Tax Type
Consumer Use Tax
Retail Sales and Use Tax
Description
Tax on untaxed product sales/Taxpayer was not registered
Topic
Collection of Delinquent Tax
Collection of Tax
Records/Returns/Payments
Taxable Transactions
Date Issued
07-01-2013
July 1, 2013
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek the correction of a retail sales and use tax assessment issued to your client, ***** (the "Taxpayer"), for the period December 2005 through May 2011. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer provides leak detection and related services to public and private gas utility companies. The Taxpayer also manufactures and sells safety, survey, maintenance and leak detection equipment. The Taxpayer was not registered with the Department to report and pay Virginia sales and use taxes during the audit period. The Department audited and assessed the Taxpayer use tax on untaxed product sales made to Virginia customers. Consumer use tax was also assessed on equipment withdrawn from the Taxpayer's out-of-state inventory for use by its technicians to perform services in Virginia.
In accordance with Va. Code § 58.1-634, the audit period was extended to 66 months because a liability was found in the original 3-year audit period. The Taxpayer's records for much of the extended audit period were unavailable. The assessment for this period was estimated based on the audit results for the periods in which records were available. As a result, the Taxpayer maintains that the assessment of tax is overstated with respect to the untaxed Virginia product sales and the technicians' equipment withdrawn from inventory for use in Virginia.
DETERMINATION
Product Sales
The auditor estimated the Taxpayer's Virginia taxable sales for the oldest 30 months of the audit period based on actual product sales for the other 36 months of the audit period. The Taxpayer states that actual product sales to Virginia customers for the entire audit period totaled $433,380.00 compared to total sales computed in the audit of $648,284.02. In a phone conversation with a member of my staff, the Taxpayer stated that it can provide documentation for actual product sales made in Virginia for the audit period. The product sales in the audit will be adjusted based on the Taxpayer's provision of sales documentation that allows the Department to review and confirm the actual amount of Virginia product sales for the audit period. The audit will be referred to the appropriate member of the Department's audit staff to review the sales documentation and revise the audit, if warranted.
Technicians' Equipment
The Department's auditor used a Virginia fixed asset report furnished by the Taxpayer to identify equipment that was withdrawn from inventory and used by technicians to perform services in Virginia. Asset costs for duplicate equipment identification numbers listed on the report were excluded from the audit. The Taxpayer could not provide the auditor with records that tracked and accounted for equipment used by technicians in Virginia for periods prior to September 2008. Thus, the auditor estimated the taxable amounts of equipment used in Virginia for the period December 2005 through August 2008. The audit estimates were based on the same information that was used to calculate the taxable equipment costs for the audit period in which this information was available.
The Taxpayer maintains that the estimated taxable measure in the audit erroneously overstates the use tax liability for the equipment used in Virginia during the audit period. The Taxpayer proposes a methodology to calculate the taxable amount of the equipment used by its technicians to perform services in Virginia. This methodology uses an assumed number of 10 technicians in Virginia and a 50% employee turnover rate for the audit period. An assumed equipment cost figure of $6,500 per technician is multiplied by 10 (the number of technicians), by the 50% turnover rate and by 5, which represents the approximate number of years in the audit period. The resulting taxable measure produced by this calculation is $162,500. The 5% use tax liability computed on the taxable measure is $8,125, rather than $23,551 in tax as computed in the audit.
Virginia Code § 58.1-205 1 provides that any assessment of a tax by the Department shall be deemed prima facie correct. The burden of proof lies with the Taxpayer to prove the assessment is incorrect. Based on a review of the Taxpayer's proposed methodology, I do not agree that the calculation of the use tax liability is proper. The use of the 50% turnover factor in the calculation actually reduces the total number of technicians in Virginia to 5, which is less than the assumed starting number of 10 used in the Taxpayer's calculation for the audit period
Further, the auditor used a Virginia asset report provided by the Taxpayer to calculate the liability for the equipment used by its technicians in Virginia for 33 months of the audit period. A review of this spreadsheet indicates that the equipment listed in the audit corresponds to the equipment information in the spreadsheet. The spreadsheet also provides that 27 technicians worked in Virginia during the period of September 2008 through May 2011. The auditor eliminated duplicate equipment items in the audit to avoid double taxation of the same equipment. Moreover, the auditor calculated the estimated taxable measure by reducing the taxable measure for the period in which records were available by 30%.
The Taxpayer indicates that sales or use tax may have been paid on the equipment at issue in the state where the equipment was withdrawn from inventory. If this is the case, I will agree to review any documentation that confirms the tax was properly paid to that state on the equipment held taxable in this audit. The audit will be adjusted based on the Department's review of this information. Otherwise, the assessment of the tax on the technicians' equipment used in Virginia is correct.
Post-Amnesty Penalty
Based on the Department's records, the Taxpayer was assessed a post-amnesty penalty after the audit assessment was issued. The post-amnesty penalty was assessed pursuant to Va. Code § 58.1-1840.1 F 1, which provides:
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- If any taxpayer eligible for amnesty under this section and under the rules and guidelines established by the Tax Commissioner retains any outstanding balance after the close of the Virginia Tax Amnesty Program because of the nonpayment, underpayment, nonreporting or underreporting of any tax liability eligible for relief under the Virginia Tax Amnesty Program, then such balance shall be subject to a 20 percent penalty on the unpaid tax. This penalty is in addition to all other penalties that may apply to the taxpayer. [Emphasis added.]
Subsection VI (6) of the amended 2009 Virginia Tax Amnesty Guidelines states the amnesty penalty will not apply to:
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- Any assessment generated from a field audit of a business for an amnesty eligible period, provided that the audit is TAX's first audit of the taxpayer, no penalty has been applied to the tax deficiency, any uncontested liability is paid within 30 days from the date of assessment, and payment for any contested liability remaining upon resolution of an appeal under Va. Code §§ 58.1-1821 or 58.1-1825 is paid within 30 days from the date of the Tax Commissioner's or the court's final determination.
In accordance with the 2009 Virginia Tax Amnesty Guidelines, the amnesty eligible periods for sales tax are periods up to and including May 2009. In this instance, the Taxpayer did not remit payment for the full amount of tax due that was assessed in the audit. An amnesty penalty of ***** was subsequently assessed for the amnesty eligible periods in the audit of December 2005 through May 2009. However, the amnesty penalty does not apply if all the listed criteria in subsection VI (6) of the amended 2009 Virginia Tax Amnesty Guidelines are met.
The Department's records indicate that three payments totaling ***** have been applied to the Taxpayer's audit assessment issued as bill *****. These payments were credited within 30 days from the assessment date and paid the uncontested portion of the audit liability in full. Therefore, the amnesty penalty is not applicable to the uncontested part of the assessment. The amount of tax due on the Taxpayer's product sales and on technicians' equipment used in Virginia may be reduced if documentation is provided that supports adjustments to the audit. If the audit liability is reduced, the applicable amnesty penalty will be reduced accordingly.
Subsection VI (6) of the amended Virginia Tax Amnesty Guidelines provides for the waiver of any amnesty penalty related to a liability that is appealed under Va. Code § 58.1-1821, if the liability is paid within 30 days from the Tax Commissioner's determination and if the other criteria in this subsection are met. In this case, possible audit revisions could delay the Taxpayer's payment of the contested liability. Thus, the amnesty penalty on the tax liability related to untaxed product sales or the technicians' equipment that remains after the Department's review and possible revision of the audit will be waived if payment of the balance due is made within 30 days from the date of the revised bill. If the Taxpayer is unable to provide the requested documentation to the Department but pays the current balance of the assessed tax and interest, including accrued interest, within 30 days from the date of this letter, the post-amnesty penalty will be waived.
CONCLUSION
The Taxpayer should provide the Department with the documentation requested within 45 days from the date of this letter. If this information is not received by the Department within 45 days, the assessment will be considered correct and the Taxpayer will be issued an updated bill with accrued interest. The Taxpayer should contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at ***** when the documentation is ready for submission. ***** will provide the Taxpayer with instructions for providing this information to the Department.
The Code of Virginia sections and guidelines cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions concerning this determination or regarding the documentation requested, please contact ***** at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5212987581.S
Rulings of the Tax Commissioner