February 3, 2016
Re: § 58.1-1821 Application: Retail Sales and Use Tax
This is in response to your letter submitted on behalf of ***** (the "Taxpayer") in which you request correction of the retail sales and use tax assessments issued to the Taxpayer as a result of an audit for the periods May 2008 through September 2011. I apologize for the delay in responding to your appeal.
The Taxpayer is a telecommunications carrier. An audit resulted in the assessment of consumer use tax on various purchases of tangible personal property. The Taxpayer raises six issues and contends that certain items are not taxable and, thus, should be removed from the audit.
Burden of Proof
Virginia Code § 58.1-205(1) sets out the statutory rule that "[a]ny assessment of a tax by the Department shall be deemed prima facie correct." This means that the Taxpayer carries the burden of proving a correction to an assessment.
For an application to court, Virginia Code § 58.1-1825(D) sets out that "[i]t shall be the burden of the applicant in any such proceeding to show that the assessment or collection or action on a transferred credit or other tax attribute complained of is erroneous or otherwise improper."
Virginia Code § 58.1-633(A) sets out the statutory requirements for records as follows:
Every dealer required to make a return and pay or collect any tax under this chapter shall keep and preserve suitable records of the sales, leases, or purchases, as the case may be, taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.
In addition, Title 23 of the Virginia Administrative Code (VAC) 10-210-470 requires the following:
Records must be open for inspection and examination at all reasonable hours of the business day by the Department of Taxation. The dealer may maintain such records on microfilm.
If an assessment has been made and an appeal to the Commissioner or to court is pending, all records relating to the period covered by such assessment must be preserved until the final disposition of the appeal.
The courts have long held that exemptions from the retail sales and use tax are strictly construed against a taxpayer because taxation is the rule and not the exception. When a tax statute is susceptible to alternative constructions, one granting an exemption and the other denying it, the latter construction will be adopted. See Winchester TV Cable Co. v. State Tax Commissioner, 216 Va. 286, 217 S.E.2d 885 (1975).
***** (Vendor 1)
This issue appears as line item #1 in the contested assets of the audit report. The description in the audit is "not accrued — TPP (tangible personal property) freight charges." In other words, no tax was accrued by the Taxpayer on this line item. Because freight charges are indicated, it appears that tangible personal property was delivered to the Taxpayer, such as prewritten software on discs. The Taxpayer contends, however, that the software was delivered electronically and thus should not have been taxed.
Virginia Code § 58.1-609.5(1) provides an exemption from the retail sales and use tax for "services not involving an exchange of tangible personal property which provide access to or use of the Internet and any other related electronic communication service, including software, data, content and other information services delivered electronically via the Internet." In order to gain such exemption, a taxpayer must prove that computer software is delivered electronically via the Internet and that no tangible personal property (such as software on a disc) is furnished initially or subsequently as part of the transaction.
The Department has issued determinations involving electronic delivery of prewritten software. For instance, see Public Document (P.D.) 05-44 (4/4/05). This determination requires a sales invoice, contract or other sales agreement to expressly state the electronic delivery of computer software (via the Internet) and that no tangible personal property is transferred. Also see P.D. 05-114 (7/18/05), which requires that a taxpayer must be able to substantiate its claim of electronic delivery and has the burden of proving an assessment is erroneous. In P.D. 05-134 (8/10/05), the assessment was upheld because of the lack of documentation necessary to prove the assessment was erroneous. Also see P.D. 05-12 (2/7/05) and P.D. 08-134 (7/30/08).
It is my understanding, however, that the Taxpayer has not provided any data or invoice documentation to the auditor in support of its claim although requested by the auditor. I also understand that the Taxpayer attempted to obtain an invoice reprint from the vendor, but the vendor was unable to comply with such request. In addition, the Taxpayer has furnished no evidence with its appeal in support of its claim for exemption. Absent any evidence to establish electronic delivery of the computer software via the Internet, the Taxpayer has not met its burden of proof. As such, line item #1 will remain in the audit.
***** Vendor 2)
The Taxpayer contends that this transaction is for a renewal of a software license in which the computer software was delivered electronically. The only transaction from Vendor 2 is listed as line item #6 of the contested assets and is described as contract labor.
I understand that the Taxpayer has failed to furnish any evidence in support of its contention. Absent evidence to establish that the computer software was delivered electronically via the Internet, the Taxpayer has not met its burden of proof. Thus, line item #6 will remain in the audit.
***** (Vendor 3)
The Taxpayer contends that this item is for maintenance and support without replacement of hardware and thus should not be taxable. As such, it appears that the Taxpayer contends that the transaction is for a labor only contract, which is treated as exempt pursuant to Title 23 VAC 10-210-910(B).
There are four transactions included in the contested assets that were purchased from this vendor. According to the audit report, line items #11 and #12 were purchases of contract labor in February 2011; line item #14 was a purchase of material in March 2011; and line item #22 was a purchase of RTU/digital software in February 2011. I understand that the Taxpayer did not furnish any transactional documentation to the auditor. The Taxpayer did not furnish any evidence with its appeal to support this contention.
Absent any evidence to establish that any of the Vendor 3 transactions constitute exempt labor only contracts, the Taxpayer has not met its burden of proof. As a result, line items #11, #12, #14 and #22 will remain in the audit.
***** (Vendor 4)
The Taxpayer contends that this transaction is for software delivered electronically. The only transaction held in the audit for Vendor 4 is line item #15, which is described as "50% tax software maint." In other words, the auditor held the transaction as a prewritten parts and labor software maintenance contract in accordance with Title 23 VAC 10-210-910(D) and taxed it in accordance with Va. Code § 58.1-609.5(9), i.e., one-half of the total charge for such contract.
I understand that the Taxpayer did not furnish any transactional documentation to the auditor. The Taxpayer did not furnish any evidence with its appeal to support this contention. As such, the Taxpayer has not met its burden of proof. Line item #15 will remain in the audit.
***** (Vendor 5)
The Taxpayer contends that this transaction is for software delivered electronically. Line item #10 is the only transaction held in the audit for Vendor 5. It is described as "circuit RTU fees/software." As so described, the transaction appears to include tangible personal property.
I understand that the Taxpayer has not furnished any transactional documentation for this item to the auditor. Nor has the Taxpayer furnished any evidence of its contention with its appeal. As such, the Taxpayer has not met its burden of proof. Line item #10 will remain in the audit.
Invoice Capture Tool (ICT) Gross-Up of Assets
The Taxpayer indicates that it was included on a consolidated audit and assigned an asset gross-up exception based on the Department's Invoice Capture Tool (ICT) program. Because certain assets have been contested and used in the computation of the ICT asset gross-up, the Taxpayer requests a reduction in its liability as a result of any adjustments made to such gross-up.
In this case, the Taxpayer has failed to provide documentation to support its position that certain items qualify for an exemption from the tax or otherwise should be removed from the audit based on some other reason. Because the Taxpayer has failed to satisfy its burden of proof, the contested ICT asset gross-up amount will remain in the audit.
Based on this determination, the assessment is correct. Notwithstanding the foregoing, I will allow the Taxpayer sixty (60) days from the date of this letter to furnish supporting documentation and information (e.g., invoices, back-up detail, maintenance contracts, etc.) to the Department's auditor for the originally contested items. No additional time will be granted. The auditor will contact the Taxpayer to arrange for the receipt of the requested documentation and information. Documentation received within the allotted time will be used, as appropriate, to revise the assessment and to issue a revised bill. If the requested documentation is not furnished within the allotted time, no revision will occur. In such an event, an updated bill, with interest accrued to date, will be sent to the Taxpayer. For questions about the revision, please contact the auditor, ***** at *****.
The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, please contact ***** at *****.
Please note that failure to remit full payment within the 30-day payment period may result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's Amnesty Program. See the enclosure entitled "Important Payment Information."
The Code of Virginia sections, regulations and public documents cited 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 about this determination, please contact ***** in the Department's Appeals and Rulings at *****.
Craig M. Burns