Tax Type
Retail Sales and Use Tax
Description
Transportation equipment; Allocation between common and contract carriage
Topic
Taxability of Persons and Transactions
Date Issued
08-30-1996
August 30, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**************
This is in response to your letter of April 25, 1996 and prior correspondence in which you seek correction of sales and use tax assessments issued to********************(the "Taxpayer") for the period September 1992 through August 1995. I note that a payment has been remitted for the tax and interest on uncontested issues.
FACTS
The Taxpayer operates as a motor vehicle carrier of property. The bulk of the assessment is based on the auditor's determination that approximately 90 percent of the Taxpayer's carriage was provided outside of exempt common carrier authority.
The Taxpayer protests the assessment and maintains that it operated at all times during the audit period under certificates of convenience and necessity issued by the Interstate Commerce Commission (ICC) and during that period has been a public service company engaged in business as a common carrier of property. Additionally, the Taxpayer maintains that the assessment fails to appreciate the difference between common and contract carriage. Under the Interstate Commerce Act, a rate agreement between the Taxpayer and customers is by itself insufficient to characterize the carriage as contract carriage. Finally, the Taxpayer points out that during the prior audit it was depicted as providing transportation services exclusively as a common carrier.
In addition to protesting the allocation between common and contract carriage, the Taxpayer questions the assessment on a variety of other untaxed purchases which it maintains were erroneously assessed. The Taxpayer also contests the imposition of all penalty charges.
DETERMINATION
Allocation Between Common and Contract Carriage
Code of Virginia § 58.1-609.3(3) provides an exemption from the tax for:
-
- Tangible personal property sold or leased to a public service corporation engaged in business as a common carrier of property or passengers by motor vehicle or railway, for use or consumption by such common carrier directly in the rendition of its public service.
This statutory exemption is further addressed in Virginia Regulation (VR) 630-10--24.3 which states that "a common carrier must be authorized to operate under a certificate of convenience and necessity issued by ... the Interstate Commerce Commission in order to qualify for this exemption. This regulation applies only to common carriers of property by motor vehicle, including restricted common carriers, and has no application to contract or other carriers."
It has been established in this case that the Taxpayer operates in a dual capacity both as a common carrier and a contract carrier. Based on the statute and regulation, the exemption can only apply to tangible personal property used in the Taxpayer's common carrier activity. Conversely, tangible personal property used to provide contract carriage is taxable. In instances where property is used to provide both exempt common carriage and taxable carriage outside of the carrier's common carrier authority, Subsection C of the regulation indicates that:
-
- It is possible for an item of tangible personal property to be used in both a taxable and exempt manner.... In such instances the tax due on the item is prorated between the percentage of time the property is used in a taxable manner and the percentage of time used in an exempt manner.
In prior rulings, the department has determined that the percentage of time property is used in a taxable and exempt manner may be calculated by using revenue derived from common or contract carriage or from miles traveled in each operation during the audit period. See, for example, Public Document 92-28 (4/20/92).
Contract carriage: In the instant case, and based on the Taxpayer's records, about 60 percent of the transportation services was characterized by the Taxpayer as contract work. A document which may be representative of this contract work was also submitted to the department. That document, between the Taxpayer and a specific customer, appears to satisfy the contract carrier requirements of the Interstate Commerce Act. Accordingly, an allocation which incorporates this 60 percent contract work as taxable is correct as assessed.
Negotiated rates: The assessed allocation of taxable usage also includes, in addition to the 60 percent contract work, transportation which was provided with customers under negotiated rates. I understand that there has been some confusion surrounding the use of negotiated rates, a situation which was clarified only in 1994 through a congressional amendment to the Interstate Commerce Act. Nevertheless, the department in this case will agree to follow the intent of the ICC's Negotiated Rates Policy which allowed a common carrier to negotiate rates with its customers. For purposes of this assessment, the department accepts the premise that written agreements between the Taxpayer and its customers which merely set a negotiated rate may not necessarily be indicative of contract carriage. The proration of work performed under these negotiated rates will therefore be removed from the taxable allocation.
Penalty: I understand that the Taxpayer's prior audit did not fully address the application of the tax to potential contract carriage. Further, that prior audit was calculated on the supposition that the Taxpayer provided transportation services exclusively as a common carrier. Accordingly, for the current audit, I find grounds to waive the penalty assessed in connection with this issue.
Other Untaxed Purchase
The Taxpayer identifies four purchases which it maintains were improperly taxed. Each of these issues, and the remaining penalty charges, will be addressed as follows:
Item 1: Hydraulic Excavator: The Taxpayer has provided an invoice from the vendor of this property showing an invoice date of 9/19/95. The Taxpayer does not dispute that this purchase is taxable, but maintains that it was assessed outside of the audit period (which ended 8/31/95). That same invoice, however, shows a "ship date" of 6/27/95.
The term "sale" is defined in Code of Virginia § 58.1-602 to mean "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property...." In this instance, the evidence indicates that the Taxpayer had possession of the property during the audit period. I therefore find that this purchase was properly assessed.
Item 2: Consulting on Employee Communications: The Taxpayer made payments to a vendor who you describe as a consultant on employee communications. You indicate that this vendor consults with management to identify employer/employee topics and then uses that information to prepare a recommended text. For example, the vendor will prepare announcements concerning changes to employee benefits. The announcements are generally formatted on word processing equipment and provided to the Taxpayer on a disk. The Taxpayer subsequently employs a photocopying service to reproduce the announcement for distribution to employees.
In Public Document 95-283, the department determined that the writing, editing, and preparing of newsletters, technical reports, and other written materials represented the provision of a nontaxable service. Because the vendor in your case provides analogous services to the Taxpayer, payments made to this vendor will be removed from the assessment.
Item 3: One-Time License Fee: The liability for untaxed expensed purchases in this case was extrapolated based on an eight month sample. One of the assessed purchases was for a computer software license fee. You maintain that this license fee is a one-time charge that should have been included as an asset purchase but not a recurring expense.
A review of the additional information which you provided shows that the charge for the license fee was erroneously assessed twice - once as an asset purchase and again as an expensed purchase in the sample period. Accordingly, this charge will be removed from the sampled expensed purchases but will remain taxable as an asset purchase.
Item 4: Charges for Software Maintenance: Also included in the sample period was the purchase of a software maintenance contract, the charge for which was first incurred in August 1995. The underlying software was acquired by the Taxpayer in 1994 for use with a satellite communication system. You indicate that this software and the maintenance fee do not have any counterpart in the period prior to the acquisition of the software. You therefore maintain that extrapolating this purchase over the entire audit period is incorrect.
For an item to be removed from the audit sample, the Taxpayer must show that the transaction was isolated in nature and not a normal part of the Taxpayer's operation. It may well be that the purchase of software maintenance is infrequent, but such purchases appear to be an integral part of the Taxpayer's business activity.
That the underlying software had no counterpart throughout the entire audit period is not convincing. The purpose of the sample extrapolation is to account for likely transactions on which the Virginia tax was not properly paid. Removing the contested purchase would nullify the purpose and validity of the sample in that other purchases may not have been properly taxed.
Penalty: As noted above, the penalty associated with the taxable contract carrier allocation will be removed from the assessment. Also, the remaining penalty will be reduced through the revisions made on Items 2 and 3. I note, however, that this is the Taxpayer's third audit, yet the compliance ratio for untaxed purchases was 0 percent. As a result, I cannot agree to waive any remaining penalty charges.
Summary
The audit will immediately be returned to the auditor to be revised pursuant to this determination, as follows: (1) the allocation for taxable contract carriage will be reduced to 60 percent; (2) the penalty assessed on the revised taxable allocation will be waived entirely; (3) the purchase addressed as Item 2 will be removed from the assessment; (4) the purchase addressed as Item 3 will be removed from expensed purchases; and (5) the assessed penalty and interest will be revised accordingly. A revised assessment, reflecting these revisions and with interest accrued to date, will then be issued.
As you are aware, the State Corporation Commission ceased issuing certificates of convenience and necessity to motor vehicle carriers of property (except household goods movers) effective January 1, 1995. Also, the Interstate Commerce Commission was disbanded effective January 1, 1996 through the ICC Termination Act. These actions have considerably impacted the distinction between motor vehicle common and contract carriers and the application of Virginia's exemption. The department, however, is bound by the existing exemption which clearly limits the exemption to common carriage rather than contract carriage.
I might also point out that the Virginia Trucking Task Force was appointed in response to SJR 24 to examine a number of issues affecting the Virginia trucking industry. The taxation of motor vehicle carriers, including the impact of deregulation on the existing sales tax exemption, is one of the topics under review. Also, House Bill 239, which was introduced in the 1996 Session and which would provide an exemption to common carriers and contract carriers, has been carried over to the 1997 Session.
If you have any questions regarding the issues addressed in this letter, please
contact ********* in my Office of Tax Policy at**********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11163I
Rulings of the Tax Commissioner