Tax Type
Retail Sales and Use Tax
Description
Removal of the certain tangible personal property from audit
Topic
Appropriateness of Audit Methodology
Date Issued
03-28-2005
March 28, 2005
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment for the period December 1997 through August 2003. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a contractor with respect to real property. An audit by the Department resulted in the assessment of tax in several areas. The Taxpayer disputes three issues included in the assessment:
1. The Taxpayer disputes three invoices included in the audit sample as "Customs Broker/Agent Purchases" that should not be subject to the Virginia sales tax. You state these items represent materials that were used in construction contracts outside Virginia.
2. The Taxpayer disagrees with the findings in regard to subjecting out-of-state fabrication labor to Virginia sales tax.
3. The Taxpayer disagrees with the six-year period covered by the audit.
DETERMINATION
Purchases of Tangible Personal Property
The purchases at issue involve items of tangible personal property that were received either through the *****. You maintain that some of the tangible personal property was delivered to construction sites located outside Virginia, with the remainder being delivered to construction sites in Virginia. You contend that the Virginia sales tax should not be applicable to the tangible personal property that was delivered to the Maryland construction sites.
Title 23 of the Virginia Administrative Code (VAC) 10-210-780 A states, "The tax shall not apply to sales of tangible personal property in interstate or foreign commerce. A sale in interstate or foreign commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia."
In Public Document (P.D.) 98-75 (4/23/98), the taxpayer inquired whether the terms "F.O.B. point of origin (Virginia)" resulted in title and constructive possession that subjected the sale to the Virginia sales tax. The Department ruled that "the buyer does not take constructive possession at the time and place the product is delivered to the common carrier provided that there are no instructions from the buyer to the seller at the time the order is completed, other than instructions indicating where to ship the property, and the property is shipped by the common carrier to a location out of this state."
Pursuant to Title 23 VAC 10-210-780 and P.D. 98-75, the tax is not applicable to the items of tangible personal property purchased for use at the out-of-state construction sites. The Taxpayer did not take constructive possession of this property in Virginia, and the Taxpayer did not make use of this property in Virginia. The property was not stored in Virginia. The property merely passed through Virginia on its way to its ultimate destination outside Virginia. Accordingly, these items of tangible personal property will be removed from the assessment.
Fabrication Charges
The Taxpayer contests the inclusion of out-of-state fabrication labor in the audit assessment. You maintain that the Taxpayer utilizes businesses located outside Virginia for fabrication services and because the fabrication labor was not performed in Virginia, it should not be included in the Virginia sales tax base. The audit staff indicates that the assessment only includes untaxed fabrication labor related to materials used in Virginia contracts.
In Public Document (P.D.) 04-22 (6/2/04), the taxpayer, an out-of-state contractor, used out-of-state fabricators to fabricate items to be installed at Virginia construction sites. The taxpayer contested the assessment of tax on the fabrication labor charges. The Department held that the labor charges billed to the taxpayer for the fabrication of materials used in Virginia real property construction were properly assessed. The rationale and determination in P.D. 04-22 is directly on point with the Taxpayer's situation.
You rely on P.D. 89-94 to support your position that fabrication labor performed outside Virginia is not taxable. This public document is not on point with the Taxpayer's situation, however. It addresses fabrication charges in an intercompany transaction. The Taxpayer is a contractor that uses unrelated companies to perform fabrication services.
Based on the information provided, the Taxpayer does not perform the fabrication services. The Taxpayer contracts with a third party to fabricate the materials that the Taxpayer uses in Virginia real property construction projects. Accordingly, the labor charges for the fabrication of materials used in Virginia real property construction projects are properly assessed.
Audit Period
The audit period at issue covers six years. Relying on Va. Code § 58.1-634, you contend the audit was erroneously extended beyond the three-year period of limitations for assessing taxes. According to the audit report, the audit period was extended beyond three years because there was tax liability during the three-year audit period for which a return was not filed.
Virginia Code § 58.1-634 provides that "[t]he taxes imposed by this chapter shall be assessed within three years from the date on which such taxes became due and payable." It further states, "The Tax Commissioner shall not examine any person's records beyond the three-year period of limitations unless he has reasonable evidence to believe that such person was required by law to file a return and failed to do so."
Pursuant to Va. Code § 58.1-634, the Department may examine the Taxpayer's records beyond the three-year period of limitations if there is reasonable evidence that shows that the Taxpayer was required by law to file a return and failed to do so. The audit staff found reasonable evidence that indicated the Taxpayer had not filed a return when, by law, it was required to do so. Accordingly, the audit period was properly extended as authorized by Va. Code § 58.1-634.
I understand the auditor used the original three-year period as a sample to project the liability for the preceding three years. I also understand this was done with the Taxpayer's consent. If the Taxpayer can produce complete and accurate records for the three years preceding the original three-year audit period, I will allow the auditor to review them and make any appropriate adjustments based on those records.
CONCLUSION
Based on this determination, the audit will be revised to reflect removal of the certain tangible personal property as discussed above. In addition, the Taxpayer may furnish to the auditor complete and accurate records regarding the first three years of the six-year audit period. If no additional documentation is provided within 30 days from the date of this letter, the Department will issue an updated bill, with interest accrued to date, to the Taxpayer. The updated bill must be paid within 30 days to avoid the accrual of additional interest. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****. While you request a conference in your letter, your request is declined because the Department's policy is well established in the regulations and several prior rulings on point.
The Code of Virginia sections, regulations and public documents cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions about this response, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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Kenneth W. Thorson
Tax Commissioner
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AR/51711P
Rulings of the Tax Commissioner