Tax Type
Retail Sales and Use Tax
Description
Resales; Depreciation of inventory
Topic
Taxability of Persons and Transactions
Date Issued
01-31-1997
January 31, 1997
Re: § 58.1-1821 Application: Retail Sales & Use Tax
Dear***********************
This is in reply to your letter in which you seek correction of the department's sales and use tax assessment issued to *********(the "Taxpayer"), for the period September 1992 through August 1995. I apologize for the delay in our response.
FACTS
The Taxpayer is involved in various sales and services dealing with fuel oils, propane, installation and repairs of heating systems, and other related transactions. The Taxpayer is in disagreement with the results of the audit relating to two issues, the taxation of propane cylinders, and the purchases of property used to refurbish the propane cylinders.
The Taxpayer also requests waiver of the penalty.
DETERMINATION
Propane Tanks
-
- Code of Virginia § 58.1-623 provides that:
-
- If a taxpayer ... makes any use of [resale] property other than an exempt use or retention, demonstration, or display while holding property for resale ..., such use shall be deemed a taxable sale by the taxpayer as of the time the property ... 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)
Further, Code of Virginia § 58.1-602 defines "use" to mean "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business. "
The Taxpayer contends that the propane tanks are packaging and are resold with the sale of the gas, becoming the property of the final consumer. The Taxpayer seeks to have the purchase of the tanks removed from the fixed asset schedule. I cannot agree, on the basis that the tanks were depreciated for federal income tax purposes. Pursuant to § 1221 of the Internal Revenue Code, a capital asset may not include "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business."
Additionally, United States Treasury Regulation § 1.167(a)-2 specifically provides that, with regard to depreciation allowances, "The allowance does not apply to inventories or stock in trade ...." As a result, I must conclude that the Taxpayer's treatment of this property as a depreciable asset illustrates that the propane tanks are not part of the Taxpayer's resale inventory. Accordingly, the auditor was correct by including the tanks in the department's audit. I have enclosed copies of previous rulings, P.D.'s 93-77 (03/22/93), and 94-45 (03/09/94), which further elaborates the department's position.
Recurring Expense Purchases
The Taxpayer contends that the items included as recurring purchases are used as component materials for the refurbishing of the propane tanks, which are resold to the end consumer. Inasmuch as the materials are used on tanks which have been determined to be used by the Taxpayer in its operations, and not held for resale, I find that the auditor properly held these items taxable as well.
Penalty
Although Code of Virginia § 58.1-635 mandates the application of penalty to tax deficiencies, its application in sales and use tax audits is generally determined based on whether a satisfactory level of tax compliance has been achieved. For third audits of use tax compliance, penalty will generally apply unless a taxpayer's use tax compliance ratio meets or exceeds 85%. As the Taxpayer's compliance ratio in this third audit equals 80%, the penalty has been properly applied. Please note that for the future, the Taxpayer will be expected to exhibit a use tax compliance ratio of 85% as detailed in the enclosed regulation.
Penalty, however, may be waived based on evidence of exceptional mitigating circumstances. On the basis that the contested areas were first time issues, Virginia Regulations (VR) section 630-10-80, copy enclosed, allows for the exclusion from the compliance calculations the deficiency occurring in new areas not covered by a previous audit. As a result, the revised compliance ratio would be within the required range, and penalty would not apply. Accordingly, I find sufficient cause to waive the penalty. As the Taxpayer has previously paid the assessment in full, I will authorize a refund of the penalty, inclusive of interest. The Taxpayer may expect to receive its check within two to three weeks.
If you should have any questions regarding this matter, please contact *******of the department's Office of Tax Policy at**********
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11271Q
Rulings of the Tax Commissioner