Tax Type
Retail Sales and Use Tax
Description
Deficiency assessments; Breakdown of tax liability
Topic
Collection of Delinquent Tax
Date Issued
05-23-1997
May 23, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear************
This will reply to your letter in which you seek the correction of assessments issued to your clients, ********** (“Taxpayer A"), ******** ("Taxpayer B") for the periods August 1992 through July 1995 and December 1992 through November 1995, respectively.
FACTS
Taxpayer A is an automobile dealership that was audited by the department and assessed sales and use tax on various purchases and sales. Taxpayer A maintains the assessment is erroneous for the following reasons: 1 ) paint and body shop supplies used to perform warranty work should be removed from the audit as purchases for resale; 2) various magazines and periodicals in the audit are exempt publications under Code of Virginia § 58.1-609.6(3); 3) monthly fees to use computer software for the benefit of the Commonwealth are exempt; and 4) sales of automotive parts and supplies for which Taxpayer A had no exemption certificates on file were purchases for resale.
Taxpayer B makes retail sales of all terrain vehicles and jet skis. Taxpayer B maintains that the sale of an all terrain vehicle was held taxable in the audit even though Taxpayer B had accepted an invalid exemption certificate from the purchaser in good faith. While Taxpayer B has agreed to pay the tax and interest on this transaction, it seeks waiver of the sales tax compliance penalty. Taxpayer B also seeks the removal of processing fees from the audit. The fees are charged to customers for the preparation of sales and title documentation required with the sale of certain all terrain vehicles and jet skis.
Taxpayer A and Taxpayer B both maintain that because the notices of assessment issued to them by the department only reference sales tax, the use tax liabilities included in each assessment are not valid.
DETERMINATION FOR TAXPAYER A
Warranty Paint and Supplies
Taxpayer A operates an automobile paint and body shop at its dealership. A large percentage of the paint and body work is performed under warranty. Taxpayer A suggests that because charges for warranties that include parts are subject to sales tax and the paint and supplies are tangible personal property that is transferred to its customers, the resale exemption applies to its purchases of the paint and supplies. Taxpayer A maintains that the amount of paint and supplies used can be accurately determined for each job.
Title 23 of the Virginia Administrative Code (VAC) 10-210-1020 states that “[m]otor vehicle refinishers and painters are engaged primarily in rendering personal services, and their gross receipts are not subject to the tax. However, they are the consumers of the materials used in their business and are required to pay tax on their purchases." The department does not dispute the fact that automobile paint is tangible personal property. The auditor held the paint taxable based on the department's longstanding policy that automobile painters provide a professional service. As the enclosed copies of Public Documents 85-197 (10/15/85) and 96-342 (11/21/96) illustrate, the department's policy is longstanding. Since the paint and supplies are used and consumed by Taxpayer A in the provision of a professional service, the resale exemption does not apply to purchases of those items. Based on the above, the auditor correctly held the purchase of paint and supplies taxable in the audit.
Publications
Taxpayer A maintains that certain subscriptions to magazines, periodicals, and other publications qualify for the exemption in Code of Virginia § 58.1-609.6(3) and were incorrectly held taxable in the audit. Code of Virginia § 58.1-609.6(3) provides an exemption for "[a]ny publication issued daily, or regularly at average intervals not exceeding three months ... The department traditionally has relied on the definition of "publication" as upheld by the Virginia Supreme Court in Jefferson Publishing Corp. v. Forst, 217 Va. 988, 234 S.E.2d 297 (1977), in determining whether various printed materials qualify as exempt publications. In Jefferson, the court defined "publication" as a "newspaper, magazine or other periodical which is available for general distribution to the public."
The auditor has indicated that at the time the audit was completed, there was no documentation available to determine the exempt status of the publications at issue. If Taxpayer A can provide documentation that the publications meet the interval test and are available to the general public as discussed in the preceding paragraph, those publications qualifying for exemption will be removed from the audit.
Computerized Vehicle Registration
Taxpayer A pays a monthly support fee to use computer software for an on-line vehicle titling and registration system known as "Computerized Vehicle Registration" ("CVR"). The fee is paid to a vendor approved by the Department of Motor Vehicles ("DMV"). DMV pays a commission to Taxpayer A for each registration transaction performed using CVR. The auditor held the monthly CVR support charges paid to the vendor taxable as a software license fee. Taxpayer A maintains the charges are incurred for the convenience of the Commonwealth and that it would be placed at a competitive disadvantage if it did not participate in the CVR program.
The auditor assessed the tax based on Title 23 VAC 10-210-763, which explains that the tax applies to sales and leases of prewritten software. Under current law, the department treats license fees for prewritten software as a taxable lease or sale when the licensing agreement conveys the right to use the software and the software is transferred to the customer in tangible form. Based on the information presented, the assessment is correct. There is no statutory exemption available for dealers that participate in programs such as CVR for the convenience of the Commonwealth. Taxpayer A's contention that it would be at a competitive disadvantage if it did not participate in the CVR program is not persuasive; the sales tax would apply to the same type of support fees paid by other dealers that participate in the CVR program.
Exemption Certificates
The department's policy with respect to exemption certificates and exempt sales is discussed in Title 23 VAC 10-210-280. Paragraph A states that "[a]ll sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law."
The auditor indicates that certain sales exceptions were removed from the audit for those customers that had a current sales or use tax registration with the department and whose purchases were consistent with the class of purchases qualifying for the resale exemption for each respective business. The regulation clearly states that the dealer is required to obtain valid exemption certificates at the time of sale. If Taxpayer A did not obtain certificates from exempt customers at the time of sale, then sales tax should have been charged on the transactions. While the department allows taxpayers to obtain certificates after an audit has been completed, in such cases the department carefully examines the certificates to ensure that they are valid.
Taxpayer A suggests that the department is aware that certain customers held certificates of registration and that the sales to those customers were made for resale. While some of Taxpayer A's customers may have certificates of registration with the Department, this is not conclusive evidence that the customers' purchases were exempt. Some customers may have been aware at the time of purchase that the property would be used in a taxable manner and did not offer an exemption certificate for their purchases. Only those purchases covered by the exact wording of an exemption certificate can be made exempt of the tax. I will allow Taxpayer A an opportunity to provide certificates to the department for review. The audit will be adjusted to remove those sales for which a valid certificate is provided. Any remaining sales will be considered taxable.
DETERMINATION FOR TAXPAYER B
Penalty
Taxpayer B sold an all terrain vehicle exempt of the tax to a customer who provided Taxpayer B with an agricultural exemption certificate (Form ST-18). Because the all terrain vehicle was purchased by a logging company, the auditor determined that the certificate was invalid on its face and assessed sales tax on the sale. Taxpayer B maintains that the Form ST-18 was accepted in good faith from its customer and that the customer offered to pay the tax to the department. Taxpayer B feels that the department refused to accept the payment in an effort to create an unfavorable compliance ratio that would generate an assessment for sales tax compliance penalty.
While Taxpayer B concedes that the tax and applicable interest is due on the sale of the all terrain vehicle, it requests the waiver of the sales tax compliance penalty. This was Taxpayer B's second audit and its sales tax compliance ratio was 84 percent. The ratio required in second audits to avoid the assessment of penalty is 85 percent. Based on the circumstances, and under the authority granted the Tax Commissioner by Code of Virginia § 58.1-105, I agree to waive the sales tax compliance penalty of **********. I ask that Taxpayer B exercise caution when accepting exemption certificates in future sales transactions.
Processing Fees
Taxpayer B charges a processing fee on the sale of each all terrain vehicle and jet ski to cover the costs of preparing sales and title documentation. The processing fee is itemized separately on each bill of sale and Taxpayer B contends the fee is not taxable because it is a charge for an exempt service. The department has previously addressed an analogous situation in P.D. 96-199 (8/19/96, copy enclosed). As this document indicates, services provided in connection with the sale of tangible personal property are deemed to be part of the sales price of the property sold. Such charges, unless specifically exempt by law, are subject to the tax when a taxable sale is made. The auditor properly held the processing fees taxable in the audit.
Assessment of Wrong Tax
Both Taxpayer A and Taxpayer B contend that the department's notices of assessment are erroneous to the extent that they do not provide for the assessment of the use tax portion of the audit liabilities. The notices reference sales tax, sales penalty, and sales interest, yet both audits contain some use tax liability.
The reference to sales tax in the notices of assessment for both taxpayers reflects the type of registration assigned to the taxpayers' accounts. Since both taxpayers are Virginia dealers, they are registered for sales tax; thus, the notices of assessment reference "sales tax," "sales penalty," and "sales interest." Both audit reports clearly reflect a breakdown of the use tax and sales tax liabilities for each taxpayer.
Taxpayers A and B should also note that Virginia dealers report use taxes on line 2 of Form ST-9 although this form is primarily used to report sales tax. In addition, Code of Virginia § 58.1-623(C) provides that "[i]f a taxpayer who gives a certificate under this section makes any use of the property other than an exempt use or retention, demonstration, or display while holding property for resale, distribution, or lease in the regular course of business, such use shall be deemed a taxable sale by the taxpayer as of the time the property or service is first used by him, and the cost of the property to him shall be deemed the sales price of such retail sale." (Emphasis added). The department recently addressed a similar issue in P.D. 97-80 (2/19/97, copy enclosed). For the reasons stated above, the assessments are correct.
Taxpayer A's audit assessment will be adjusted as discussed above based on the department's review of the publications and exemption certificates it can provide. Taxpayer B's audit assessment will be adjusted to remove the sales tax compliance penalty and an updated notice of assessment with accrued interest will be issued. The documentation requested should be provided to the department within sixty days from the date of this letter.
I note that you requested a conference to discuss the issues raised in your letters. Since the department's policies with respect to the issues are well established and some issues are factual in nature, I do not feel a conference is needed at this time. If you have any questions concerning this matter, please contact*** in the Office of Tax Policy a********. Your payment and any documentation may be sent to****at P. O. Box 1880, Richmond, Virginia 23218-1880.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11389S
Rulings of the Tax Commissioner