Tax Type
Retail Sales and Use Tax
Description
Exemption certificates; Dealer responsible for obtaining exemption certificates
Topic
Exemptions
Date Issued
06-24-1998
June 24, 1998
Dear**********:
This will reply to your letter in which you seek correction of a sales and use tax assessment issued to ***** (the Taxpayer) as a result of an audit.
FACTS
The Taxpayer, a sign fabricator, operates in a dual capacity of fabricating tangible personal property for sale or resale and fabricating for its own use and consumption in real estate contracts. An audit for the period August 1991 through July 1997 resulted in an assessment of use tax for untaxed purchases used or consumed by the Taxpayer in its real estate contracting. The Taxpayer was also assessed the tax on untaxed sales of signs, banners, decals, and similar items.
The Taxpayer claims that it received insufficient instruction six years ago from a representative of the department on how to apply the tax. The Taxpayer also claims that it was unaware that it was ultimately liable for the sales and use tax on signs which become attached to realty. Lastly, the Taxpayer questions the auditor's use of gross sales to extrapolate the results of the sample.
DETERMINATION
Retail Sales and Use Tax
The Taxpayer believed that it was operating as a wholesaler prior to opening its retail shop. However, a review of the audit indicates that the Taxpayer offered signs for sale at retail prior to sales tax registration with the department. The fact that the Taxpayer did not have a retail showroom has no bearing in this case.
The Taxpayer also purchased materials from out of state suppliers for use in the fabrication of signs in real property contracts. The Taxpayer did not pay the sales tax nor accrue use tax on purchases of materials used in such signs.
Code of Virginia Sec. 58.1-603 imposes the sales tax on every person who sells or leases or rents tangible personal property in the Commonwealth. Code of Virginia Sec. 58.1-602 defines sale to mean ``any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property. . . .' The sale or lease of signs, and similar items constitutes a taxable sale or lease of tangible personal property and is taxable.
The tax imposed by Code of Virginia Secs. 58.1-603 and 58.1-604 on the sale of tangible personal property is to be collected by the ``dealer' and remitted to the department. The term ``dealer' is defined in Code of Virginia Sec. 58.1-612(B) to include every person who ``[s]ells at retail, or who offers for sale at retail, or who has in his possession for sale, or for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth, tangible personal property.'
Sign Manufacturers
The regulation further provides that charges to customers for signs that are not affixed to real property are subject to the sales tax. The tax applies to the total charge for the finished product including labor involved in the construction or painting of the sign. Materials that become an integral part of fabricated signs may be purchased exempt of the sales tax. Public Document P.D. 96-133, copy enclosed, further addresses the application of the tax to signs affixed to realty and signs that remain tangible personal property.
Title 23 VAC 10-210-410(E) addresses the purchase of tangible personal property by fabricators who operate in a dual capacity. If the Taxpayer is able to determine at the time of purchase tangible personal property for its own use in real property construction, the Taxpayer must pay the tax to the supplier based on the cost price of the raw materials. However, if the Taxpayer maintains an exempt inventory for resale and withdraws tangible personal property for use in real estate construction contracts, the Taxpayer must pay the tax on the fabricated cost price. If a person is unable to identify at the time of purchase the tangible personal property which will be resold, such person is required to pay the tax to his supplier. If at a later date, the person sells the tangible personal property at retail, the tax is collected upon retail selling price. Such persons are not entitled to a credit for the tax paid to suppliers since the transactions are separate and distinct taxable transactions.
The regulation provides clear guidance to the application of the tax to signage; as such, the Taxpayer reasonably should have been aware of its potential liability.
Certificates of Exemption
The Taxpayer was assessed the tax on certain untaxed sales in which the Taxpayer did not obtain certificates of exemption from its customers. Sales with valid certificates of exemption were not held in the audit.
The Taxpayer assumed that when a customer provides a Virginia sales tax registration number at the time of purchase, the sale is exempt. The Taxpayer maintains that it was unaware that it must obtain a certificate of exemption from its customers indicating that the property is exempt.
The department's policy with respect to exemption certificates is discussed in Title 23 VAC 10-210-280. The regulation states that ``all sales or leases 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.' This same section notes that when a certificate is inconsistent, incomplete, invalid, or infirm on its face, it is never acceptable, either before or after notice by the department. Section B of Title 23 VAC 10-210-280 provides that ``[r]easonable care and judgement must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates.'
In this case, sales were held taxable because the exemption certificates were either missing, incomplete, or invalid.
Nonprofit organizations
An assessment was made for sales to nonprofit organizations that did not qualify for exemption from the tax or where the purchase was not paid for directly out of the funds of the nonprofit organization. The Taxpayer was under the assumption that all sales to nonprofit organizations are tax exempt.
There is no general exemption from the retail sales and use tax for nonprofit organizations, as the enclosed copy of Title 23 VAC 10-210-1070 explains. Absent a specific statutory exemption, a nonprofit organization must pay the sales and use tax on purchases used or consumed in its operations. Furthermore, nonprofit organizations which have been granted an exemption by the General Assembly are only exempt with respect to purchases for use or consumption within the scope of activities for which the organization was granted an exemption. The dealer must obtain a properly completed exemption certificate or letter issued by the department from a nonprofit organization on purchases of tangible personal property or services indicating that such purchases are exempt from the tax. See the enclosed P.D. 94-69 (3/18/94) which further addresses the acceptance of exemption certificates for purchases by churches.
Motor Vehicle Refinishers and Painters
The Taxpayer was assessed the tax on the sale of reflective pin striping. It is my understanding that before the audit was finalized, the Taxpayer provided the auditor with an exemption certificate from the body shop for the purchase of the pin stripping. The auditor denied the exemption certificate since the body shop is providing a service and must pay the tax on materials used in providing its service.
Title 23 VAC 10-210-1020 provides that ``[M]otor vehicle refinishers and painters are engaged primarily in rendering professional services. . . [and] they are the consumers of the materials used in their business and are required to pay tax on their purchases.' Therefore, the body shop was not entitled to use a resale certificate to purchase the pin striping exempt of the tax. The Taxpayer was required to charge tax on the retail sale of materials to the body shop.
Information on Application of Tax
The Taxpayer claims that it received insufficient information from a representative of the department on the application of the tax. It is my understanding that the Taxpayer is referring to the time when the department's auditor was conducting an audit on a business not related to the Taxpayer. The auditor provided the Taxpayer with the answer to a question regarding the application of the tax to a specific transaction involving billboard rentals. While the Taxpayer indicates that the auditor should have inquired more about the Taxpayer's business and provided additional information, it is my understanding that the Taxpayer did not inform the auditor that it operated a sign business nor indicate that it wanted additional information.
Code of Virginia Sec. 58.1-204 states that the department is required to publish regulations and written rulings or other interpretations of Virginia law which are of interest to taxpayers and practitioners. The regulations are widely distributed and made freely available to the general public. The regulations provide guidance in the registration of dealers and the application of the tax to sales and purchases of tangible personal property.
I would also note that the above cited regulations regarding sign manufacturers, exemption certificates, and nonprofit organizations have been in effect in substantially their present form since 1985. They are also published in the comprehensive set of regulations entitled the Virginia Administrative Code. These regulations have always been freely available to the public. The department's written policy on the application of the tax for sign manufacturers is longstanding, consistently applied, and distributed freely to the public.
Sample
In conducting an audit of purchases, it is often difficult for a taxpayer to provide purchase information on which to extrapolate the results of the sample. When increases and decreases in gross sales vary directly with purchases, the use of gross receipts to extrapolate the results of a purchase sample is an acceptable audit procedure. The auditor divided the use tax deficiency by the total purchases for the sample period to arrive at the percentage of error factor. The percentage of error factor multiplied by the total sales base for the audit period resulted in the total use tax audit deficiency.
In a conversation with a member of my staff, the Taxpayer suggests that the department use a purchase base to determine the use tax audit liability. If the Taxpayer can provide sufficient purchase information for extrapolating the results of the purchase sample, the auditor will make the appropriate adjustments to the error factor and the audit report.
Summary
Based on a review of the issues in this case, there is no statutory basis to revise any part of the assessment. Accordingly, the assessment is correct as issued. Nevertheless, l will allow the Taxpayer the opportunity to provide the department with sufficient purchase information for extrapolating the results of the purchase sample. Accordingly, the audit will be returned to the *****District Office. The auditor will contact the Taxpayer within 30 days to review the purchase information. If the Taxpayer can provide sufficient purchase information for extrapolating the results of the purchase sample, the auditor will make the appropriate adjustments to the audit report.
If you have any questions regarding this letter, you may contact at ***** at *****. Questions concerning audit procedures should be directed to ***** at *****.
Dear**********:
This will reply to your letter in which you seek correction of a sales and use tax assessment issued to ***** (the Taxpayer) as a result of an audit.
FACTS
The Taxpayer, a sign fabricator, operates in a dual capacity of fabricating tangible personal property for sale or resale and fabricating for its own use and consumption in real estate contracts. An audit for the period August 1991 through July 1997 resulted in an assessment of use tax for untaxed purchases used or consumed by the Taxpayer in its real estate contracting. The Taxpayer was also assessed the tax on untaxed sales of signs, banners, decals, and similar items.
The Taxpayer claims that it received insufficient instruction six years ago from a representative of the department on how to apply the tax. The Taxpayer also claims that it was unaware that it was ultimately liable for the sales and use tax on signs which become attached to realty. Lastly, the Taxpayer questions the auditor's use of gross sales to extrapolate the results of the sample.
DETERMINATION
Retail Sales and Use Tax
The Taxpayer believed that it was operating as a wholesaler prior to opening its retail shop. However, a review of the audit indicates that the Taxpayer offered signs for sale at retail prior to sales tax registration with the department. The fact that the Taxpayer did not have a retail showroom has no bearing in this case.
The Taxpayer also purchased materials from out of state suppliers for use in the fabrication of signs in real property contracts. The Taxpayer did not pay the sales tax nor accrue use tax on purchases of materials used in such signs.
Code of Virginia Sec. 58.1-603 imposes the sales tax on every person who sells or leases or rents tangible personal property in the Commonwealth. Code of Virginia Sec. 58.1-602 defines sale to mean ``any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property. . . .' The sale or lease of signs, and similar items constitutes a taxable sale or lease of tangible personal property and is taxable.
The tax imposed by Code of Virginia Secs. 58.1-603 and 58.1-604 on the sale of tangible personal property is to be collected by the ``dealer' and remitted to the department. The term ``dealer' is defined in Code of Virginia Sec. 58.1-612(B) to include every person who ``[s]ells at retail, or who offers for sale at retail, or who has in his possession for sale, or for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth, tangible personal property.'
Sign Manufacturers
-
- Title 23 of the Virginia Administrative Code (VAC) 10-210-4070 provides that:
-
- Any person who constructs and installs signs, billboards or similar items which, upon installation, become incorporated into realty is a contractor with respect to such items. No tax is applicable to the charge for constructing and installing a sign which becomes attached to realty, but the person constructing and installing the item must pay the tax on all property used in the construction and installation.
The regulation further provides that charges to customers for signs that are not affixed to real property are subject to the sales tax. The tax applies to the total charge for the finished product including labor involved in the construction or painting of the sign. Materials that become an integral part of fabricated signs may be purchased exempt of the sales tax. Public Document P.D. 96-133, copy enclosed, further addresses the application of the tax to signs affixed to realty and signs that remain tangible personal property.
Title 23 VAC 10-210-410(E) addresses the purchase of tangible personal property by fabricators who operate in a dual capacity. If the Taxpayer is able to determine at the time of purchase tangible personal property for its own use in real property construction, the Taxpayer must pay the tax to the supplier based on the cost price of the raw materials. However, if the Taxpayer maintains an exempt inventory for resale and withdraws tangible personal property for use in real estate construction contracts, the Taxpayer must pay the tax on the fabricated cost price. If a person is unable to identify at the time of purchase the tangible personal property which will be resold, such person is required to pay the tax to his supplier. If at a later date, the person sells the tangible personal property at retail, the tax is collected upon retail selling price. Such persons are not entitled to a credit for the tax paid to suppliers since the transactions are separate and distinct taxable transactions.
The regulation provides clear guidance to the application of the tax to signage; as such, the Taxpayer reasonably should have been aware of its potential liability.
Certificates of Exemption
The Taxpayer was assessed the tax on certain untaxed sales in which the Taxpayer did not obtain certificates of exemption from its customers. Sales with valid certificates of exemption were not held in the audit.
The Taxpayer assumed that when a customer provides a Virginia sales tax registration number at the time of purchase, the sale is exempt. The Taxpayer maintains that it was unaware that it must obtain a certificate of exemption from its customers indicating that the property is exempt.
The department's policy with respect to exemption certificates is discussed in Title 23 VAC 10-210-280. The regulation states that ``all sales or leases 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.' This same section notes that when a certificate is inconsistent, incomplete, invalid, or infirm on its face, it is never acceptable, either before or after notice by the department. Section B of Title 23 VAC 10-210-280 provides that ``[r]easonable care and judgement must be exercised by all concerned to prevent the giving or receiving of false, fraudulent or bad faith exemption certificates.'
In this case, sales were held taxable because the exemption certificates were either missing, incomplete, or invalid.
Nonprofit organizations
An assessment was made for sales to nonprofit organizations that did not qualify for exemption from the tax or where the purchase was not paid for directly out of the funds of the nonprofit organization. The Taxpayer was under the assumption that all sales to nonprofit organizations are tax exempt.
There is no general exemption from the retail sales and use tax for nonprofit organizations, as the enclosed copy of Title 23 VAC 10-210-1070 explains. Absent a specific statutory exemption, a nonprofit organization must pay the sales and use tax on purchases used or consumed in its operations. Furthermore, nonprofit organizations which have been granted an exemption by the General Assembly are only exempt with respect to purchases for use or consumption within the scope of activities for which the organization was granted an exemption. The dealer must obtain a properly completed exemption certificate or letter issued by the department from a nonprofit organization on purchases of tangible personal property or services indicating that such purchases are exempt from the tax. See the enclosed P.D. 94-69 (3/18/94) which further addresses the acceptance of exemption certificates for purchases by churches.
Motor Vehicle Refinishers and Painters
The Taxpayer was assessed the tax on the sale of reflective pin striping. It is my understanding that before the audit was finalized, the Taxpayer provided the auditor with an exemption certificate from the body shop for the purchase of the pin stripping. The auditor denied the exemption certificate since the body shop is providing a service and must pay the tax on materials used in providing its service.
Title 23 VAC 10-210-1020 provides that ``[M]otor vehicle refinishers and painters are engaged primarily in rendering professional services. . . [and] they are the consumers of the materials used in their business and are required to pay tax on their purchases.' Therefore, the body shop was not entitled to use a resale certificate to purchase the pin striping exempt of the tax. The Taxpayer was required to charge tax on the retail sale of materials to the body shop.
Information on Application of Tax
The Taxpayer claims that it received insufficient information from a representative of the department on the application of the tax. It is my understanding that the Taxpayer is referring to the time when the department's auditor was conducting an audit on a business not related to the Taxpayer. The auditor provided the Taxpayer with the answer to a question regarding the application of the tax to a specific transaction involving billboard rentals. While the Taxpayer indicates that the auditor should have inquired more about the Taxpayer's business and provided additional information, it is my understanding that the Taxpayer did not inform the auditor that it operated a sign business nor indicate that it wanted additional information.
Code of Virginia Sec. 58.1-204 states that the department is required to publish regulations and written rulings or other interpretations of Virginia law which are of interest to taxpayers and practitioners. The regulations are widely distributed and made freely available to the general public. The regulations provide guidance in the registration of dealers and the application of the tax to sales and purchases of tangible personal property.
I would also note that the above cited regulations regarding sign manufacturers, exemption certificates, and nonprofit organizations have been in effect in substantially their present form since 1985. They are also published in the comprehensive set of regulations entitled the Virginia Administrative Code. These regulations have always been freely available to the public. The department's written policy on the application of the tax for sign manufacturers is longstanding, consistently applied, and distributed freely to the public.
Sample
In conducting an audit of purchases, it is often difficult for a taxpayer to provide purchase information on which to extrapolate the results of the sample. When increases and decreases in gross sales vary directly with purchases, the use of gross receipts to extrapolate the results of a purchase sample is an acceptable audit procedure. The auditor divided the use tax deficiency by the total purchases for the sample period to arrive at the percentage of error factor. The percentage of error factor multiplied by the total sales base for the audit period resulted in the total use tax audit deficiency.
In a conversation with a member of my staff, the Taxpayer suggests that the department use a purchase base to determine the use tax audit liability. If the Taxpayer can provide sufficient purchase information for extrapolating the results of the purchase sample, the auditor will make the appropriate adjustments to the error factor and the audit report.
Summary
Based on a review of the issues in this case, there is no statutory basis to revise any part of the assessment. Accordingly, the assessment is correct as issued. Nevertheless, l will allow the Taxpayer the opportunity to provide the department with sufficient purchase information for extrapolating the results of the purchase sample. Accordingly, the audit will be returned to the *****District Office. The auditor will contact the Taxpayer within 30 days to review the purchase information. If the Taxpayer can provide sufficient purchase information for extrapolating the results of the purchase sample, the auditor will make the appropriate adjustments to the audit report.
If you have any questions regarding this letter, you may contact at ***** at *****. Questions concerning audit procedures should be directed to ***** at *****.
Rulings of the Tax Commissioner