May 25, 2016
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 ***** (the “Taxpayer”) for the period November 2005 through October 2008. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a provider of telecommunications services. Pursuant to a decision by the Federal Communications Commission (“FCC”), broadcast entities operating in certain broadcast spectrums (“broadcasters”) were required to relocate to and use different channel frequencies for broadcasting purposes. The Taxpayer would then use the vacated channel frequencies for its telecommunications operations. An agreement was reached with the FCC in which the Taxpayer was required to pay for certain relocation costs incurred by the broadcasters to make the transition to different channel frequencies. Pursuant to this transition plan, the Taxpayer paid the costs to purchase upgraded equipment needed by the broadcasters to broadcast over the new channel frequencies.
The Department audited the Taxpayer and assessed consumer use tax on untaxed equipment purchased on behalf of the broadcasters under the FCC order. The equipment was purchased from out-of-state vendors and shipped by common carrier directly to the broadcasters in Virginia. The Taxpayer contends that the assessment of use tax on the equipment purchases is erroneous because the Taxpayer made no taxable use of the equipment in Virginia. Further, the Taxpayer states that the purchase of the equipment at issue qualifies for the broadcasting exemption in Va. Code § 58.1-609.6 2.
DETERMINATION
The Taxpayer maintains that it made no taxable use in Virginia of the equipment purchased on behalf of the broadcasters. Based on documentation provided by the Taxpayer, the broadcasters identified the replacement equipment needed to operate in the new channel frequencies. The broadcasters obtained price quotes from a list of participating manufacturers and prepared purchase orders for the replacement equipment. Prior to ordering the equipment, the Taxpayer reviewed the purchase orders to confirm that the equipment qualified for reimbursement under the FCC agreement. If approved, the purchase orders were then submitted to the manufacturers. The manufacturers shipped the equipment to the physical addresses of the broadcasters. The Taxpayer was invoiced for the equipment purchases. The broadcasters took delivery of and inspected the equipment. The broadcasters notified the Taxpayer that the equipment was acceptable. The Taxpayer then paid the invoices issued by the equipment manufacturers.
Virginia Code § 58.1-604 imposes a use tax on “the use or consumption of tangible personal property in this Commonwealth ....” “Use” is defined in Va. Code § 58.1-602, in part, as “the exercise of any right or power over tangible personal property incident to the ownership thereof ....” In the instant case, the Taxpayer exercises some control over the equipment ordering process. However, the Taxpayer does not exercise any right or power over the equipment prior to or after its delivery in Virginia to the broadcasters. The broadcasters take possession of the equipment, inspect it and then notify the Taxpayer that the respective invoice can be paid, if the equipment is acceptable. The Taxpayer does not install or oversee installation of the equipment and does not operate the equipment in any manner.
The Taxpayer cites Public Documents (P.D.) 94-294 (9/27/94) and 10-202 (9/1/10) in support of its position. P.D. 94-294 discusses an out-of-state business that manufactured, distributed and marketed cosmetic products. The business provided department stores with tangible personal property that was used by the retail stores to market and make sales of the cosmetics to customers. Although the business had a sales force working to promote sales of the cosmetics in Virginia, the determination states that the activities of the sales force were insufficient to impose the Virginia consumer use tax on the contested property. The retail stores owned the property at issue and controlled the use of the property. The sales force for the business made no use of the property prior to its transfer to the retailers.
P.D. 10-202 discusses a paint manufacturer that was assessed consumer use tax on purchases of paint color cards. The color cards were purchased from a third party vendor and shipped via common carrier to Virginia paint retailers. This determination, citing P.D. 94-294, also concludes that the manufacturer made no use in Virginia of the paint cards. The retailer was responsible for unpacking the paint cards after receiving the shipments and the retailers' employees placed the cards in store displays. The determination concludes that there was no control exercised over the paint cards by the manufacturer.
Based on the cited authorities, I agree that the Taxpayer did not exercise power or control over the equipment sufficient to constitute taxable use. It is the broadcasters that exercise control over the equipment. The audit assessment of consumer use tax on the equipment is erroneous and the audit will be adjusted accordingly.
The Taxpayer also claims in this appeal that the broadcasting exemption applies to the equipment purchases. Based on the determination that there was no taxable use of the equipment exercised by the Taxpayer, the application of the broadcasting exemption to the equipment is not addressed.
CONCLUSION
The audit will be referred to the Department's audit staff to revise the audit by removing the contested equipment purchases. The Taxpayer will be issued a revised audit report that reflects the adjusted expense purchases liability. The Department's records indicate that the Taxpayer has paid ***** which represents the uncontested portion of the audit liability issued on bill *****. Therefore, the contested liability remaining on bill ***** will be abated in full.
The Code of Virginia sections and public documents 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, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5862415127.S