Tax Type
Retail Sales and Use Tax
Description
Penalties and Interest; Penalty for deficiency
Topic
Collection of Delinquent Tax
Date Issued
08-28-1997
August 28, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**************
We have reviewed your letters of June 18, 1997 and July 22, 1997, in which you seek correction of the two retail sales and use tax assessments issued to *********(the Taxpayer) as a result of an audit of its **********. .
FACTS
The Taxpayer is engaged as a government contractor providing data processing services and computer systems. The Taxpayer has been audited for the period of August 1992 through July 1995 and takes exception to all of the audit findings.
The Taxpayer alleges that the error factor used to extrapolate the sampled deficiency is incorrect and erroneously includes non-recurring purchases. The Taxpayer also alleges that the fixed asset measure includes items that are exempt from the tax, that have tax previously paid, or that were purchased for out-of-state use. In addition, the Taxpayer alleges that certain purchases assessed in the audit are nontaxable. The Taxpayer requests abatement of the penalty applied in this case.
Copies of the all references cited in this determination are enclosed.
DETERMINATION
The Taxpayer desires a substantial adjustment to the audit findings; however, no evidence has been furnished in support of the issues raised by the Taxpayer in this appeal. Accordingly, the department is unable to substantiate the claims made by the Taxpayer relating to the sample, fixed assets and other purchases issues.
Sampling
The Taxpayer claims that there were many non-recurring, isolated purchases included in the eight-month and four-month sample periods used in the audit. However, the Taxpayer does not identify the specific purchases which are non-recurring, nor does the Taxpayer furnish any proof that such purchases were isolated in nature and not a normal part of the Taxpayer's operation. Although a customer may consider a particular purchase by the Taxpayer as a one-time or isolated transaction under its contract, such a purchase does not necessarily constitute a unique or isolated purchase by the Taxpayer. The Taxpayer should be able to demonstrate that such purchases are not a normal part of the Taxpayer's operation.
Fixed Assets
The Taxpayer has also not submitted evidence that tax was assessed on items that are exempt from the sales tax, that have tax previously paid, or that were purchased for out-of-state use. Until proof of these claims is furnished my audit staff, there is no basis to remove any of these purchases from the audit.
For exempt purchases, the Taxpayer must prove that the property qualified for an exemption from the tax. For tax previously paid, the Taxpayer must show either that the sales tax was paid to the vendor or the use tax was remitted and reported by the Taxpayer to the department for each item in question. For purchases intended for out-of-state use, the Taxpayer needs to show that the Taxpayer never took title or possession of the tangible personal property in Virginia, i.e., that these items never entered Virginia.
Other Purchase Exceptions
Although the Taxpayer claims that the auditor included exempt transactions, the Taxpayer has not furnished the necessary proof in support of its claim. Until the Taxpayer furnishes proof to the department that these transactions constitute a separately stated exempt charge or an exempt purchase, there is no basis to remove any of these purchases from the audit.
Under a services contract or a service transaction, the Taxpayer is deemed under Virginia law to be the taxable user or consumer of all of the tangible personal property purchased in connection with the performance of the services contract or a service transaction. See 23 VAC 10-210-410(J),10-210-693 and 10-210-4040(E).
For purchases of tangible personal property, the Taxpayer must be able to show that the property is used in an exempt manner as described in 23 VAC 10-210-3070 through 10-210-3074.
For maintenance contracts, see 23 VAC 10-210-910.
Government Contracts
Although the Taxpayer has not identified the three contracts at issue, it is my understanding that these contracts are with the***** (Contract #1),****************(Contract #2), and **** (Contract #3). The statement of work for these contracts is summarized below.
It is my understanding that Contract #1 requires the Taxpayer to install and maintain equipment, software and support services; operate a network control center; monitor, control and report; install, manage and maintain a government-owned network management function for the network; and be responsible for management of network administration, operations and resources.
Based on a review of the Work Statement, Contract #2 requires the Taxpayer to install, operate and maintain a data network; be responsible for data network management and operation of a network control center; manage and operate a diagnostic testing facility; be responsible for furnishing, operating and managing the data network; provide the organization and qualified personnel necessary to provide total network management and operational support for the network control center, an around-the-clock customer service center, engineering enhancement support, analysis and planning support, and network expansion full service maintenance support; and provide and operate a customer service center to serve as the single contact point for data network trouble reporting.
It is my understanding that Contract #3 requires the Taxpayer to design, install, implement and maintain a network and to operate the host system in a production environment.
The authority to procure goods to support operations and/or management of a network does not transform a service contract into a contract for the sale of tangible personal property. In a mixed transaction which involves the provision of tangible personal property and services, the courts have used a true object test, described in Virginia Administrative Code (VAC) 10-210-4040(D), to determine whether the particular transaction constitutes an exempt service or a taxable retail sale. From the information provided, it appears that the true object of the above contracts is for the provision of services. In addition, the Taxpayer has provided no evidence that the credit of the federal government was directly bound to the Taxpayer's purchases and that the Taxpayer was officially designated as the purchasing agent of the governmental entities for all purchases made in connection with these contracts.
If the contracts addressed above are not the contracts at issue, the Taxpayer should provide copies of the appropriate Statements of Work for the contracts at issue to my audit staff at the department's**************District Office.
In the prior audit, the Taxpayer claims that the prior auditor characterized Contract #2 as a sales contract. However, it is my understanding that Contract #2 was not treated as a retail sale to the government. Rather, it was determined to be a services contract. If the Taxpayer has documentation to establish that the department treated Contract #2 as a retail sale to the government in the prior audit, l will review this information and amend the assessment, if warranted.
Penalty
The statutes mandate the application of penalty to tax deficiencies. When the department audits a taxpayer for compliance with Virginia's sales and use tax laws, the application of penalty is generally based on the percentage of tax compliance determined by computing a compliance ratio. For third and subsequent audits, penalty generally applies to tax deficiencies unless the taxpayer's compliance ratios meet or exceed 85% for sales tax and 85% for use tax. As the Taxpayer's use tax compliance on the third audit of one division and on the fourth audit of another division was 5% and 45% respectively, the auditor properly applied the penalty.
To date, the Taxpayer has not demonstrated any exceptional mitigating circumstances for the deficiency. Based on the foregoing reasons, l find no basis to waive the penalty at this time.
However, if the Taxpayer is able to provide the evidence needed to revise the audit, the compliance ratios will be recomputed. If the recomputed compliance ratios meet or exceed an acceptable level of compliance as noted above, the penalty will be waived.
Requested Information
The Taxpayer is required to furnish all of the relevant facts, issues and documentation in support of their positions with their written appeal. The Taxpayer has, to date, not provided the data necessary to address the issues raised in its appeal. Accordingly, at this time, l do not find sufficient basis to revise the assessments.
If the Taxpayer will furnish the necessary documents to the department's***** District Office, a determination can be made based on the specific facts of this case. A member of my audit staff will be contacting you to arrange for a review of the additional documentation and to further discuss any of the issues involved.
All of the requested information should be furnished to my audit staff within the next 90 days. If a reasonable extension of time is needed to furnish this information, please contact ***** Audit Supervisor of the department's **** District Office at ******. If the audit staff determines that a revision is necessary, the audit will be revised accordingly, and the Taxpayer will receive a revised audit report and bill.
Interest
By law, interest continues to accrue until the assessment is paid in full. To reduce the amount of interest accrual, the Taxpayer should submit payment of the noncontested portion of the assessment to the department as soon as possible.
If you have any questions on the content of this letter, please contact-***** of the department's Office of Tax Policy at*********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12692R
Rulings of the Tax Commissioner