Tax Type
Retail Sales and Use Tax
Description
Exemption certificates; Certificates of exemption
Topic
Exemptions
Date Issued
05-16-1996
May 16,1996
Re: § 58.1-1821 Application: Retail Sales & Use Tax
Dear**************
This will reply to your letter of October 24,1995 in which you seek correction of the department's assessment issued to your company,******(the "Taxpayer"), for the period May 1992 through February 1995.
FACTS
The Taxpayer is a wholesaler of office products. The department's audit assessed tax on the purchase of fixed assets, the untaxed rental of equipment, and the untaxed sale of catalogs to customers for their own use and consumption.
The Taxpayer presents documentation to show that tax has been accrued and paid, or paid to the vendor on the purchase of lift trucks, fixtures, and a mailing system. Accordingly, the Taxpayer requests that these purchases be removed.
The Taxpayer also disputes the sample calculation of the equipment rental on the basis that such rentals are infrequent, and the extrapolation of the rental is an incorrect representation of such an error. The Taxpayer acknowledges, however, that while tax is applicable, tax should only apply to the untaxed rentals on a detailed basis, rather than on an extrapolated sample.
Lastly, the Taxpayer disputes the taxation of catalogs on the basis that such catalogs are sold to customers who present certificates of exemption. Since the certificates are taken in good faith from dealers who purchase for resale, the Taxpayer states that the assessment of tax on such sales is incorrect since it would be unreasonable for them to attempt to determine the actual end use by the customer.
Accordingly, the Taxpayer seeks a correction of the department's assessment by excluding all purchases of fixed assets, all sales of catalogs, and the exclusion of the sample calculations. The Taxpayer has submitted its check for****in full payment of its calculation of the audit deficiency.
DETERMINATION
I shall respond to the issues as they were presented in your letter.
Fixed Assets
The department has reviewed the Taxpayer's documentation supporting its contention that the Virginia tax has been paid on the purchase of the lift trucks, fixtures, and the mailing system. Based on the information presented, those items will be removed from the audit.
Sample Calculation
Despite the Taxpayer's argument, I find no basis for the recalculation of the audit sample to a detailed application of the rental errors. The courts have held that a tax assessment is prima facie correct and that the burden is upon the taxpayer to prove that the assessment is incorrect.
Sampling is an audit technique of significant value. It is widely used in both the public and private sector in all types of audits where a detailed audit would not prove beneficial to either the auditor or the client. Sampling techniques when properly applied provide results within a narrow percentage range of the actual amount that would have been determined by a detailed audit.
The purpose of an audit sample is to determine a factor for errors within a representative selected period. Once an error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid. The removal of the rentals from the sample would nullify the purpose and validity of the sample, in that other untaxed purchases or rentals may not have been properly taxed. Accordingly, I find no basis to adjust the sample calculations.
Catalog Sales
Code of Virginia § 58.1-623 provides that all sales or leases are subject to the tax unless the dealer takes a certificate of exemption from the customer to the effect that the property is exempt. VR 630-10-20 also provides that "reasonable care and judgement must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates." In receiving exemption certificates the Taxpayer must always be alert for instances in which exemption certificates may be misused. Such a misuse could occur when a customer purchases property not covered by the exact wording of the certificate .
While the Taxpayer must be aware of such problems in receiving exemption certificates, the Taxpayer cannot knowingly sell property for which no such exemption is available. The department does not attempt to infer that the Taxpayer must determine the actual end use of property sold to its customers, as such an inference would certainly be unreasonable. I do note however, that the catalogs include a page dedicated to sales policies. One section specifically addresses Dealer Catalogs and Net Pricers stating that the "Dealer Catalog and Dealer Net Pricer are the property of [the Taxpayer] and are provided to our customers for their information only" (emphasis added). I can only presume from this wording that catalog sales are not for resale.
In reviewing the sale of the catalogs to one of your customers currently under the department's review, I am informed that the customer uses all catalogs and that none are intended for resale. In light of such a disclosure and based on the fact that such "sales" are intended for your customers' use, I do not find sufficient cause to adjust the department's audit for the removal of the catalog sales.
The department's audit will be revised to remove the purchase of the lift trucks and certain fixtures, as previously stated. Any additional adjustment, however, will depend upon the provision of proper documentation. If the required information is not returned in a timely fashion, the information on which the assessment was originally based will be presumed to be the best available, and the assessment will become due and payable.
If you have any additional questions regarding this matter, you may contact ***** of the department's Office of Tax Policy at****** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10438Q
Rulings of the Tax Commissioner