Tax Type
Retail Sales and Use Tax
Description
Transportation equipment; Vehicle; Transportation carrier operating in dual capacity; Contract Carrier, Common Carrier
Topic
Taxability of Persons and Transactions
Date Issued
11-25-1996
November 25, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*********
This is in response to your letters of October 16, 1996 in which you seek correction of sales and use tax assessments issued to****** (the "Taxpayer"). I note that the tax portion of the assessment on the uncontested issues has been paid.
FACTS
The Taxpayer operates as a motor vehicle carrier of property. An audit for the period February 1993 through May 1996 resulted in assessments for untaxed purchases of fixed assets and expensed items. The Taxpayer indicates that it received a certificate of convenience and authority as a common carrier in 1993. The Taxpayer therefore contests the assessment on purchases of items used for the care, maintenance and operation of its trucks in performing transportation services as a common carrier. The Taxpayer also maintains that the assessment is incorrect in that it does not recognize that common carriers are allowed to negotiate rates with their customers.
In addition to the assessment of tax on the contested items, the Taxpayer also protests the assessment of all penalty and interest charges.
DETERMINATION
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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.
As can be seen from both the Code of Virginia and the regulations, the exemption applies only to property used directly when the carrier provides its services as a common carrier. Conversely, the exemption does not apply when the carrier provides its services to shippers outside its common carrier authority (e.g., as a contract carrier)l
In the instant case, I understand that the auditor was informed that the Taxpayer's revenues were generated during the audit period from negotiated contracts. This being the case, no exemption would apply to purchases used to provide those contract carrier services.
Contract carriage v. negotiated rates: I understand that the Interstate Commerce Act and regulations issued thereto set out specific requirements which defined contract carriage. These requirements specify that the contract carrier enter into a written agreement for the provision of transportation, and that the agreement, at a minimum, (1) identify the parties, (2) contain the contract rate, (3) commit the carrier to transport a series of shipments, and (4) state the carrier provides services designed to meet the distinct needs of the shipper.
At the same time, 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 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.
Notwithstanding the above, Code of Virginia §58.1-205 indicates that any assessment by the department is deemed to be prima facie correct. Nevertheless, I will allow the Taxpayer an opportunity to provide additional records and other evidence which show that its transportation services were provided under its common carrier authority (including the provision of services under negotiated rates as opposed to contract carriage). Based on a review of that evidence, the assessment will be revised as warranted.
It may be found that the Taxpayer operated 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. 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 (4120192).
Penalty and interest: In regard to the uncontested purchases, I note that this is the Taxpayer's second audit, yet the compliance ratio for untaxed purchases was 0 percent. Accordingly, I cannot agree to remove the penalty charges associated with these items. Further, the application of interest charges to audit assessments is mandatory, and such interest charges may be waived only in the case of doubtful collectibility. Because doubtful collectibility does not appear to be an issue in this case, no revision to the assessment of the uncontested purchases is justified .
In regard to the contested issues, I recognize that the assessment may be revised following a reexamination of the Taxpayer's records as addressed above. I therefore propose to wait until the reexamination is complete before making a determination on the penalty charges.
Summary: The department's audit staff will contact the Taxpayer as soon as practical to schedule a further review of the Taxpayer's records. I will continue to suspend collection activity on the assessment of the contested issues pending the outcome of that review.
The assessment for the uncontested purchases, however, is now found to be correct. This assessment will be reissued and sent to the Taxpayer for payment with interest accrued to date. No additional interest will accrue provided the assessment is paid within 30 days.
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
Rulings of the Tax Commissioner