May 2, 2018
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessments issued for the period April 2012 through March 2015. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a full service door and glass shop for commercial and residential customers. In the audit for the period at issue, the auditor held taxable sales made by the Taxpayer to its customers on which the sales tax was not charged. The auditor also held taxable in the audit purchases made by the Taxpayer on which the Taxpayer did not pay the sales tax at the time the purchases were made or accrue and remit the use tax to the Department. The Taxpayer contests the inclusion of several of these transactions in the audit and the extrapolation of the measure associated with these transactions. The Taxpayer is also contesting any penalty assessed with respect to the contested transactions.
DETERMINATION
Sales
Line Item 4
The transaction at issue is for the sale of windows to an association affiliated with churches (the “Association”). The sale was made exempt of the sales tax pursuant to an exemption certificate, Form ST-13A. The auditor held the sale taxable in the audit, finding that the church exemption did not apply. Based upon Form ST-13A and a letter provided by the Association to the Taxpayer, the Taxpayer contends that the transaction at issue was properly made exempt of the tax.
The letter provided by the Association states that the windows were purchased for use in the Association's ministry house mission project. The Taxpayer asserts that the property sold to the Association is for a ministry the Association performs in the community and not for use in the Association's building. The Taxpayer further provides that it sold the windows to the Association at less the cost for the windows as an additional donation to the ministry. The Taxpayer requests that this transaction be removed from the audit. However, if found to be taxable, the Taxpayer requests that the transaction be treated as a one-time sale and that it not be included in the extrapolation.
Virginia Code § 58.1-609.10 16 provides an exemption from the sales tax on certain purchases of tangible personal property made by non-profit churches for use in specific situations. Churches may use Form ST-13A to make exempt purchases of tangible personal property in accordance with the statute.
In this instance, the Association is not a church as considered in the statute. Rather, it “is a diverse network of churches” according to its website. Therefore, given that the Association seems to be a ministry support association, it is not eligible for the exemption provided for in Virginia Code § 58.1-609.10 16. As a result, the Association cannot use Form ST-13A to make purchases of tangible personal property exempt of the sales tax. Accordingly, the transaction at issue is subject to the sales tax and is properly included in the audit. Should the Taxpayer make sales to the Association in the future, the Taxpayer should not accept Form ST-13A from the Association.
In regard to the extrapolation issue, Public Document (P.D.) 07-44 (4/26/07) provides that the purpose of the audit sample is to determine a factor for errors within a representative select period. Once the error factor is determined, the factor is extrapolated over the entire audit period. The purpose of the projection is to account for likely similar transactions on which Virginia tax has not been paid. In accordance with P.D. 99-35 (3/29/33), for an item to be removed from the audit sample, the taxpayer must establish that the transaction was an isolated event and not a normal part of its operations.
In order for this transaction to be removed from the audit sample and the extrapolation, the Taxpayer must establish that the transaction is an isolated event and not a part of its normal operations. Based upon the information presented, the transaction at issue is not isolated in nature because the Taxpayer sells windows as a regular part of its business operations. Accordingly, I find that the transaction is properly included in the audit sample and the extrapolation.
Line Item 5
The sale at issue is for measuring, furnishing and installing material. This transaction was held taxable by the auditor because the Taxpayer did not provide an invoice for this sale. The Taxpayer states that it does not have the original documentation related to this transaction. The Taxpayer requests that the transaction be removed from the audit. However, if the transaction is not removed, the Taxpayer contends that the labor associated with the transaction should not be held taxable in the audit. The Taxpayer also contends that the sale should be treated as a one-time sale and should not be included in the audit extrapolation.
In this instance, the Taxpayer has not provided documentation to support its contention that the transaction is not taxable or the labor associated with the transaction is not taxable. The Taxpayer states that such documentation is not available. Accordingly, the transaction will remain in the audit. In accordance with the previously cited public documents, the transaction will remain in the audit sample and the extrapolation because the Taxpayer has not established that the transaction is isolated in nature and not a part of the Taxpayer's normal operations.
Line Items 8, 9, 10, 11, 13, 14, 15 and 16
The transactions at issue are for sales of various materials by the Taxpayer to its customers. The auditor held these transactions taxable in the audit because the sales tax was collected by the Taxpayer but not remitted to the Department. The Taxpayer states that the sales were made to companies that it usually does contract work for, and that the sales were erroneously accounted for in the Taxpayer's records. The Taxpayer states that it pays the tax on the material when it is purchased. The Taxpayer agrees that it should pay and submit the sales tax on the materials sold to these customers. However, the Taxpayer requests that these transactions be removed from the extrapolation.
As provided in P.D. 07-44 and P.D. 99-35, in order for these transactions to be removed from the audit sample and the extrapolation, the Taxpayer must prove that the transactions at issue are isolated in nature and not a part of the Taxpayer's normal operations. Based upon the information presented, the Taxpayer has not proven that the transactions should be removed from the audit sample and the extrapolation. The sales tax is due on these transactions and the assessment is correct as issued.
Purchases
Line Items 1, 6, 7, 8, 9, 10, 14, 45, 47, 48, 56, 57, 60, 62, 66, 73, 76 and 131
The transactions at issue are for purchases of automotive parts made by the Taxpayer's co-owner for the restoration of an antique vehicle. The purchases were held taxable in the audit because the sales tax was not paid at the time the transactions took place. The Taxpayer states that this is the first and only time that purchases were made using the company credit card for personal use, and the charges were paid for by personal check. The Taxpayer agrees that the charges are taxable. However, the Taxpayer requests that the purchases be treated as one-time purchases and the transactions be removed from the extrapolation.
Based on the information presented, the Taxpayer has not proven that the transactions should be removed from the audit sample and the extrapolation. The sales tax is due on these transactions and the assessment is correct as issued.
Line Items 31, 54, 103 and 106
The transactions at issue are for purchases of glass products. The auditor held these transactions taxable in the audit because the sales tax was not paid at the time the transactions occurred. The Taxpayer contests the inclusion of these transactions in the audit sample and in the extrapolation. The Taxpayer maintains that it very rarely makes purchases from these vendors because the items purchased are specialty items that the Taxpayer does not often use.
The Taxpayer makes purchases of glass products as a part of its normal business operations. The fact that these transactions are for specialty items and that the Taxpayer does not regularly purchase from these vendors does not make these transactions isolated in nature and not a part of the Taxpayer's normal business operations. Accordingly, these transactions are properly included in the audit sample and the extrapolation, and removal is not warranted.
Line Items 102 and 107
The transactions at issue are for purchases of hardware items. The auditor held the transactions taxable in the audit because the sales tax was not paid on these transactions at the time they occurred. The Taxpayer states that these are costly items that were purchased for a specific project. The Taxpayer agrees that the tax is due on these transactions, but requests that they not be included in the extrapolation.
In P.D. 10-263 (12/15/10), a taxpayer contested the audit sample, maintaining that it contained an isolated, large dollar transaction that was nonrecurring and not representative of its normal purchasing activity. The transaction at issue was for the purchase of computer hardware. The auditor found recurring errors in the periods sampled, including untaxed purchases of computer hardware. The taxpayer contended that the transaction distorted the audit sample and overstated the resulting tax liability because the transaction amount exceeded normal purchase amounts for the business. In rendering a determination, the Tax Commissioner referenced P.D. 99-66 (4/15/99) and P.D. 04-204 (11/23/04), which provide that a transaction cannot be removed from the audit sample unless the transaction is isolated in nature and not a normal part of the taxpayer's business operation, regardless that the item is a large dollar transaction or that it may constitute a large percentage of the taxable measure in the audit sample.
As provided in P.D. 10-263, these transactions cannot be removed from the audit sample and the extrapolation based solely on the fact that they are large dollar transactions or that these types of hardware items are not normally purchased by the Taxpayer. Making purchases of hardware is a normal part of the Taxpayer's business operations. Accordingly, the transactions at issue are properly included in the audit sample and the extrapolation, and removal is not warranted.
Penalty
Virginia Code § 58.1-635 mandates the application of penalty to tax deficiencies. Title 23 of the Virginia Administrative Code (VAC) 10-210-2032 generally provides that a penalty will not be assessed in first generation audits. However, the regulation sets out an exception to this rule that when an audit by the Department discloses that the sales tax has been collected but not remitted, the penalty will apply.
In this first generation audit, the Taxpayer was assessed penalty on sales transactions in which the Taxpayer collected the sales tax from its customers, but failed to remit such tax to the Department. Penalty was not assessed on the transactions being contested by the Taxpayer, with the exception of sales for the line items 8, 9, 10, 11, 13, 14, 15 and 16 addressed earlier in this letter. Pursuant Title 23 VAC 10-210-2032, the penalty was properly assessed and there is no basis for its waiver.
CONCLUSION
Based on this determination, the assessments are correct. An updated bill, with interest accrued to date, will be mailed to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit your payment to: Virginia Department of Taxation, 600 E. Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections, regulation 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, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1018.P