Tax Type
Retail Sales and Use Tax
Description
Application of sales and use tax; Property used or sold outside Virginia
Topic
Taxability of Persons and Transactions
Date Issued
08-27-1996
August 27, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*********
This is in response to your letter of April 5, 1996 in which you seek correction of an assessment issued to* (the "Taxpayer") for the period September 1994 through December 1995. I understand that you have been in contact with the department's Office of Tax Policy regarding the protested issues and that you have paid the unprotested portion of the assessment.
FACTS
The Taxpayer primarily provides background music transmissions to customers both within and without Virginia. This service is provided generally through audio tapes, satellite transmissions, or through FM multiplex transmissions. In this phase of its business, the Taxpayer generally uses various audio equipment and makes that equipment available to customers in providing its service.
To a lesser extent, the Taxpayer sells audio equipment (e.g., speakers and tape players) and may install that equipment. You indicate that sales of equipment may be made to customers who receive the Taxpayer's background music transmissions. For example, a customer who contracts with the Taxpayer for background music transmissions may decide to purchase some of the audio equipment. In other cases, the Taxpayer may sell audio equipment to customers and not provide any transmission services.
The Taxpayer was assessed the tax on a wide variety of untaxed purchases. You maintain that the purchases were made for resale and that the Taxpayer either has already paid the tax or will pay the tax on those purchases in due course. The Taxpayer also questions the tax on the rental of music tapes.
DETERMINATION
Sales for Resale: Virginia Regulation (VR) 630-10-72.1 indicates that persons engaged in providing background music transmissions are providing a service. The regulation also indicates that the person providing this service "must pay the tax on all tangible personal property which they use...." The Taxpayer acknowledges that the tax is due on the property which it uses to provide background music transmissions. Because the Taxpayer also sells such property, however, it maintains that it does not know at the time of purchase whether the property will be used or sold. Accordingly, the Taxpayer suggests that it be allowed to make such purchases exempt of the tax for resale and apply the correct tax when the property is withdrawn from inventory.
Code of Virginia §§ 58.1-603 and 58.1-604 impose the tax on the retail sale of tangible personal property in Virginia and upon the use or consumption of tangible personal property in Virginia, respectively. "Retail sale" is defined in § 58.1-602 to mean "a sale to any person for any purpose other than for resale in the form of tangible personal property...." That same statute indicates that the use tax applies to "storage" which is defined to be "any keeping or retention of tangible personal property for use, consumption or distribution in the Commonwealth, or for any purpose other than sale at retail in the regular course of business." (Emphasis added)
Based on the above, the Taxpayer may use a resale exemption certificate to purchase for resale those items which it does not know at the time of purchase will be sold or used in providing services. The tax on these items will therefore be imposed when the property is removed from inventory as follows: (1) Items which are used by the Taxpayer to provide its background music services will be due on the cost price of the property. This tax is imposed regardless of whether the services are provided inside or outside Virginia. (2) For items which are sold, the Taxpayer is required to separately charge, collect, and remit the tax. Further, the tax on such sales must be charged on the total sales price of the property in accordance with VR 630-10-95.
This use of the Taxpayer's resale exemption certificate is proper only for that property which cannot be identified at the time of purchase as being for sale or use. The resale exemption certificate cannot be used by the Taxpayer to purchase non--saleable items or installation supplies, as addressed below.
Items Not for Resale: I note that there are a number of assessed purchases which are clearly not for resale. These items include, but are not limited to, office equipment and supplies, tools, sales literature, and uniforms. These non-saleable items are taxable at the time of purchase and have been correctly assessed.
Installation Supplies: The Taxpayer has indicated that installation supplies are taxed when the underlying equipment is removed from inventory. For example, when equipment is sold, the cost of installation supplies is added to the sales price of the equipment based on a percentage of the total charge made. Because the tax is charged and collected on the sales price of the equipment, the Taxpayer maintains that the installation supplies are also taxed at the time of the sale.
The department's long-standing policy is that persons who install tangible personal property are deemed to be the users and consumers of all supplies used in installation. Such persons are therefore subject to the tax on the Purchase of all installation supplies. In this regard, see Public Document 85-72 (4/3/85) and VR 630-10-102.2.
Based on the above, the purchases of installation supplies in the instant case are found to be correctly assessed. Furthermore, the tax applies on the purchase of installation materials whether the equipment is sold to customers or used by the Taxpayer in providing its music transmission services.
Sales Outside Virginia: I understand there has been some confusion regarding the application of the tax to property used to provide music transmission services to customers outside Virginia.
As noted above, a use tax is imposed on all tangible personal property used or consumed in the Commonwealth, including the storage of such property. When the Taxpayer takes possession of equipment in Virginia, and subsequently uses that equipment to provide services in another state, the tax is due to Virginia on the cost price of the equipment. By storing the property in Virginia, the Taxpayer has made a taxable use of that property in Virginia. I understand that the Taxpayer has investigated these transactions with some border states and concedes the application of the Virginia tax.
Notwithstanding the above, if the Taxpayer makes an outright sale of equipment to a customer outside Virginia, no tax is due to Virginia on the use of the equipment. This is because the equipment was held in Virginia for sale at retail - an activity which is excluded from taxable storage. Further, the Taxpayer is not required to collect sales tax on the outright sale of tangible personal property to customers outside Virginia provided that the sale is an exempt sale in interstate commerce. (See VR 630-10-51.)
Rental of Music Tapes: Code of Virginia § 58.1-603 imposes the sales tax on the gross proceeds on the lease or rental of tangible personal property. The term "lease or rental" is defined in § 58.1-602 to mean "the leasing or renting tangible personal property and the possession or use thereof by the lessee or renter for a consideration, without transfer of the title to such property."
When the Taxpayer makes a charge to customers for the rental of music tapes, that charge is for the rental of tangible personal property in accordance with these statutes. I can therefore find no grounds to remove the assessed charges for tape rentals from the assessment.
Summary: The audit will be returned to the audit staff for the following actions: (1) The Taxpayer and the auditor will identify non-saleable items. These items will remain in the assessment. (2) The Taxpayer and the auditor will identify installation supplies. The purchases of these supplies will remain in the assessment. (3) The Taxpayer and the auditor will identify property eligible to be purchased under the resale exemption in accordance with this determination and verify that the tax was properly applied on the sale or use of that property when it was removed from inventory. For example, if an assessed item was removed from inventory and used by the Taxpayer to provide services either inside or outside Virginia, the Taxpayer will need to show that the tax was properly accrued on that item. If the tax was properly accrued, that item will be removed from the assessment. Resale property which is still in inventory will be removed from the assessment.
I would also like to remind the Taxpayer that House Bill 61, which was introduced in the 1996 General Assembly, has been carried over for consideration to the 1997 Session. If enacted, this legislation would amend Code of Virginia § 58.1-609.6(2) to exempt from the tax amplification, transmission, and distribution equipment and towers used by cable radio providers and background music transmission systems.
As noted above, the audit will immediately be returned to the auditor so that further examination of the contested purchases can be made. In the meantime, please contact******* in my Office of Tax Policy at ***********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11118I
Rulings of the Tax Commissioner