Rulings of the Tax Commissioner

July 28, 2016

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

Dear *****:

This is in response to your letter appealing the retail sales and use tax assessments issued to ***** (the “Taxpayer”) as a result of an audit for the period February 2009 through January 2015.  The contested assessments are paid in full.

FACTS

The Taxpayer is a motor vehicle common carrier engaged in the interstate transportation of household goods.  An audit resulted in the assessment of consumer use tax on untaxed purchases of assets and expensed purchases.

The Taxpayer takes exception to the audit findings.  The Taxpayer contends that its purchases of tangible personal property are entitled to the exemption set out in Va. Code § 58.1-609.3 3.  The Taxpayer further contends that if the tax is owed, that it must be fairly apportioned as mandated by the courts.  Lastly, the Taxpayer contends double taxation.

DETERMINATION

Exemption Claim

Prior to September 1, 2004, Va. Code § 58.1-609.3 3 provided an exemption from the retail sales and use tax for:

Tangible personal property sold or leased to (i) a public service corporation subject to a state franchise or license tax upon gross receipts, (ii) a telecommunications company as defined in § 58.1-400.1 or (iii) a telephone company chartered in the Commonwealth which is exclusively a local mutual association and is not designated to accumulate profits for the benefit of, or to pay dividends to, the stockholders or members thereof, for use or consumption by such corporation, company, person or mutual association directly in the rendition of its public service; and tangible personal property sold or leased to a public service corporation engaged in business as a common carrier of property or passengers by motor vehicle or railway, for use or consumption by such common carrier directly in the rendition of its public service.

In 2004, the General Assembly of Virginia amended Va. Code § 58.1-609.3 3 to repeal the sales tax exemptions for certain public service corporations.[1]  Thus, effective on and after September 1, 2004, Va. Code § 58.1-609.3 3 provides an exemption from the retail sales and use tax for:

Tangible personal property sold or leased to a public service corporation engaged in business as a common carrier of property or passengers by  railway, for use or consumption by such common carrier directly in the rendition of its public service.  [Emphasis added.]

A comparison of Va. Code § 58.1-609.3 3 before and after its amendment in 2004 indicates that the exemption for common carriers of property or passengers by motor  vehicle was repealed on September 1, 2004.  Accordingly, the Taxpayer is not  entitled to the exemption set out under Va. Code § 58.1-609.3 3.

Fair Apportionment Claim

The Taxpayer contends that the consumer use tax owed should be fairly apportioned among the various states in which it operates.  The Taxpayer cites three court cases to support its contention: The U.S. Supreme Court decision in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076 (1977); the Supreme Court of Virginia decision in Short Brothers (USA), Inc. v. Arlington County, 244 Va. 520, 423 S.E.2d 172 (1992); and the Circuit Court of Virginia, Stafford County, decision in McLane Co., Inc. v. Stafford County, 45 Va. Cir. 180 (1998).  Each of these court cases require the satisfaction of an apportionment rule before certain state taxes may be imposed on interstate commercial activities.

In Complete Auto, a Mississippi sales tax was at issue.  In general, the tax rate was applied “against gross proceeds of sales or gross income or values, as the case may be . . . .” In regard to persons operating a transportation business, the Mississippi sales tax rate was levied as a “tax equal to five per cent of the gross income, of such business . . . .”  [Emphasis added.]  Complete Auto Transit, Inc. was engaged as a motor carrier that transported motor vehicles manufactured outside of Mississippi to Mississippi dealers.  Thus, the tax at issue was imposed on gross income.  In Short Brothers, the tax in question was a business activity license tax that was measured by gross receipts, and thus was not a tax on sales or leases on goods.  In McLane, the tax in question was a personal property tax on motor vehicles engaged in interstate commerce.  This particular tax is subject to local taxation only.  For motor vehicles operating over interstate routes, the tax may be “apportioned in the same percentage as the total number of miles traveled in the Commonwealth by such vehicle bears to the total number of miles traveled by such vehicle.”  See Va. Code § 58.1-3511 B.

Pursuant to Va. Code § 58.1-604, the Virginia use tax is imposed on the “cost price” of tangible personal property.  As such, it is not a tax measured by gross receipts or gross income for which an apportionment rule may apply.  Moreover, no apportionment rule exists in the Virginia Retail Sales and Use Tax Act.  Thus, such Act has no apportionment rule similar to the one in Va. Code § 58.1-3511 B.

More on point is the decision rendered by the Supreme Court of the United States in D.H. Holmes Co. v. McNamara, 486 U.S. 24, 108 S.Ct. 1619 (1988).  The issue in that case was a Louisiana use tax imposed on tangible personal property.  Such use tax was calculated on the retail price of the property when brought into the taxing state.  The Court applied the four-prong test of Complete Auto and determined that “[t]he Louisiana taxing scheme is fairly apportioned, for it provides a credit against its use tax for sales taxes that have been paid in other States.”  Pursuant to Va. Code § 58.1-611, Virginia provides a similar credit.[2]  Thus, under the D.H. Holmes opinion, the Virginia use tax scheme is fairly apportioned because of the credit provided by Va. Code § 58.1-611.  Because the Virginia use tax is fairly apportioned by its statutory scheme, is not calculated on gross income, and has no apportionment rule, there is no basis to apportion the Virginia use tax among the states.

Double Taxation Claim

The Taxpayer contends double taxation in that the consumer use tax was applied to federal highway use tax, state fuel tax and toll expenses.[3]  The Taxpayer indicates that these expenses are included in the cost of goods sold on its corporation income tax returns and were duplicated when the total amount of expenses was computed.  While none of the sampled purchases include the expenses in question, the auditor has confirmed that the gross purchases amount used to extrapolate the tax deficiencies inadvertently duplicated some expenses.  Accordingly, the audit will be revised to remove the duplications.

I would note that the cost of goods sold figure that included the federal highway use tax and other amounts noted above was used only for extrapolation purposes.  As long as this figure is consistent for all three years, there is no adverse impact on the error factor computation.  While the adjustment will result in a lower gross population amount, the error factor will increase because of the smaller population.  Thus, there may not be any significant impact on the extrapolated amounts.

CONCLUSION

The assessment will be revised in accordance with this determination, and a revised audit report will be furnished to the Taxpayer.  If the revision results in a reduction in the amount of tax assessed and paid, a refund of the overpaid amount with refund interest as computed in accordance with Va. Code § 58.1-15 will be issued to the Taxpayer.

The Code of Virginia sections, regulation and public document cited are available on­line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.  If you have any questions about this matter, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6207754089.R