Tax Type
Retail Sales and Use Tax
Description
Airline microfilming equipment
Topic
Taxability of Persons and Transactions
Date Issued
02-27-1987
February 27, 1987
Re: §58.1-1821 Application/Sales and Use Tax
Dear***************
This will reply to your letter of December 8, 1986, in which you submit an application for correction of sales and use tax assessed to ******** as the result of a recent audit.
FACTS
*************** (Taxpayer) is an airline engaging in activities entitling it to the exemption from the sales and use tax provided in §58.1-608.26 of the Code of Virginia for tangible personal property used directly in the rendition of its common carrier service.
A recent audit of the taxpayer produced an assessment for tangible personal property used in the microfilming of airline tariffs, on various items of property on which the tax was improperly paid to the District of Columbia, and on food service charges. The taxpayer contests the assessment of tax on property used in microfilming tariffs on the basis that the property is used directly in the rendition of its common carrier service. In addition, the taxpayer requests the relief of tax assessed on items for which tax was erroneously paid to the District of Columbia and requests the revision of the assessment to delete certain food service charges not related to the sale of food
DETERMINATION
§58.1-608.26 of the Code of Virginia provides an exemption from the sales and use tax for "[t]angible personal property sold or leased to an airline operating in intrastate, interstate or foreign commerce as a common carrier providing scheduled air service on a continuing basis to one or more Virginia airports for use or consumption by such airline directly in the rendition of its common carrier service." Emphasis added
In Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973), the Virginia Supreme Court established a two-pronged test in order to determine if an item is used "directly" in the rendition of common carrier service:
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- (1) whether the item is indispensable to ... (the) actual rendition of ... service, and (2) whether the item is primarily used or consumed immediately in ... (the) rendition of ... service.
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- The court went on to note that "convenient or facilitative items are, of course, not exempt" under the direct use test. Further, the court noted that "items which are essential to the operation of a business but not an immediate part of actual performance of ... service are not exempted because essentiality itself would exempt nearly all items in contravention of the legislature's evident intent."
Based on the above test, I cannot conclude that items used in the microfilming of airline tariffs is used directly in the rendition of airline common carrier service. In fact, Virginia Regulation 630-10-24.3 relating to common carriers by motor vehicle specifically states that tariff rate schedules are not used directly in the rendition of a common carrier's service.
Nor do I find basis for exemption in the opinion of the Virginia Supreme Court in Commonwealth v. United Airlines, 219 Va. 374, 248 S.E.2d 124 (1978). In this case, the court recognized that n a common carrier of passengers by air is under a duty to exercise the highest degree of care for the safety of its passengers compatible with the normal prosecution of its business. n Using this rationale, the court found an anti-hijacking system and a sophisticated electronic information system to be used directly in the rendition of airline common carrier service. This opinion, however, in no way serves to extend the exemption to tariff schedules and equipment and supplies used to microfilm such schedules.
As to taxes erroneously paid to the District of Columbia, I cannot offer relief inasmuch as first use of the property in question occurred at National Airport over which Virginia exercises the right to impose sales and use taxes pursuant to Airport and Airways Development Act of 1970 (see United Airlines, supra). I would note, however, that refunds of all or part of the tax erroneously paid may be available from the District of Columbia.
The portion of the audit dealing with food service charges will be revised to delete that portion of the charges which are not connected with the sale of food. In the future, however, lump sum food service charges will be taxed in full. Therefore, the taxpayer's vendors will fully be expected to separately state any nontaxable charges on their invoices.
I do not find basis for the removal from the department's audit sample of a computer software maintenance agreement as I feel that this transaction is likely indicative of similar transactions in periods that were not part of the sample.
Lastly, I find basis in this instance for the relief of penalty. Nonetheless, substantially improved compliance will be expected in future audits in order to avoid the assessment of penalty.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner