10-50 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Taxpayer underreported the tax in connection with textbooks

Topic

Accounting Periods and Methods

Computation of Tax

Records/Returns/Payments

Date Issued

05-07-2010

May 7, 2010

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

Dear *****:

This is in response to your letter submitted on behalf of ***** (the "Taxpayer") requesting correction of the retail sales and use tax assessments issued for the period September 2005 through November 2008. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a for-profit educational institution that charges students a lump-sum charge for tuition, textbooks and other fees. The Taxpayer purchased textbooks exempt of the tax based on the resale exemption but reported and paid sales tax to the Department on the textbooks furnished to students based on a cost of tuition methodology. An audit indicated that the Taxpayer underreported the tax in connection with such textbooks. The Taxpayer disputes the assessments and contends that it has paid its tax liability in full.

The Taxpayer also contends that it is grossly unfair to retroactively apply the assessments because the Taxpayer used its tax application methodology for many years without objection from the Department in its prior audits, and the tax assessments will be impossible to retroactively recoup from students. Accordingly, the Taxpayer requests the abatement of these assessments and acceptance of the sales and use tax as filed and paid by the Taxpayer.

DETERMINATION

Application of the Tax - Institutions of Learning Conducted For Profit

Because of the uncertainty in determining how much tuition was allocated to textbooks, I understand that the Taxpayer established a formula to allocate a portion of the tuition revenue to pay the tax owed on the textbooks. I also understand that the Taxpayer reported the tax owed on textbooks based on a flat rate of 2.5 percent of total monthly revenue received. In attempting to reconcile this flat rate with the value of textbooks actually distributed, a discrepancy was noted by the auditor. Since textbook charges were not separately stated and invoiced to the student, it was accepted by the auditor that the taxpayer furnished textbooks "at cost" to the students. Although the Taxpayer claims that the audit report was not supported by factual evidence, the auditor determined by way of a cost of goods sold analysis that the reported textbook tax liability was understated. I understand that such analysis was given to the Taxpayer and it indicates that the flat rate used to estimate the textbook tax liability did not equate to the number of textbooks actually distributed to students. Based on this analysis, the auditor applied the tax to the difference between the tax reported and the tax due on textbooks actually distributed during the audit period.

Title 23 of the Virginia Administrative Code 10-210-4020 B sets out the regulations for schools, colleges and other educational institutions that are conducted for profit. This regulation specifically sets out the following:

- The tax applies to sales of tangible personal property to schools, colleges and other institutions of learning when they are conducted for profit. They are required to pay the tax to their vendors at the time of purchase, unless their purchases are made for resale as dealers. All sales of tangible personal property made by such institutions are taxable. In addition, these institutions must collect the tax on any retail sales of meals to students or others, if the price of the meals is not included in room, board, or tuition charges or fees.

Pursuant to the definition of retail sale in Virginia Code § 58.1-602, all sales for resale must be made in strict compliance with the Department's regulations. Any dealer making a sale for resale that is not in strict compliance with such regulations is personally liable for payment of the tax.

Thus, a for-profit educational institution may only purchase textbooks exempt of the tax when purchased for resale purposes only. In such instances, the institution must be registered as a dealer to collect the sales tax. While the above regulation does not specifically address the application of the tax to textbooks included in the price of tuition, it does provide clear guidance when meals are not included in the price of room, board, or tuition charges. In such instances, the sales tax must be collected on the sales price charged for the meals. This same tax treatment applies to the retail sales of textbooks for use by students attending a for-profit educational institution.

In this case, the Taxpayer claims to have correctly paid the tax. A review of an enrollment agreement between the Taxpayer and a student indicates that the Taxpayer does not state a sales price for the textbooks. Furthermore, the Taxpayer did not separately state the sales tax on such agreement. I understand that other enrollment agreements were similarly structured.

When making any retail sale of tangible personal property, a dealer is required by law to separately state the amount of sales tax and add such tax to the sales price or charge. See Va. Code § 58.1-625. In this case, no evidence has been presented that the Taxpayer actually collected any sales tax from its students with respect to the textbooks at issue. Instead, the Taxpayer merely remitted an uncollected tax amount that it reported as sales tax on its sales tax returns. Such uncollected tax payment does not constitute sales tax collected because the Taxpayer did not separately state a sales tax on invoices or enrollment agreements with its students and thus did not collect a sales tax from students.

Furthermore, a retail sale must disclose the sales price of the item being sold. Pursuant to Va. Code § 58.1-603, the sales tax is imposed on the gross sales price of tangible personal property when sold at retail in Virginia. No evidence has been presented that the Taxpayer charged any sales price for the textbooks at issue. For instance, the enrollment agreements provide the students with programs of training and charge lump-sum amounts for tuition, texts, sales tax and other fees. These transactions do not constitute retail sales of textbooks because the true object ¹ of these transactions is for the provision of training and educational services.

This application of the true object test is consistent with Public Document 93-230 (12/15/93), in which a company performed computer training services by charging a lump sum fee for tuition and all course materials. The Tax Commissioner ruled that the true object of these transactions was for the provision of training services. As a result, no tax was applicable to charges for the professional services provided, but the company was liable for the sales or use tax on its purchases of course materials used in the provision of its training services. This ruling noted that if the training company sold training materials independent of its provision of classroom instruction, it would be deemed a retailer of such materials and required to collect and remit the sales tax.

Similarly, the Taxpayer's lump-sum charges to its students for professional training services, textbooks and other costs are not taxable. As a service provider, the Taxpayer is the user or consumer of all textbooks purchased for use in the provision of its services. As such, the resale exemption is not applicable to such textbooks purchased by the Taxpayer. Rather, the legal incidence ² of the tax falls upon the Taxpayer who must pay the tax on the cost price of textbooks used to perform its training services. The sales tax must be paid to vendors at the time of purchase. If a vendor fails to collect such tax or is not registered to collect the Virginia sales or use tax, the Taxpayer must remit the full amount of the use tax to the Department based on the cost price of the textbooks.

Furthermore, because the Taxpayer is the taxable consumer of textbooks when it charges students a lump-sum fee for tuition, textbooks and other fees, it is not permitted to pass on the sales or use tax paid on textbooks as a tax to its students. Rather, it should take the tax into account like any other costs related to the provision of its educational services.

Based on the foregoing, the Taxpayer is liable for the tax assessed in this case, except for separately stated shipping charges that are exempt pursuant to Va. Code § 58.1609.5 (3). Such shipping charges will be removed from the assessments.

Fairness Dispute

The Taxpayer contends that the assessments in this case are grossly unfair to the Taxpayer because it cannot retroactively recoup these liabilities from its students. Based on the analysis above, the Taxpayer is not a dealer of textbooks because it is a provider of educational services and bills such on a lump-sum basis. As such, the Taxpayer is the taxable consumer of the textbooks and is thus directly liable for the tax, not the students.

The Taxpayer points out that it has been audited routinely and its tax application methodology for textbooks was not previously challenged. While this may be the case, no evidence has been presented that the prior auditors were specifically aware of the Taxpayer's methodology and accepted it. Pursuant to Va. Code § 58.1-1835, the Tax Commissioner must abate any portion of any tax, interest, and penalty attributable to erroneous advice furnished to a taxpayer in writing by an employee of the Department acting in his official capacity when:

- 1. The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;

- 2. The portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; and

- 3. The facts of the case described in the written advice and the request therefor are the same, and the taxpayer's business or personal operations have not changed since the advice was rendered.

The Department's archived records provide no evidence that the Taxpayer made any written request from the Department asking for permission to apply the tax based on the methodology used. The Department's archived records also provide no evidence that the Department issued any written acceptance of the Taxpayer's tax application methodology.

Generally, when a taxpayer makes sales and finds it impractical to collect the tax, Va. Code § 58.1-614 allows a taxpayer to report his wholesale purchases for sale at retail and remit a tax amount based on five percent of such wholesale purchases. In these instances, the statute requires the Tax Commissioner to determine whether it is impractical to collect the tax in accordance with the bracket system. No taxpayer is allowed to apply an alternative tax application methodology unless it has received written authorization from the Tax Commissioner. The Taxpayer has not provided any written authorization indicating that the Tax Commissioner previously agreed to the Taxpayer's methodology for estimating, reporting and paying the tax owed on textbooks. The Taxpayer's sales tax reporting methodology is not acceptable.

Future Tax Application

Although the auditor advised the Taxpayer to increase the taxable percentage from 2.5% to 4.5% for reporting its tax liability, I do not approve of the Taxpayer's tax reporting methodology and it must cease by April 30, 2010.

Beginning on and after May 1, 2010, the Taxpayer must pay the sales tax to its vendors on the sales price charged by them for textbooks if such vendors are registered to collect the Virginia sales tax. If a vendor is not registered to collect the Virginia sales tax, then the Taxpayer is expected to report and pay the consumer use tax on the cost price of textbooks used in connection with the Taxpayer's training program. If the Taxpayer amends its enrollment agreements to exclude textbooks from the cost of tuition and separately charges for textbooks, then it must separately charge and collect the sales tax from students based on the sales price charged for textbooks.

Effective July 1, 2010, Va. Code § 58.1-609.10 (8) provides an exemption for required school textbooks when sold by a for-profit institution of learning and certified by a department or instructor of such institution of learning as required textbooks for students attending courses at such institution. If the Taxpayer continues its current practice of including textbooks within the cost of tuition, the exemption will not apply to textbooks purchased by the Taxpayer for use in providing its training services. The above cited exemption would apply to required student textbooks effective July 1, 2010, provided the Taxpayer sells the textbooks independent of tuition charges by excluding them from tuition charges in any student enrollment agreement and separately invoicing each student for the sales price of the textbooks sold and the sales tax based on the sales price charged for the textbooks.

CONCLUSION

The assessments will be revised in accordance with the determination. Revised bills, with interest accrued to date, will be sent to the Taxpayer. The outstanding balances should be paid within 30 days of the bill dates to avoid additional interest charges. The Taxpayer should remit its payments to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P. O. Box 27203, Richmond, Virginia 23261-7203, Attention: *****.

Please note that failure to remit full payment within the 30-day period may result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's recent Amnesty Program. See the enclosure entitled "Important Payment Information."

The Code of Virginia sections, regulation and public document 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 *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-3551334438.R

1)The true object test for mixed sales and service transactions was first adopted by the Supreme Court of Virginia in WTAR Radio-TV Corp. v. Commonwealth, 217 Va. 877, 883, 234 S.E.2d 249 (1977). Also see LZM Inc v. Department, 296 Va. 105, 606 S.E.2d 797 (2005).
2)United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978).

Rulings of the Tax Commissioner