Tax Type
Retail Sales and Use Tax
Description
Deficiency assessments, retail clothier
Topic
Collection of Delinquent Tax
Date Issued
06-18-1999
June 18, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear****
This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer'). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a retail clothier. An audit for the period November 1994 through October 1997 resulted in the assessment of sales and use tax. The Taxpayer disputes several sales and purchases held taxable in the audit. The Taxpayer also seeks waiver of the penalty assessed in this case.
DETERMINATION
Fixed Asset Exceptions
Based on all of the facts and documentation presented, the fixed asset exception in the amount of ***** will be removed from the audit.
Purchases Exceptions
The Taxpayer maintains that pants and shirt hangers included in the audit are exempt because they can be retained by customers when merchandise is purchased. To be considered part of the sale, these hangers must be transferred with the merchandise sold to the customer. The Taxpayer has not shown that hangers are customarily transferred with each sale of pants or shirts. Rather, based on the facts presented, I must presume that in many instances, these hangers are retained by the Taxpayer after the sale.
In an attempt to resolve this matter, it is my understanding that the department's audit staff asked the Taxpayer to provide the average amount or percentage of hangers which are transferred to customers with merchandise sold. If this average amount or percentage for hangers transferred to customers were known, such amount could be removed from the audit. However, the Taxpayer has not responded to this request. Accordingly, this portion of the audit cannot be revised, unless the Taxpayer provides the requested information to the auditor.
Sales Exceptions
The Taxpayer contests the tax assessed on certain group sales of ties, shirts, and suits, claiming that these are exempt sales to religious organizations.
Code of Virginia § 58.1-609.8(2) provides an exemption from the retail sales and use tax for tangible personal property purchased by nonprofit churches for use (I) in religious worship services by a congregation or church membership while meeting together in a single location, and (ii) in the libraries, offices, meeting or counseling rooms or other rooms in the public church buildings used in carrying out the work of the church and its related ministries. In order to qualify for this exemption, Title 23 of the Virginia Administrative Code (VAC) 10-210-310 provides, in subsection D, that:
In this case, it is my understanding that the Taxpayer did not obtain, and therefore did not rely on, any exemption certificates from churches at the time the contested sales were made. In addition, it is my understanding that there is no proof that the sales at issue were paid for directly by the churches. As these sales were exempted by the Taxpayer without reliance on an exemption certificate and direct payment by the church, I find no basis to remove these items from the audit.
I would also note that the sample period examined in the Taxpayer's prior audit provides no evidence that similar sales were made by the Taxpayer. It is my understanding that invoices from the March 1993 sample period used in the prior audit were reviewed, and no evidence was found that the Taxpayer had made similar sales during such sample period. Accordingly, these type of sales were not taxed in the prior audit since they were not seen by the prior auditor using a one month sample.
Miscellaneous Sales Exceptions
In 1996, the Taxpayer closed one of its Virginia stores and two others like it located outside Virginia. These stores sold the same or similar merchandise as the Taxpayer's other stores but used marketing concepts which were different than other stores operated by the Taxpayer and were the last stores of its kind. At issue is the tax assessed on the fixed assets sold as a result of closing the Virginia store. The Taxpayer claims that these stores constituted a separate division of the Taxpayer and should qualify for the occasional sale exemption as the sale of all or substantially all of the assets of a business.
In Public Document (P.D.) 91-290 (11/18/91, copy enclosed), the department established the minimum criteria to constitute a separate and distinct division for purposes of the occasional sale exemption. Based on the criteria set forth in P.D. 91-290, it appears that the Taxpayer has not sufficiently established that the store closings at issue constituted the sale of a separate and distinct division of the Taxpayer.
For example, the department has evidence which infers that the Taxpayer may not have maintained a completely separate set of books and records for the stores at issue. In addition, insufficient or no evidence has been provided to the department that the Taxpayer maintained separate bank accounts for the stores at issue, that employees involved in these stores were only active in overseeing the operation of such stores, or that fixed assets were not used interchangeably between the stores at issue and other stores operated by the Taxpayer. It is also my understanding that there is no evidence of separate housing of staff.
As the Taxpayer has not satisfied the established criteria set out P.D. 91-290, I find no basis to conclude that these stores were organized as a separate and distinct division of the Taxpayer. Accordingly, the sale of these stores does not represent the sale of all, or substantially all of the Taxpayer's business. Therefore, the occasional sale exemption is unavailable for the transaction at issue.
Penalty
The Taxpayer requests waiver of the penalty applied to use tax since a majority of the use tax deficiency is attributable to purchases in connection with a new point of sale system from one vendor. The Taxpayer indicates that it was not possible to adequately estimate use tax due on the purchase of this system as it claims there was confusion as to whether the vendor would invoice the Taxpayer for the sales tax.
Generally, if the invoice does not separately bill for sales tax, it can be presumed that no sales tax has been charged. The Taxpayer has presented no evidence that the vendor charged an incorrect amount of Virginia sales tax, the wrong state's sales tax, or billed for sales tax in a misleading manner. Rather, it is my understanding that this vendor charged no sales tax on its invoices to the Taxpayer. Accordingly, the Taxpayer should have remitted the use tax to the department on charges for cash registers, scanners, backup devices, and other tangible personal property transferred to the Taxpayer. Licenses purchased in connection with these sales are also taxable. However, separately stated installation charges are not taxable.
Although the Taxpayer specifies on its invoices that all purchase orders are to include the Virginia sales tax, I must point out that the tax is the ultimate liability of the purchaser, even though a registered dealer is obligated to collect the sales tax. United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978). It is my understanding that the vendor at issue is located outside Virginia and is not registered to collect Virginia's use tax.
Although I do appreciate the Taxpayer's efforts to faithfully file and pay an estimated use tax, I must recognize that such efforts have fallen short of meeting an acceptable level of compliance on this seventh generation audit. In this audit, the use tax compliance ratio must meet or exceed 85% in order for the audit penalty to be waived. However, the use tax compliance ratio on this seventh audit is 60%.
Therefore, penalty has been properly applied.
The only other basis for waiving penalty is when there is evidence of exceptional mitigating circumstances as the direct cause for the low level of compliance. In this audit, there is no evidence of exceptional mitigating circumstances. Based on the foregoing, I find no basis for waiving the penalty assessed in this case.
Conduct of Audit
I regret that the Taxpayer is dissatisfied with the conduct of this audit. The department strives to provide the highest level of customer service. I apologize for any inconvenience caused during the audit and ensure you that your future dealings with the department will reflect our commitment to customer service. Thank you for sharing this information with me.
Conclusion
The requested information on the hangers should be furnished to ***** Audit Supervisor of department's ***** District Office, within 60 days of the date of this letter ***** will determine whether the requested information is sufficiently suitable to revise this portion of the audit. Her telephone number is *****
After receipt of the requested information, the audit will be revised as soon as possible and in accordance with this determination. If the requested information is not submitted to the District Office within the allotted time, it will be assumed that it will not be forthcoming. In such an event, the audit will be revised to remove the one fixed asset exception at issue, and a revised bill for the outstanding liabilities will be sent to the Taxpayer.
If you are any questions about this response, please contact ***** of my tax policy staff at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20158R
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear****
This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer'). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a retail clothier. An audit for the period November 1994 through October 1997 resulted in the assessment of sales and use tax. The Taxpayer disputes several sales and purchases held taxable in the audit. The Taxpayer also seeks waiver of the penalty assessed in this case.
DETERMINATION
Fixed Asset Exceptions
Based on all of the facts and documentation presented, the fixed asset exception in the amount of ***** will be removed from the audit.
Purchases Exceptions
The Taxpayer maintains that pants and shirt hangers included in the audit are exempt because they can be retained by customers when merchandise is purchased. To be considered part of the sale, these hangers must be transferred with the merchandise sold to the customer. The Taxpayer has not shown that hangers are customarily transferred with each sale of pants or shirts. Rather, based on the facts presented, I must presume that in many instances, these hangers are retained by the Taxpayer after the sale.
In an attempt to resolve this matter, it is my understanding that the department's audit staff asked the Taxpayer to provide the average amount or percentage of hangers which are transferred to customers with merchandise sold. If this average amount or percentage for hangers transferred to customers were known, such amount could be removed from the audit. However, the Taxpayer has not responded to this request. Accordingly, this portion of the audit cannot be revised, unless the Taxpayer provides the requested information to the auditor.
Sales Exceptions
The Taxpayer contests the tax assessed on certain group sales of ties, shirts, and suits, claiming that these are exempt sales to religious organizations.
Code of Virginia § 58.1-609.8(2) provides an exemption from the retail sales and use tax for tangible personal property purchased by nonprofit churches for use (I) in religious worship services by a congregation or church membership while meeting together in a single location, and (ii) in the libraries, offices, meeting or counseling rooms or other rooms in the public church buildings used in carrying out the work of the church and its related ministries. In order to qualify for this exemption, Title 23 of the Virginia Administrative Code (VAC) 10-210-310 provides, in subsection D, that:
-
- ... tangible personal property must be purchased by, invoiced to and paid for directly by the nonprofit church. Purchases by the minister from his own funds, purchases by affiliated religious associations, and purchases by church members or others for donation to the church are subject to the tax. (Emphasis added.)
- ... tangible personal property must be purchased by, invoiced to and paid for directly by the nonprofit church. Purchases by the minister from his own funds, purchases by affiliated religious associations, and purchases by church members or others for donation to the church are subject to the tax. (Emphasis added.)
-
- All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. The certificate will remain in effect except upon notice from the Department of Taxation that it is no longer acceptable. However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice. (Emphasis added.)
- All sales, leases and rentals of tangible personal property are subject to the tax until the contrary is established. The burden of proving that the tax does not apply rests with the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law. The certificate will remain in effect except upon notice from the Department of Taxation that it is no longer acceptable. However, a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice. (Emphasis added.)
In this case, it is my understanding that the Taxpayer did not obtain, and therefore did not rely on, any exemption certificates from churches at the time the contested sales were made. In addition, it is my understanding that there is no proof that the sales at issue were paid for directly by the churches. As these sales were exempted by the Taxpayer without reliance on an exemption certificate and direct payment by the church, I find no basis to remove these items from the audit.
I would also note that the sample period examined in the Taxpayer's prior audit provides no evidence that similar sales were made by the Taxpayer. It is my understanding that invoices from the March 1993 sample period used in the prior audit were reviewed, and no evidence was found that the Taxpayer had made similar sales during such sample period. Accordingly, these type of sales were not taxed in the prior audit since they were not seen by the prior auditor using a one month sample.
Miscellaneous Sales Exceptions
In 1996, the Taxpayer closed one of its Virginia stores and two others like it located outside Virginia. These stores sold the same or similar merchandise as the Taxpayer's other stores but used marketing concepts which were different than other stores operated by the Taxpayer and were the last stores of its kind. At issue is the tax assessed on the fixed assets sold as a result of closing the Virginia store. The Taxpayer claims that these stores constituted a separate division of the Taxpayer and should qualify for the occasional sale exemption as the sale of all or substantially all of the assets of a business.
In Public Document (P.D.) 91-290 (11/18/91, copy enclosed), the department established the minimum criteria to constitute a separate and distinct division for purposes of the occasional sale exemption. Based on the criteria set forth in P.D. 91-290, it appears that the Taxpayer has not sufficiently established that the store closings at issue constituted the sale of a separate and distinct division of the Taxpayer.
For example, the department has evidence which infers that the Taxpayer may not have maintained a completely separate set of books and records for the stores at issue. In addition, insufficient or no evidence has been provided to the department that the Taxpayer maintained separate bank accounts for the stores at issue, that employees involved in these stores were only active in overseeing the operation of such stores, or that fixed assets were not used interchangeably between the stores at issue and other stores operated by the Taxpayer. It is also my understanding that there is no evidence of separate housing of staff.
As the Taxpayer has not satisfied the established criteria set out P.D. 91-290, I find no basis to conclude that these stores were organized as a separate and distinct division of the Taxpayer. Accordingly, the sale of these stores does not represent the sale of all, or substantially all of the Taxpayer's business. Therefore, the occasional sale exemption is unavailable for the transaction at issue.
Penalty
The Taxpayer requests waiver of the penalty applied to use tax since a majority of the use tax deficiency is attributable to purchases in connection with a new point of sale system from one vendor. The Taxpayer indicates that it was not possible to adequately estimate use tax due on the purchase of this system as it claims there was confusion as to whether the vendor would invoice the Taxpayer for the sales tax.
Generally, if the invoice does not separately bill for sales tax, it can be presumed that no sales tax has been charged. The Taxpayer has presented no evidence that the vendor charged an incorrect amount of Virginia sales tax, the wrong state's sales tax, or billed for sales tax in a misleading manner. Rather, it is my understanding that this vendor charged no sales tax on its invoices to the Taxpayer. Accordingly, the Taxpayer should have remitted the use tax to the department on charges for cash registers, scanners, backup devices, and other tangible personal property transferred to the Taxpayer. Licenses purchased in connection with these sales are also taxable. However, separately stated installation charges are not taxable.
Although the Taxpayer specifies on its invoices that all purchase orders are to include the Virginia sales tax, I must point out that the tax is the ultimate liability of the purchaser, even though a registered dealer is obligated to collect the sales tax. United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978). It is my understanding that the vendor at issue is located outside Virginia and is not registered to collect Virginia's use tax.
Although I do appreciate the Taxpayer's efforts to faithfully file and pay an estimated use tax, I must recognize that such efforts have fallen short of meeting an acceptable level of compliance on this seventh generation audit. In this audit, the use tax compliance ratio must meet or exceed 85% in order for the audit penalty to be waived. However, the use tax compliance ratio on this seventh audit is 60%.
Therefore, penalty has been properly applied.
The only other basis for waiving penalty is when there is evidence of exceptional mitigating circumstances as the direct cause for the low level of compliance. In this audit, there is no evidence of exceptional mitigating circumstances. Based on the foregoing, I find no basis for waiving the penalty assessed in this case.
Conduct of Audit
I regret that the Taxpayer is dissatisfied with the conduct of this audit. The department strives to provide the highest level of customer service. I apologize for any inconvenience caused during the audit and ensure you that your future dealings with the department will reflect our commitment to customer service. Thank you for sharing this information with me.
Conclusion
The requested information on the hangers should be furnished to ***** Audit Supervisor of department's ***** District Office, within 60 days of the date of this letter ***** will determine whether the requested information is sufficiently suitable to revise this portion of the audit. Her telephone number is *****
After receipt of the requested information, the audit will be revised as soon as possible and in accordance with this determination. If the requested information is not submitted to the District Office within the allotted time, it will be assumed that it will not be forthcoming. In such an event, the audit will be revised to remove the one fixed asset exception at issue, and a revised bill for the outstanding liabilities will be sent to the Taxpayer.
If you are any questions about this response, please contact ***** of my tax policy staff at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20158R
Rulings of the Tax Commissioner