June 5, 2012
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letters requesting correction of the retail sales and use tax assessments issued to ***** ("Taxpayer 1") and ***** ("Taxpayer 2"), (together, the "Taxpayers") as a result of an audit for the period August 2007 through July 2010. I apologize for the delay in responding to your letter.
The Taxpayer 1 was assessed consumer use tax on untaxed purchases of repair and replacement parts (tires, consumables, etc.) installed on motor vehicles (tractors and trailers) leased to Taxpayer 2. Taxpayer 1 contends that such parts are eligible for the resale exemption and, therefore, should be excluded from the audit.
Taxpayer 1 submitted additional purchase information to establish the removal of excise taxes and labor service charges from the audit. I understand that the auditor revised the audit to remove such charges.
Taxpayer 2 was also assessed consumer use tax on untaxed purchases used or consumed in its operations. No information was furnished to specifically identify and appeal any items at issue in Taxpayer 2's audit. Lacking such information, there is no basis for appeal by Taxpayer 2. As such, this determination applies only to Taxpayer 1.
Repair and Replacement Parts
Taxpayer 1 claims that the resale exemption applies to purchases of repair and replacement parts because they are incorporated into trucks and trailers that it leases to Taxpayer 2. The motor vehicles are leased in one year increments, and Taxpayer 1 is contractually responsible for making repairs to the equipment.
The Department previously addressed an analogous situation in Public Document (P.D.) 94-6 (1/7/94). The document cites Title 23 of the Virginia Administrative Code (VAC) 10-210-990 (C) [formerly Virginia Regulation 630-10-67 (C)]. The Tax Commissioner determined, however, that the resale exemption provided in the regulation did not apply to repair and replacement parts installed in motor vehicles leased on a long-term basis. As such, the retail sales and use tax applies to such parts because no motor vehicle sales tax was charged on the lease payments received from the lease of the motor vehicles.
I would note that payment of the motor vehicle sales tax by the lessor on the purchase price of the motor vehicle does not constitute payment of the tax by the lessee of the leased motor vehicles. In this regard, no evidence has been presented that Taxpayer 1 charged Taxpayer 2 the Virginia motor vehicle sales; and use tax or that Taxpayer 2 paid such tax on the gross proceeds paid for such leased property and (if included) the cost of repair and replacement parts.
Furthermore, payment of the Virginia motor vehicle sales and use tax on the purchase price of a motor vehicle used for subsequent lease does not constitute payment of future repairs on such leased vehicle when the cost of such repairs is not incorporated into the purchase price of the motor vehicle. Moreover, no evidence has been presented that the contested repair and replacement parts were installed before or at the time of the purchase of the motor vehicles and subject to the motor vehicle sales and use tax as to allow the resale exemption to apply as set forth in subsection C of Title 23 VAC 10-210-990. Absent any tax payment either to the Department of Motor Vehicles or to the Department of Taxation on the contested repair and replacement parts in the instant case, the consumer use tax is correctly assessed on such parts.
I understand that Taxpayer 1 relies upon three public documents as justification for applying the resale exemption to the parts at issue. Those public documents, however, do not support Taxpayer 1's contention that the parts are entitled to the resale exemption. In P.D. 91-19 (2/29/91), the Tax Commissioner determined that a crane, and any repair parts thereof, may be purchased exempt of the tax when used on a bare rental basis (i.e., without an operator). The resale exemption applies to the crane and repair parts for it because the retail sales and use tax applies to the bare rental of the crane and its replacement parts when the rental includes replacement or repair parts. In the instant case, no evidence has been presented that Taxpayer 1 charged a sales tax to Taxpayer 2 for the lease of the highway trucks and trailers or otherwise charged tax for the repair and replacement parts for such vehicles.
In P.D. 01-170 (10/26/01), the Tax Commissioner determined that repair and replacement parts are exempt from the retail sales and use tax when purchased by an aircraft dealer and installed on a leased or rented aircraft when such aircraft is subject to the aircraft sales and use tax based upon gross receipts. As provided in Title 23 VAC 10-210-70 C, such parts are exempt of the retail sales and use tax provided they are installed either (1) on an aircraft at the time of sale so that the charge for such parts is included in the sales price for computing the aircraft sales and use tax, or (2) on leased or rented aircraft when such aircraft are subject to the aircraft sales and use tax based on gross receipts. In the instant case, Taxpayer 1 has not presented evidence that the costs of contested parts installed on leased motor vehicles were included in gross receipts subject to the motor vehicle sales and use tax.
In P.D. 99-62 (4/12/99), the Tax Commissioner cited the Department's regulation on maintenance contracts, i.e., Title 23 VAC 10-210-910. The Tax Commissioner noted that persons providing maintenance pursuant to parts and labor maintenance contracts may purchase repair or replacement parts exempt of the tax for resale. The reason is that a parts and labor maintenance contract is treated as a taxable sale of tangible personal property subject to the retail sales and use tax. In the instant case, Taxpayer 1 contracted to repair motor vehicles as part of its motor vehicle lease with Taxpayer 2. Notwithstanding this repair responsibility, no evidence was furnished that Taxpayer 1 charged either the motor vehicle or retail sales tax in connection with such lease of motor vehicles.
For these reasons, the Department has no basis to exclude the repair parts from the assessment. Based on the long-standing policy set out in P.D. 94-6, the resale exemption for repair parts under the circumstances of this case is not applicable.
Federal Excise Tax
In reviewing the Taxpayer's appeal, it was noted that separately stated federal excise tax amounts were not included in the taxable base. Based on the facts presented, it appears that the excise tax at issue is a federal tire excise tax.
Virginia Code § 58.1-602 excludes from gross sales "the federal retailers' excise tax or the federal diesel fuel excise tax . . . if the excise tax is billed to the purchaser separately from the selling price of the article." As pointed out in P.D. 88-318 (12/7/88), this statute does not provide an exclusion from the retail sales and use tax for federal manufacturer's excise taxes, except for the federal diesel fuel excise tax. It is my understanding that the federal tire excise tax is a type of manufacturer's excise tax administered by the Internal Revenue Service.
The consumer use tax applies to the federal tire excise tax in this case because such excise tax is charged in connection with the sale of tangible personal property. Consumer use tax is assessed on the cost price as defined in Va. Code § 58.1-602. This statute specifically defines "cost price" to mean "the actual cost of an item or article of tangible personal property computed in the same manner as the sales price as defined in this section without any deductions therefrom on account of the cost of materials used, labor, or service costs, transportation costs, or any expenses whatsoever." [Emphasis added.] As an added expense to the purchase transactions at issue, the federal tire excise tax added to the sale of tangible personal property is part of the actual cost of the tire sold and may not be deducted from such cost price.
The tires were purchased from a tire supplier that is a tire manufacturer. The federal tire excise tax should be included in the taxable sales price. As such, Taxpayer 1 is liable for the consumer use tax on such charges.
Under Va. Code § 58.1-1822, if an assessment appealed by a taxpayer "is less than the proper amount, the Tax Commissioner shall order that the applicant pay the proper taxes." Under this statute, the Tax Commissioner has the authority to increase a tax assessment as a result of a determination of an appeal filed under Va. Code § 58.11821. The Department's policy has been to make such assessments only if the statute of limitations for otherwise making an assessment has not expired. See Title 23 VAC 10-20-160 D 6.
In this case, the Taxpayer did not file any consumer use tax returns during the audit period. Virginia Code § 58.1-634 allows a six-year period for the Department to assess sales and use taxes in cases of failure to file a return. In this case, the periods for which the federal tire excise tax was erroneously excluded from the assessment are as follows: August 2007, September 2007, June 2008, July 2008, August 2008, October 2008, February 2009, March 2009, April 2009, June 2009, and August 2009. Because the period for reassessing the consumer use tax has not expired for these periods, the federal tire excise tax for all the periods noted above may be assessed in accordance with Va. Code § 58.1-1822.
Based on this determination, the assessment is correct. Updated bills, with interest accrued to date, will be sent to the Taxpayers. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayers should remit payment to: Virginia Department of Taxation, 600 East Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
In addition, the Department will issue another Notice of Assessment only for the tax due on the federal tire excise tax.
The Code of Virginia sections, regulations 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 ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-4886320909.R