March 22, 2022
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****.:
This is in reply to your letter in which you seek correction of the retail sales and use tax assessments issued to ***** (the “Taxpayer”) for the period March 2011 through April 2017. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer operates a landscaping business with multiple locations in Virginia. As a result of the Department’s audit, the Taxpayer was assessed tax and interest on fixed assets, untaxed purchases, employee expense reimbursements, leases of tangible personal property, and purchases of software. The Taxpayer appeals, contending sales tax was paid at the time of purchase where applicable and as such, they should be removed from the audit. The Taxpayer also contends that the expansion of the audit period to six years was unreasonable and should be limited to three years.
DETERMINATION
Virginia Code § 58.1-610 A provides, in pertinent part, that:
Any person who contracts orally, in writing, or by purchase order, to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property, shall be deemed to have purchased such tangible personal property for use or consumption.
Title 23 of the Virginia Administrative Code (VAC) 10-210-610 provides guidance for florists, nurserymen, landscapers and contractors. Title 23 VAC 10-210-610 states, “the tax applies to retail sales or flowers, potted plants, shrubbery, nursery stock, sod, wreaths, bouquets, and similar items”.
Pursuant to Public Document (P.D.) 07-171 (11/7/2007), the Tax Commissioner determined that businesses that perform real property services would be the taxable users and consumers of the trees, plant materials, sod, silt fence and other similar items and must pay the application sales tax when purchasing these items from vendors. If a vendor does not charge the sales tax, the business will be responsible for remitting the use tax on the untaxed purchases to the Department.
Virginia Code § 58.1-633 A states that every dealer required to file a retail sales and use tax return and pay or collect such tax must keep and preserve suitable records of the sales, leases, or purchases, as the case may be, subject to the retail sales and use tax. The dealer must also maintain such other books of account as may be necessary to determine the amount of tax due, and “such other pertinent information as may be required by the Tax Commissioner”. This record keeping requirement is further explained in Title 23 VAC 10-210-470:
Every person who is liable for collection of sales tax or remittance of use tax or both is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Such records must include… a daily record of all cash and credit sales, including sales under any type of financing or installment plan in use… A record of the amount of all merchandise purchased, including a bill or lading, invoice, purchase order or other evidence to substantiate each purchase… A record of all tangible property used or consumed in the conduct of the business… Records must be open for inspection and examination… by the Department of Taxation…
Sales Tax Paid or Accrued
The Taxpayer claims that sales tax was assessed on various transactions in the audit on which the sales tax was paid. While the Taxpayer cannot provide invoices for the transactions in question, the taxpayer states that it is attempting to locate documentation demonstrating that sales tax has been paid on these transactions.
The Taxpayer’s arguments that vendors consistently collect sales tax in similar transactions are not sufficient evidence that the tax was paid on contested items. Taxpayers are clearly required to provide documentation to show that the tax was paid.
Employee Expense Reimbursements
The auditor assessed the tax on purchase made by employees that were reimbursed by the Taxpayer. The employees purchased tangible personal property and were reimbursed by the Taxpayer for the expense. The Taxpayer could not provide documentation to show that the tax was paid on these purchases. Unless the Taxpayer provides documentation that the tax was paid on the contested items or that the items were purchased outside Virginia and no use of the property was made in this state, there is no basis to remove the items from the audit.
Lease of Tangible Personal Property
Virginia Code § 58.1-603 imposes the sales tax on the lease or rental of tangible personal property in the Commonwealth. The tax is computed on the gross proceeds derived from such lease or rental.
Virginia Code § 58.1-609.5 1 provides an exemption from the sales and use tax for "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made...." Title 23 VAC 10-210-4040 addresses the application of the tax to service transactions and states, "Charges for services generally are exempt from the sales and use tax. However, services provided in connection with sales of tangible personal property are taxable." The regulation describes the "true object" test used in determining whether a transaction involving both the rendition of services and the provision of tangible personal property constitutes an exempt service or a taxable retail sale. The “true object” test states:
If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable. In this case, the Taxpayer has not provided documentations sufficient to show that the true object of transaction for leased equipment was in procurement of a service.
Electronic Delivery of Software
The Taxpayer also disputes the inclusion of several software purchases in the audit and argues that because there was no tangible personal property received it was not taxable. It is the Department’s long-standing policy that the sale or prewritten software delivered electronically to customers does not constitute the sale of tangible personal property and is generally not subject to sales and use taxation.
Virginia Code § 58.1-609.5 1 provides an exemption from the tax, in part, 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 P.D. 05-44 (4/4/2005), the Department set forth minimum documentation requirements for confirming the electronic delivery of software products. At a minimum a sales invoice, contract or other sales agreement must expressly certify the electronic delivery of the software and that no tangible medium for that software has been furnished to the customer. The Department expanded the documentation requirements in P.D. 16-124 (6/22/2016) when it opined that an email or statement from a vendor referencing the specific transaction at issue, or similar documentation could be sufficient evidence of the software delivery method. Again, the Taxpayer has provided no documentation to support its claim that the software was delivered by electronic download and there was no provision of the software in tangible form.
Statute of Limitations
The Taxpayer argues that because the three-year statute of limitation had expired prior to the extension, the audit period could not be extended an additional three years. Virginia Code § 58.1-634 provides, in part that, “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.”
It is my understanding that the Taxpayer was not registered for the consumer use tax and no returns had been filed. Because use tax liability was found in the initial three-year period reviewed, the audit period was extended to include an additional three years. .
CONCLUSION
In accordance with Virginia Code § 58.1-634, an audit period of six years is proper in this instance. Further, based upon the information presented and the above referenced authorities, the assessments were properly issued.
Notwithstanding the foregoing, I am willing to grant the Taxpayer one final opportunity to provide documentation to the Department for review with respect to the audit period at issue. The Taxpayer must provide the records and documentation to the Department within 60 days of the date of this letter. Once received, the information will be reviewed by audit staff and revisions will be made, if warranted. Should the taxpayer fail to provide the documentation within the allotted timeframe, the assessment will become immediately due and payable.
The Code of Virginia sections, regulations and public documents are available online at www.virginia.tax.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions concerning this determination, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1905.A