use tax compliance on this second audit was only 4% and because there are no exceptional mitigating circumstances in this situation, I have no alternative other to impose the penalty as set out in the regulation.
The audit will be revised in accordance with this determination, and revised assessments will be issued as soon as possible. If you have any questions regarding this letter, please contact**********of my Office of Tax Policy at**********.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/8696R
Rulings of the Tax Commissioner