February 25, 2019
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 assessment issued for the period June 2008 through July 2011. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a contractor/retailer for a satellite programming provider. The auditor assessed sales tax in the audit on untaxed sales of attire and tools made by the Taxpayer to its employees. The Taxpayer is contesting the assessment, contending that the sales tax was paid to the Taxpayer’s vendors at the time the Taxpayer made the purchases. Additionally, the auditor assessed use tax on untaxed purchases of tires by the Taxpayer from an out-of-state vendor because the vendor was not registered for the Virginia sales and use tax when the transactions took place. The Taxpayer asserts that it paid sales tax to the vendor at the time the tire purchases were made.
The auditor further assessed penalty in the audit for sales tax that was collected by the Taxpayer but not remitted to the Department. The Taxpayer requests abatement of the penalty, as well as the interest assessed in the audit.
DETERMINATION
Sales to Employees
During the audit period, the Taxpayer purchased attire and tools that it sold to its employees. The Taxpayer states that it paid the Virginia sales tax to its vendors at the time the purchases were made.
Virginia Code § 58.1-602 defines retail sale as “a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter, and shall include any such transaction as the Tax Commissioner upon investigation finds to be in lieu of a sale.”
The sales at issue are retail sales that are subject to the retail sales and use tax. Accordingly, the Taxpayer should have charged the sales tax to its employees at the time the sales took place during the audit period. Going forward, the Taxpayer should purchase exempt of the tax any items that will be resold to its employees using Form ST-10, the Virginia Resale Exemption Certificate. The Taxpayer should then charge the sales tax to its employees on such sales, and remit the tax to the Department. The sales tax should be reported on the Taxpayer’s Virginia sales tax returns.
The Taxpayer states that it was unable to provide invoices related to the purchases of attire and tools at issue because the invoices were destroyed by a former employee who embezzled from the business. The Taxpayer states that it can provide current documentation that illustrates that the sales tax has been paid on purchases of the same types of attire and tools that are at issue in the audit.
Virginia Code § 58.1-633 A provides that:
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 accordance with Virginia Code § 58.1-633, the Taxpayer must maintain adequate records. The Taxpayer was unable to provide the documentation necessary to support that the tax had been paid. While I understand that documentation related to these transactions may have been destroyed by a prior employee, this fact does not provide a sufficient basis for use of documentation for a period outside of the audit period to verify taxes paid during the audit period. Accordingly, the tax was properly assessed in the audit and removal of these transactions from the audit is not warranted.
Tire Purchases
During the audit period, the Taxpayer purchased tires from Wholesale Tire, Inc. (the “Vendor”) an out-of-state vendor. The Taxpayer asserts that it paid the sales tax to the Vendor at the time the purchases were made, and requests that the transactions be removed from the audit.
Virginia Code § 58.1-625 A states in pertinent part that:
The tax levied by this chapter shall be paid by the dealer, but the dealer shall separately state the amount of the tax and add such tax to the sales price or charge. Thereafter, such tax shall be a debt from the purchaser, consumer, or lessee to the dealer until paid and shall be recoverable at law in the same manner as other debts.
In United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff’d 569 F.2d 811 (4th Cir. 1978), the Court ruled that the legal incidence of the Virginia retail sales and use tax is on the ultimate purchaser. Although a registered seller is legally obligated to collect the tax from the purchaser on retail transactions, Virginia Code § 58.1-625 makes the sales or use tax the legal debt of the purchaser.
In this instance, the invoices presented to the Taxpayer by the Vendor listed an amount for the Virginia sales tax. The Taxpayer paid the full amount due, including the listed sales tax amount, to the Vendor. However, the Vendor was not registered for the Virginia sales and use tax at the time the transactions took place, and the sales tax paid by the Taxpayer was not remitted to the Department. During the audit, the Taxpayer was made aware by the auditor that the Vendor was not registered for the Virginia sales and use tax, and the Taxpayer was instructed by the auditor to request a refund from the Vendor for all taxes paid to the Vendor.
In accordance with the cited authorities, the Department can seek payment of the sales tax that has not been remitted to the Commonwealth from either the seller or the purchaser. The tire purchases are subject to the Virginia retail sales and use tax because the Taxpayer took delivery of the tires in Virginia. Additionally, the Vendor did not remit the sales tax it collected to Virginia because the Vendor is not registered in Virginia. Accordingly, the use tax was properly assessed in the audit on these transactions.
Interest and Penalty
Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it simply represents a fee for the use of money over a period of time. As such, the assessment of interest is generally not abated. In this instance, the completion of the audit was delayed while the Department dealt with a matter related to application of the retail sales and use tax to the type of work done by the Taxpayer. Once that matter was resolved, the Taxpayer’s audit was finalized, and interest was assessed to include the period during which the delay occurred. Based upon these facts, I find that an abatement of a portion of the interest assessed in the audit is warranted. Accordingly, the interest assessed in the audit is reduced to $*****.
In regard to the penalty, Title 23 of the Virginia Administrative Code 10-210-2032 B 1 provides that “Generally, penalty will be waived for first generation audits. First generation audit penalty cannot be waived if … [t]he taxpayer has collected the sales tax, but failed to remit it to the Department of Taxation”. The Taxpayer has not proven that the tax assessed in this instance is incorrect. Accordingly, the penalty was properly assessed in the audit and cannot be waived.
An updated bill, revised in accordance with this determination, will be mailed shortly 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 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 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 about this response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner