Retail Sales and Use Tax
Resales; Computers used then sold
Taxability of Persons and Transactions
February 18, 1997
Re: § 58.1-1821 Application: Retail Sales & Use Tax
This is in reply to your letter in which you seek a correction of the department's sales and use tax audit assessment issued to ******* (the "Taxpayer"), for the period August 1993 through July 1996.
The Taxpayer disagrees with the conclusion of the audit on the basis that a detail listing of untaxed purchases within the working papers was smaller than the measure indicated on the actual report. The Taxpayer also questions the taxation of "computer assets" which the Taxpayer claims are actually inventory for resale. The Taxpayer states that computers are purchased and used until the technology changes, and then sold to customers. Once sold, newer replacement computers are purchased for use until eventually sold. Accordingly, the Taxpayer requests a revision of the department's assessment.
In reviewing the audit, l find that the purchase listing to which you refer is a sample listing of purchases for 1995. The sample details all purchases for 1995 and identifies those purchases on which taxes were not paid to the vendor. Total untaxed purchases are then applied against the total of all purchases for 1995 in an effort to develop an error factor, which is applied against all purchases for the audit period.
Sampling is a widely used audit technique which is employed when a detailed audit would not prove beneficial either to the auditor or the client. The use of a statistical analysis has been proven to produce final results within a narrow percentage range of the actual amount that would have been determined by a detailed audit. I note that the sample and resulting projection were discussed with the Taxpayer, who agreed to the methodology of the calculation. Accordingly, the untaxed purchases total is correct.
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 computers are held in inventory and seeks to have the purchase of the computers removed from the fixed asset schedule. I cannot agree, on the basis that the computers were first used by the Taxpayer for purposes other than those outlined in the foregoing statute. Accordingly, the auditor properly included the computers as taxable assets.
Additionally, it should be noted that the subsequent sale of a computer to a customer is deemed to be a separate and distinct transaction, and is also subject to the collection of sales tax on the sales price.
If the Taxpayer is unsure as to the proper application of the tax to any transaction, l encourage the Taxpayer to contact the department's *********** District Office for assistance or the department's Customer Services Office in Richmond, Virginia, at *************.
Based on the foregoing, there is no basis to revise the assessment. Please return your payment for the balance of the tax, penalty and interest totaling ***** to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 30 days. If payment is not received within that time, interest will accrue on the balance due from the original date of assessment. If you should have any questions regarding this matter, please contact *******of the department’s Office of Tax Policy at *********.
Danny M. Payne