April 3, 2017
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek correction of the retail sales and use tax assessments issued to ***** (the “Taxpayer”) for the periods June 2010 through June 2013 and July 2013 through December 2015.
FACTS
The Taxpayer operates a horse boarding facility. The Department's audit disclosed that the Taxpayer made purchases of grain, hay, various supplies and maintenance materials without payment of the sales tax to suppliers or accrual and remittance of the use tax to the Department. The Taxpayer disagrees with the Department's assessment, contending its operations as a horse boarding facility should be recognized as an agricultural business and its purchases should be exempt from the retail sales and use tax. The Taxpayer seeks a waiver of the assessment based on doubtful liability and states that it also would experience a financial burden if forced to pay the Department's assessments. The Taxpayer also disagrees with the expansion of the audit period to six years.
DETERMINATION
Agricultural Exemption
Virginia Code § 58.1-609.2.1 provides an exemption from the retail sales and use tax for persons in the business of producing agricultural products for market. The exemption applies to:
Commercial feeds; seeds; plants; fertilizers; liming materials; breeding and other livestock; semen; breeding fees; baby chicks; turkey poults; rabbits; quail; llamas; bees; agricultural chemicals; fuel for drying or curing crops; baler twine; containers for fruits and vegetables; farm machinery; medicines and drugs sold to a veterinarian provided they are used or consumed directly in the care, medication, and treatment of agricultural production animals or for resale to a farmer for direct use in producing an agricultural product for market; tangible personal property, except for structural construction materials to be affixed to real property owned or leased by a farmer, necessary for use in agricultural production for market and sold to or purchased by a farmer or contractor; and agricultural supplies provided the same are sold to and purchased by farmers for use in agricultural production, which also includes beekeeping and fish, quail, rabbit and worm farming for market.
The statutory exemption cited above is also addressed and further interpreted in Title 23 of the Virginia Administrative Code (VAC) 10-210-50, which states that, “the tax does not apply to . . . farm machinery and agricultural supplies sold to farmers for use in agricultural production for market.”
In order to qualify for the agricultural exemption, a person must be raising or growing products for sale or resale on the open market. The statutory exemption and the regulation provide that the listed machinery, equipment, and supplies used by a grower or farmer to produce their product would qualify for the exemption. However, the Taxpayer in this case is in the business of boarding horses at its facility and does not raise livestock (horses) for breeding purposes or for sale.
Boarding of Horses
Title 23 VAC 10-210-790 specifically states the tax does not apply to charges to customers for keeping or boarding pets. Operators of kennels, stables and pet shops are required to pay the tax on their purchases of tangible personal property used in their operations.
Accordingly, the Taxpayer's charges to its customers for the boarding of horses, which is a service, is not subject to the sales and use tax. With regard to the provision of such services, Title 23 VAC 10-210-4040 E provides that “a service provider is the taxable user and consumer of all tangible personal property purchased for use in providing exempt services.” As a service provider, the Taxpayer is required to pay the sales tax to its suppliers of tangible personal property, e.g., nonprescription drugs, feed and other supplies, used in providing its boarding services, whether separately stated or not.
Statute of Limitations
Virginia Code § 58.1-634 states:
The taxes imposed by this chapter shall be assessed within three years from the date on which such taxes became due and payable. In the case of a false or fraudulent return with intent to evade payment of the taxes imposed by this chapter, or a failure to file a return, the taxes may be assessed, or a proceeding in court for the collection of such taxes may be begun without assessment at any time within six years from such date. The Tax Commissioner shall not examine any person's records beyond the three-year period of limitations unless he has reasonable evidence of fraud, or reasonable cause to believe that such person was required by law to file a return and failed to do so. [Emphasis added.]
In this instance, the Taxpayer, as a service business, was required to pay the sales tax to its suppliers or accrue and remit the consumer's use tax to the Department on those purchases for which the Taxpayer's suppliers failed to collect the sales tax. Because the Taxpayer did not file returns, the Tax Commissioner is authorized to examine the Taxpayer's records beyond the three-year statute of limitations. Accordingly, the extension of the audit period to six years, and the review of the Taxpayer's records for that period are proper under the law.
Financial Hardship
The Taxpayer indicates that paying the full amount of the assessment will cause a financial burden. As such, the Taxpayer has submitted documentation in support of its request for an offer in compromise based on doubtful collectability. The Taxpayer's documentation and its request for compromise will be forwarded to the Department's Offer in Compromise Team in the Special Taxes and Services Unit for a review and analysis of the Taxpayer's financial situation. A representative may contact the Taxpayer in the event that additional information may be needed. Upon completion of the Department's review of the Taxpayer's request for compromise based on doubtful collectability, a response will be issued based on all of the information provided.
CONCLUSION
Based on the foregoing authorities, there is no basis for waiver of the Taxpayer's assessment or for the settlement of the assessment based on doubtful liability.
The Code of Virginia sections and regulations cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If there are any questions regarding this matter, please contact ***** of the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/803.Q