Tax Type
Retail Sales and Use Tax
Description
Deficiency assessments, application of the tax to telephone handsets
Topic
Collection of Delinquent Tax
Date Issued
05-24-1999
May 24, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear************
This is in response to your letter seeking correction of a sales and use tax assessment issued to ***** (the "Taxpayer') for the period January 1995 through June 1997. I note that the uncontested portion of the assessment has been paid. Further, I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a public utility telephone company and telecommunications company. At issue in this case is the application of the tax to telephone handsets that are purchased by the Taxpayer and subsequently leased or rented to the Taxpayer's customers. I understand that the handsets are generally leased or rented to those same customers who purchase the Taxpayer's telecommunications services. No assessment was made in the current audit period on the Taxpayer's charges to customers for the lease or rental of the handsets. An assessment was issued, however, for the Taxpayer's untaxed purchases of those handsets.
I issued a ruling to the Taxpayer dated June 12, 1997, in which I addressed these transactions as they occurred in a prior audit period. That prior ruling included certain information which was provided to me by the State Corporation Commission ("SCC') with respect to telephone handsets. I noted that according to the SCC, and effective 1986, public utility telephone companies are required to separately state on their invoices to customers the charges for the lease or rental of handsets.
Based on my discussions with the SCC, I also noted that: (1) the provision of handsets to customers is no longer an activity which is regulated by the SCC; (2) the provision of handsets to customers is a competitive activity which is outside the telecommunications company's public service; (3) public service telephone companies are not required to file tariffs with the SCC on the lease or rental or handsets; and (4) the cost of providing handsets to customers is not recoverable through the rate making process. The SCC informs me that these provisions also apply to other equipment provided to customers and generally referred to as Customer Provided Equipment.
DETERMINATION
I would first like to review the application of the tax to charges made to customers for the lease or rental of handsets. In my prior ruling to the Taxpayer, I determined that the lease or rental of telephone handsets to customers is not taxable when the handsets are provided in connection with the Taxpayer's telecommunications services. The true object of that transaction is the provision of a nontaxable service as addressed in Title 23 of the Virginia Administrative Code (VAC) 10-210-4040.
Tangible personal property used to provide nontaxable services is deemed to be used or consumed by the service provider. Pursuant to Code of Virginia § 58.1-604, the tax is imposed on the cost price of tangible personal property used or consumed in the Commonwealth.
Specifically at issue in this case is the exemption set out in Code of Virginia § 58.1-609.3(3). In pertinent part, this exemption applies to tangible personal property sold or leased to a telecommunications company for use or consumption by such ... company ... directly in the rendition of its public service....' (Emphasis added.)
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- This exemption is addressed in 23 VAC 10-210-3020 which provides that:
Generally, property is not deemed to be used directly in the rendition of a public service unless it is used in activities the cost of which is recoverable by a utility through the rate making process. However, the fact that property is used in activities the cost of which is recoverable through the rate making process does not, of itself, mean that the property is used directly in the rendition of a public service. When tangible personal property is to be used in activities the cost of which is not recoverable through rates, such property is deemed to be subject to the tax when purchased or used by a utility.
- This exemption is addressed in 23 VAC 10-210-3020 which provides that:
You further disagree with the assessment because it represents a change of position by the department for which the Taxpayer did not receive sufficient notice. In this respect, you maintain that it is not fair or equitable to assess this issue on the current audit. Rather, in the event that I find the contested purchases to be taxable, you suggest that they be assessed as of the date of the prior ruling.
I believe that the notification issue has been substantially met by the regulation set out in 23 VAC 10-210-3020 as noted above. This provision of the regulation - which addresses the statutory exemption with respect to the rate making process - has remained substantially unchanged for a number of years. I agree that the federal and state regulatory environment has changed, but accounting for these changes is an integral part of the Taxpayer's business.
Further, the circumstances in the current audit are significantly different from those in the prior audit. In the earlier audit, the Taxpayer was not assessed on the purchase of handsets. Rather, the Taxpayer was assessed on the charges made to customers for the lease or rental of the handsets. I determined, and as confirmed above, these charges are not taxable when made in connection with exempt telecommunications services. I also determined in that prior audit, and based on the existing statute and regulation, that the Taxpayer's purchases of the handsets are taxable.
Based on the above, the contested items are found to be correctly assessed. A revised bill, with interest accrued to the date of your letter of protest, will be sent to the Taxpayer. No additional interest will accrue provided the bill is paid within 30 days from the date of this letter.
If you have any questions regarding this letter, please call ***** in the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/134251
Rulings of the Tax Commissioner