Tax Type
Retail Sales and Use Tax
Description
Construction; Awning fabricator.
Topic
Taxability of Persons and Transactions
Date Issued
04-22-1998
April 22, 1998
Dear*************:
This is in response to your letters seeking correction of retail sales and use tax audit assessments issued to ***** (the Taxpayer). I apologize for the delay in responding to your letters.
FACTS
The Taxpayer owns and operates restaurants in Virginia. An audit for the period January 1994 through December 1996 resulted in the assessment of use tax on untaxed purchases of tangible personal property used or consumed in its restaurant business. In this third audit, the Taxpayer seeks waiver of the audit penalty.
The Taxpayer also takes exception to the use tax assessed on an awning furnished and installed by a Pennsylvania fabricator. The Taxpayer submits evidence that the awning installation was a custom job and the component parts for the awning were purchased by this fabricator exclusively for this job after the order was received. The evidence submitted also shows that the fabricator does not maintain an inventory of finished awnings, nor most of the component parts used in the fabrication of awnings, at their place of business.
Accordingly, the Taxpayer maintains that the awning fabricator does not fit the definition of a ``retailer' as set out in Title 23 of the Virginia Administrative Code (VAC) 10-210-410(G) and therefore should be treated as a real property installation contractor in regard to the contested transaction. If classified as a contractor, the awning fabricator would be subject to the tax on the awning materials, rather than the Taxpayer. For these reasons, the Taxpayer requests abatement of the use tax assessed on the awning purchase.
DETERMINATION
Awning
The Taxpayer relies on Public Document (P.D.) 86-270 (10/14/88). In that ruling, a custom awning fabricator did not maintain most of the parts necessary to fabricate a finished awning. Since the fabricator did not meet all three criteria of a retailer as defined under 23 VAC 10-210-410(G) (formerly Virginia Regulation 630-10-27(G)), the department ruled that the fabricator should be classified as a contractor.
The department has also considered other cases involving circumstances similar to the Taxpayer's. For instance, in P.D. 98-21 (2/11/98, copy enclosed), a kitchen equipment dealer did not maintain or sell from an inventory of kitchen equipment, or component parts thereof. Rather, this dealer purchased kitchen equipment or component parts thereof only after an order was received. Accordingly, the dealer was classified as a contractor of the installed kitchen equipment since it did not satisfy the inventory requirement of a ``retailer' as defined in 23 VAC 10-210-410(G).
Although the awning fabricator in the instant case maintains a place of business and performs installation, it appears from the evidence submitted that this awning fabricator does not maintain an inventory of finished awnings or most of the component parts necessary to fabricate finished awnings. As such, the awning fabricator is considered a contractor in regard to the contested transaction and is responsible for the tax as the user or consumer of the awning materials. Accordingly, bill ***** which consists only of the awning assessment will be abated in full.
Penalty
On third or subsequent audits, it has been the department's longstanding policy to waive penalty if a taxpayer's use tax compliance ratio meets or exceeds 85%. Removing the awning issue causes the Taxpayer's use tax compliance ratio to increase from 69% to 72%. Since the revised use tax compliance ratio does not meet or exceed an acceptable level of compliance, the penalty assessed on the noncontested tax deficiencies cannot be waived based on the level of compliance.
The department will also waive penalty when there is evidence of exceptional mitigating circumstances. During the audit period, the Taxpayer claims that it experienced system changes in its method for paying invoices. The Taxpayer also indicates that it has put into place a new training program to enable employees to accrue sales and use tax more accurately. Although system changes may have contributed to a failure to achieve an acceptable level of compliance, I find that these problems do not constitute exceptional mitigating circumstances. I appreciate the Taxpayer's efforts to improve its tax compliance by the introduction of a training program. However, these worthwhile efforts have no direct bearing on the audit period in question. Accordingly, I find no basis to waive the penalty.
Conclusion
The department's records show that bill *****, which represents the noncontested tax portion of the audit, has an outstanding balance of penalty and interest in the amount of *****. The Taxpayer will receive the updated bill under separate cover. If the Taxpayer wishes to avoid further interest charges, the outstanding balance of bill ***** should be paid within 30 days.
If you have any questions about this determination, please contact ***** of my policy staff at *****.
Dear*************:
This is in response to your letters seeking correction of retail sales and use tax audit assessments issued to ***** (the Taxpayer). I apologize for the delay in responding to your letters.
FACTS
The Taxpayer owns and operates restaurants in Virginia. An audit for the period January 1994 through December 1996 resulted in the assessment of use tax on untaxed purchases of tangible personal property used or consumed in its restaurant business. In this third audit, the Taxpayer seeks waiver of the audit penalty.
The Taxpayer also takes exception to the use tax assessed on an awning furnished and installed by a Pennsylvania fabricator. The Taxpayer submits evidence that the awning installation was a custom job and the component parts for the awning were purchased by this fabricator exclusively for this job after the order was received. The evidence submitted also shows that the fabricator does not maintain an inventory of finished awnings, nor most of the component parts used in the fabrication of awnings, at their place of business.
Accordingly, the Taxpayer maintains that the awning fabricator does not fit the definition of a ``retailer' as set out in Title 23 of the Virginia Administrative Code (VAC) 10-210-410(G) and therefore should be treated as a real property installation contractor in regard to the contested transaction. If classified as a contractor, the awning fabricator would be subject to the tax on the awning materials, rather than the Taxpayer. For these reasons, the Taxpayer requests abatement of the use tax assessed on the awning purchase.
DETERMINATION
Awning
The Taxpayer relies on Public Document (P.D.) 86-270 (10/14/88). In that ruling, a custom awning fabricator did not maintain most of the parts necessary to fabricate a finished awning. Since the fabricator did not meet all three criteria of a retailer as defined under 23 VAC 10-210-410(G) (formerly Virginia Regulation 630-10-27(G)), the department ruled that the fabricator should be classified as a contractor.
The department has also considered other cases involving circumstances similar to the Taxpayer's. For instance, in P.D. 98-21 (2/11/98, copy enclosed), a kitchen equipment dealer did not maintain or sell from an inventory of kitchen equipment, or component parts thereof. Rather, this dealer purchased kitchen equipment or component parts thereof only after an order was received. Accordingly, the dealer was classified as a contractor of the installed kitchen equipment since it did not satisfy the inventory requirement of a ``retailer' as defined in 23 VAC 10-210-410(G).
Although the awning fabricator in the instant case maintains a place of business and performs installation, it appears from the evidence submitted that this awning fabricator does not maintain an inventory of finished awnings or most of the component parts necessary to fabricate finished awnings. As such, the awning fabricator is considered a contractor in regard to the contested transaction and is responsible for the tax as the user or consumer of the awning materials. Accordingly, bill ***** which consists only of the awning assessment will be abated in full.
Penalty
On third or subsequent audits, it has been the department's longstanding policy to waive penalty if a taxpayer's use tax compliance ratio meets or exceeds 85%. Removing the awning issue causes the Taxpayer's use tax compliance ratio to increase from 69% to 72%. Since the revised use tax compliance ratio does not meet or exceed an acceptable level of compliance, the penalty assessed on the noncontested tax deficiencies cannot be waived based on the level of compliance.
The department will also waive penalty when there is evidence of exceptional mitigating circumstances. During the audit period, the Taxpayer claims that it experienced system changes in its method for paying invoices. The Taxpayer also indicates that it has put into place a new training program to enable employees to accrue sales and use tax more accurately. Although system changes may have contributed to a failure to achieve an acceptable level of compliance, I find that these problems do not constitute exceptional mitigating circumstances. I appreciate the Taxpayer's efforts to improve its tax compliance by the introduction of a training program. However, these worthwhile efforts have no direct bearing on the audit period in question. Accordingly, I find no basis to waive the penalty.
Conclusion
The department's records show that bill *****, which represents the noncontested tax portion of the audit, has an outstanding balance of penalty and interest in the amount of *****. The Taxpayer will receive the updated bill under separate cover. If the Taxpayer wishes to avoid further interest charges, the outstanding balance of bill ***** should be paid within 30 days.
If you have any questions about this determination, please contact ***** of my policy staff at *****.
Rulings of the Tax Commissioner