Tax Type
Retail Sales and Use Tax
Description
Penalties and Interest; Penalties; Purchaser failing to make return or pay use tax
Topic
Collection of Delinquent Tax
Date Issued
05-31-1996
May 31, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This is in response to your letters of December 20, 1995 and May 20, 1996 seeking correction of the use tax assessment issued to*********** (the Taxpayer). I apologize for the delay in responding to your initial letter.
FACTS
The Taxpayer is an electrical contractor. An audit for the period June 1992 through May 1995 resulted in an assessment of use tax on untaxed purchases of tangible personal property used or consumed by the Taxpayer. The Taxpayer was also assessed tax on combined shipping and handling charges. It is maintained by the Taxpayer that these charges are not taxable based on recent court rulings.
The Taxpayer also seeks waiver of the penalty. Since the prior audit, the Taxpayer indicates that it has made a good faith effort to pay use tax on its untaxed purchases from out-of-state suppliers. In the Taxpayer's current audit, most of the assessment of tax is the result of untaxed purchases from in-state suppliers. The Taxpayer contends that its in-state suppliers are to blame for not billing the sales tax on taxable purchases and, therefore, feels that it is being penalized for the suppliers' mistakes. In this regard, the Taxpayer wants to know if there is any other state law or statute that transfers liability to a party based on the mistakes of others.
DETERMINATION
Shipping and Handling Charges: Code of Virginia § 58.1-609.5(3) provides an exemption from the retail sales and use tax for transportation charges when separately stated. If transportation or delivery charges are not separately stated on the invoice or are combined with handling or other nonexempt charges, it has been the department's consistent and long-standing policy that the tax applies to such charges.
Although you indicate that recent court rulings would exempt combined shipping and handling charges, Virginia Regulation (VR) 630-10-107 (copy enclosed) has set out, since 1985, that transportation charges do not include handling charges and must be separately stated on the customer's invoice in order for the exemption to apply. Furthermore, the department has issued numerous rulings stating that combined shipping and handling charges are taxable. See P.D.'s 89-132 (4/27/89), 90-220 (12/14/90), 94-80 (3/22/94) and 95-253 (9/11/95); copies enclosed.
Based on the department's established policy, and absent any evidence that the Virginia Supreme court has ruled otherwise, the tax assessed on the charges at issue is proper.
Penalty: Although Code of Virginia § 58.1-635 mandates the application of penalty to tax deficiencies, its application in sales and use tax audits is generally determined based on whether a satisfactory level of tax compliance is achieved. For second audits of use tax compliance, penalty will generally apply unless a taxpayer's use tax compliance ratio meets or exceeds 60%. As the Taxpayer's use tax compliance on this second audit is 52%, the penalty applies.
Penalty may also be waived based on evidence of exceptional mitigating circumstances. Although the Taxpayer blames its suppliers for its predicament, the circumstances presented are not of an exceptional mitigating nature as explained below.
Taxpayer's Responsibilities: 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 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, the statute makes the sales or use tax the legal debt of the purchaser. In Lee Brothers v. Tax Commissioner (9/13/73), the court ruled that "a person who uses property in Virginia and cannot establish that a sales tax has been added to the purchase price at the time of its purchase is properly assessable with the use tax...even though the vendor fails to collect the sales tax from the consumer...."
Based on the above cited court rulings (copies enclosed), the Taxpayer is the one ultimately responsible for ensuring the payment of the sales or use tax on all taxable purchases. The Taxpayer does not escape its responsibilities merely because a registered dealer does not charge and collect the sales or use tax.
Although the suppliers may have failed to charge and collect the sales tax, the Taxpayer did furnish its suppliers with exemption certificates (Form ST-11A) which were relied upon by them to exempt the Taxpayer's purchases. In such instances, the supplier may not know to charge and collect the sales tax on a particular purchase unless the Taxpayer has notified the supplier when making a taxable purchase. Even if such notice has been given and the supplier fails to charge the sales tax, the courts have determined that the purchaser remains ultimately liable for ensuring that the tax has been paid.
Ultimate Liabilities in Other State Taxes: Similar consumer responsibilities are applicable to the watercraft sales and use tax. Also, an employee remains ultimately liable for the income tax even if the employer fails to deduct a portion of his or her wages for income tax withholding purposes.
As the ultimate liability for the retail sales and use tax rests with the Taxpayer, I regret that I cannot honor the Taxpayer's request for waiver of the penalty or adjustment of the tax assessed in this case. Our records indicate that the assessment has been paid.
If you have any questions concerning this matter, please contact****at************** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10964R
Rulings of the Tax Commissioner