Document Number
05-99
Tax Type
Retail Sales and Use Tax
Description
Value of the products shipped outside Virginia included in the audit calculation
Topic
Appropriateness of Audit Methodology
Property Subject to Tax
Date Issued
06-08-2005


June 17, 2005



Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear **************:

This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer"), for the period January 2001 through February 2002. I apologize for the delay in the Department's response.

FACTS

The Taxpayer is a provider of Internet services. The Taxpayer purchased a sublicense for software and supporting hardware for the software from a vendor that did not charge Virginia sales or use tax on the sale. The Department assessed use tax on the purchase based on documentation showing a Virginia shipping address for the products purchased. The Taxpayer maintains that the software and hardware was shipped to 16 locations outside Virginia and a Virginia location. For this reason, the Taxpayer suggests that the Department's assessment overstates its use tax liability by including in the audit calculation the value of the products shipped outside Virginia.

DETERMINATION

During the audit, the Department reviewed a purchase order and invoices that showed a Virginia shipping address for the products purchased. The Department's position during the audit was that the seller provided the Taxpayer with one master copy of the software in Virginia, which the Taxpayer then copied and provided to its other business locations outside Virginia. The Taxpayer disagrees with this assertion and makes the following points to support the position that there was no master copy of the software shipped to the Virginia location:

1) The contract references five North American locations and 12 international locations and it is unlikely the contract would specify the locations if the vendor were not shipping products to all the locations;
    2) The contract contains a list of the items purchased, many of which are multiple quantities. This suggests the same items were purchased for installation in different locations;
      3) The software sub-license agreement prohibits the duplication of software by the Taxpayer for any purpose other than back-up or archive and recovery. This suggests that the contract provided for multiple copies of the software, which would have been shipped to the locations outside Virginia;
        4) No reference to a master copy of software is made in the contract so it seems reasonable that a master CD was not shipped to the Taxpayer's Virginia office.

        Based on the above, the Taxpayer maintains that the seller shipped the software and hardware products to various locations outside Virginia in addition to the Taxpayer's location in Virginia. The Taxpayer suggests that the assessment should be revised by computing the Virginia use tax due on 1/17th of the total contract price for the products.

        During the audit, the Taxpayer was unable to produce any documentation showing shipping addresses other than the purchase order and invoices for the software. These documents indicate a shipping address in Virginia. The sales contract is silent on the delivery of the products purchased by the Taxpayer and, since the audit was concluded, the Taxpayer has not provided any evidence that the seller shipped the property to sites outside Virginia. While the Taxpayer offers circumstances it claims support its contention that the software was shipped out-of-state, I am not persuaded by these arguments.

        I agree the contract lists multiple items and sites for installation of the software, but such a listing is consistent with the need to specify the locations covered by the sublicense. The contract contains no language specifying how delivery would occur or by whom. The contract does not specify shipping addresses for the various locations. I also agree that the contract makes no mention of a master software CD that would be provided to the Taxpayer for copying and distribution to its out-of-state sites. The contract contains language that prohibits the Taxpayer from making copies of the software except under limited circumstances; however, the contract does not state that the seller would ship or distribute copies of the software to each of the Taxpayer's out­of-state sites.

        It is plausible that copies of the software for each of the Taxpayer's sites were shipped to the Taxpayer in Virginia and subsequently shipped to the Taxpayer's out-of­state sites. Alternatively, the seller may have shipped one copy of the software to the Taxpayer's Virginia location where the software was then downloaded via the Internet to the Taxpayer's out-of-state sites. In either of these cases, "first use" of the property would have occurred in Virginia and use tax would properly be assessed on the purchase of the property. Public Document 96-63 (4/24/96) addresses a similar issue and explains that goods shipped to a purchaser in Virginia are "first used" in this state and become subject to use tax regardless that the goods are later shipped to another state.

        Conclusion

        Virginia Code § 58.1-205 provides that tax assessments issued by the department are deemed prima facie correct. The burden of proving that an assessment is erroneous is on the taxpayer. The Taxpayer has not met the burden of proving that the Department's assessment is erroneous. The only documentation available supports the auditor's position that the items at issue were shipped to Virginia.

        Based on the above, the assessment is correct as issued. The outstanding balance of ***** remains due and payable and must be paid within 30 days from the date of this letter to avoid the accrual of additional interest. The Taxpayer's payment should be sent to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia, 23230, Attention: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.

        The Code of Virginia section and public document cited 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 determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *********.

        Sincerely,

                      • Kenneth W. Thorson
                        Tax Commissioner



        AR/51267S

        Rulings of the Tax Commissioner

        Last Updated 08/25/2014 16:46