Tax Type
Retail Sales and Use Tax
Description
The taxpayer maintains that the assessment of consumer use tax is erroneous
Topic
Collection of Tax
Computation of Tax
Exemptions
Records/Returns/Payments
Date Issued
11-19-2009
November 19, 2009
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek the correction of assessments issued to ***** (the "Taxpayer") for the period October 2004 through September 2007. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates in a dual capacity as a flooring products retailer and real property contractor. During the audit period, the Taxpayer made purchases of flooring materials and supplies exempt of the tax. The Department audited the Taxpayer and assessed consumer use tax on the untaxed purchases of flooring materials supplies. When billing customers for real property flooring jobs, the Taxpayer invoiced customers a charge for sales tax. The tax amount charged was equal to the consumer use tax due on the cost price of the materials used on these jobs. The taxpayer maintains that the assessment of consumer use tax is erroneous because the Department received the correct amount of tax on the flooring materials despite the fact it was improperly billed and collected from customers.
If the Department determines that the consumer use tax assessment is valid, the Taxpayer requests consideration of a protective claim for refund, which was filed as part of this appeal. Further, if the Department agrees to the Taxpayer's refund request pursuant to the protective claim, the Taxpayer requests that the refunds be credited against its audit liability. The protective claim is supported by affidavits obtained from customers that assign to the Taxpayer their rights to refunds of the erroneously collected sales taxes.
DETERMINATION
Consumer Use Tax Assessment
The Department conducted a sample of the Taxpayer's purchases and assessed consumer use tax based on an extrapolation of untaxed purchases over the audit period. The Taxpayer does not dispute the fact that it is a real property contractor with respect to the flooring jobs that resulted in the consumer use tax assessment. However, the Taxpayer maintains that the assessment is erroneous because the consumer use tax, which was invoiced to and collected from customers as sales tax was reported and remitted to the Department with the Taxpayer's sales and use tax returns. The Taxpayer also asserts that if it was a dealer collecting sales tax, the tax would have been calculated on the retail sales price of materials rather than on the cost price of the materials.
The Taxpayer has provided documentation showing that the tax billed to customers was based on the cost price of the job materials, i.e., the tax on the markup of the materials was not billed and collected from customers. The Taxpayer state that this documentation supports its claim that the Department received the correct amount of tax on the job materials. Thus, the Taxpayer argues that, while the tax was collected erroneously from its customers, the amounts collected should offset the consumer use tax assessment made on the untaxed purchases of materials.
Title 23 of the Virginia Administrative Code (VAC) 10-210-410 A state that contractors that perform real property construction services are the users and consumers of all purchases of tangible personal property used in the performance of real property construction, installation, repair and similar contracts. The contractor is required to pay sales or use tax on the cost price of materials, supplies, tools and equipment purchased for use or consumption. The same regulation then states, "A contractor, whether he be a prime contractor or subcontractor, does not pass the sales or use tax on to anyone else as a tax. He will take the amount of the tax into consideration in submitting bids." During the audit period, the Taxpayer did not pay sales or use tax on flooring materials at the time of purchase or on the withdrawal of these types of items from a tax exempt inventory. Based on the provisions of this regulation, the auditor properly assessed consumer use tax on untaxed purchases made by the Taxpayer for its use or consumption in real property construction work.
Erroneous Collection of Sales Tax
The Taxpayer states that the sales tax erroneously collected from its customers should be credited against the consumer use tax assessment.
Virginia Code § 58.1-625 states in part:
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- Any dealer collecting the sales or use tax on transactions exempt or not taxable under this chapter shall transmit to the Tax Commissioner such erroneously or illegally collected tax unless or until he can affirmatively show that the tax has since been refunded to the purchaser or credited to his account.
The erroneous tax collected by the Taxpayer was remitted to the Department as required by Va. Code § 58.1-625. Based on the provisions of this same statute, contractors are allowed a credit for erroneously collected tax only if the contractor first refunds the tax or credits the tax to the account of its customers. In Public Documents (P.D.) 07-135 (9/4/07) and 05-130 (8/3/05), the Department addresses the issue of real property contractors that erroneously bill sales tax to customers. Both of these determinations affirm the Department's established policy of prohibiting a credit against a using and consuming contractor's use tax liability for sales taxes collected in error from customers.
A real property contractor represents itself as a dealer when it charges and collects sales and use tax from customers on real property transactions. In such cases, the collection of the tax is erroneous. To allow a credit for erroneously collected tax would authorize contractors to avoid financial responsibility for paying their tax liability by using funds improperly collected from their customers. Further, the tax amounts billed to customers were clearly labeled "sales tax" on the invoices. Neither the Taxpayer's customers, nor the Department's auditors, could determine a taxpayer's proper tax liability due to the confusing nature of the Taxpayer's invoices. The Taxpayer has not met the statutory requirement that it refund or credit the erroneously collected tax to its customers. Therefore, the auditor properly denied the credit in the audit.
Protective Claim for Refund
The Taxpayer has obtained signed affidavits from its customers that assign their rights to refunds of the erroneously collected sales taxes to the Taxpayer. Title 23 VAC 10-210-3040 states:
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- A dealer may request a refund for taxes erroneously or illegally collected. The dealer must show that the tax erroneously or illegally collected was paid by him and not passed on to the consumer or the tax was collected from the consumer as tax and subsequently refunded to the consumer…. The amount refunded will be the net amount of state and local tax remitted to the state on the transaction(s) generating the refund. Thus, if a dealer filed a timely return and deducted dealer's discount for the period for which the refund is claimed, the amount of refund will be reduced by the dealer's discount taken....
While the Taxpayer has not refunded the erroneously collected sales taxes to its customers, certain customers have assigned their rights to the refunds to the Taxpayer. The assignments are limited to transactions that occurred during the audit period at issue. Thus, I will agree to allow refunds of the erroneously collected taxes assigned to the Taxpayer based on verification of the refund information submitted. The information will be referred to the Department's audit staff for verification. The Taxpayer should note that the refund amounts will be reduced by the applicable dealer discounts taken on its returns when the tax was reported and paid to the Department.
Refund Interest
Virginia Code § 58.1-1833 A states, "No interest will be paid on sales taxes refunded to a dealer unless the dealer agrees to pass such interest on to the purchaser." The Taxpayer has not paid interest to the purchasers because their rights to refunds of the tax have been assigned to the Taxpayer. It is clear that the intent of the statute is to ensure that the purchaser or actual payer of the tax receives the interest due on a refund. It is the purchasers' money that is held by the state of Virginia, not the dealer's. The dealer merely collected the purchaser's money and remitted it to the Department. Thus, if the dealer pays a customer interest on a refund of erroneously collected tax, the intent of the statute is to prevent a financial loss to the dealer by reimbursing the dealer for the interest paid to the purchaser. The dealer does not profit by receiving interest on purchasers' money. In this case, the Taxpayer acted as a dealer by collecting tax erroneously and would realize a financial gain by being paid interest on refunds of tax due to customers. Further, the customer affidavits provide for the assignment of refunds of tax but do not include any language for the assignment of interest on the refunds. I find no basis to pay interest to the Taxpayer on the tax refunds assigned by its customers.
CONCLUSION
The Taxpayer's customer affidavits and sales documentation will be referred to the Department's audit staff for verification and a refund will be calculated based on the auditor's review. A credit against the audit liability will be allowed that is equal to the refund amount determined by the Department's review, less applicable dealer discounts. The Taxpayer will be advised in writing of the results of the review. A revised bill will then be issued to the Taxpayer that reflects interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest.
The Code of Virginia sections, regulations and public documents cited, along with other reference documents, 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 concerning this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/1-2342935528.S
Rulings of the Tax Commissioner