Tax Type
Retail Sales and Use Tax
Description
Audit Procedures
Topic
Collection of Delinquent Tax
Date Issued
07-28-1998
July 28, 1998
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
In your letter of May 21, 1998, you seek correction of a retail sales and use tax assessment issued to ***** (the Taxpayer) as a result of an audit.
FACTS
The Taxpayer sells and installs commercial fencing, especially chain link and ornamental fences. An audit for the period September 1994 through August 1997 resulted in an assessment of sales tax on charges labeled as "fabricate & install' or "furnish & install' and use tax on untaxed purchases of certain fixed assets and recurring purchases used or consumed in the Taxpayer's operations.
The Taxpayer has furnished documentation dated August 15, 1996, that it was notified by its CPA to remove the "fabrication' terminology used on its invoices since it performed no fabrication and was only installing materials at the work site. The Taxpayer followed this advice from that point on.
Upon audit by the department, the Taxpayer was held taxable on all charges which were labeled and separately stated as "fabricate & install' or "furnish & install.' However, the Taxpayer was not assessed any sales tax on those separately stated charges labeled as "installation.' It is my understanding that the Taxpayer maintains that its labor methods in erecting fences were the same before and after the invoicing terminology change.
The Taxpayer seeks relief from the sales tax assessed on the entire sales portion of the assessment and all of the penalties applied in this case.
DETERMINATION
Penalty
Title 23 of the Virginia Administrative Code (VAC) 10-210-2032(A)(1) sets out that penalty assessed on a sales or use tax audit is generally waived on the first audit of taxpayers provided certain conditions do not exist. For example, penalty will apply in a first audit when a taxpayer was previously notified by the department in writing to collect tax on sales or to pay tax on purchases and has failed to follow instructions. In this case, there is no evidence the Taxpayer was notified in writing by the department either before or during the period of audit as to how to collect tax on the contested sales or to pay tax on purchases.
I must also recognize the fact that the Taxpayer only came into existence four months prior to the beginning of audit period. Accordingly, I find the audit at issue to be a first audit of the Taxpayer and, therefore, find sufficient basis to waive the entire penalty assessed in this audit.
Fabrication and installation charges
Although separate charges were listed on customers' invoices as "fabricate & install' or "furnish & install,' the Taxpayer maintains that it did not perform any fabrication work as to alter the form or state of the various fencing components, such as cutting the posts. Rather, the Taxpayer maintains that the extent of labor was for the mere installation of the various fencing components at the work site. Consequently, the charges at issue were mislabeled and should have been labeled only as separately stated charges for "installation labor.'
I would note that the Code of Virginia does not provide an exemption from the retail sales and use tax for "fabrication and installation' labor. Rather, Code of Virginia Sec. 58.1-609.5(3) provides an exemption only for separately stated charges for installation labor. Accordingly, the lump-sum charges in this case do not fall within the express language of the exemption statute.
Although I recognize this audit as the first audit of the Taxpayer, I must also recognize the fact that the Taxpayer advertises that it is engaged in selling and installing wood fences and other fences which may require an element of fabrication labor. Accordingly, I find it reasonable to presume that there may be a degree of fabrication performed by the Taxpayer and to hold the Taxpayer responsible for establishing whether it did or did not perform fabrication labor in connection with the sales at issue. For purposes of this audit only, I will consider a revision of the audit to remove all installation charges, provided the Taxpayer furnishes additional information and documentation to the department's ***** District Office to establish one of the following:
The Taxpayer should furnish the requested information to the department's auditor at the ***** District Office within the next 60 days. When the revision has been made, the Taxpayer will receive a revised bill for the outstanding liabilities.
If you have questions about the audit revision, please contact ***** of the department's ***** District Office at ***** . If you have any questions about this response, please contact ***** at ***** .
Sincerely,
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
In your letter of May 21, 1998, you seek correction of a retail sales and use tax assessment issued to ***** (the Taxpayer) as a result of an audit.
FACTS
The Taxpayer sells and installs commercial fencing, especially chain link and ornamental fences. An audit for the period September 1994 through August 1997 resulted in an assessment of sales tax on charges labeled as "fabricate & install' or "furnish & install' and use tax on untaxed purchases of certain fixed assets and recurring purchases used or consumed in the Taxpayer's operations.
The Taxpayer has furnished documentation dated August 15, 1996, that it was notified by its CPA to remove the "fabrication' terminology used on its invoices since it performed no fabrication and was only installing materials at the work site. The Taxpayer followed this advice from that point on.
Upon audit by the department, the Taxpayer was held taxable on all charges which were labeled and separately stated as "fabricate & install' or "furnish & install.' However, the Taxpayer was not assessed any sales tax on those separately stated charges labeled as "installation.' It is my understanding that the Taxpayer maintains that its labor methods in erecting fences were the same before and after the invoicing terminology change.
The Taxpayer seeks relief from the sales tax assessed on the entire sales portion of the assessment and all of the penalties applied in this case.
DETERMINATION
Penalty
Title 23 of the Virginia Administrative Code (VAC) 10-210-2032(A)(1) sets out that penalty assessed on a sales or use tax audit is generally waived on the first audit of taxpayers provided certain conditions do not exist. For example, penalty will apply in a first audit when a taxpayer was previously notified by the department in writing to collect tax on sales or to pay tax on purchases and has failed to follow instructions. In this case, there is no evidence the Taxpayer was notified in writing by the department either before or during the period of audit as to how to collect tax on the contested sales or to pay tax on purchases.
I must also recognize the fact that the Taxpayer only came into existence four months prior to the beginning of audit period. Accordingly, I find the audit at issue to be a first audit of the Taxpayer and, therefore, find sufficient basis to waive the entire penalty assessed in this audit.
Fabrication and installation charges
Although separate charges were listed on customers' invoices as "fabricate & install' or "furnish & install,' the Taxpayer maintains that it did not perform any fabrication work as to alter the form or state of the various fencing components, such as cutting the posts. Rather, the Taxpayer maintains that the extent of labor was for the mere installation of the various fencing components at the work site. Consequently, the charges at issue were mislabeled and should have been labeled only as separately stated charges for "installation labor.'
I would note that the Code of Virginia does not provide an exemption from the retail sales and use tax for "fabrication and installation' labor. Rather, Code of Virginia Sec. 58.1-609.5(3) provides an exemption only for separately stated charges for installation labor. Accordingly, the lump-sum charges in this case do not fall within the express language of the exemption statute.
Although I recognize this audit as the first audit of the Taxpayer, I must also recognize the fact that the Taxpayer advertises that it is engaged in selling and installing wood fences and other fences which may require an element of fabrication labor. Accordingly, I find it reasonable to presume that there may be a degree of fabrication performed by the Taxpayer and to hold the Taxpayer responsible for establishing whether it did or did not perform fabrication labor in connection with the sales at issue. For purposes of this audit only, I will consider a revision of the audit to remove all installation charges, provided the Taxpayer furnishes additional information and documentation to the department's ***** District Office to establish one of the following:
-
- 1. That all of the contested "fabricate & install' or "furnish & install' charges are in fact charges for installation labor only, or
-
- 2. That a portion of the contested charges is for fabrication labor with the remainder of the charge being for installation labor. In such an event, the Taxpayer would need to furnish supporting evidence as to the portion (or percentage) which reasonably reflects the degree of fabrication performed in connection with all of the fencing jobs at issue.
The Taxpayer should furnish the requested information to the department's auditor at the ***** District Office within the next 60 days. When the revision has been made, the Taxpayer will receive a revised bill for the outstanding liabilities.
If you have questions about the audit revision, please contact ***** of the department's ***** District Office at ***** . If you have any questions about this response, please contact ***** at ***** .
Sincerely,
Rulings of the Tax Commissioner