Tax Type
Retail Sales and Use Tax
Description
Leases and rentals; Sales tax liability of lessee
Topic
Taxability of Persons and Transactions
Date Issued
03-15-1995
March 15, 1995
Re: §58.1-1821 Application: Retail Sales & Use Tax
Dear***********
This will reply to your letter seeking correction of a sales and use tax assessment to your company, ***************(the "Taxpayer"), for the period November 1989 through October 1992.
FACTS
The Taxpayer sells and services motorcycles, all-terrain vehicles, and lawn and garden equipment. You were recently audited and contest the tax assessed with respect to the following issues: prepaid labor charges, special handling charges, good faith acceptance of exemption certificates, credits, and equipment leases.
DETERMINATION
I will address each of the above issues separately below:
Prepaid Talent Time: The auditor held taxable charges by a company for a telephone system cassette tape. You maintain that the charges were for prepaid talent time that had not been used. However, it is the department's understanding that the charges were progress billings made by the vendor while producing the telephone cassette tape.
Although transactions involving the production and sale of audio tapes entail a substantial service element, the transactions are not exempt service transactions under Code of Virginia §58.1-609.5(1). The department has previously determined that the true object in obtaining a recorded tape is the actual tape itself -- tangible personal property. [See P.D. 86-217, (11/3/86)] Furthermore, Code of Virginia §58.1-602 defines "sales price" as "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale...." (Emphasis added.) Accordingly, the progress billings for the tape were appropriately held taxable in the assessment.
Handling Charges: The special handling charges held taxable in the audit applied in cases where parts required special ordering or when extra labor was involved in the handling of an order. You suggest that in an audit of a similar company and in the prior audit of the Taxpayer, the department found the taxpayers to be in compliance on this issue. In addition, you suggest that some of the charges held taxable were in connection with sales to exempt entities.
Handling charges are charges for services in connection with a sale of tangible personal property and accordingly are includable in the sales price of an item, the total amount for which is taxable. While handling charges may not have been an issue in the prior audit of the Taxpayer or in the audit of the other company cited in your letter, the transactions were appropriately held taxable in this case. Further, the Taxpayer has not provided any specific evidence to indicate that such charges were specifically reviewed by the department's auditor during the prior audit. To the extent that similar charges were not taxed in the audit of a competitor, the department's*************District Office will contact the company and rectify any potential oversight. The District Office will also review any evidence you can provide regarding the earlier audit of the
Taxpayer.
With respect to the exempt sales, while the Taxpayer has been provided ample opportunities to provide the appropriate exemption certificates, no specific exemption certificates have been provided. However, if the Taxpayer can illustrate to the District Office's satisfaction that valid exemption certificates were on file prior to the start of the audit or that valid certificates were obtained after the audit, an appropriate adjustment will be considered.
Exemption Certificates: In Virginia, all sales, leases and rentals of tangible personal property are subject to the tax unless the contrary is established. Virginia Regulation (VR) 630-10-20(B) explains that the burden of proving that the tax does not apply rests with a dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. A certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable.
The regulation further provides that "[a]n exemption certificate cannot be used to make a tax-free purchase of any item of tangible personal property not covered by the exact wording of the certificate." Therefore, the seller must use reasonable care and judgment in selling tangible personal property exclusive of the tax, even when an exemption certificate from the purchaser is in his file. Furthermore, certificates of exemption obtained during or after an audit situation will be accepted only if the department can confirm that the customer's use of the certificate was valid and proper for the specific transaction. [See P.D. 94-165 (5125194), copy enclosed)]
It is my understanding that the Taxpayer was given additional time to obtain exemption certificates for sales made exempt of the tax but held taxable by the auditor due to the absence of exemption certificates or inaccurate or incomplete certificates on file, and that where a valid exemption certificate has been provided after the fact, the assessment has been revised. You continue to contest the tax assessed with respect to five sales. Based upon the information provided, I will agree to remove the tax assessed with respect to lines 17, 19, 20 and 22 on page 7. However, the remaining item, on page 5, line 12 will continue to be taxable. This particular transaction involved the sale of a lawn mower to a church. The church exemption certificate, ST-13A, was provided; however, that exemption certificate does not allow an exemption for property used outside of public church buildings. Accordingly, this certificate was not valid at the time of acceptance and the transaction was appropriately held taxable in the assessment.
In the future, the Taxpayer must exercise due caution in selling all-terrain vehicles, push mowers, etc., exempt of the tax. The department simply expects that the Taxpayer exercise reasonable care as described in VR 630-10-20. If a seller has a good reason to believe that an article is not being purchased for use in a proper exempt manner (e.g., a push mower to mow a farmer's lawn), then he should not sell it exempt. Furthermore, a seller should not accept a certificate for purchases of items which are not covered by the exact wording of the certificate.
Credits: The Taxpayer states that credit should be given for tax that was charged in error and remitted to the state on sales of various items. It is my understanding that the Taxpayer charged the sales tax on the selling price of an item, without an allowance for the trade-in. The credits in question were due to trade-in allowances which were taxed in error by the Taxpayer.
Code of Virginia §58.1-602 provides that when used articles are taken in trade, or in a series of trades as a credit or part payment, the tax shall be paid on the net difference between the sales price of the new or used articles and the credit for the used. The department's policy with respect to this issue is longstanding. A taxpayer must refund any tax overcharged or collected in error to customers before the department will allow a credit or refund to the Taxpayer himself. VR 630-1-1820, copy enclosed, provides that when a dealer is applying for a refund of sales tax, he "shall attach a list of the purchasers from whom the tax was collected and to whom the refund and interest, if allowed, will be paid." Accordingly, the department will be glad to refund this tax to you upon proof that the erroneously collected tax has been refunded to customers. Such documentation should be provided to the department's Office of Taxpayer Services, Business TPA Unit, P. O. Box 1880, Richmond, Virginia 232821880.
Equipment leases: It is my understanding that the issue at hand relates to the tax assessed with respect to leases of computers, a burglar alarm system, and a dynajet machine from the owner of the Taxpayer's business. From the information provided, it appears that you are suggesting that since the tax was collected by a Virginia dealer, that no tax should have been assessed in the audit. However, it is the department's understanding that while copies of invoices illustrating separately stated sales tax for the equipment leases were provided, the department has no record of the lessor being registered for collection of the tax. In the instant case, the department may look to the seller or the purchaser for the tax. Although the seller is legally obligated to collect the tax from the purchaser, the statute make the tax the legal debt of the purchaser. United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978) Furthermore, the bookkeeper indicated to the auditor that no sales tax had been paid on the transactions. Accordingly, the lease charges were appropriately held taxable in the audit.
The assessment will be revised as set forth herein and, upon the provision of the information with respect to the handling charges made in connection with sales to exempt entities to the*******District Office. Such information should be provided within 30 days of this letter. Once the assessment is revised, a revised Notice of Assessment will be mailed to the Taxpayer.
If you have any questions about this matter, please contact*************in my********.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/7708H
Rulings of the Tax Commissioner