May 16, 2016
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you seek correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period July 2014 through June 2015.
FACTS
The Taxpayer is a retail dealer of furniture and natural latex mattresses. As a result of the Department's audit, an assessment was issued for the tax, penalty and interest on the sale of the natural latex mattresses and for sales tax collected and not remitted to the Department. The Taxpayer contests the assessment of the tax and interest on the natural latex mattresses and claims such mattresses qualify as exempt durable medical equipment under Va. Code § 58.1-609.10 10. The auditor denied the exemption because the natural latex mattress failed to meet all the criteria set out in the statute for exemption. The Taxpayer also cites the Code of Federal Regulation (CFR) § 1632.31 in support of its position.
DETERMINATION
Durable Medical Equipment
Virginia Code § 58.1-609.10 10 addresses durable medical equipment and provides an exemption for the following:
Wheelchairs and parts therefor, braces, crutches, prosthetic devices, orthopedic appliances, catheters, urinary accessories, other durable medical equipment and devices, and related parts and supplies specifically designated for those products; . . . Durable medical equipment is equipment that (i) can withstand repeated use, (ii) is primarily or customarily used to serve a medical purpose, (iii) generally is not useful to a person in the absence of illness or injury, and (iv) is appropriate for use in the home. In order for an item to be exempt from the tax, it must meet all of the above criteria and the products must be purchased by or on behalf of an individual for use by such individual. The fact that an item is purchased from a medical equipment supplier or is purchased on a physician's prescription is not dispositive of its exempt status.
According to the information provided on the Taxpayer's website, the natural latex mattress is marketed for its 100% natural ingredients that are free of fire-retardant chemicals, its durability and its resistance to body impressions and softening. The mattress is for use by people that may suffer from fibromyalgia, lupus, or other ailments that cause pain or for people that prefer a soft mattress. For perspective buyers that don't have a doctor, the Taxpayer informs them that most chiropractors are highly interested in the natural health of individuals and are happy to help them acquire a chemical free mattress. The natural latex mattress can only be purchased on prescription of a physician or chiropractor. The Taxpayer devised a mattress prescription form for customers to take to their physician or chiropractor to complete and return to the Taxpayer in order to purchase the natural latex mattress.
The Taxpayer cites CFR § 1632.31 (f) (1) to support its claim that the natural latex mattress qualifies for the durable medical exemption and exempt from the sales tax. CFR § 1632.31 (f) (1) addresses a “one of a kind” exemption for physician prescribed mattresses and mattress pads and provides the following:
[a] mattress or mattress pad manufactured in accordance with a physician's written prescription or manufactured in accordance with other comparable written therapeutic specification, to be used in connection with the treatment or management of a named individual's physical illness or injury, shall be considered a “one of a kind mattress” and shall be exempt from testing under the Standard pursuant to § 1632.2 (b) (4) . . .provided that the mattress bears a permanent, conspicuous and legible label. . .[that] the mattress or mattress pad may be subject to ignition and hazardous smoldering from cigarettes . . ."
The administration and enforcement of flammable fabrics under this regulation is by a federal authority. For this reason, CFR § 1632.31 (f) (1) is not applicable in the administration and enforcement of the Virginia retail sales and use tax. Therefore, the federal regulation cited by the Taxpayer has no bearing on the tax assessed in this instance.
Based on the Va. Code § 58.1-609.10 10 and the information provided on the Taxpayer's website, the natural latex mattress does not meet criteria (iii) of the exemption statute because it is useful in instances when illness or injury is not present. While the natural latex mattress may be useful in treating a number of medical conditions, such mattresses do not meet all the mandatory requirements set out in the statute. Therefore, the auditor properly assessed the tax on the Taxpayer's sale of the natural latex mattresses.
Penalty
Title 23 of the Virginia Administrative Code10-210-2032 B 3 addresses penalty on first generation audits and provides that:
Generally, penalty will be waived for first generation audits. First generation audit penalty cannot be waived if any of the following conditions exist:
a. The taxpayer has been previously notified in writing by the Department of Taxation to collect tax on sales or to pay tax on purchases, but has failed to follow instructions;
b. The taxpayer has collected the sales tax, but failed to remit it to the Department of Taxation; or
c. The taxpayer has willfully evaded reporting and remitting the tax to the Department of Taxation and indications of fraud exist.
While the penalty assessment is not being contested, I find that the fraud penalty was improperly imposed in this case. Title 23 VAC 10-210-2030 states that underreporting sales by 50 percent or more is prima facie evidence of intent to defraud the Commonwealth; however, in this case the underreporting resulted from an issue regarding proper application of the tax to the contested mattresses. I note that the Taxpayer collected the sales tax on taxable tangible personal property but failed to remit it to the Department. While the penalty cannot be waived in this instance, I find basis to reduce the penalty from 50% to 30% on the sales tax collected and not remitted pursuant to Title 23 VAC 10-210-2032.
CONCLUSION
The audit will be adjusted based on this determination. After the audit is revised, an updated bill with accrued interest will be issued to the Taxpayer. The bill should be paid within 30 days of the bill date to avoid the accrual of additional interest.
The Code of Virginia sections and regulation 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 concerning this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-6180904140.T