Tax Type
Individual Income Tax
Description
Capital taxes assessed
Topic
Penalties and Interest
Returns/Payments/Records
Date Issued
04-09-1982
April 9, 1982
Re:
Application for Correction of Assessments
Capital Not Otherwise Taxed
For the Years 1979 and 1980
Dear *************
This is in reply to your letter in which you made application pursuant to § 58-1118 of the Code of Virginia for correction of state capital taxes assessed against the above taxpayer for the years 1979 and 1980.
FACTS
We are advised that Taxpayer, a general contractor conducting business only from offices within Virginia, maintains its general accounting records and published financial statements on the accrual basis of accounting, utilizing the percentage of completion method for recording profit or loss from long term construction contracts.
Taxpayer failed to file State return of tax. on capital not otherwise taxed for the years 1979 and 1980 and as a result of field audit, a report of audit adjustments was submitted to Taxpayer on or about December 8, 1980 and assessments of tax, penalty and interest were made on December 17, 1980.
Audit adjustments based on Taxpayer's accounting records and financial statements reflected the following amounts of taxable capital for the years 1979 and 1980:
Excess of bills and accounts receivable over bills and accounts payable Other taxable property *********** master note Employee loans Total Taxable Capital
Subsequently, on June 19, 1981, Taxpayer submitted an application for correction of audit adjustments pursuant to § 58-1118 of the Code of Virginia alleging error in that for the year 1979 the report of audit changes failed to reflect an excess of overbillings over underbillings in the amount of $ ***** and for the year 1980 the report of audit changes failed to reflect the excess of overbillings over underbillings in the amount of $****************
State tax on capital not otherwise taxed is a property tax imposed on specific items of property defined by the Virginia Code as the capital of a trade or business in Virginia. As such, it includes all property not specifically exempt and recognizes only those specific liabilities which the law provides for offset against the value of specific items of property.
Virginia Code § 58-411 defines capital for purposes of this tax as three basic categories of property; (1) inventory, (2) the excess of bills and accounts receivable over bills and accounts payable and (3) all other taxable property. The first category includes a contractor's inventory of materials on hand for construction since such inventory is considered to be held for resale indirectly as specified by Code § 58-412. It does not include construction in progress since such construction is real estate of the property owner. The second category is limited to bills and accounts receivable less the total amount of bills and accounts payable contracted in the usual course of business. See Code § 58-422. The third category includes all other intangible personal property of a contractor except those classes of property which are specifically exempted by Code §§ 58-411 and 58-412. This category of taxable property includes, but is not limited to, choices in action, equities, demands and claims. See § 58-411, subparagraph A(4).
It is my understanding that under Taxpayer's accounting procedures, all amounts which are billed or billable under the terms of contracts have been included in the books and financial statements as "accounts receivable" and in accordance with the provisions of Code § 58-411 these were included in audit in the category of "the excess of 211 bills and accounts receivable over bills and accounts payable." The amount of accumulated costs and earnings which is unbilled and unbillable under
the terms of contracts is recorded in the accounting records as an asset and reflected in the financial statements as a "current asset", but not as "accounts receivable". While such amounts do not represent "accounts receivable", they are nevertheless property represented by Taxpayer's "equity" in uncompleted and unbillable contracts. They are therefore included in audit in the category of "all other taxable property" as defined by Code § 58-411. Additionally; Taxpayer's accounting records and financial statements reflect as "current liabilities", but not as "accounts payable", an amount of billing in excess of costs and earned profits. Under the restrictive provision of Code § 58-422, liabilities ray be included and offset against bills and accounts receivable only if they are represented by bills and accounts payable contracted in the usual course of a taxpayer's business. While I do not question the accounting classification of the amounts in issue as "current liabilities", nothing has been presented to substantiate their inclusion in "accounts payable" as defined by Code § 58-422. Indeed, according to the contract forms utilized by Taxpayer, as submitted for our review, there is no contractual entitlement to any payment in advance of work performed as certified by architects. The amounts were therefore excluded in audit computation of taxable capital.
In protest, Taxpayer refers to 1980 changes in law which provide for inclusion of "underbillings" in accounts receivable and "overbillings" in accounts payable and expresses a view that the actions of the legislature only clarified the prior law. We disagree with this view. When the General Assembly amends a statute by adding to it a new provision the presumption is that the General Assembly acted with full knowledge of and in reference to existing law, and the courts construe the amendment as making some change in existing law. In light of the Department's previous interpretation of § 58-411(3), the 1980 amendment can only be viewed as a legislative determination to change substantively the meaning which had previously been in existence for over fifty years since the new law included the contract overbillings and underbillings in capital tax categories in which they were not included previously.
DETERMINATION
On the basis of information submitted and for the reasons stated above, I find no error in audit computations of taxable capital or in the deficiencies assessed. Your application for correction is therefore denied and the assessments should be paid with interest accrued to the date of payment.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner