Tax Type
Retail Sales and Use Tax
Description
Erroneously collected sales tax
Topic
Collection of Tax
Prohibited Activity
Records/Returns/Payments
Taxability of Persons and Transactions
Date Issued
06-04-2010
June 4, 2010
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear Gentlemen:
This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ***** (the Taxpayer) as a result of an audit for the period April 2005 through May 2008. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer sells and installs traditional and IP network based phone systems. The installation includes cabling installed within walls that become a part of the realty. The Taxpayer purchased its materials tax exempt, including cable that became a part of the real property. The Taxpayer collected sales tax on the total charge including cabling. As a result of the Department's audit, the auditor assessed consumer use tax on purchases of cable on the basis that the Taxpayer is the consumer of the cable pursuant to Va. Code § 58.1-610.
The Taxpayer contests the use tax assessed on the cable because no credit was provided against the assessed tax for sales tax collected by the Taxpayer on the installed cable. The Taxpayer contends that the Department previously permitted such a credit. I understand that the Taxpayer contends it was treated as a retailer in the prior audit and charged sales tax on the sale of digital phone systems and cable installations.
DETERMINATION
Prior Audit
The prior audit (copy enclosed) covers the period January 1993 through January 1994. A review of the prior audit indicates that the Taxpayer sold, installed and repaired telephones. A detailed audit of sales was conducted, and a number of exceptions were noted. Although sales tax was only collected on two sales during the first eight months of the audit, there are no sales exceptions assessed in the audit specifically for cable or wiring. Based on a review of the prior audit report and its accompanying audit comments, there is no conclusive evidence that the Taxpayer was assessed sales tax on cable or wiring or that the Taxpayer collected sales tax on cable or wiring.
Moreover, the telecommunications regulation was in existence during the entire prior audit period. Formerly, Title 23 of the Virginia Administrative Code 10-210-5040 A (repealed effective March 10, 2007) set out the following:
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- The tax applies to the total charge for the sale or lease of intercom, interconnect and telephone systems. Separately stated charges for the installation of such systems are not subject to the tax.
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- Persons engaged in the sale or lease of such systems must pay the tax on all equipment and supplies used in installation, including, but not limited to, equipment and tools and wiring and other similar items. [Emphasis added.]
I must presume in the absence of evidence to the contrary that the prior auditor was cognizant of the above regulatory provisions and acted on them accordingly. I must also presume that the prior auditor was cognizant of the public documents issued at that time on related subject matters.
Interpreting the above regulation are several public documents issued prior to the Taxpayer's prior audit period. For instance, Public Document (P.D.) 91-50 (3/24/91) addresses a business that sold and installed telecommunications systems. The business claimed the resale exemption for cable used in the installation of the telecommunications systems. Based on the above regulation, however, the Tax Commissioner determined that the resale exemption was not applicable to the cable.
In addition, the Tax Commissioner issued P.D. 90-210 (11/28/90), in which the provision and installation of cable within walls and ceilings was determined to be a service with respect to real property. As such, the taxpayer in that case was deemed the consuming contractor of such cable. Similarly, the Tax Commissioner issued P.D. 92-29 (4/20/92), in which a person installing wiring inside walls and ceilings was deemed a real property contractor and liable for the tax on such wiring.
These cited authorities demonstrate an established policy requiring the application of the tax to the cost of wiring and cable used in the installation of telecommunications systems. As such, the collection of the sales tax on installed cable would be in clear conflict with the established policy in effect at the time of the prior audit.
Current Audit
Although the telecommunications regulation cited above was repealed during the Taxpayer's current audit period, the Department's policy as set out in that regulation remains applicable today. For instance, the application of the sales tax to the sale of tangible personal property is set out in Va. Code § 58.1-604, and the application of tax to tangible personal property permanently attached to the realty, such as wiring permanently installed in walls, is based on the real property contractor provisions of Va. Code § 58.1-610.
I would also note that the Department has not changed its policy since the prior audit period regarding the application of the tax to telephone wiring installations. For instance, see P.D. 95-295 (11/16/95) in assessing use tax on cable purchased by the Taxpayer.
Credit
In P.D. 03-87 (11/12/03), the Tax Commissioner allowed a credit of taxes collected and remitted to be applied against taxes assessed on cabling. The Tax Commissioner in P.D. 07-135 (9/4/07) overturned the credit allowance granted in P.D. 03-87. The Tax Commissioner reasoned that permitting such a credit would ignore well established law and regulations that have been consistently applied. In effect, such a credit would erroneously authorize using and consuming contractors to use monies improperly collected from their customers to pay the contractors' tax liabilities. Additionally, it would undermine the Department's long-standing policies regarding using and consuming contractors by enabling such contractors to avoid financial responsibility for violating the Department's policy by obtaining credit for amounts improperly collected from their customers. As summarized in P.D. 07-135, the Department no longer allows a credit against a use tax assessment for the amount of sales tax erroneously collected. For these reasons, I must deny the Taxpayer's request to credit sales tax collected on the sale of cable against the use tax assessed on the cost price of cable.
Notwithstanding the foregoing, the only exception to the revised credit policy noted above was made in P.D. 09-177 (11/19/09). In that determination, a credit of the erroneously collected tax was allowed against the consumer use tax audit liability only because the customers had assigned their rights to refunds of the erroneously collected sales tax to the consuming contractor. In the instant case, the customer's refund rights have not been reassigned to the Taxpayer.
Absent a reassignment of the customer's rights to a refund of the sales tax erroneously collected by the consuming contractor acting as a dealer, the statute only authorizes a refund or credit to the customer (i.e., the purchaser). In such instances, the dealer must have remitted the erroneously collected sales tax to the Department and is entitled to a refund of such tax only if the dealer can affirmatively show that the tax had been refunded to the purchaser or was credited to the purchaser's account. See Va. Code § 58.1-625 and Title 23 VAC 10-210-3040. The Taxpayer has not shown that it has refunded or credited the erroneously collected sales tax to its customers and is thus not entitled to a refund or credit for such tax.
CONCLUSION
Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *****.
The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact ***** at *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/1-2942182555.R
Rulings of the Tax Commissioner