Tax Type
Retail Sales and Use Tax
Description
Leases and Rentals, Penalty in Audit
Topic
Payment and Refund
Penalties and Interest
Taxability of Persons and Transactions
Taxpayers' Remedies
Date Issued
02-07-1997
February 7, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
In your letter, you seek correction of the use tax audit assessment issued to ********(the Taxpayer). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer provides legal services. An audit for the period January 1993
through May 1995 resulted in the assessment of use tax on various untaxed purchases.
The Taxpayer takes exception to the tax assessed on three purchases and maintains that it has paid the sales tax charged by its vendors. The Taxpayer also takes exception to the penalty applied on the use tax assessed on maintenance contracts and maintains that this is a new area not covered by the prior audit and should therefore not be penalized. In addition, the Taxpayer requests a refund of sales tax paid on property taxes.
DETERMINATION
Contested purchases
Based on the documentation provided, I find basis for removing the three contested purchases from the audit. To maintain compliance with Virginia Regulation (VR) 630-10-30 for the future, the Taxpayer is expected to retain all of its original sales invoices to ensure that it can substantiate payment of the sales tax charged by its vendors.
Penalty
Generally, the application of penalty is mandatory. However, it has been the department's longstanding policy that penalty will not apply to audit deficiencies occurring in new areas not covered by a prior audit. This is the policy provided that the application of the tax is not clearly established under existing law, regulations or other published documents of which the taxpayer reasonably should have had knowledge, or areas where the taxpayer has relied on prior correspondence with the department that has not been superseded by a law change, a change in regulations, or other published documents of which the taxpayer reasonably should have had knowledge. In addition, penalty will be waived when a taxpayer demonstrates an acceptable level of compliance with the tax laws or there is evidence of exceptional mitigating circumstances.
I would note that VR 630-10-62.1 has set out since January 1, 1985, the application of the tax to maintenance contracts. As provided in subsections C and D of this regulation, the total charge for "parts only contracts" and "parts and labor contracts" is subject to the tax. Furthermore, the department has issued numerous public documents setting out the application of the tax to maintenance contracts on plants, computer software and hardware, and various equipment.
Although the Taxpayer's first audit contained no deficiencies for maintenance contracts, l must recognize that the application of the tax to maintenance contracts is clearly established under the department's regulations and other available public documents. As such, the deficiencies related to maintenance contracts in this audit cannot be considered a new area in light of the well established policy. In addition, l would note that the Taxpayer's percentage of use tax compliance on this second audit is below the 60% threshold to achieve waiver of the penalty. Furthermore, the Taxpayer has not presented any evidence of exceptional mitigating circumstances.
Based on all of the foregoing, l find no basis to waive any part of the penalty assessed in this case.
Please note that effective January 1, 1996 and thereafter, parts and labor maintenance contracts are taxed on one-half of the total charge of such contracts. For additional information on this law change, see Tax Bulletin 95-8 (9/27/95), copy enclosed.
Refund request
Code of Virginia § 58.1-603 imposes the sales tax upon the “gross proceeds” derived from the lease or rental of tangible personal property. VR 630-10-57(B) defines "gross proceeds" to mean:
-
- ...the charges made or voluntary contributions received for the lease or rental of tangible personal property computed with the same deductions, where applicable, as for sales price in 630-10-95. The term "gross proceeds" includes any finance charges, insurance charges, charges for property tax on the property being leased, and other similar charges. (Emphasis added.)
The documentation presented indicates that the property taxes upon which sales tax has been collected were charged in connection with equipment being leased or rented. Based on the above cited regulation, the sales tax paid on the property tax charged in connection with the lease or rental of tangible personal property is correct. Accordingly, there is no basis to refund the sales tax paid on such transaction.
Based on all of the foregoing, the Taxpayer will receive a revised bill for the outstanding balance of ******* . To preclude further interest charges, payment should be sent to the address shown on the bill, or to the attention of ******at the*****department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within the next 45 days.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11352R
Rulings of the Tax Commissioner