Tax Type
Retail Sales and Use Tax
Description
Penalties and Interest; Waiver of penalty
Topic
Collection of Delinquent Tax
Date Issued
11-14-1996
November 14, 1996
Re: 58.1-1821 Application: Retail Sales and Use Tax
Dear
This will reply to your letter in which you take exception to the retail sales and use tax audit findings of ********* (the "Taxpayer") for the period of January 1993 through December 1995.
FACTS
The Taxpayer operates a retail store in Virginia and is also a retail catalog merchandiser. The Taxpayer was audited and is contesting the tax assessment with respect to the following issues: the purchase of merchandise samples, third party gift transactions, and audit penalty. It should be noted that both of the contested items were issues in the last audit of the Taxpayer.
DETERMINATION
Merchandise Samples
The Taxpayer purchases merchandise for evaluation to determine if they are suitable for use in their mail order catalog. Subsequent to the evaluation, items that are not used in the catalog are returned to the vendor for a full credit. The remainder are entered on the Taxpayer's books as inventory for resale and sent to their retail outlet.
Code of Virginia 58.1 -623 provides that "if a taxpayer gives a certificate (of exemption)... makes any use of the property other than an exempt use or retention, demonstration, or display while holding property for resale... in the regular course of business, such use shall be deemed a taxable sale to the taxpayer...". In the present case, the use of the samples in the evaluation process subjects the samples to a taxable use under the above cited Code section.
It is the Taxpayer's contention that the department's determination of March 3, 1994 (copy enclosed) on this same issue was ambiguous and open to varying interpretations. As provided in my letter of March 3, 1994, "the assessment with respect to this issue is correct...". While I am aware that I agreed to remove the sample items from the previous audit findings, l in no way implied that such items would be exempt on a prospective basis. For this reason, l find no basis for removing the samples from the current audit.
Third Party Gift Transactions
Third party gift transactions were also an issue in the previous audit. The department's determination provided that the tax applied to third party gift transactions, however, the Taxpayer was advised to pay the tax associated with these transactions and to file a protective claim for refund pending the outcome of The Smithfield Ham and Products Company. Inc. V. Commonwealth of Virginia, Department of Taxation, (Cir. Ct. Isle of Wight County (Law No. 5127, January 29, 1992)). The Circuit Court in Isle Wight County found in favor of the Department of Taxation. This opinion prompted a law change which was enacted by the 1995 General Assembly (House Bill 2286, Chapter 96) to exempt third party gift transactions from the sales and use tax, effective July 1, 1995.
As provided above, the department's policy with respect to third party gift transactions was well-founded and upheld in the Virginia courts. While I realize the department did not issue a final determination addressing this issue until March 3,1994, the Taxpayer was advised at the conclusion of the previous audit that they should begin collecting tax on these transactions. I would also like to point out that the department did not hold any third party gift transactions taxable after the law change which went into effect on July 1, 1995. Based on all of the above, the department finds no basis for removing third party gift transactions from the audit.
Audit Penalty
Virginia Regulation (VR) 630-10-80 addresses audit penalty and states, in part, the following:
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- The application of penalty is mandatory to audit deficiencies but it's application may be waived at the discretion of the Tax Commissioner based upon the extent of a dealer's compliance with requirements for payment of use tax or good cause... On a second or subsequent audit, a dealer is expected to demonstrate a higher degree of sales and use tax compliance. Penalty will be waived on second or subsequent audits for other than exceptional mitigating circumstances.
The assessment of penalty on audits is determined by the level of compliance exhibited by a taxpayer. Use tax compliance on a second generation audit must meet 60% and sales tax compliance must meet 85%. On this the second generation audit of the Taxpayer, use tax compliance was 36%. Compliance on sales tax was 74%. Consequently, penalty was properly assessed in the audit.
It is noted in your letter that payment of the audit assessment in its entirety may cause a financial hardship on the Taxpayer. If the Taxpayer can provide financial statements to substantiate this claim, the department will be glad to initiate a partial payment plan in order to satisfy the audit liability.
If you should have any questions, please contact*********Office of Tax
Policy, at*****************.
Sincerely
Danny M. Payne
Tax Commissioner
OTP/11424K
Rulings of the Tax Commissioner