Tax Type
Retail Sales and Use Tax
Description
Vending machine sales; Premium band income; Theft deduction
Topic
Basis of Tax
Date Issued
11-01-1989
November 1, 1989
Re: §58.1-1821 Application/Sales and Use Tax
Dear***************
This will reply to your letter of February 7, 1989, on behalf of ***********(taxpayer), seeking correction of a sales and use tax assessment for the period November 1985 through September 1988.
FACTS
The taxpayer is engaged in the business of selling tangible personal property through vending machine and has elected under Virginia Code §58.1-614 to pay the 5 1/2% tax on the cost price of items sold instead of the 4 1/2% tax on the gross receipts.
As the result of a recent audit, the taxpayer was assessed additional tax on "premium brand income" and "inventory shortages" which it failed to include in cost price for purposes of computing the tax. Premium brand income is a reduction in the cost price of items purchased as a result of volume selling. This reduction is obtained by quarterly payments from the supplier to the taxpayer. Inventory shortages is an adjustment to cost of goods sold as a result of theft and items dispensed from vending machines without payment.
DETERMINATION
As stated in your letter, §630-10-110(2)(B) of the Virginia Retail Sales and Use Tax Regulations dealing with vending machine sales provides, in part, that "the method of accounting used for federal income tax purposes shall be the accounting method used in determining the cost price of purchased tangible personal property and the cost of manufactured tangible personal property."
As such, a reasonable allowance for inventory shortages is allowed to vending machine dealers. However, based on the information submitted, it is not entirely evident that premium brand income should be netted against the invoice price of purchases for resale in determining the cost of inventory for federal income tax purposes.
Although Treasury Regulation 1.471-3 provides for "trade or other discounts" to be netted against invoice price, it is not apparent that premium brand income is in fact a "discount" against the purchase price. Rather, I understand that premium brand income is based on the number of units sold by the taxpayer, not the number of units purchased for resale.
Based on the foregoing, the audit will be revised to permit a reasonable allowance for inventory shortages. I do not find basis at this time for the abatement of tax assessed with respect to premium brand income, but will permit the taxpayer within the next 60 days to submit additional information on the computation and payment of premium brand income and the taxpayer's specific federal income tax accounting practices with respect to the income.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner