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Objective: Discuss the application of sales and use tax as it applies to advertising.
I. History
Prior to 1977. Advertising where the final product was tangible personal
property was taxable.
7/1/95. For period July 1, 1995 through June 30, 1997, Code of
Virginia 58.1-609.6(4) amended to allow any advertising business
to purchase printing from a Virginia printer exempt of the tax when
the printing will be stored in Virginia for 12 months or less and shipped
outside of Virginia.
II. References
III. General
IV. Procedures
A. SALES
When auditing an advertising agency, it's best to begin with sales in order
to obtain a knowledge of who and where the clients are and what the jobs
are. (Agencies usually refer to sales invoices as "client billings".)
If a job falls into any of these categories, the charge is not taxable.
(However, purchases for these jobs will, for the most part, be taxable.)
Advertising
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If you identify a job that does not seem to be both promotional and widely
disseminated to the public generally, and it involves the sale of tangible
personal property, then it is taxable. In ad agency billings, there is often
a breakdown between creative (time) charges and production expenses
(printing, etc.) The taxable sales price should include all creative
services in connection with the sale. However, if an advertising business
receives from its client in good faith a properly completed exemption
certificate, the tax should not be charged.
Also, some printers will do layouts for flyers and simple brochures that
customers use to advertise things for sale( to be put in windshields at
supermarket parking lots, etc.) These "quick printer" business are
generally not considered advertising business, but rather sellers of
tangible personal property.
Just how wide an audience does the marketing campaign have to cover
for it to be considered media advertising? A general rule of thumb is that
if the ad is placed in a newspaper or magazine or is shown on television
Advertising
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or played on the radio, it has reached the general public. This is the case
regardless of what the magazine is or how small the radio listening
audience is.
Also, many agencies maintain separate folders for each job which contain
copies of client billings, purchases invoices and cost breakdowns. When
beginning a review of sales, ask if the agency keeps such job folders; it is
helpful to see all the information about a job in one place.
B. PURCHASES
are exempt from the tax when purchased from an entity deemed as an
advertising business pursuant to this regulation. (However, in order to
purchase tangible personal property without tax, a properly completed
exemption certificate, Form ST-10A, must be furnished to the vendor.)
Auditing note
In-house advertising
I. History
II. References
III. Definitions
Dealer - Any person owning five or more aircraft at any time during a
calendar year which are held for resale or used for compensation.
IV. General
The Virginia aircraft sales and use tax is imposed at the rate of two percent
upon the retail sale of every aircraft sold in this state, upon the nonexempt
use in Virginia of any aircraft, and upon the lease, rental, or charter by a
dealer as defined above who has properly applied for the dealer exclusion
with the Tax Commissioner (see Aircraft Tax Reg. Sec. 630-11-1507). If a
dealer elects to pay the two percent tax at the time of the purchase of the
aircraft, the gross receipts from the lease, rental, or charter would not be
taxable.
Form AST-1 is the form used for application for the dealer exclusion. The
AST-2 is the Dealer's Aircraft Sales and use Tax Return. The AST-3 is the
Virginia Aircraft Sales and use Tax Return filed by the aircraft purchaser.
Section 58.1-1502 - There is hereby levied and imposed, in addition to all other
taxes and fees of every kind now imposed by law, a tax upon the retail sale of
every aircraft sold in the Commonwealth and upon the use in the Commonwealth
of any aircraft required to be licensed by the Department of Aviation pursuant to
5.1-5.
the purchaser or user of such aircraft and collected by the Commissioner prior to
the time the owner applies to the Department of Aviation for, and obtains, a
license therefor.
V. Procedures
The 2% aircraft tax is computed on the gross purchase price of the aircraft
without deduction for trade-in. As cited in the new Virginia Administrative
Code 10-220-40, the Virginia aircraft sales and use tax does not apply to any
aircraft sold or used by:
It should be noted that the new regulation does not reflect the 1995 legislative
change effective January 1, 1994, that redefined scheduled air service.
Aircraft sales and use tax audit leads and information on those leads come
from various sources:
As auditors conduct sales and use tax audits they should note and investigate
any evidence that the business may own an aircraft. The review of assets
may disclose ownership of an aircraft. Expenses incurred for hangar space,
tie-down services, aircraft repairs and maintenance, and payments to a
company for aircraft management may indicate ownership of an aircraft by
the business.
Aircraft Sales and Use Tax
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The initial step in conducting an aircraft tax audit is to contact the taxpayer
through a letter accompanied by a worksheet. The completed worksheet
includes information such as purchase price of the aircraft; aircraft tax paid to
another state, and length of time that the aircraft has been located in Virginia.
When the worksheet is returned, all pertinent information should be verified
by the auditor. Descriptions of aircraft can be obtained from the FAA in
Oklahoma at (405) 954-3116. Valuation of the aircraft can be verified through
Janice Cole with the Department of Taxation (financing documents or bill of
sale also state the value). Tax paid can be checked on the STARS screen 8-
03. Typically when tax is paid, the taxpayer receives a certificate of tax
payment and notes are made on screen 8-03 indicating payment along with
the tail number and serial number. In addition, the Department of Aviation can
provide the auditor with payment information. Since the 8-03 screen is
regularly purged, it is sometimes necessary to contact Aviation to verify
payment and licensing of the aircraft.
Serial numbers for aircraft do not change but tail numbers, similar to auto
license plates, can change. It is important to use both numbers as references.
Serial numbers on the worksheet should be checked with those on the
STARS screen 8-03 and on the Landings Internet website at
www.landings.com, or with the Federal Aviation Administration.
Each district office should keep a current list of planes based in their region.
This list should include the tail number, serial number, and the most recent
owner's name and address. This list can be compared annually to the airport
survey and Landings to identify aircraft sales to new owners and new aircraft
located in the region.
The owner may claim that the aircraft was never located in Virginia. For
verification, the auditor should review the aircraft's flight logs which can be
obtained from the owner/operator. The flight log contains the flight history of
the aircraft. If the aircraft regularly used a Virginia airport as a hub (e.g., flying
from Virginia and back again), it would be taxable. Aircraft based in Virginia
more than 60 days (need not be consecutive) in any 12-month period would
also be taxable.
Although both Dulles and National airports have Washington, D.C., mailing
addresses, they are located in Virginia. Aircraft at these airports would be
subject to the aircraft tax absent any statutory exemption.
Aircraft Sales and Use Tax
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In the case of leases, if total lease payments equal or exceed 80% of the
aircraft's fair market value, the lessee is subject to the tax. Should lease
payments be less than 80% of the aircraft's market value, the lessor is liable
for the tax even if the lease is to a government agency.
The Office of Tax Policy has taken the position that the statute of limitations is
three years for taxpayers who have filed returns and six years for those who
have not filed, as is the case with the four and one-half percent retail sales
and use tax.
Aircraft Sales and Use Tax
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Exercise Problems
Exercise Answers
2. $1,000,000; based on the definition of sales price, the tax is on the gross
amount before trade-in.
Sales and Use Tax Training
Objective: Discuss the application of sales and use tax as it applies to agriculture.
I. History
With the 1966 Rules and Regulations, as with many sections of the Rules and
Regulations booklet, the agriculture section was limited and generalized. Since that
time the code of Virginia has changed only slightly, while the Rules and Regulations
has grown tremendously. In the beginning, “agricultural products” was not defined,
but today we have farmer-horse breeder, commerical tree farming, commerical fish
farming, commerical worm farming. Also the Code of Virginia states that
“Agricultural commodity,” for the purposes of this subdivision, means horticultural,
poultry, and farm products, livestock and livestock products, and products derived
from bees and bee keeping.
A substantial change in the regulation occurred effective July 1, 1979 with the
introduction of the term “structural construction materials” and those items that were
excluded from that definition. The term “structural construction materials” includes
but is not limited to the following: silos; barns and sheds; storage bins (not portable);
greenhouses, including plastic covered houses; permanent fencing; fuel oil storage
tanks; electrical wiring, except for wiring running from special purpose equipment to
an on-off switch; plumbing, except as part of special purpose equipment (e.g., water
feeding system in poultry house); cattleguards; farrowing houses; and bulk tobacco
curing barns. These items are therefore subject to tax.
enclosed domesticated rabbits or hares raised for human food or fiber; or any other
individual animal specifically raised for food or fiber, except companion animals.
II. References
ST 15-Discontinued 9/81, old ST 15s are valid still (Should be replaced with
ST 18)
ST 18
III. General
A. Generally we are not auditing the farmer himself, rather we are auditing
the farm supply dealers, farm implement & equipment dealers and farm
bureaus. The agricultural exemption can be defined as broad. What is
necessary for agricultural production is exempt. Many rules of agricultural
auditing relate to other types of auditing, ie real property is taxable
(except specific “structural construction materials”), tools used to repair
farm equipment are taxable and so forth. As with other regulations the
same item can be used in a taxable and also an exempt manner, ie light
bulbs, temporary vs permanent fencing, tractor blade, parts for licensed
and unlicensed vehicles used on the farm etc. Purchases may be
taxable, exempt or proratable. A “custom farmer” does not enjoy the
agricultural exemption. Custom farmers generally do not raise an
agriculture product for sale. Instead they provide a “service” for farmers
where the custom farmer has equipment to harvest crops for the farmer.
These typically may be corn pickers, combines and hay balers.
IV. Procedures
Audits of Farmer
Audits of Supplier
the auditor or the farmer may prorate items based on use. Normally the
dealer would not prorate.
The following excerpt is taken from Commerce Clearing House, Virginia Tax Reports, Sales
and Use Section, either hard back edition or cd-rom. COPYRIGHT 2000, CCH Incorporated.
Additions to or changes from the original printing by CCH are identified by bold, italicized
and underlined print.
I. Tangible personal property listed in Items A through H below is exempt from the
Virginia retail sales and use tax when purchased by a farmer for his use in agricultural
production for market--(These exemptions do not apply to purchases for personal or family
use or consumption as distinguished from purchases for use or consumption in agricultural
production for market. A farmer who is not engaged in the business of producing agricultural
products for market cannot claim any agricultural exemption.)
A. Commercial feeds and seeds purchased by a farmer for his use in agricultural
production for market.
Seeds
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B. Fertilizers and liming materials purchased by a farmer for his use in agricultural
production for market.
C. Poultry purchased by a farmer for his use in agricultural production for market.
Baby chicks
Ducklings
Geese
Guineas
Hatching eggs
Turkey poults
E. Fuel for drying or curing crops purchased by a farmer for his use in agricultural
production for market.
F. Twine and containers, including bags and wrapping materials, purchased by a farmer
for his use in agricultural production for market.
G. Farm machinery and equipment, and parts therefor, purchased by a farmer for his use in
agricultural production for market.
Automatic feeding and watering equipment for poultry and livestock including electrical
wiring to on/off switch
Bush hog or like equipment used on a farm to cut over existing pasture land
Cab covers for farm equipment and machinery when attached at factory or added later
Front-end loader attached to a farm tractor when attached at factory or added later
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Hand operated pruning equipment, power pruning equipment and power saws for use
exclusively in pruning fruit and nut trees.
Milk cans
Milk coolers
Parts for unlicensed vehicles used exclusively on the farm Parts for unlicensed farm
vehicles as well as farm vehicles licensed as such Restrictions such as the transportation
of agricultural products to market and personal non-farm use would be subject to
proration by the farmer
Portable bins or tanks for use in feeding poultry and livestock (Bins and tanks for storage
of agricultural products for market are taxable)
Portable elevator machinery used to load harvested crops into storage facilities on the farm
Pruning equipment and chainsaws when used by orchardmen, christmas tree farmer,
vineyard
H. Other agricultural items purchased by a farmer for his use in agricultural production for
market.
Baler twine
Brooms and other commodities for use in cleaning dairy barns, hog parlors, poultry
houses and other buildings used to produce an agricultural product for market
Clippers, shears, and grooming tools used on livestock that will become an agricultural
product for market
Covering materials, such as canvas or plastic, or the like, for farm crops and farm supplies.
Fluorescent lamps and bulbs and light fixtures used in feeding poultry
Fuel, oil, grease, and antifreeze for farm machinery or unlicensed vehicles used on the
farm as well as farm vehicles licensed as such
Grain shovels, hay forks, hoes, scoops for use in cleaning dairy barns, hog parlors,
poultry houses and other buildings used to produce an agricultural product for market
Paint for farm machinery (Paint for any building or structure that is a part of real estate is
taxable)
Poultry and hog equipment such as heaters, light bulbs, and brooders
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Power washers for cleaning the dairy barn, farrowing houses or poultry house
Machinery used to clear land for future farming(machinery used to construct ponds,
roads or make other real property improvements would be taxable)
Repair items for storage and production facilities (Repair items for any building or
structure that is a part of real estate or for bins and tanks used for storage of agricultural
products for market, are taxable)
Seeders
Signs and safety reflectors attached to farm machinery when passing over public roads
Supplies used in brooder construction and repair (but not applicable to building itself)
or sanitation control
Temporary portable fencing material such as metal posts or stakes, strand-wire, and
electric fence controllers that will not become a part of real estate
Tires, batteries, tubes and truck covers for unlicensed vehicles used on the farm as well as
farm vehicles licensed as such
2, 3, 4, and 6 wheelers, golf carts and similar equipment used to herd livestock, gather
eggs in a poultry operation, transportation of feed or hay around the farm would be
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exempt. However, the use of this equipment to go from one field to another to check on
crops, general farm transportation, performing maintenance or permanent fence repairs
would be taxable. In the case of both exempt and taxable uses of this equipment, the tax
may be prorated based on the use
II. No farmer may claim any agricultural exemption with respect to the purchase of any of
the items of tangible personal property listed below:
Air tanks
Building materials, including lumber, bricks, cement, paint, and nails, for use in building
or repairing any building or structure (barn, chicken house, shed, silo, etc.) that is a part of
real estate.
Electrical and plumbing supplies and fixtures for the home or any farm tenant building
Fuel oil for heating the home or a farm tenant house changed to fuel oil for farm tenant
house(unless paid for by tenant) Fuel oil is exempt for residential heating except for the
1% in some localities
Lawn mowers, hand or powered are taxable (Riding lawn mowers with blade
attachments to clean litter from chicken houses, etc, are exempt if that is the exclusive use,
otherwise prorate taxable portion)
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Luxury items which are not agricultural supplies such as radios, tape decks, air
conditioning, and other items when bought separately or added to the tractor solely for the
benefit or comfort of the farmer are taxable. If, however, these items were part of the
tractor when bought new, the items would be exempt (power steering would be exempt if
added at at later date)
Oils, lubricants, tires, batteries, tubes, antifreeze, repair parts, or any other items of
tangible personal property for use in or on any licensed vehicle(excluding vehicles with farm
use tags)
Oxygen, acetylene, and welding equipment used to repair farm machinery and equipment
Ramps
Soaps, fly sprays, rat killers and other insecticides or pesticides used on or around the
home or farm tenant house
Weed eaters
Work gloves, work clothes and plastic aprons used in a dairy barn or pen to keep clothes
clean, also plastic shoe covering for prevention of disease transmission from one poultry
house to another
Any other item not used by a farmer in agricultural production for market.
Memorandum of Sales and Use Tax Division, October 20, 1966 (as revised October 1, 1967,
and February, 1971).
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Those items listed as exempt is assuming that the purchaser can file a Federal
Schedule F. (Some farms are corporations and would be exempt filing a
Schedule C). Filing of these schedules is prima-facie evidence that these
taxpayers are entitled to the exemption.
The above listing is based on written and verbal opinions issued by the
department as of this date. Changes may be made by legislation and/or
opinions from the Tax Cfommissioner. Persons wishing rulings relative to
agriculture not covered above are encouraged to write the Tax Commissioner
stating all facts.
Updated 8/28/2000
Auctioneers, Agents, Factors
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Objective: Discuss the application of sales and use tax as it applies to Auctioneers,
Agents, and Factors selling tangible personal property.
I. References
II. General
B. Exceptions
1. An auctioneer, agent, or factor who sells substantially all the assets
of a liquidating or reorganizing business which qualifies as an "occasional
sale" is not liable for collection or payment of the tax provided the sale
occurs in 3 days or less.
2. PD 88-335 An auctioneer would not be deemed in the business of
selling at retail if he gratuitously bid calls an auction which is actually
conducted by a nonprofit organization, i.e. the auctioneer has no direct
association with the money being collected, registration, clerking, etc..
3. PD 95-294 The Dept of Taxation has also determined that under
very limited circumstances an auctioneer may make sales without
collecting the tax such as a public school fund raising auction provided
the auctioneer has no direct association with the money being collected,
registration, clerking, etc..
Auctioneers, Agents, Factors
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III. Procedures
When auditing auctioneers the main concerns would be if all sales have been
accounted for, and were any exempt i.e. occasional sales, certificate of exemptions.
Normally there will be acceptable accounting and the audit trail will discover any
problems.
In the case of little or no records, you use the normal checkbook and bank
statement audit search. Deposits can lead you to trace real estate sales,
commissions, other rentals, and other income. Payments can lead you to newspaper
advertising where the auctioneer advertised for auctions. If this doesn't lock in on
auction sales then the auditor can go to the newspapers and get copies of auction
advertising which would provide an adequate audit trail.
The main problem auditors find with auctioneers is the reverse, that is you're
auditing a business, such as a contractor, and a sales invoice from an auction has
no sales tax. Usually someone at the audit can clarify if the sale was an
"occasional" type or other. If this doesn't satisfy the auditor then the question should
be presented to the auctioneer. Typically the correct answer can be determined, but
it's still a judgment call by the auditor. In all cases the proper documentation should
be made for the auctioneer to become an audit candidate.
The same scenario exists for an auction that takes place outside Virginia and
the property purchased is brought or shipped to Virginia. If it was "occasional"
based on VA law then it would be exempt. One extra lead in this situation is how the
item purchased was delivered. The transaction may have been exempted because
of the interstate commerce rule, thus making it taxable in VA.
Auctioneers, Agents, Factors
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Explanation:
Explanation:
3. You're auditing a highway construction contractor located in VA and you find the
following:
Two purchase invoices from ABC Auction Co, Charlottesville, VA. dated May 12
and June 30 of the same year. Both were for excavating equipment and both
showed no sales tax.
1. Disagree.
The "occasional sale" exemption does not apply because (1) there was no
liquidation of a business and (2) sales on three or fewer separate occasions
within one calendar year does not apply to auctioneers.
The auctioneer should be assessed sales tax on gross receipts on both sales.
2. Yes
3. (4)
The contractor may furnish you information on whether the sale was a liquidation
sale or not. Contact the auction company and get their explanation.
Then it is a judgment call by the auditor!
Always document and refer for audit candidate.
Audit Selection
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Objective: Discuss the application of sales and use tax as it applies to audit
selection.
I. General
II. Procedures
1. Identification
2. Research
2. Recurring audits - Based upon the results of the previous audit, these
taxpayers were selected as potential candidates.
4. New businesses.
Audit Selection
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a. manufacturers
b. contractors
c. professionals/service providers
a. DMV
b. Commissioner of Revenue
c. IRS
d. VEC
e. ABC Board
(ii) 2-03 Once you have all the account numbers, identify the tax
types associated with each account number, the address,
and social security numbers of the owners. You may also
discover a different trade name or legal name. Look for other
accounts under these names.
(v) 2-16, 2-17 Check for related entities of the business and it's
owners.
b. Payment/billing
c. Tax returns
Audit Selection
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(ii) 5-03 - The detail of the sales tax returns indicates the volume
of gross sales, exempt sales and personal use reported.
Fluctuations in sales can be identified by reviewing the
returns. Filing errors may be more obvious. Reporting errors
can be identified when return totals for a particular time span
are compared to other sources such as the income tax return.
e. Audit
(ii) 9-07 - Results of previous audit - This will identify the areas of
deficiency on the prior audit -sales, purchases and/or assets.
Were issues contested, and subsequently revised?
D. Make selection
Weigh all the information you have reviewed in order to determine the
feasibility of the candidate - revenue potential vs. time and other
costs.
Keep in mind that an audit candidate does not have to have a large
revenue potential to be a good candidate. Small audits that can be done
in a short amount of time are good candidates, too.
Audit Selection
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2. Refer to Question 1. Explain why the auditor should utilize these screens.
Audit Selection
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1 and 2.
2-03 Once you have all the account numbers, identify the tax types
associated with each account number, the address, and social security
numbers of the owners. You may also discover a different trade name or
legal name. Look for other accounts under these names.
2-16, 2-17 Check for related entities of the business and it's owners.
3-01, 3-02 - These screens will provide payment records, including a detail of
the local tax allocation.
3-27 - VA-6 inquiry - the amount of withholding paid to Virginia and the
number of W2's sent to Virginia is an indicator of the size of business
and/or its activity in Virginia.
5-01, 502 - provide return detail for withholding and corporate taxes which will
indicate activity in Virginia. Corporate return detail shows if the business
is showing a profit or loss and how much income is being apportioned to
Virginia
5-03 - The detail of the sales tax returns indicates the volume of gross sales,
exempt sales and personal use reported. Fluctuations in sales can be
identified by reviewing the returns. Filing errors may be more obvious.
Reporting errors can be identified when return totals for a particular time
span are compared to other sources such as the income tax return.
9-07 - Results of previous audit - This will identify the areas of deficiency on the prior
audit -sales, purchases and/or assets. Were issues contested, and
subsequently revised?
AUDIT TECHNIQUES
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Objective: Discuss the application of sales and use tax as it applies to audit
techniques.
I. References
II. General
III. Procedures
1. Prior audit history - Check STARS screen 9-06. Locate prior audit file.
Read prior audit file. Read audit comments and any letters written to
the taxpayer.
2. Stars Research
(b) Screen 5-03 - Return statistics for the audit period. Patterns of
gross sales, exempt sales, and use tax accruals can provide
clues to non-compliance.
(a) Fixed Assets - Typically, the auditor will request these records to
review first. Capital project folders - both closed and open
projects, depreciation schedule, or other fixed asset listing,
federal forms 4562 and 4797.
(1) job cost files - all purchases charged to a particular project are
filed together. This is the best situation.
(2) purchases filed by vendor- This requires asking for the job
cost ledgers that list the vendors for a particular job. Most job
cost ledgers include the invoice number. This speeds cross
referencing to the vendor purchase files.
(b) Are sales journals available that include the data needed to
conduct the audit?
- tax charged on invoice
- separate freight and/or non taxable labor charges
-where taxpayer is multi-state, can the Virginia sales be readily
identified?
-invoice number and date included
AUDIT TECHNIQUES
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2. Purchases and fixed assets - Identify the list that use tax accrual
comes from. Are there any percentages or amounts taken straight
from general ledger expense accounts included in the use tax
accrual? If so, you must find out why this is being done. There might
be a valid reason based on a previous audit. Are fixed assets
accounted for as a separate amount? Are there separate files for
fixed assets?
Questions to consider:
D. Scope of the audit. The scope of the audit is the amount of time, the
number of records, and the areas of non-compliance.
Many small tasks have been mentioned in sections A-C above. Many
questions have been asked and answered. The process of going through
this checklist need not consume a great deal of time. Some of the
answers are self-evident, others require careful questioning of the
taxpayer. In order to make a good decision on the scope of the audit all
these questions (and more) must be answered.
AUDIT TECHNIQUES
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Two types of liability - There are two actions that cause tax liability:
The agenda - the scope of the audit becomes the minimum work to
be performed
E. The Test of Time - When should an audit be terminated? The first answer
to this question is: the audit should be terminated at a minimum, when the
original "scope of the audit" work is completed. In order to maintain
integrity in the result, the work set out must be completed. There may
very well be circumstances that demand expanding the sample period or
examining more detailed records because of a larger remittance problem.
AUDIT TECHNIQUES
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F. Post Audit Conference - The taxpayer is your customer. The post audit
conference is your opportunity to serve your customer. It is your
obligation to fully disclose to the taxpayer several items:
After the post audit conference there are other important tasks:
Be sure to summarize conference in the audit comments
If necessary, write the taxpayer a letter explaining changes to be
made for future compliance. Why is this needed? Taxpayer may
have indicated that remediation of taxpayer procedures is not
likely. This letter puts the taxpayer on notice and provides a file
document for future audit.
BAD DEBTS
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Objective: Discuss the application of sales and use tax as it applies to bad debts.
I. References
II. General
A. Section 58.1-621 of the Code of Virginia provides that a dealer may claim
a credit for "the amount of sales or use tax previously returned and paid
on accounts which are owed to the dealer and which have been found to
be worthless ...." This section further indicates that amounts "for which a
credit has been taken that are thereafter in whole or in part paid to the
dealer shall be included in the first return filed after such collection."
C. If the dealer receives reimbursement for bad debts from a guarantor for a
sale made to a customer, then no bad debt deduction is allowed. A
taxable sale does not depend on the source of the reimbursement.
III. Procedures
A. Verify all deductions for bad debts reported on the sales tax returns. For
prior years, the bad debts will be included in deductions on the dealer's
federal income tax returns. For current periods, the dealer will have
documentation such as a bankruptcy notice supporting amounts deemed
worthless.
BAD DEBTS
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B. Once it has been determined that the bad debts are legitimate, the auditor
must analyze the amounts deducted to determine if any portion is not
attributable to taxable sales. In order to take the deduction on the sales
tax returns, the deduction must be computed on each bad debt, not
based on a percentage of sales.
Parts $100.00
Labor 35.00
Freight 15.00
Subtotal $150.00
Tax 4.50
Total $154.50
Objective: Discuss the application of sales and use tax as it applies to Banks.
I. History
II. References
C. Ruling Letters AGO 55--85, P.D. 86-103, P.D. 88-243, P.D. 91-12, P.D.
91-142, P.D. 91-166, P.D. 94-207, P.D. 94-230, P.D. 94-
271, P.D. 95-72, P.D. 95-159, P.D. 95-207, P.D. 96-184
III. General
IV. Procedures
A. Pre Audit
B. SALES
All sales of tangible personal property by banks are subject to sales and
use tax. Types of sales to be cognizant of are as follows:
1. Check sales: The reporting of tax of check sales has been simplified by
allowing the check printers to collect and remit the tax on behalf of the
bank (see P.D. 95-159). Check printers who sign a sales tax collection
agreement with the Department of Taxation would be allowed to collect
the tax on behalf of the institution.
2. Sales of fixed assets. Many banks make a sufficient number of sales
of fixed assets to be required to register and collect sales tax. In addition
to reviewing individual asset sales, sales of divisions or groups of assets,
reorganizations and spin off type sales should be carefully reviewed. The
occasional sale exemption may apply in some cases but each incident
should be reviewed to determine the proper application of tax. Tax-free
reorganizations governed by IRC Sec 368(a)(1)(D) are exempt from sales
tax. Each of these types of sales should be carefully reviewed. There are
several Public Documents that deal with these type of transactions but
each is individual and should be examined on its own merits.
3. Leases. Banks often have lease departments or subsidiaries. 23 VAC
10-210-80 applies to these transactions.
4. Microfilm. In providing checking account services banks may supply
their customers with account information on microfilm. The "true object"
test must be applied in these sales. Generally sales of multiple copies of
microfilm will be subject to the tax (see P.D. 94-230).
C. PURCHASES
software packages are sold to banks and the only efficient way to
understand what is being purchased is to read the agreements. In some
cases you may request that the Bank contact the vendor and provide a
description of the invoices in writing to assist in the decision making
process.
3. Bank Equipment. The decision here is to determine if bank
equipment is tangible or real property. P. D. 94-207 lists various types of
equipment and the treatment by the Tax Department. P.D. 91-166 also
addresses several different types of equipment and states the
Departments position. In this P.D. it is apparent that the treatment of
ATM's is dependent on the type of installation. There are several large
vendors of bank equipment who properly charge tax on sales of tangible
personal property; however there are also many smaller, independent
suppliers who are not as well versed in the treatment of sales of bank
equipment. Security systems should be looked at to see if they are
monitored or non monitored systems.
Catalogs and Other Printed Material
Page - 1
Objective: Discuss the application of sales and use tax as it applies to catalogs and
other printed material.
I. History
7/1/77 and after. The catalog statute was amended to narrow the scope of
the exemption to catalogs and other printed materials thereby making printed
advertising materials such as pencils, pens, grocery store displays,
matchbooks, calendars, etc. taxable.
7/1/79 and after. The catalog statute was amended to provide exemption for
the purchase of raw paper by a non-printer when the paper will be furnished
to a printer for fabrication into catalogs or other printed materials that
advertise the sale of tangible personal property which will be stored in Virginia
for 12 months or less and be distributed for use outside Virginia.
7/1/86 and after. Letters, brochures, reports, and similar printed materials,
etc. were added to the statute and the wording "used in the advertising of
tangible personal property for sale" was dropped. The exemption for these
additional items was set to expire 6/30/90 but became a permanent part of
the statute in 1989.
7/1/94 and after. The catalog exemption was expanded to include (without
an expiration date) any advertising business located outside Virginia which
purchases printing from a printer within the state when such purchases are
stored for twelve months or less in Virginia and distributed for use outside the
state.
7/1/95 and after. The catalog exemption was expanded to include (with an
expiration date of 6/30/97 extended in 1997 to 6/30/02) any advertising
business which purchases printing from a printer within Virginia when such
purchases would have been exempt under Code of Virginia § 58.1-609.6(3)
(newspaper/magazine exemption) or § 58.1-609.6(4) (catalog exemption).
Catalogs and Other Printed Material
Page - 2
II. References
C. Ruling Letters
III. Definitions
The following words or terms are useful in understanding the catalog statute.
While all businesses are now more equally treated under this statute, prior to
1994 and 1995 there were substantial differences for advertising businesses.
materials. . . ." Similar printed materials can include items that would be
taxable under the definition of other printed materials.
• A business prospectus;
IV. General
1987 and does not take into account subsequent statute changes, the
statute, itself, provides the best overall summary of the extent of the
exemption.
There was another legislative change the following year (effective 7/1/95)
which put Virginia advertising businesses on parity with all other
companies when making purchases from a Virginia printer. This, in
effect, has given a competitive advantage to Virginia printers since the
exemption is limited to purchases from an instate printer. Any printing
purchased from an out-of-state printer is 100% taxable when constructive
delivery takes place in Virginia (i.e., a Virginia mailing house) or if delivery
is made to the purchaser's Virginia location, regardless of its eventual
distribution.
. . . and (ii) from July 1, 1995 through June 30, 2002, any
advertising business which purchases printing from a printer
within the Commonwealth shall not be deemed the user or
consumer of the printed materials when such purchases
would have been exempt under subdivision 3
[newspaper/magazine exemption] or this subdivision,
provided that the advertising agency shall certify to the Tax
Catalogs and Other Printed Material
Page - 6
Note the unusual wording of this section that states the Commissioner
can request certification that the printed material was actually distributed
outside Virginia. This section of the exemption has a "sunset provision"
that has already been extended once to 6/30/02.
V. Procedures
For purposes of this training, transactions are discussed from the viewpoint of
the purchaser. It is also assumed that all examples meet the limitations set
out in § 58.1-609.6(4) for catalogs and similar printed materials and occur
under current law unless otherwise stated. The examples deal strictly with
the application of the Virginia sales tax law to catalogs and similar printed
materials. Furthermore, the terms "taxable" and "exempt" are also limited to
Virginia sales tax - another state's tax may well apply. Except for the
procedures discussed in section D, all transactions should be considered
purchased by other than an advertising business. Finally, delivery, whether
actual or constructive, is often the crucial criteria that will determine the
taxability of catalogs and similar printed materials. (Location! Location!
Location!)
The treatment of sales by the seller can readily be inferred from the purchase
scenarios, but will not be specifically addressed. If catalogs and similar
printed materials are sold for resale (to other than advertising businesses),
the purchaser can provide a Form ST-10 to purchase such resale materials
exempt, whether they meet the § 58.1-609.6(4) limitations or not.
A. Purchases
c. The Code provides an exemption from the sales tax for catalogs,
letters, brochures, reports, and similar printed materials (except
administrative supplies), the envelopes, containers and labels
used for packaging and mailing the same and paper furnished to
a printer for fabrication into such printed materials, when stored
for twelve months or less in Virginia and distributed for use
outside Virginia. (Review the Section III definitions for "similar
printed materials", "other printed materials" and "administrative
supplies".) If these conditions are met there is no sales tax
liability as long as Form ST-10A is provided to the mailing
service or printer.
Note: The scope of the last condition has been broadened since 1986
with the removal from the statute of the wording "used in the
advertising of tangible personal property for sale." The public
documents have consistently ruled, however, that the printed
materials still must be promotional or informational in nature to
qualify.
* Note: Even though the catalogs are being delivered into Virginia, the
purchaser has exercised no right or power over them in Virginia. (P.D.
95-185, P.D. 97-61)
D. Advertising Businesses
I. References
ST-10 Resale Certificate typically used by dealers for the exempt purchase
of items for resale or lease.
ST-13A Used by non-profit churches. Non profit churches also have the
option of applying for a numbered exemption certificate with a broader
exemption.
III. Generally
B. The dealer must act in good faith and exercise reasonable care and
judgment to prevent the receiving of a false, fraudulent or bad faith
exemption certificate.
1. Date
2. Signature
D. ST-13A Smaller churches will probably use this certificate rather than
apply for a numbered exemption certificate. The church exemption under
this certificate is more limited than that available under a numbered
exemption certificate. Structural construction materials are not exempt to
churches under this certificate. (for information on numbered exemption
certificates see the section on Non-Profit Organizations)
EXEMPTION CERTIFICATES
Page - 5
E. ST-18 The agricultural exemption is broad but it has its limits. For
example, the farmer must be producing products for the market, not for
his/her personal use, and not custom farming for someone else.
Furthermore, the property purchased must be used in agricultural
production. Lawn mowers for the farmer’s personal use do not qualify for
the exemption. Structural construction materials are specifically identified
on the ST-18 as not qualifying for the exemption.
F. ST-20 This certificate was recently revised to reflect the loss of the
exemption by certain public service corporations and certain airlines.
Effective 9-1-04, House Bill 5018 (Chapter 3, 2004 Special Session I)
eliminates the sales tax exemptions for certain public service corporations
including electric suppliers, gas utilities, water and sewer utilities,
telecommunications companies, telephone companies and common
carriers of property or passengers by motor vehicle. Also, the
manufacturing exemption will not apply to machinery, tools and
equipment used by a public service corporation in the generation of
electric power, except for raw materials, including fuel.
Objective: Discuss the application of sales and use tax as it applies to the
certificate of registration.
I. History
There have been no significant changes in the sales and use tax law
pertaining to the certificate of registration.
II. References
III. General
A. The Virginia Retail Sales and Use Tax Act requires every individual,
partnership, corporation, etc. desiring to engage in or conduct business
as a dealer to apply for a certificate of registration. (See 23 VAC 10-
210-460 for the definition of a dealer.) An out of state dealer who did
not have the obligation to obtain a registration could voluntarily do so for the
benefit of his customers.
IV. Procedures
(1) First, determine what the business entity type is. (Sole proprietorship,
general partnership, limited partnership, corporation, etc.) See Business
Registration Guide for definitions of entities.
Page - 2
(2) Complete and submit Form R-1. This form can be used to apply for all
Virginia taxes; however, for the sales and use tax, a separate application
is required for each location. The certificate of registration must be
displayed at at the location of the business.
(4) Any dealer who has two or more business locations for which he is
required to hold a certificate of registration within the same locality may
elect to file a single combined return for all locations within that locality.
(5) Any dealer who has five or more business locations for which he is
required to hold a certificate of registration within the state may request
permission to file a consolidated return to report and remit sales and use
tax for all locations; however, he agrees to separately account for and
report sales and use tax for each locality.
Objective: Discuss the application of sales and use tax as it applies to nonprofit
Churches.
I. History
Effective 7/1/86, the exemption was expanded to select items for use
outside the public buildings. Specifically, baptisteries affixed to realty,
gifts for use outside the public buildings, and purchases of bulletins,
programs, newspapers, and newsletters for distribution outside the
public church building were exempted. (1986 Legislative Summary)
Effective 7/1/87, House Bill 1256 expanded the existing exemptions for
nonprofit churches to provide an exemption for food, disposable
serving items, cleaning supplies, and teaching materials used by a
nonprofit church, or organization composed of several nonprofit
churches, such as a diocese, synod or conference, in the operation of
camps or conference centers, provided such items are used in carrying
out the work of the church(es). However, the exemption does not apply
to purchases of food, disposable serving items, etc., used or
consumed while the church camp or conference center is being utilized
by non-church related functions, such as business groups,
governmental organizations, civic groups and other groups not
affiliated with the church. (Virginia Tax Bulletin 87-4)
Effective July 1, 2004 - Any entity that was exempt from paying sales
and use tax for the purchase of services, as of June 30, 2003, shall
continue to be exempt from such payment, provided that it follows the
exemption criteria set forth in 58.1-609.11. (House Bill 2100, SB 1105)
(2005 Legislative Summary)
II. References
E. Ruling Letters:
-PD 05-9 Worship Service and Church Building
-PD 97-107 Effect of HB 1562 of 1997 General Assembly
-PD 96-196 Sales of food by churches
-PD 95-115 Denominational Governing Body
-PD 95-54 Automotive Parts
-PD 94-237 Christian Ministry Camp
-PD 94-11 Church Affiliated Day Care Center
-PD 93-204 Church Operated Swimming Pool
-PD 93-177 Campground Facilities
-PD 91-157 Roman Catholic Church: Education Programs-Marriage
-PD 92-55 Property Purchased By Churches-Conference Center
-PD 90-164 Administrative Governing Body (see also PD 95-115)
-PD 90-66 Mobile Food Bank-Church Parking Lots
-PD 90-36 Building Materials
-PD 89-331 Food for Distribution
-PD 89-176 Camp Meeting
-PD 89-174 Rentals: Church Christmas Play
-PD 88-216 Items Used in Public Church Buildings
-PD 88-85 Church Provided Prison Ministry
-PD 88-14 Conference Center
-PD 87-65 Meals Sold at Cost By Church
-PD 86-109 Non Profit Religious Shelter
-Ruling of Commissioner: Administrative & Clerical Assistance to
Churches.
III. General
Purchases by Churches
Acolyte robes
Administrative supplies (letterheads, envelopes, office supplies, etc.)
Altar cushions and cloths
Baptism, marriage, and membership certificates
Baptismal font and Baptisteries
Bibles and bible stands
Bulletins, programs, newspapers, and newsletters, which do not contain
paid advertising (including paper and ink used to print these)
Candles and candelabra used at the location of the worship service
Carpeting used at the location of the worship service (except glued-down
carpeting)
Choir robes
Cleaning equipment and supplies
Communion supplies and tables Curtains
Flags used at the location of the worship service
Flowers, plants, live or artificial, and-accessories thereto used at the
location of the worship service
Fuel oil
Funeral pall
Gifts, including food baskets, for distribution outside the public church
building
Hymnals and hymnal racks
Light bulbs used at the location of the worship service
Kitchen equipment that is not incorporated into realty
Microphones and public address system used in the worship service
except when incorporated into realty
Musical instruments (e.g., organ, piano, hand bells)
Nametags for ushers and guests, and attendance records
Offering envelopes
Office machinery and equipment
Pews, cushions, chairs, or other seating systems
Portable heaters and fans and window air conditioners used at the
location of the worship service
Prayer books
Pulpit, lectern, pulpit lamp Rosaries, crosses, crucifixes Sheet music
Systems to assist persons who are hearing impaired, except when used
in the recording or reproduction of church services
Tallithim
Torahs
Vestments for ecclesiastical celebrants
Wafers, bread, wine, grape juice used in communion services
Yarmulkes
Churches
Page 6
SALES BY CHURCHES
If there are fewer than three such sales per calendar year, the sale may
be exempt as an occasional sale. Check VAC 10-210-1080 to determine
if the sales could qualify as an occasional sale.
For food only, if the sales price charged for food is completely offset by
the cost of the food, and the church does not realize a profit, the church
is not required to register, collect, and remit the tax to the department.
The church must pay the tax to its vendors on the cost price of the food
purchased.
(PD 87-65)
Purchases. The tax does not apply to purchases for church related
activities of food (including beverages), disposable serving items (such
as paper plates, cups, napkins, plastic eating utensils), cleaning
Churches
Page 8
Sales
Meals. The sales price of the meals sold to participants is taxable. The
church must register, collect, and remit the tax to the department. Food
provided in the meals, as well as, paper place mats, plastic ware, and
similar items furnished with the meals and disposed after the use by only
one person, may be purchased exempt of the tax using a ST-10.
Objective: Discuss the application of sales and use tax as it applies to over
collection and erroneous collection of tax by dealers.
I. References
II. General
A. All sales and use tax collected by the dealer must be remitted to the
Department of Taxation. This includes over collected taxes, tax collected
on nontaxable transactions, and collection of the wrong state's tax on
Virginia transactions. Over collected taxes do not include taxes collected
in accordance with the bracket system for sales transactions of $5.00 or
less.
III. Procedures
A. Any dealer collecting the sales and use tax on nontaxable transactions
must remit the sales tax to the Department of Taxation unless it can show
that the tax has been refunded to the customer. Such nontaxable
transactions include exempt sales and out-of-state sales.
B. Any dealer who over collects the tax must remit any amount over
collected to the state. This includes wrong state's tax collected on
Virginia transactions.
(a.) The "Gross Up" method must be used in order to calculate the
taxable measure amount to enter in the exceptions list. The sales price
on an invoice is increased to a taxable amount that, when multiplied by
the Virginia tax rate, results in the amount of tax charged on the invoice.
Generally, this taxable measure is computed by dividing the tax collected
by the Virginia rate.
OVERCOLLECTION AND ERRONEOUS COLLECTION
Page - 2
Objective: To provide information on the application of Virginia sales and use tax to
real estate contractors, dual role contractors, and contractors deemed to
be retailers.
I. References
II. General
A. Unless otherwise noted, the law treats every contractor as the user or
consumer of all tangible personal property furnished to him or by him in
connection with real property construction, reconstruction, installation,
repair, and similar contracts. A contractor, whether a prime contractor or a
subcontractor, does not pass the sales or use tax on to anyone else as a
tax. He takes the amount of tax paid in consideration when submitting
bids.
B. Contractors may use form ST-11A to purchase tax exempt materials used
in the performance of the following contracts:
Contractor
Page - 2
III. Procedures
Objective: Discuss the application of sales and use tax as it applies to taxes paid in
error.
I. References
A. Section 58-1-611 of the Code of Virginia provides for a credit against the
taxes imposed by the Commonwealth with respect to a person's use of
tangible personal property in the Commonwealth for taxes paid in the
state of purchase.
B. Section 58.1-609.10(4) exempts from sales and use tax the delivery of
tangible personal property outside the Commonwealth for use or
consumption outside the state.
III. Procedures
B. In some instances where the taxpayer has either been charged the wrong
state's tax or no tax at all, the taxpayer will remit Virginia tax to the vendor
with his payment. These transactions should be included in the audit
exceptions and the taxpayer must apply to the vendor, whether in-state or
not, or registered or not, for a refund of the tax paid.
Taxpayer has made a purchase, and is now a dealer, by definition. 630-
10-29.1 d. states,"the term 'dealer' includes every person who:
SALES TAX CHARGED AND PAID IN ERROR
Page - 2
has...used, consumed or distributed, or stored for use or consumption in
this state, tangible personal property and who cannot prove that the tax
has been paid on the sale at retail...".
The taxpayer was not charged the correct Virginia Sales Tax and "cannot
prove that the tax has been paid". Voluntarily including the correct
Virginia Sales Tax with the payment to the vendor does not assure that
the tax was remitted to the Department.
See PD 94-165.
DEALER
Page - 1
Objective: Discuss the application of sales and use tax as it applies to definition of
dealer and nexus.
I. References
II. General
A. Sales tax is collectible from all persons who meet the definition of a
dealer and who have sufficient activity within the Commonwealth.
III. Procedures
D. The dealer must perform one of the listed activities to require registration
and collection of the tax.
E. Nexus does not exist for an out-of-state seller whose only presence in
Virginia is the use of a computer server to create or maintain a site on the
Internet.
Objective: Discuss the application of sales and use tax as it applies to cash basis
taxpayers.
I. References
II. General
A. Section 58.1-603.5 of the Code requires that the sales tax paid by
retailers be computed on gross sales. Gross sales are defined as the
sum total of retail sales. A sale for the purpose of determining gross
sales is defined as "any transfer of title or possession, or both, exchange,
barter, lease or rental, conditional or otherwise, in any manner or by any
means whatsoever, of tangible personal property and any rendition of a
taxable service for a consideration."
B. Sections 58.1-615 and 58.1-616 require that dealers file a return and pay
the sales or use tax on or before the twentieth day of the month for the
gross sales of the previous month. Sales tax must be paid on every sale,
whether the sale is an installment sale, charge sale, or cash sale. For
purposes of the sales tax laws, the sale is complete in any case.
III. Procedures
(1) The current accounts receivables represent sales that have not been
reported on any sales tax return. These should be entered in the
unremitted sales exceptions list during the month of the actual sale.
(2) No additional tax is due on charge sales made during the audit period
that have already been paid and reported. A debit entry is made in
the sales exceptions list in the month of the actual sale, and a credit
entry is made in the month reported. A review of detailed accounts
receivable for the audit period can be used to identify sale and
payment dates. Also, a detail list including sales dates may
accompany the sales tax return worksheets each month.
This method will correctly compute the interest due. Penalty will also be
computed correctly for the unreported sales, and for sales that were
reported six months or more after the original sale (30% penalty is due).
A manual calculation of penalty is required for all other sales that were
remitted late.
Sales and Use Tax Training
Direct Payment Permit
Objective: Discuss the application of sales and use tax as it applies to the dealer’s
discount for holders of the direct payment permit.
I. History
II. References
III. General – The Tax Commisioner, upon application, may issue a direct
payment permit to manufacturers, mine operators and public service corporations.
This permit allows a person subject to the tax to pay that tax directly to the
Department instead of to its vendor. This permit is used in situations in which the
applicant finds it impossible to determine at the time of purchase how the company
will use the property and, therefore, whether a tax will be due on that purchase. The
holder of the direct payment permit is entitled to the dealer’s discount if it is a
registered dealer, that is, has a certificate of registration in addition to the direct
payment permit and provided the Direct Payment Permit Sales and Use Tax Return,
Form ST-6, is timely filed and paid.
Sales and Use Tax Audit Procedure
Fabrication
Objective: Discuss the application of sales and use tax as it applies to fabrication
and fabrication services.
I. History
The concept of fabrication and fabrication labor has been integral to Virginia
sales and use tax since the beginning. Fabrication labor is specifically
mentioned in the Instructions to Dealers published by the Department on July
1, 1966.
II. References
C. Ruling Letters
III. General
This distinction, that something new has been created, is key for
differentiating between potentially taxable fabrication labor and other
forms of labor qualifying for the service exemptions granted by 58.1609.5
(2). The sawing of a board, for example, creates two new shorter boards.
A change in the form or state of the original board has occurred. The
labor charge for sawing the board is taxable.
purchase raw materials, component parts, and other materials that go into
the product under a resale exemption. In addition, if the fabricator is also
qualifies as an industrial processor, then the production exemption would
also be available for purchases of equipment used directly in the
production process in same manner as any other industrial processor.
On the other hand, if a fabricator primarily produces product for their own
use or consumption, they would lose all production exemptions. In
addition they would only be able to claim a resale exemption on those raw
materials and component parts that could be identified at the time of
purchase as being purchased for resale. If such identification was
impossible, the fabricator would pay the tax at the time of purchase as
well as charge the tax at the time of sale.
IV. Procedures
Objective: To provide information on the application of Virginia sales and use tax on
floor coverings.
I. References:
II. General:
The application of the tax on floor coverings is set forth in the Code of Virginia Section
58.1-610 D and the Virginia Administrative Code 23VAC 10-210-410 G. Both discuss
the application of tax to materials used by contractors in the performance of their
contract jobs. The regulations and bulletin provide that “floor coverings” are
distinguished from “floors” themselves and are defined to include rugs, mats, padding,
wall-to-wall carpets when installed by the tack strip or stretch-in methods, and other
floor coverings which are not glued, cemented, or otherwise permanently attached to
the floor below. Floor coverings, which are glued, cemented, or otherwise permanently
attached to the floor below, are deemed to be floors.
Persons who sell and install floor coverings are considered either a retailer or
contractor. A person is considered a retailer of floor coverings if such person maintains
a retail or wholesale place of business, an inventory of floor coverings or their
component parts, and if that person performs installation as part of the sale of the floor
coverings. The sale of "floor coverings," as described above, by a retailer constitutes
retail sales and the retailer must collect the tax on the sales price of the floor coverings.
A retailer selling and installing "floors" is deemed a using and consuming contractor with
respect to the floors and must pay the use tax on the cost price of the floor covering. In
both instances, the retailer must pay the use tax on materials used in the installation of
floor coverings.
A person selling and installing floor coverings, who is not a retailer, is considered a
using and consuming contractor with respect to such items, regardless of the method in
which the floor covering is installed. The contractor is subject to the tax on the costs of
all materials used in the performance of the contract work and the tax is not collected
from the purchaser.
The tax does not apply to installation charges when separately stated on the invoice
under Code of Virginia § 58.1-609.5(2), copy enclosed. If the installation charge is not
separately stated, the tax must be computed on the total invoice charge.
III. Procedures:
This type of business is considered a using and consuming contractor with respect to
floor coverings, regardless of the method in which the floor covering is installed. The
contractor is subject to the tax on the costs of all materials used in the performance of
the contract work and the tax is not collected from the purchaser.
A retailer shall be deemed to be any person who maintains a retail or wholesale place of
business, an inventory of floor coverings and/or materials which enter into or become a
component part of the aforementioned items, and who perform installation as part of the
sale of such items.
Permanent "Double-Stick" Carpet, Tile and Laminate Installation: Due to the fact that
both the cushion and the carpet are permanently glued down, this would be classified
as contract work.
Releasable "Double-Stick" Carpet, and Laminate Installation: Due to the fact that the
carpet is attached to the cushion using a releasable adhesive, this would be considered
a floor covering and classified as a retail sale.
Permanent Modular Carpet Installation: Due to the fact that the carpet tiles are
permanently glued down and the entire substrate is covered with permanent adhesive,
this would be considered contract work.
Releasable Full Spread Modular Carpet and Laminate Installation: If the carpet can be
removed without material injury to the carpet/Laminate or to the real estate, this would
be considered a floor covering and considered as a retail sale.
Releasable Grid System Modular Carpet Installation: The carpet can be removed with
no damage to the substrate. If this were the case, this would be classified as a floor
covering and considered as a retail sale.
Releasable Perimeter Glue Carpet Installation: The fact that this is a loose lay
installation with only releasable adhesive used on the perimeter of the carpet, this would
be classified as a floor covering and considered as a retail sale.
Floating Floors: This consists of tongue and groove planks that are glued together to
create a sheet of laminate flooring. The flooring is laid on top of the layer of foam and
secured by moldings around the perimeter. This type of flooring is distinguished from
the floor themselves and is considered a retail sale.
P.D. 98-139
October 6, 1998
Dear
This is in reply to your letter of September 11, 1998, in which you seek
information on the application of the retail sales and use tax to (the
"Taxpayer").
FACTS
The Taxpayer is a retailer who sells and installs floor coverings. One type of
flooring it sells, laminate flooring materials or "floating floors," consists of tongue and
groove planks that are glued together to create a sheet of laminate flooring. The
flooring is laid on top of a layer of foam and secured by moldings around the perimeter.
The flooring is not secured to the sub floor or the floor below. You question the
application of the tax to the laminate flooring.
RULING
The application of the tax to floor coverings is set forth in Code of Virginia §
58.1-610 and Title 23 of the Virginia Administrative Code (VAC) 10-210-410. Tax
Bulletin 92-7, issued September 15, 1992 (copy enclosed), also addresses the
application of the sales tax to floor coverings.
"Floor coverings" are distinguished from "floors" themselves and are defined to
include rugs, mats, padding, and wall-to-wall carpets when installed by the tack strip or
stretch-in methods, and other floor coverings that are not glued, cemented, or otherwise
permanently attached to the floor below. Floor coverings that are glued, cemented, or
otherwise permanently attached to the floor below are deemed to be floors.
P.D. 98-139
October 6, 1998
Page 2
The laminate flooring described in this case is not glued down, cemented, or
otherwise permanently attached to the floor below. Consequently, the laminate flooring
is considered a floor covering and not a floor. The sale of a floor covering is considered
a retail sale, and the seller must collect the tax from its customers on the sales price.
Accordingly, the Taxpayer must collect sales tax from its customers on its sales of
laminate flooring or “floating floors."
The tax does not apply to the installation charges when separately stated on the
invoice. See Code of Virginia § 58.1-609.5(2). If the installation charge is not
separately stated, the tax must be computed on the total invoice charge. Please note
that the Taxpayer must pay tax on materials used in the installation of its floor
coverings.
I hope this has responded to your inquiry. If you have additional questions,
please contact in the Office of Tax Policy at .
Sincerely,
Danny M. Payne
Tax Commissioner
Enclosure
OTP/17527J
September 21, 1989 P.D. 89-252
Dear
This will reply to your letter of April 27, 1989 requesting a ruling on the sales tax application to various
methods of carpet installation.
The application of the tax to floor covering dealers is set forth in Virginia Retail Sales and Use
Regulation 630-10-27(G) (copy enclosed). Persons selling and installing floor covering which
becomes permanently affixed to the floors below are considered to be the using or consuming
contractor with respect to such items.
A person who installs floor coverings may be either a contractor or a retailer. Floor coverings, as
distinguished from the floors themselves, include rugs, mats, padding, wall-to-wall carpet and any other
floor covering not permanently affixed to the floor below. A retailer shall be deemed to be any person
who maintains a retail or wholesale place of business, an inventory of the aforementioned and/or
materials which enter into or become a component part of the aforementioned items, and who perform
installation as part of the sale of such items. I will now address the specific situations as outlined in
your letter.
Permanent "Double-Stick" Broadloom Carpet Installation: Due to the fact that both the cushion and the
carpet are permanently glued down, this would be classified as contract work.
Releasable "Double-Stick" Broadloom Carpet Installation: Due to the fact that the carpet is attached to
the cushion using a releasable adhesive, this would be considered a floor covering.
PD 89-252
Page 2
September 21, 1989
Permanent Modular Carpet Installation: Due to the fact that the carpet tiles are
permanently glued down and the entire substrate is covered with permanent adhesive,
this would be considered contract work.
Releasable Full Spread Modular Carpet Installation: If the carpet can be removed
without material injury to the carpet or to the real estate, this would be considered a floor
covering.
Releasable Grid System Modular Carpet Installation: From the information
provided, it appears that the carpet can be removed with no damage to the
substrate. If this were the case, this would be classified as a floor covering.
Releasable Perimeter Glue Broadloom Carpet Installation: The fact that this is a
loose lay installation with only releasable adhesive used on the perimeter of the
carpet, this would be classified as a floor covering.In answer to your question
concerning the invoicing to your customers, no sales tax would be shown on the
invoice for contract work. Instead your corporation would be responsible for the
sales or use tax on all material used to perform contract work. This tax may be
taken into account when bidding on contract jobs. When making retail sales, the
tax does not apply to installation charges when separately stated on the invoice.
If the installation charge is not separately stated, the tax must be computed on
the total charge.
I hope this has answered all of your questions. If you should have any further
questions, please feel free to contact this department.
Sincerely,
W. H. Forst
Tax Commissioner
Landscapers & Nurserymen (Rev. 10/97)
Page - 1
Objective: Discuss the application of sales and use tax as it applies to landscapers
and nurserymen.
I. History
Prior to 1996. The department has consistently treated landscapers who sell
and transplant trees, shrubs, plants and like items as dealer/installers making
retail sales.
1996 and after. Due to a large number of contested audits and taxpayer
inquiries, a short moratorium on audits of landscaping companies was in
effect while the interpretation of the regulation was reevaluated. After
exploring the possibility of allowing landscapers to operate solely as
contractors under 23 VAC 10-210-410, it was decided, because of industry
opposition and the new problems which would be created, to retain the
established interpretation. The moratorium was lifted and audits may be
performed on landscaping companies and nurserymen.
II. References
A. Code of Virginia Sections
C. Ruling Letters:
" " " Landscaper is retailer for trees, shrubs, etc. - not contractor.
P.D. 86-214 Maintenance contract w/o plant replacement gtd. is service.
P.D. 86-58 Immovable silos are taxable.
P.D. 84-126 Tests to determine if tpp becomes real property after install.
P.D. 82-153 Exempt items for greenhouse facilities.
¶200-694 (CCH) Plastic covered greenhouse is taxed as is the plastic.
III. General
A. 23 VAC 10-210-610) - Florists and Nurserymen.
The first three paragraphs of this regulation describe the general tax
treatment of landscapers and nursery men as follows:
B. Working Definitions
IV. Procedures
A. First Audit
The sales tax registration status of the landscaper during the period under
audit determines how the audit will be conducted.
operated during the audit period and then "turned around." Normally this
will result in auditing the unregistered landscaper as a contractor. Most
often these audits will be on those companies commonly thought of as
landscape contractors. Tax will be assessed on purchases on which no
tax was paid to the vendor and on which no consumer use tax was
remitted by the landscaper. Of course, a landscaper should be held liable
for any over the counter retail sales, which would include the sale of
mulch, topsoil, etc. that was delivered with no contractor services
involved. These transactions should be shown as sales exceptions. The
taxpayer should be instructed on the proper procedure for requesting a
refund of sales tax paid to their supplier on these resale items. The audit
comments should note how the business was operated and confirm that
the landscaper was informed of the correct operating procedures. Lack of
such comments can jeopardize the application of penalty in future audits.
These special instructions should also be noted in the letter to the
taxpayer at the conclusion on the audit.
5. Similar Items
The auditor also has to determine the tax status of tpp installed by a
landscape contractor which are not similar items. P.D. 84-126 explains
the tests set forth by the Virginia Supreme Court in Transcontinental Gas
Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970).
(Note: P.D.84-126 erroneously shows the year of the court case as 1969.)
With these tests in mind, most tpp (other than listed items) installed by a
landscape contractor becomes real property. A landscape contractor
must pay tax at the time of purchase or the withdrawal from an exempt
resale inventory when installing items such as landscape timbers, edging,
walkways (gravel, rock, slate, etc.), decks, decorative boulders and other
similar items. If the intent is for permanent installation, the landscape
contractor is considered a consuming contractor with respect to real
property. The classification of other items such as a decorative pond or a
fountain is more open for interpretation. For example, if hard wired or
plumbed in, it would most likely be considered realty after installation. If
each winter it must be brought indoors to protect from freezing, then it
would retain its status as tpp.
Plant maintenance contracts, which only provide for the regular watering,
fertilizing, mulching, pruning, etc., are service contracts not subject to the
tax. Plant maintenance contracts, which include any of the above
Landscapers & Nurserymen (Rev. 10/97)
Page - 9
G. Records
Objective: Discuss the application of sales and use tax as it applies to the Food
Tax Reduction Program.
I. References
II. General
A. For purposes of the Virginia sales and use tax reduction for food
purchased for human consumption as enacted by the 1999 Virginia
General Assembly, the definition of “food purchased for human
consumption” includes most staple grocery food items and cold
prepared foods packaged for home consumption. Specifically
excluded from the definition are alcoholic beverages, tobacco, and
prepared hot foods sold for immediate consumption.
C. The first rate reduction was effective January 1, 2000. The following
table illustrates the implementation of the state sales and use tax rate
reduction.
Effective Date State Tax Rate Local Tax Rate Total Tax Rate
Note: The rate reductions scheduled for April 1, 2001, 2002, 2003
are conditional upon prescribed revenue growth requirements set out in
the legislation. The Dept of Taxation will know no later than December of
each year whether a rate reduction scheduled for the following April will
take effect and issue the proper notification to dealers and the public. The
second rate reduction did not take effect on April 1, 2001.
III. Procedures
When testing the register tapes, verify the “total” tax from the tapes
as posted to the daily closing sheets, then to the monthly closing
sheets and to the sales tax return.
Objective: Discuss the application of sales and use tax to government contractors.
I. History
II. References
E. Court Cases: U.S. vs. New Mexico, et al (U.S. Supreme Court); U.S. and
Hercules vs. W.H. Forst, State Tax Commissioner, et al (U.S. District
Court for the Western District of VA).
FAR - Federal Acquisition Regulations. FAR are used by all federal executive
agencies for acquisition of supplies and services with appropriated funds.
FAR, together with agency supplemental regulations (such as the Department
of Defense FAR Supplement that applies to all Defense agencies), should be
the primary guideline for the contractor's conduct in administering the
contract.
IV. General
the property provided may pass to the government and/or the contractor may
be fully and directly reimbursed by the government.
V. Procedures
During the pre-audit conference and tour, the auditor should determine if the
contractor makes sales of tangible personal property. If such sales are to
customers other than the government, the sales transactions should be
reviewed to ensure proper application of tax. For example, sales by the
contractor to other government contractors are not entitled to the exemption
afforded the U.S. government. Such sales are taxable in the absence of an
exemption certificate. The contractor can purchase resale inventory exempt
from tax using the ST-10 form.
In those cases when the contractor provides services to the government, the
relevant contracts must be reviewed to verify consumer use tax compliance.
The "true object" test must be applied when examining contracts by reviewing
the "statement of work (SOW)." The SOW will explain the scope of the
contract and the product or service to be provided by the contractor. An
analysis of the SOW is essential in determining the "true object" of the
transaction.
Equipment $10,000,000.00
Direct Labor 1,000,000.00
Indirect Labor 1,000,000.00
TOTAL $12,000,000.00
In reviewing the SOW, the auditor should focus on key terms such as
"operate," "maintain," or "manage." Such terminology would indicate a service
contract and purchases charged to that contract may be fully taxable to the
contractor absent another exemption such as R&D.
There is, however, a January 4, 2001 ruling (PD 01-6) that identifies a
government contracting situation where the auditor would apply the “true
object” test at the task level rather than the contract level. The following is a
description of this contracting arrangement.
It should be noted that there can be many tasks or delivery orders under a
single overall contract between GSA and the contractor. Additionally, there
can be multiple client agencies doing business and letting out tasks under the
contract.
I. References
II. General
1) Forest products that are cut by an individual owner from their own
property for their own use. Own use means in the construction or repair of
their structures, buildings or improvements; or for their home consumption
(i.e. firewood); or for use by them in processing their farm products.
2) Forest products that are severed and used by the State educational
institutions for the experimentation in teaching about forestry if the
product is severed from land owned by the state.
post, mine ties, mine props, pine-4' or less, 38¢ per 100 pieces
round mine collars and other other species-4' length or less, 9¢ per 100
types of timber used in pieces
connection with mining and pine-over 4' but not over 8', 61.75¢ per 100
ordinarily sold by the piece pieces
other species-over 4' but not over 8',
14.25¢ per 100 pieces
pine-over 8', 76¢ per 100 pieces
other species-over 8', 18¢ per 100 pieces
pilings and poles of all types 2.31% invoice value f.o.b. loading point
III. Procedures
When doing a sales & use tax audit on a business that sells or buys any of
the items listed above then the forest products tax may apply.
Some of the businesses that will be subject to the forest products tax:
Loggers: If they sell chips to anyone whether the chips will be used as fuel,
landscaping or any other type of use. If they ship whole logs to
anyone outside of Virginia. If they sell firewood directly to a
consumer.
Papermills: If they buy the whole logs from the logger or woodyard.
A manufacturer that uses logs as their raw material will be prime candidates
for paying the forest products tax. The tax is computed on board feet or on
weight, depending on the product, being manufactured or shipped. Most logs
are bought by a weight measure. This will need to be converted into a board
feet measurement for some of the tax rates. There is currently no standard
conversion rate. The manufacturer that you are auditing will need to give you
the board feet or measurements for each product being taxed.
Forest products tax is a Quarterly tax. The quarters end on March 31, June
30, September 30 and December 31. The tax is due within 30 days of the end
of the quarter. Some small manufacturers can pay an annual tax. The tax
for these dealers is due within 30 days of the last day of December.
Forest Products Tax
Page - 5
You will need to account for which locality the forest product was
manufactured in or shipped out of. At least 50% of the tax collected is to
returned to the locality from which the tax was collected.
Currently there is no audit report for forest products. When doing an audit
use the forest products tax return, Form 1034 or 1035, depending on the size
of the business. The interest can be computed manually or thru STARS.
Penalty may apply but the regulations do allow for the penalty to be waived
at the Department of Taxation's discretion.
MEDICAL FACILITIES / PROVIDERS
Page - 1
Objective: Discuss the application of sales and use tax as it applies to hospitals,
hospital cooperatives and hospital corporations, nursing homes, clinics, homes for
adults and physician offices.
I. References
D. Ruling Letters
D. Exemption Certificate –
The ST-13 has been revised as of July 2001 and should be used by the
specific purchasers listed and for the specific items and products listed on
the exemption certificate form. The ST-13 should not be used by nonprofit
hospitals, nonprofit hospital cooperatives and nonprofit hospital
corporations, nonprofit nursing homes, nonprofit adult homes, and other
nonprofit medical facilities that are entitled to exemptions. These entities
MEDICAL FACILITIES / PROVIDERS
Page - 3
II. Generally
D. Home for Adults (profit and not for profit) - Only nonprofit homes for adults
as defined by Virginia Code Section 63.1-172A are exempt. All other
homes for the care and maintenance of children, adults and other
persons are taxable.
who regularly makes sales of T.P.P. must register as a dealer and collect
and pay the tax on retail sales.
NOTE: All facilities, regardless of the taxability on all other items, may
purchase hemodialysis and peritoneal dialysis equipment and supplies
exempt of the tax. This does not include general supplies but supplies
specifically for dialysis equipment and treatment.
NOTE: There are also exemptions for other specific nonprofit medical
facilities, refer to 58.1-609.7.
NOTE: Effective 7/1/98 all nonprescription and proprietary medicines will
be exempt from sales and use tax. “Nonprescription drugs” include any
substance or mixtures of substances containing medicines or drugs for
which no prescription is required and which are generally sold for internal
or topical use in the cure, mitigation, treatment, or prevention of disease
in human beings. “Proprietary medicines” are any nonprescription drug
sold to the general public under the brand name or trade name of the
manufacturer and does not contain any controlled substance or
marijuana. The exemption does not apply to cosmetics.
NOTE: The auditor needs to keep in mind that although a medical facility
may be deemed taxable – other exemptions such as those under
Controlled Drugs or DME may apply.
Ill. Procedures
Profit - Profit hospitals and profit nursing homes are taxable on all
purchases of tangible personal property used in the provision of their
medical services. Effective 7/98 purchases of nonprescription and
proprietary medicines are exempt regardless of the purchaser. Also,
effective 7/00, the exemption for medicines and drugs have been
expanded to include purchases by any licensed hospital. The exemptions
for durable medical equipment and prosthetic devices would still apply for
purchases made on behalf of individuals. The purchases of prescription
medicine and drugs by profit hospitals prior to 7/00 are taxable. The
purchases of drugs by profit nursing homes prior to 7/06 are also
taxable. When any of the divisions or departments are selling T.P.P., it
must register and collect the tax.
The auditor should note that external transfers or sales from the hospital
or nursing homes to other entities (related and non-related) could be
taxable as well. If the transfers are to inter-related companies, the
transfers are usually handled internally with the transactions posted in the
general ledger
The sale of fixed assets is also an area of possible liability for nonprofit
hospitals and nonprofit licensed nursing homes. The sale would be exempt
if they met the "occasional sale rule" of three or less sales per year. With
constant changes in technology, many medical facilities are continually
updating their equipment. Sometimes, these are sales to related
companies, both exempt and taxable.
Another area for these nonprofit facilities to incur possible liability is in the
sale of T.P.P. Some departments may go beyond their services to the
hospital and make sales to other entities. In addition to services, they
could also have sales of printing or audio-visual slides. If this is the case,
then the hospital's department or division must be registered and
instructed in the proper method for charging and reporting sales tax.
Most likely, the purchases would have been bought exempt under the
hospital exemption, so only the sales would have to be examined. This
does not negate the exemption for the operating expenses of this
department or division of the nonprofit facility.
homes, only a portion of their available beds is licensed and this same
auditing procedure would be applicable.
C. Clinics
There are only two instances in which a clinic will qualify for the sales tax
exemption. If a clinic is conducted not for profit and is licensed as a
hospital by the Department of Health, it will qualify for this exemption. All
profit clinics are subject to the tax. The only other situation in which a
clinic will be eligible for the exemption is when the clinic is an integral part
of a nonprofit hospital. The relationship between the clinic and hospital
must be examined to make this determination. Several areas which must
be analyzed are the corporate structure, billing practices and the question
of whose credit is bound. The physical location of a clinic in relation to its
affiliated hospital may be part of the analysis but is not a determining
factor (P.D. 93-82).
E. Physicians Offices
Physicians who regularly engage in the sale of T.P.P. must register for
sales tax and collect and remit the tax based on those sales. Some
physicians, because of their rural location, will obtain a license from the
Board of Pharmacy, in effect acting as pharmacists. In cases such as
this, the physician may purchase items for resale but must report any use
tax on items (except controlled drugs) for use in his professional practice.
Also, some dermatologists offer skin care and cosmetic products to their
patients. These products are not deemed to be drugs or medicines and
the sales are not considered part of their medical services. Therefore, the
dermatologist is operating as a retailer and must register to collect the
tax. Another example of taxable sales is the selling of vitamins, minerals
or nutritional food supplements in conjunction with a physician's weight
loss program. (P.D. 96-64).
MEDICAL FACILITIES / PROVIDERS
Page - 10
The ST-13 has been revised as of August 2001 and should be used by
the specific purchasers listed and for the specific items and products
listed on the exemption certificate form.
I. References
A. Code of Virginia Section- 58.1-203. Regulations and rulings. and 58.1-
609.5(8) Service exemptions. (8) " the sale or charges for any room or
rooms....for more than ninety continuous days..." of the Code of Virginia
C. Ruling Letters
-P.D. 96-306, 96-295, 95-172, & 88-72, Charges for long-distance phone
calls taxable
-P.D. 97-229, 97-150 90-225, Lodging Federal Employees, taxable
-P.D. 91-143, Temporary Lodgings of Shipbuilders, taxable
-P.D. 98-206 & 92-120, Comprehensive List of Transactions Related to
Hotels w/references
-P.D. 97-229, 97-150 & 93-133, Use of Credit Card by Government
Employee - taxable
-P.D. 96-55 & 93-167, Hotel Contract with Government Agency, taxable (less
than 90 days)
-P.D. 96-23 & 94-60, Meals furnished to non-restaurant employees
-P.D. 94-107, Purchases with I.M.P.A.C. Credit Card, exempt, 4/12/94
-P.D. 96-379, 96-295, 95-322 & 95-17, Green fees in connection with hotel
services
-P.D. 96-3, Reservation services, taxable
-P.D. 98-148, 97-229, & 96-23, Meals and lodging sold to state and local
employees
-P.D. 98-206 Rental of Property
-P.D. 99-221 Ice sculptures
-P.D. 99-31 Internet, Special event services
-P.D. 98-117 Amenities, Complimentary breakfast
-P.D. 99-254, 98-31, 95-237, 90-32, 88-41, 84-262 & 82-205 Conference
room rentals
-P.D. 95-307 & 86-156 Veterans Organization, Lodgings and
Accomodations
-P.D. 96-3, 91-219 & 87-268, Transient Accommodations--Food Purchases
of Bed and Breakfast Inns
-P.D. 92-120 & 88-41, Transient Accommodations--Setup Charges,
-P.D. 98-148, 96-135, 90-208, 89-291, 88-277 & 88-121, Virginia and its
Page - 2
II. General
A. The tax applies to the sale or charge for any room or rooms, lodgings or
accommodations furnished to transients by any hotel, motel, inn, tourist
camp, tourist cabin, camping grounds, club, extended stay hotels, or
other similar place. The tax applies to all sales of tpp by such
businesses.
the dealer furnishing the room or other accommodation may refund any
sales tax actually collected from the person. In filing a subsequent return
with the Department of Taxation, the dealer may deduct from gross sales
in the place provided the amount of the charges for which the tax was
refunded.
III. Procedures
The auditor should look for any exempt sales that a hotel or motel makes
to confirm whether they should have been exempted. In particular sales
to governmental employees or agencies or Nonprofit Organizations
should be examined. State and local governmental agencies or
employees are not exempt on their purchases of hotel or motel meals or
lodging, P.D. 88-72 "No exemption is provided for state and local
government employee purchases of meals or lodging whether purchases
are pursuant to required official purchase orders or not." This differs from
the law on Federal Employees.
Federal Employees are exempt from tax on meals and lodging only under
certain circumstances. An exemption is provided for federal government
purchases of meals and lodging when they are made pursuant to official
purchase orders or with an official government credit card that bills the
government directly.
Look for an St-12 with a required official purchase order attached for sales
to federal agencies. The purchase must be made by the federal
governmental agency itself, where the government is directly billed or the
proper government credit card is used. What is an acceptable
governmental credit card? Acceptable cards are an American Express
Card with the Exempt prefix numbers 3783 9...which indicates a card that
is directly billed to the government, although it will still have the name of
the employee on the card at the bottom left. Also, an I.M.P.A.C. Visa
card issued in the name of the United States is acceptable. It is not
required that a TP maintain a copy of the card in their Certificate of
Exemption file.
exemption card is desirable, but not required provided that the number
has been annotated. Foreign diplomats who qualify for the exemption on
taxable services are exempt when hosting a group of non-diplomats.
(P.D. 95-17)
Areas in sales that have been problems in prior audits include: catering,
equipment rentals, telephone charges, and miscellaneous items.
Catering is covered in another area of this manual, but it involves issues
related to taxable services provided in conjunction with the sale of tpp and
the gratuity issue of discretionary (non-taxable) versus non-discretionary
(taxable).
Equipment rented by a restaurant for its own use in preparing and serving
meals, such as kitchen equipment, tablecloths, and similar items are
taxable and may not be purchased under a Certificate of Exemption.
Page - 6
Also, the tp should apply tax to the total charge for an event including the
cost of labor, equipment, supplies or other services provided in
connection with its catering service, whether separately stated or not.
Look for add- on- costs by hotels for various services connected to the
sale of lodging or accommodations. Sales price is defined in VAC 10-21-
4000 as , "the total amount for which tpp or taxable services are sold and
includes any services in connection with such sale." Examples would be:
added charges for movies (other than nontaxable programming),
telephone charges other than long-distance toll charges, whale watching
fees, golf fees etc. if they are sold in connection with the room rental.
Toll charges for long-distance telephone calls (without markup) are not
subject to the tax. However, additional charges for telephone calls are
subject to the tax. The auditor should inquire as to how the hotel or motel
bills for telephone calls. A company may have additional charges added
on to the billing for number of calls made, local charges for long distance
calls, and various other similar charges associated with the phone usage.
Toll charges for long distance calls are charges made by the long
distance carrier and are independent of the local call charges. An
examination of a bill from the phone company will itemize toll charges for
long distance calls. Additional amounts billed by the hotel are taxable.
The auditor should examine billings from the telephone company to the
hotel/motel and compare them to the taxpayer’s charges to their
customers. Look for any telephone charges made to the customer that
are not long distance toll charges. Also, it would be helpful to look at
information brochures etc. that a hotel/motel makes available to their
guest. Usually, they will give information as to the company's policy and
procedures in terms of phone charges and usage that will identify any
charges associated with phone calls.
The department has been consistent in not applying the tax to such
rentals pending the establishment of definitive policy guidelines.
The department is currently reviewing its policy with respect to this issue,
and until any change in this policy is finalized and communicated to the
industry, NO TAX SHOULD BE ASSESSED ON SUCH RENTALS.
Computers
Page - 1
Objective: Discuss the application of sales and use tax to computer hardware and
software.
I. History
II. References
IV. General
The production of prewritten software for sale or resale qualifies for the
industrial manufacturing exemption. The research and development
exemption applies to the purchase of equipment and supplies used directly
and exclusively in developing a prewritten software program.
V. Procedures
A. Computer Hardware
The initial step in conducting an audit of a company that sells and installs
computer hardware is to schedule a pre-audit conference and a tour of
the facility. The auditor should make a determination if the taxpayer is
entitled to the manufacturing exemption.
Computer resellers may purchase equipment for their resale inventory tax
exempt using the ST-10. The auditor should be aware that certain
purchases charged to inventory may not be entitled to the resale
exemption. Items such as tools, cable affixed to real estate, and similar
installation materials are taxable when purchased by the retailer/installer.
B. Computer Software
Custom software is designed and developed for only one customer and is
considered a non-taxable service. Sales of additional copies of custom
software are taxable. Custom programs originally developed for in-house
use and then marketed for resale become taxable. The auditor should
review sales invoices and contracts to verify if the taxpayer is selling
additional copies. When conducting audits of custom software
developers, the major focus will be on asset acquisitions and expense
purchases.
The auditor must take special care in classifying purchases for the R&D
exemption. Equipment must be used directly and exclusively in R&D
(e.g., software used to write new code) to enjoy the exemption.
Equipment used to encode the diskette with a program that has already
been developed, or hardware used by researchers for use in software
development and also for administrative purposes (e.g., word processing)
is taxable.
The auditor should note that the current R&D regulation allows for
"de minimis" usage. In accordance with VAC 10-210-3071, when
research property is used in a taxable manner, it will continue to be
exempt from the tax if the taxable use is de minimis in nature. Taxable
use of the property is considered de minimis if the taxable usage of the
property (i) does not involve a continuous or ongoing operation; (ii) does
not follow a consistent pattern, i.e., weekly, monthly, quarterly, etc.; (iii) is
occasional in nature, occurring no more than three times; and (iv) in total,
accounts for no more than three days.
C. System Sales
If a dealer installs a system and lap links the installation of the software
along with the customer receiving tangible copies of the program, then
separately stated charges for the program are taxable.
D. Training
It is essential for the auditor to examine both the invoices and the contract
documents to properly apply the tax.
F. Licensing Agreements
Computers
Page - 7
G. Additional Information
Objective: Discuss the application of sales and use tax as it applies to leasing or
rental companies.
I. History
Prior to 01/01/96 . Total gross proceeds from the lease or rental of tangible
personal property were taxable.
01/01/96 and after. Separately stated transportation charges for the picking
up of leased or rented tangible personal property are exempt.
II. References
C. Ruling Letters P.D. 95-189, P.D. 95-47, P.D. 91-241, P.D. 95-246,
P.D. 95-223, P.D. 87-241, P.D. 89-139, P.D. 94-90,
P.D. 91-266, ADMN RUL 55-85, P.D. 96-66
III. General
B. Tangible personal property for future use by a person for taxable lease or
rental may be purchased tax exempt under a certificate of exemption
(CODE OF VIRGINIA 58.1-609.10(3),VR 630-10-57,23 VAC 10-210-
840,ST-10 EXEMPTION CERTIFICATE).
C. The term "lease" or "rental" does not include the leasing, renting or
licensing of copyright audio or video tapes and films for public exhibition
at motion picture theatres or by licensed radio and television stations
(CODE OF VIRGINIA 58.1-609.6(6),23 VAC 10-210-3030,VTB 95-5,ST-
20A EXEMPTION CERTIFICATE).
IV. Procedures
A. When auditing look for all untaxed charges on invoicing. Reading the lease
or rental agreement can help determine what charges the lessor has agreed
to pay.
5. Fees to pick up leased property . Taxable until 1/1/96 after 1/1/96 exempt
if separately stated. Fees to pick up lease payments are taxable
(VIRGINIA TAX BULLETIN 95-7, P.D. 95-246).
Page - 3
6. Combined lease of real and personal property. The portion of the lease
payment attributable to personal property is taxable. A taxpayer who cannot
determine the taxable portion of the lease payment may pay the tax on 28%
of the lease payment for restaurant operation. (CODE OF VIRGINIA 58.1-
602, 23 VAC 10-210-840, P.D. 95-223.
7. Charges for parts used to repair leased equipment when the repair was
performed by the lessor and billed to the lessee. CODE OF VIRGINIA 58.1-
602(17),58.1-603(3), 23 VAC 10-210-840,23 VAC 10-210-4000, P.D. 87-241).
If the taxpayer purchases the property, makes no use of the property, sells
the property to another company, and leases the property back from the
company, the taxpayer may purchase the property exempt of the tax using
form ST-10. The lease payments for the property is taxable.
If the taxpayer purchases and uses the property, he must pay the tax on the
purchase price of the property. If at a later date, he sells the property to
another company and enters into a leaseback arrangement, he must pay
the tax on the lease payments. Because two separate transactions have
occurred, there would be no relief from double taxation. (CODE OF VIRGINIA
58.1-609.10(3), P.D. 91-266, ADMN RUL 55-85).
Convenience Stores
Inadequate Records/Purchase & Sales Mark-Up
I. History
II. References
III. General
Because of the wide variety of items sold at a convenience store, these audits
present a challenge. Preaudit activities are important to give a “heads up” on
the operations. The dealer may be on a commission basis for gasoline,
newspaper sales, vending machines. Some departmentalized areas such as
books and magazines or hardware may be on a consignment basis.
Page - 2
Most convenience stores now serve prepared food and prepackaged foods as
well. Be aware of the Food Tax Reduction Program which may affect how
sales are reported. Reference: Tax Bulletin 99-11, Question and Answer
Summary-Food Reduction Program.
Video rentals and tanning bed rentals are also seen occasionally at
convenience stores. There are also a growing number of convenience stores
with ATM’s located in the store.
IV. Procedures
A. Pre-Audit Activities
Schedule returns information from 5-03 screen
Request a copy of the income tax returns for the years being audited from
Central Files
Request ABC reports to use in comparing purchases/sales, if needed
Request lottery sales/purchase information from Department of Lottery, if
needed
Visit the store to observe - store location (is it in a high traffic area?), store
layout, vending machines located outside the premises, number of gas
pumps, etc.
Develop a questionaire containing information about the business, how the
records are kept, etc. (see example)
Develop a unit price list from which mark-up will be figured (see example)
Develop a records request
B. Areas of Consideration
A comparative review of sales reported by year and an analysis of the
income tax returns are very advantageous in determining potential audit
issues. Compare the figures reported on the sales tax returns with the
income tax return and note any differences. Use these differences to
compare lottery and gasoline sales to Department of Lottery records and
Page - 3
records that the taxpayer may have. Does the income tax return show a
loss or profit? If the return shows a loss, how did the taxpayer live?
How does each year compare with the other? Care must be taken to
observe whether supplies are included in Cost of Goods Sold or
separately claimed as operating expenses as this may affect the markup
percentage. Our experience has shown that the Percentage of Markup
for convenience stores after allowance for theft is generally above 25%.
Use this percentage as a guideline when figuring the markup on the face of
the income tax return. If the percentages are below this range, chances
are that an audit is warranted.
Ask the taxpayer what his percentage of markup is. Ask what items he
sells the most. Does the taxpayer accept food stamps? What portion of
his sales does he believe are attributable to food stamps? How are
inventories valued? If there is a deli in the store, ask how selling prices
Page - 4
are determined. What does he think the markup is on the deli? Deli
markup can be as much as 200% and is most always 100% and greater.
Agree upon a reasonable percentage of markup for the deli. Ask about
whether deli supplies are taken from the store inventory and how deli
sales are handled (remember there may be a local food tax issue in
addition to the reduction of state sales tax issue).
After the initial interview, complete your unit price schedule. Walk around
the store, recording the selling price of a sampling of items from the
various departments. Convenience stores usually sell more cigarettes,
beer, and soft drinks, so be sure to get unit prices of most brands in these
categories.
Among the items that should be requested from the taxpayer are purchase
invoices received from his suppliers and cash tickets for purchases paid
for by cash. Prepare a spreadsheet for each year showing vendor by
month. Scheduling a year’s purchases on a spreadsheet will allow you to
spot any “holes” in the purchase pattern. As you schedule the invoices,
notice how often the beer vendor, bread vendor, grocery vendor, etc.
service the store. This will also assist you in determining if you have all
the invoices. If there are missing purchases, contact the vendor to get
their accounts receivable history on the taxpayer. Make a separate
schedule for deli purchases as the markup for deli is much higher than the
rest of the store.
Note that many suppliers who specialize in convenience stores show the
markup on their invoices. As you examine these invoices look for any
equipment purchases or supply purchases which may have been made
from these suppliers. In examining the overall purchase invoices, you
may also find items purchased for the taxpayer’s own use which have
been included in the records of the business.
Use invoices within the past one or two months to complete your unit price
list cost side. This will pair the sales/cost prices. Figure the markup
percentage on each item and and average overall markup. How does this
compare with the analysis of the income tax return and the percentage the
taxpayer gave you?
many as fifty “No Sale” rings per day. His explanation of “keeping the
keys in the cash register” didn’t pan out when it was found that his markup
percentage was less than 15%.
You can use the overall average markup percentage to mark up the
purchases; or mark them up by category. For example, if your purchase
spreadsheet shows the purchases are heavily weighted toward beer and
cigarettes, you may use an average of all the beer markup percentages
for beer purchases; an average of all the cigarette markup percentages for
the cigarette purchases; and the remaining overall average on the balance
of purchases. An example using overall markup percentage to mark up
the purchases is as follows: Purchases totaling $15,348.00 marked up
28% (.28) would equal sales of $19,645.44. Computation would be
$15,348.00 X 1.28 = $19,645.44
Mark up the deli purchases using the markup you agreed upon with the
taxpayer. If deli purchases are withdrawn from inventory, you must
agreee on an amount with the taxpayer and then mark it up.
Penalty would apply for sales tax collected but not remitted.
F. Sales Markup
Page - 6
Occasionally, when comparing income tax returns to sales tax returns, the
sales reported on the income tax return is greater than reported on the
sales tax return. After an analysis to determine if there were commissions
or other income included in the sales which should be separated, a sales
markup may be done.
The difference between the income tax return sales and sales tax return
sales may be spread evenly throughout the twelve months; or allocated by
month based on your analysis.
Penalty would apply for sales tax collected but not remitted.
In an instance where the sales tax return sales are greater than the
income tax return sales, an adjustment to the income tax return would be
warranted if no explanation can be given.
Page - 7
4. Who usually operates the business? Who operates the business when the usual
operator is on vacation or sick?
6. Did you acquire or dispose of any business assets during the past three years?
7. Do you own or rent the real estate? How much is the rent?
8. What types of products do you sell? Do you rent videos, tanning beds, or any
other tangible personal property?
12. What are the hours of the deli? What do you sell the most of from the deli?
14. What types of reports are prepared for the business? Who prepares them?
17. What type of payment is accepted? (i.e. cash only, credit cards, checks, food
stamps, WIC coupons, trade coupons)
18. How many bank accounts (checking & savings) do you have, both business and
personal?
Page - 8
19. What are the sources of funds deposited into each account? Were there regular
transfers between accounts?
20. Did you have any income which was not deposited in a bank account?
25. Did you borrow any money for business or personal use during the year?
29. Who maintains the daily accounting records? Is this the same person who does
the banking?
30. What records are used to prepare the sales tax returns?
34. What inventory valuation method is used? Cost? Lower of cost or market?
36. Do you have food stamp sales? Do you have records of the dealer’s
reimbursement?
37. Has there been any theft or loss of product or other property?
40. Do you keep track of how many deli items are sold each day?
Page - 9
43. Are beginning and ending cash register transaction numbers compared?
44. Is the cash reconciled to the register tapes and deposited to the bank intact?
46. Are any expenses paid in cash? If so, how are these amounts accounted for?
I. History
Since Sales & Use tax Inception in 1966 hundreds of audits, taxpayers letters,
commissioners rulings, and many court cases, producing millions of dollars in
audit assessments, have been based upon the Virginia code sections
pertaining to manufactures and fabricators, The Virginia Manufactures
Association, along with other interested parties, and the department have
traditionally worked together in producing the laws, rules and regulations
governing these exemptions. In recent years only rules and regulations have
been reinterpreted or clarified based on commissioners rulings. There have
not been any changes to the law regarding these two types of activities during
the current statue of limitations periods available for audit . For purposes of
explanation current rules and regulations categorize manufacturing activities
under three areas: administration, production and distribution.
II. References
St-11, St-11a
III. General
IV. Procedures
It should be determined that all the records necessary for the audit are
available at the audit site. Inquiries should be made to determine that all
purchasing functions for the audit site will be reviewed. Be on the lookout
for purchases made by out of state corporate headquarters for a Virginia
Manufacturing and fabricating
Page - 5
plant site. Ask for general ledgers to check for journal entries used to
record purchases and intercompany transfers. Be aware that taxpayers
could be making payments by electronic transfer which does not require
paper invoicing. Also be aware that manual checks may be utilized for
payment of some types of transactions. Purchase orders and the voucher
register( if applicable) should be reviewed to determine if all purchase
records are seen by the auditor.
The taxpayer's accrual system for use tax should be reviewed. If the
taxpayer files a sales tax return or a direct pay return, these should be
examined for correctness.
A review of the Federal and State Income Tax returns before starting the
audit will give you details about corporate officers, Social security
numbers, subsidiary companies and various other helpful facts (be sure
to update stars information if necessary) . The review of the income tax
return may disclose a problem resulting in an income tax audit.
2. TPP withdrawn from a non taxed inventory and given away is taxable
at the fabricated cost of the material. Textile manufacturers are a good
example. They withdraw material to make swatches out of, send various
lengths of material to prospective customers at no charge and also give
completed garments to various charities. (PD 88-127)
3. Catalogs and other printed material used to advertise TPP for sale and
are distributed within Virginia are taxable. Catalogs and other printed
materials distributed outside Virginia within a 12 month period are
exempt. Items in the "other printed material" category such as annual
Manufacturing and fabricating
Page - 6
Production includes the production line of the plant starting with the
handling and storage of raw materials at the plant site and continuing
through the last step of production where the product is finished or
completed for sale and conveyed to a warehouse at the plant site.
4. Swatches and swatch cards are taxable when used as a sales aids
and are not given the same exemption as catalogs. (PD 90-15)
7. Storage tanks used to store fuel are taxable. However, storage tanks
used to store raw materials are exempt. (PD 95-140)
8. Boilers, chillers, air handling units and cooling towers used for
employee comfort are taxable when purchased by the manufacturer or a
contractor. The same equipment would be exempt to the manufacturer or
contractor, with the use of a ST 11-A, when the equipment maintains
critical temperature and humidity for the quality of the product being
manufactured. (Commissioners Ruling Letter 9/29/92)
12. Spray booths are not used directly in manufacturing and are taxable.
(Technical Services Letter 3/8/88)
14. TPP used in production line testing and quality control is exempt.
The exemption is restricted to the production line. Testing prior to
manufacturing or subsequent to manufacturing is taxable. (Technical
Services Letter)
15. Hoods used to remove fumes for employee comfort are taxable.
(Commissioners Ruling Letter 12/23/87)
17. Printed forms used directly in the production process are exempt.
Any form retained for production records is taxable. If the form is a multi-
part form, it may be a percentage taxable item. (Commissioners Ruling
Letter 10/24/85)
Manufacturing and fabricating
Page - 8
19. Electrical items, where more than 50% of the electricity passing
through them is going to manufacturing equipment, are exempt. Where
electrical items are purchased and placed into stock, a percentage of the
stock items should be taxed.
20. Steam, air, or other process piping used more than 51% for
processes directly in manufacturing are exempt. These same items are
purchased and placed into stock, a percentage of the stock items should
be taxed.
21. Pit truck scales are deemed to be real property and the tax should be
paid by the contractor installing them. (PD 94-276) Other scales located
in the plant may be taxable or exempt based on their use. A postage
scale would be taxable. Scales used to weigh raw materials being
measured for manufacturing purposes would be exempt.
1. Car bracing used to hold cargo in trucks or rail cars is taxable. Where
3/4" steel strapping is typically used for packaging, 1" or larger strapping
is used most of the time for car bracing. Lumber and dunnage bags are
also used as car bracing.
Manufacturing and fabricating
Page - 9
3. Where finished goods and raw material are both stored in the same
warehouse, any equipment used will be taxable on its preponderance of
use.
Electrical Items:
• cable trays
• F96T12CW-flourescent Lighting
• F72T12CW- fluorescent Lighting
• light bulbs
• machinery lights enabling operator to see
• Lighting Ballast
• contact cleaner
• wire markers
• Greenlee electrical tools
• voltmeters
Supply Items:
• supply storage tanks
• boiler treatment chemicals
• chemical and additives that prolong the life of equipment
• fuel for comfort heating
• oil dry
• heat tape to prevent freezing
• acetylene, oxygen, argon-welding gases
Restaurant / Bars Purchase Mark-Up
Page - 1
Objective: Discuss the application of sales and use tax as it applies to purchase
markup procedures for restaurant and bars.
I. History
The use of purchase markup procedures has always been based upon the lack of
suitable records necessary to determine sale tax due.
II. References
1
Restaurant / Bars Purchase Mark-Up
Page - 2
III. General
Purchase markup procedures are resorted to when restaurant / bars have failed to
maintain suitable records for the determination of sales tax owed. The procedures
allow the auditor to estimate taxable sales by marking up purchases with ratios
derived from known cost and selling prices or industry standards. The portioned
purchases of liquor and beer, along with limited sources of supply that occur with a
bar make it especially effective. A restaurants menu, though more troublesome, will
provide good results; particularly, one which lends itself to portion control
purchasing. In addition, industry standards provide known benchmarks, which act as
a plausibility check for your results, and, may even be used alone to provide a quick
and generally accurate result.
IV. Procedures
It is already assumed that there are insufficient records maintained by the business.
Therefore, the auditor needs to ascertain what records are available that will assist
in performing a purchase markup. When mixed beverages are being sold the
business is required to file a Mixed Beverage Annual Review report with "ABC".
This is done on an annual basis. If the taxpayer does not have his most recent
reports, copies can be obtained from "ABC". The information in the report is
provided by the business and purports to be an accurate reflection of the business.
The report categorizes sales by mixed beverage, beer & wine, and food for a twelve-
month period. It also provides total purchases for each category. This information is
useful in several regards. First, it provides sales information with which to verify
what has been reported to TAX. Secondly, it provides total purchases, per category,
which is useful to have in summary form. And third, it enables the auditor to
calculate the Cost of Goods Sold for each category as reported by the business;
thereby, providing a quick figure with which to judge the reasonableness of the sales
numbers contained in the report. This in itself is a tremendous aid for the auditor.
For, given that the purchase figures are correct, the auditor may preemptively
conclude either that sales have accurately been reported, albeit with poor records
being retained, or that something is amiss and further effort is required. Thus, the
auditor has a tool that either confirms the need for a complete purchase markup or
allows for the procedure to be aborted before much effort has been expended. After
all, the auditor is most concerned with underreported sales and not just the exercise
of reconstructing sales. Except, of course, for instances where no sales have been
reported at all.
After the "ABC" report has been reviewed, purchase invoices need to be obtained.
There is only one legitimate source for liquor purchases. That is the ABC store
which serves that particular business area. Beer & wine purchases are almost
exclusively made from the few large beer & wine wholesalers that serve the area.
The business owner is required by ABC to keep liquor purchase information on the
premises. However, if it is felt that the records are incomplete or unavailable for
2
Restaurant / Bars Purchase Mark-Up
Page - 3
review, the auditor may obtain copies of all liquor purchases from the ABC store
serving the business. This will be in the form of actual invoices showing the type,
quantity, and price of liquor purchased. In like manner, beer & wine wholesalers
may be contacted for information concerning their products. Instead of actual
invoices, they will provide summary reports showing quantities and sales dollars by
product on a monthly basis. These reports usually cover the current and prior year.
An ABC agent can facilitate gathering the aforementioned information.
Once the purchase information has been obtained, the total purchase amounts
provided on the Mixed Beverage Annual Review report can be verified. The auditor
now knows how much alcohol has come into the business and at what prices.
Therefore, it needs to be determined at what serving sizes and prices the business
sold the alcohol. This is best accomplished by interview with the business owner or
manager on the initial visit to the location. At that time, posted prices and bar setup
may be observed while discussing the following:
What serving size for liquor is used? Is it one ounce, ounce and a quarter, what?
Is a measured type of system in use or is it free pour?
At what price is liquor sold at for well, call, and premium brands?
Is there a happy hour?
Are just well brands used at happy hour?
What prices are used at happy hour?
What size glass is used for draft beer?
What size are the pitchers?
What are the regular prices?
What are the happy hour prices?
What about bottled beer?
How much is domestic?
How much is import and premium?
Are there any reduced prices with bottled beer?
Are happy hour records kept?
Are Z-tapes kept from the cash register?
Are the Z-tapes consecutively numbered?
How many cash registers are there?
How are daily sales recorded?
Are daily sheets used and maintained?
These questions provide the answers you will need to perform your calculations and
also establish the degree of record keeping the business has maintained. In order to
facilitate organizing this information the following questionnaire should be used and
then maintained as a statement of record as to certain facts pertaining to the
taxpayer’s business.
3
Restaurant / Bars Purchase Mark-Up
Page - 4
Miscellaneous Sales:
Days / Hours cover charges are imposed: Days: _______ Hours: ______ .
Cover charge imposed: $_____ per person, $______ per couple. If different
amounts are charged for different times of days, please note: ___________ .
Pool tables / Video Games / souvenirs – Does the applicant or licensee have pool
tables or video games or sell souvenirs (such as hats or T-shirts)? Yes/No.
If records for miscellaneous sales are not kept, approximately how much money is
taken in per week from these sales: $ _________.
4
Restaurant / Bars Purchase Mark-Up
Page - 5
Days and times of Happy Hours: Days of Week: _____ Hours: ______ .
How long have these Happy Hour times been in effect? __________ .
If Happy Hour records are not maintained, obtain the percentage of total alcohol
sales derived from Happy Hour. _____%.
How is liquor dispensed: Free pour ____ Gun system _____ Measured pour _____ .
5
Restaurant / Bars Purchase Mark-Up
Page - 6
Call Brands
Premium
Brands
Exotic Drinks
Normally restaurants use the cost of each brand to determine the sale price.
Example: 750ml bottles that cost from $0.00 - $10.00 are considered house brands,
bottles that cost $10.01 - $18.00 are considered call brands, etc. Determine the
price structure for House, Call, Premium and Exotic brands.
House Brand
Call Brand
Premium Brand
Exotic Brand
6
Restaurant / Bars Purchase Mark-Up
Page - 7
The auditor is now prepared to begin constructing worksheets which will put the
accumulated information into meaningful form. The goal is to produce a cost of
goods sold ratio per category which, in turn, can be applied to the total purchases
per category which results in a sales figure based on known facts. This entails
arranging the information in such a manner so that the relationship between actual
costs and selling prices produces the COGS ratio necessary to project sales based
on purchases. This is not as complicated as it sounds, though it is somewhat time
consuming. Examples of such worksheets are attached.
There are certain other considerations that have to be taken into account when
constructing the worksheets. First and foremost is the issue of the sales tax itself.
Is sales tax included in the price of alcohol beverages? Can sales tax be included in
the price of alcohol beverages? When constructing the worksheets, the sale prices
used should be net of tax. This allows a true GOGS ratio to be developed based on
the actual cost and selling prices of the product itself. The sales generated by the
worksheets will be taxable sales. To begin with, when purchase markup procedures
need to be utilized, adequate records may not be available to substantiate the
handling of sales tax. And, as a practical matter, many, if not most restaurant/bars
regard the selling price of alcohol beverages to include sales tax. When you order a
drink at the bar you pay $2.25 or whatever. You do not pay $2.25 plus tax. When
they report their monthly sales, they back out the tax from their gross alcohol
beverage sales and report the result as taxable sales. What is our department's
position on this? Code of Virginia Sec. 58.1-625 provides that a dealer is required to
separately state the amount of the tax and add the tax to the sales price or charge.
Title 23 VAC 10-210-340(A) further provides that identification of the tax by a
separate writing or symbol is not required provided that the amount of the tax is
shown as a separate item on the record of transaction. However, Code of Virginia
Sec. 58.1-614(D) provides that when a dealer is able to demonstrate to the
satisfaction of the Tax Commissioner that is impractical to collect the tax in
accordance with the bracket system it may be authorized to remit an amount based
on a percentage of gross receipts which takes into account the inclusion of the sales
tax. So, it appears that, yes, tax must be accounted for separately, but, it may be
included in the sales price. The caveat is if the Tax Commissioner grants the
taxpayer authorization to do so. However, if the taxpayer includes the tax in the
sales price of the alcohol beverages without first obtaining the Tax Commissioner’s
authorization, the total price received for the drink is not considered to contain sales
tax. Either way, use net taxable prices, as best can be determined to perform your
calculations.
Another factor, which must be considered, is spillage. How much should be allowed
for overpouring, foamy beer, breakage, and theft? The bar owner will claim he's
being robbed blind and that overpouring is rampant. But where's his documentation
and inventory count sheets to show the shortfalls? The fact is some spillage does
occur.
7
Restaurant / Bars Purchase Mark-Up
Page - 8
The following spillage figures, per the ABC, should be utilized in providing an
allowance:
Another issue of concern is that of weighting. What percentage of total sales does
each broad category represent. That is, how many sales dollars are attributed to
regular prices and how many to happy hour prices. Ideally there are at least some
register tapes which can provide some guidance. In addition, the auditor has
information provided by the questionnaire previously attained with which to establish
a ratio. Lacking that, an arbitrary number can be tried using the length of time of the
happy hour as compared to the total time the business operates.
So, the auditor strives to construct worksheets that recreate past activity as
accurately as possible.
In regard to food, ABC regulations require that the food and nonalcoholic beverage
sales must account for at least 45% of the gross sales of mixed beverages and food.
The main tool available for use is the menu itself. It presents the product along with
its selling price. What remains to be determined is the cost of the product. Lack of
variety on the menu becomes a plus when attempting to analyze it. There are fewer
main selections and probably fewer vendors involved. In any case, the procedure is
similar to that of alcohol. The auditor determines the cost per portion and relates
that to the selling price. The resulting GOGS percentage for the various entrees are
then weighted to establish an overall COGS. This can be extremely tedious and
time consuming. It is much simpler and just as effective to spot check one or two
main entrees against what the Industry considers standard for that type menu. This
spot checking allows the auditor to confirm where the business stands on the
Industry's scale. An even simpler approach is to allow a somewhat high COGS, say
40 to 45 percent, which covers virtually any restaurant scenario and go with that.
Say a restaurant/bar has food purchases of $100.00. If you divide that $100.00 by
40 percent you arrive at $250.00. If the business has reported food sales of at least
$250.00, you may assume that reported sales are correct. This provides for a built
in waste factor in addition to being simple to apply. Copies of historical restaurant
ratios are attached.
8
Restaurant / Bars Purchase Mark-Up
Page - 9
Purchase markup procedures are a means to recreate the past sales history of a
particular business. As such, actual price information is utilized in conjunction with
known or estimated factors to achieve its outcome. Though complete accuracy is
sought, the reality of the situation often requires negotiation. The auditor's sense of
fairness in evaluating circumstances cannot be overly stressed.
Additional comments:
1. Experience has shown that nightclubs, go-go bars and independently run
restaurant/bars are the most likely to underreport sales.
2. While it is not carved in stone; the following GOGS ratios provide ballpark
numbers to evaluate the Mixed Beverage Annual Review: Liquor - 20%, Beer &
Wine - 25%, Food - 45%. If the evaluation of the Mixed Beverage Annual Review
shows substantially higher numbers, further investigation is required. It may be that
the business only charges low prices or it may indicate that sales have been
underreported.
3. The COGS ratio is the relation of cost to sales ( $40.00 cost divided by $100.00
sales equals 40 percent COGS. The inverse of COGS is the markup factor ( 1
divided by 40 percent equals 2.5) Therefore, purchases may either be divided by
the COGS percentage ( $40.00 cost divided by 40 percent equal $100.00 sales) or
purchases may be multiplied by the markup factor ( $40.00 cost times 2.5 equals
$100.00 sales).
4. A place of business, which sells only beer, is required to have at least $2000.00
worth of food sales per month by the ABC.
9
Restaurant / Bars Purchase Mark-Up
Page - 10
Weight COGS
10
Restaurant / Bars Purchase Mark-Up
Page - 11
Payment record.
Outstanding bills.
Non-filers.
If they do have sufficient records, you will review these records and determine
if the proper amount of tax has been paid on purchases and collected and
remitted to the Commonwealth.
To ensure that the proper amount has been submitted, you will have to review
the cost of goods sold figure. This can be done by dividing purchases for
resale by gross sales which will give you cost of goods sold percentage. If
this is in line with established guideline figures then the audit is complete.
If the cost of goods sold percentage is high then you must look into the
reasons why.
If the selling price is low, then that might explain why the cost of goods sold
percentage is high.
If the selling price is average for the industry, then that should alert you of
possible under reporting of sales.
Even if the taxpayer has all the records necessary to perform the audit there
is no way of knowing if all sales were rung up on the cash register or if the
cash register was totaled prior to closing. This leads the auditor to question
the validity of the records that were given to him.
11
Page - 1
Objective: Discuss the application of sales and use tax as it applies to Caterers.
I. References
II. General
A. Retail sales by caterers are taxable, including charges for cover, labor,
minimum, service, set-up, cleaning, non discretionary tips, etc. Virginia
Code 58.1-602 defines sales price as the total amount for which tpp or
services are sold, including any services that are part of the sale.
The only items excluded from the sale price are any cash discounts
allowed and taken or finance charges, carrying charges, service charges
or interest from credit extended on sales of tpp under conditional sales
contracts. (PD 93-33)
Page - 2
B. Items purchased or leased by a caterer for its own use in preparing and
serving meals are taxable to the caterer at the time of purchase and are
also subject to tax as part of the sales price to the customer.
III. Procedures
Purchases
Equipment and supplies leased or purchased by a caterer, for its own use
and consumption in preparing and serving meals, are taxable. Examples of
some items subject to the tax are:
The tax is applicable at the time of purchase or rental and must be paid to
the vendor. These items were not sold to customers as part of the meals, but
instead were consumed by the caterer in providing the meals. The caterer
would charge the sales tax on the entire cost of the meals including all
charges associated with the providing of the meals, even if separately stated.
(PD 93-33, PD 92-156, PD 89-167, PD 88-147, Tax Bulletin 92-10)
The application of the tax to a caterer's purchase or rental of tpp for use in
providing food service and the subsequent taxation of the caterer's total
charge to its customer for the provision of such services does not constitute
double taxation in that these are two separate and distinct transactions for
purposes of the application of the sales and use tax. (PD 94-39)
Page - 3
Policy change
SALES
SALES TO GOVERNMENTS
Dear *****:
This is in reply to your letter in which you request a ruling regarding the
application of the retail sales and use tax to purchases made by *****
(the "Taxpayer"). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a catering business and questions the application of the
tax to purchases of perishable goods and disposable items made in
connection with the provision of catering services. The purchases in
question are not reusable and transfer to the customer.
RULING
Current policy
The tax must be paid on all other purchases made in connection with the
provision of catered food. The application of the tax to purchases by
caterers is set out in a number of prior rulings of the Tax Commissioner,
including Public Documents 89-187 (5/22/89) and 93-33 (2/24/93). In
addition, Virginia Tax Bulletin 92-10 (11/4/92) discusses the application
of the tax to providers of meals, including caterers.
Policy change
It is important to note that the caterer must document all purchases and
rentals of the aforementioned items for resale purposes. The charges to
the customer for such items must be separately stated on the invoice to
the customer. It must be evident that the charges being incurred by the
caterer for the customer are the same charges that are being passed on
to the customer and on which tax is collected from the customer.
Page - 7
The regulation, public documents and Tax Bulletin cited are available
on-line in the Department's Tax Policy Library, located at
www.policylibrary.tax.virginia.gov. If you have any questions regarding
this ruling, you may contact ***** in the Office of Policy and
Administration, Appeals and Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
CONTROLLED DRUGS, MEDICINE & D.M.E.
Page - 1 #33
Objective: Discuss the application of the sales and use tax as it applies to
controlled drugs, medicines, durable medical equipment, prosthetic devices,
nonprescription drugs and proprietary medicines.
I. References
D. Ruling Letters
P.D. 84-63 - Definition of Controlled Drug
P.D. 91-24 - Supplies used with feeding equipment, ostomy supplies
and liquid nutrients
P.D. 91-43 -Third party billings – medicaid, medicare - Liquid
nutrition sold on prescription for use in enteral and
parenteral feeding equipment. See PD 92-118 and 95-
182.
P.D. 92-67 - Vitamins, minerals and food supplements.
P.D. 92-97 - Drugs sold to clinics by affiliated pharmacy
P.D. 92-118 -Various medical supplies, Third party billing See P.D.
91-43, P.D. 95-182
P.D. 94-109 - Breast and chin implants
Commissioners Ruling (4/25/94) - Clarification on implants for
cosmetic purposes
P.D. 95-182 - Changes in legislation regarding third party billings.
Department of Medical Assistance Service
reimbursement for medical supplies. See PD 91-43, 92-
118.
P.D. 95-266 - Infusion pumps and documentation required for D.M.E.
"bought for an individual"
P.D. 96-47 - Exemption for drugs and fluids used in chemotherapy
treatments
P.D. 96-64 - Taxability of dietary/nutritional supplements
P.D.97-253 - Sales to physicians, drug samples, sales to
Veterinarians
P.D. 97-488 - Taxability of acupuncture supplies
P.D. 98-98 - Exemption for Nonprescription Drugs and Proprietary
Medicines
P.D. 99-32 -Taxability of homeopathic medicines, astringents, natural
foods and supplements
P.D. 00-203 – Taxability of bath additive products
P.D. 92-172 - Home infusion therapy pharmacy’s purchase of
controlled drugs is taxable as part of the rendition of services.
P.D.97-322 - Pharmacy corporation’s provision of controlled drugs to
affiliated hospitals is a service similar to Bluefield
Sanitarium. See also PD 04-118. 04-49
II. Generally
III Definitions
A. Controlled Drugs - Shall mean those drugs itemized under Virginia Code
Sections 54.1-3446 through 54.1-3456, but shall include only medicines
and drugs and not devices.
C. Prescription - Shall mean and include an order for drugs and medical
supplies, written, signed or transmitted by word of mouth, telephone,
telegraph, or other means of communication to a pharmacist by a duly
licensed physician...or other practitioner, authorized by law to prescribe
and administer such drugs or medical supplies.
IV. Procedures
A. Medicines and Drugs - The exemption for medicines and controlled drugs
is "purchaser specific". In order for the exemption to apply, purchases of
controlled drugs and medicines must be made by an exempt entity, a
licensed pharmacy, or purchased pursuant to a physician’s prescription.
First, the auditor will determine the taxability of the purchaser of the drugs
or medicines. The auditor should note that the exemptions for medicines
and drugs has been expanded several times and therefore the timing of
purchases may be a important factor. If the purchaser is an exempted
medical facility or a licensed pharmacy, all purchases of drugs and
medicines will be exempt and no further examination of the drug
purchases is required. The exemptions for various medical facilities are
outlined in P.D. 89-254 and also detailed under medical facilities/health
care providers. If the purchaser is a taxable entity, then the auditor will
decide if the transaction meets one of the other criteria for exemption.
The auditor should also keep in mind the legislative change in 7/1/98
previously noted exempting all sales of nonprescription and proprietary
medicines as well as the legislative changes in 2006.
The tax does not apply when the ultimate consumer or a taxable entity
purchases drugs or medicines on a physician's or dentist's written or oral
prescription provided it is reduced to writing. The issue before the Court
in Northern Virginia Hospital was whether or not the issuance of drugs in
that case constituted a sale of drugs on a “prescription or work order” of a
licensed physician. The drugs were purchased by the hospitals patients
on physician's work orders from a conventional pharmacy operating
separate and apart from the hospital. The sale constituted a sale of drugs
on a prescription or work order and the transactions were deemed tax
exempt.
CONTROLLED DRUGS, MEDICINE & D.M.E.
Page - 6 #33
(Effective 7/1/2006, all licensed hospitals, nursing homes and clinics and
similar corporations are exempt on purchases of drugs and medicines)
the source of reimbursement (P.D. 91-43). However, the tax due is not
on the total charge submitted to the third party for reimbursement, but is
based on the actual reimbursement amount which is allocated to sales,
nontaxed charges and tax based on the percentages to the original total
charge (P.D. 95-182). Effective April 6, 1995, legislation was passed
exempting from sales tax medical products and supplies such as
bandages, gauze dressings, incontinence products and wound care
products when purchased by a Medicaid recipient through a D.M.A.S.
provider agreement. Billings to any other third party payers will continue
to follow the procedures outlined previously.
use; and (3) is the product for the cure, mitigation, treatment, or
prevention of a disease in human beings. (See Nonprescription Drug
exemption Teleconference Questions & Answer Summary) If the
taxpayer is computerized, you may be able to go into its software and
determine if these drugs and medicines are marked as tax exempt.
Cosmetics, toilet articles, food products, and supplements, devices,
vitamins and mineral concentrates sold as dietary supplements or
adjuncts are taxable. If the taxpayer is not computerized, each individual
sale must be examined to insure tax is not charged on the exempt
medicines but is charged on the taxable items. Retail dealers making
sales of nonprescription drugs and proprietary medicines must keep
records segregating purchases and sales of exempt items.
At the conclusion of the audit, the auditor should ensure the taxpayer is
operating in accordance with the law change effective July 1, 1998 as it
applies to nonprescription drugs.
The ST-13 has been revised as of July 2001 and should be used by the
specific purchasers listed and for the specific items and products listed on
the exemption certificate form.
Objective: Discuss the application of sales and use tax as it applies to mining and
mineral processing.
I. History
March 1983. A separate section of the Retail Sales and Use Tax
Regulations was created for mining and mineral processing, and included gas
and oil well drilling.
July 1985 and after. The Code of Virginia was amended to include in
the definition of the term “used directly” in relation to mining, any reclamation
activity of the land previously mined by the mining company required by state
or federal law.
July 1, 1994 and after. Gas and oil well drilling was removed from the
mining and mineral processing exemption.
II. References
III. General
B. Definitions
"Used directly," refers to all steps of the integrated mining process, but
does not include ancillary activities such as general maintenance or
administration. It also includes reclamation activities required by state or
federal law when performed by the mining company on land which it has
previously mined.
Mining and processing are separate and distinct activities. If the ore or
mineral excavated is subject to further mineral processing, the exemption
continues.
“Mining” means both deep and strip mining, quarrying, and other industrial
removal of natural resources, minerals, or mineral aggregates from the
earth. It does not include the extraction from tailing piles which because
of technological advances in processing have become economic mineral
deposits.
Direct use in mining begins with the drilling of the shaft in deep mining or
the removal of the overburden in strip mining, auger mining or quarrying
and ends with the conveyance of the mined product to storage or stockpile
at the mine site.
Direct use in mining processing begins with the handling and storage of
the raw material at the processing plant site and ends with the
Mining and Mineral Processing
Page - 3
C. Exploration
D. Site Preparation
Site preparation is the preparation of the mine and includes the removal of
the overburden, the clearing of the land at the mine site, construction of
access roads, and the construction of tunnels, shafts, and passageways in
underground mines.
Other land clearing activities at the mine site or the mineral processing
plant site, such as for the construction of a processing plant or office
buildings, and the construction and maintenance of access roads, are not
a part of mining and property used in such activities is subject to the tax.
E. Extraction
Such items include digging, blasting, and extracting equipment, mine roof
support materials, drainage pumps used within the mine, ventilation and
dust control equipment used in the mines, transportation devices and
equipment used to haul extracted product from the mine face or pit to a
stockpile located outside the mine or pit, personnel and supply cars, fuel,
supplies, lubricants and repair or replacement parts for exempt equipment,
Mining and Mineral Processing
Page - 4
telephones used within the mine, and protective apparel and protective
materials furnished to production employees.
Mining does not include the extraction from tailing piles. No mining or
processing occurs in this process. It does not entail the severance or
extraction of minerals from the earth as extraction from the mine has
already occurred, and no further processing occurs.
Prior to the Wellmore court case, all road building and maintenance
equipment and supplies, and automotive parts, tires and supplies used on
licensed vehicles were taxable. If the mine and the mineral processing
sites were not connected by a private transportation system, they were
deemed to be two separate sites and the transportation between the two
was taxable.
The Virginia Supreme Court in Wellmore ruled that transporting the coal to
the tipple is part of the mining process. Exempt transportation is not
limited to the transportation occurring at the plant site. The Court ruled
that repair parts and supplies for all trucks used to haul coal between
mines and the tipple are exempt. Materials used to build and maintain coal
haul roads are used directly in the process of mining and are not taxable.
The road maintenance materials facilitate transportation of the coal from
the mines to the tipple for processing.
Mining and Mineral Processing
Page - 5
G. Mineral Processing
Mineral processing begins with the handling and storage of the raw
material at the processing plant site and ends with the conveyance of the
processed product to storage at a stockpile at the plant site. It was ruled
in the Wellmore Court Case that weighing of the coal at the tipple, or
processing site, is a part of processing because it constitutes handling of
raw materials.
Tangible personal property used to clean, grade, wash, crack, crush, and
similarly process the mineral or resource is exempt.
Any testing not related to product quality control is not part of mining or
mineral processing and is a taxable activity. Examples of taxable
research are efficiency surveys, management studies, consumer surveys,
economic surveys, advertising, or promotions.
H. Refuse
plant and the dump, no exemption is available for property used to convey
the waste between the two sites.
J. Distribution
K. Reclamation
state or federal law are a part of the mining process when performed by a
mining company on land which it has previously mined. Reclamation
activities which are not required by federal or state law are not a part of
mining and tangible personal property used in such activities is subject to
the tax.
L. Pollution Control
M. Contracted Activities
N. Preponderance of Use
When auditing coal mining companies, the auditor will primarily reviewing
expensed purchases and fixed assets. Typically the only sales requiring
review are disposals of fixed assets.
Request a listing of all the taxpayer’s related companies. The listing should
include a brief description of each company’s business and the location of the
business operation. It is not unusual for a coal company to have several
related mining companies, as well as non-mining entities. Utilize the
taxpayer’s income tax returns to verify that the listing is complete.
Determine the type of mines, such as deep or strip, that the taxpayer
operates and the type of facilities owned by the taxpayer. Schedule a tour of
the facilities prior to reviewing invoices so that areas of potential liability such
as clean coal stock piles, loadouts, refuse haul roads, repair shops,
bathhouses and administrative buildings can be identified. Especially note
which pieces of heavy equipment are being used in taxable areas.
Determine how each item listed on the depreciation schedule or other fixed
asset listing is being used. Determine the preponderance of use for items
used in both taxable and exempt activities. The burden of proof is on the
taxpayer to document that an item’s use is more than 50% exempt. Assets
used indirectly in mining transferred from a related company may be taxable
at their current value if no tax was paid on the original purchase. The use of
the asset may have changed, making it taxable, or it may have been
transferred from a non-Virginia location where the item enjoyed a sales tax
exemption.
taxable, but stone purchased for use on coal haul roads is exempt. When
reviewing purchase invoices, a chart of accounts or general ledger with a brief
account description should be used to help determine the taxability of
expensed purchases. Information written on the purchase order or on the
invoice itself may assist the auditor in determining how an item is used. If the
accounts or descriptions are too general or if the items are purchased in bulk,
the items should be taxed at an agreed to percentage. Fuel and other
supplies identified as being purchased for a particular piece of equipment
should be prorated even though the equipment, itself, may be totally taxable
or exempt because of the preponderance of its use.
Auto Dealers and Auto Repair Shops (Rev. 10/97)
Page - 1
Objective: Discuss the application of sales and use tax (retail sales tax) as it
applies to auto dealers and auto repair shops.
I. History
1/1/95 and after. As a result of Tax Bulletin 94-10, all dealers in the business
of selling tires, anti-freeze, motor oil, and other like automotive accessories,
who charge a disposal fee in connection with the sale of such items, are
required to collect the retail sales tax on the disposal fee, even if it is
separately stated. By contrast, dealers who provide disposal services totally
independent of the sale or provision of tpp are deemed to be providing a
nontaxable service. Taxable fees on which no retail sales tax was charged
should not be listed or extrapolated prior to 1/1/95.
1/1/96 and after. Code of Virginia § 58.1-609.5(9) subjects parts and labor
maintenance agreements to the retail sales tax at one-half (50%) of the total
charge.
I. References
B. Virginia Regulations
C. Ruling Letters
III. General
Over the counter sales of parts and accessories by motor vehicle dealers
are subject to the retail sales tax as are parts used to repair customers'
motor vehicles. Charges for repair labor, however, are not taxable when
billed separately. "The tax does not apply to the exchange of parts under
a warranty or guarantee if no charge is made. However, the tax applies
to any difference charged for parts so exchanged." This regulation's last
paragraph explains that "[t]he tax does not apply to a handicapped
person's purchase of special equipment which will be installed on a motor
vehicle to enable him to operate the motor vehicle."
The retail sale of auto parts is subject to the retail sales tax and repair
labor is exempt only when separately stated. This regulation also
addresses purchases. "Replacement parts, materials and supplies which
are transferred to the customer may be purchased under certificates of
exemption. The tax must be paid on equipment, tools and all other
tangible personal property used in performing the repair work."
IV. Procedures for the Sale, Lease or Rental of New and Used Vehicles
For audit purposes, the handling of the DMV tax determines whether a
vehicle is a daily rental vehicle (i.e., an airport "rent-a-car") or a long-term
lease vehicle (i.e., a 1 to 4 year lease). The gross proceeds of a daily
rental vehicle are subject to the DMV tax which is added to the quoted
rate and collected from the customer. The rental vehicle plus all repair
parts and routine service supplies which actually become part of the
vehicle (i.e., a replacement headlight, oil, antifreeze) may be purchased
by the dealer under the resale exemption. A long-term lease vehicle,
however, is titled to the leasing company (the lessor) which pays the DMV
tax on the purchase price of the vehicle including any accessories added
to the vehicle prior to titling. The monthly lease payments are not subject
to either the DMV tax or the retail sales tax. The lessor is considered the
user and consumer of any accessories (i.e., cruise control, air
conditioning or upgraded sound system) added to a long-term lease
vehicle after the DMV tax is computed and for any repair parts and
routine service supplies purchased for the vehicle during the life of the
lease. The auditor should check fleet car, truck and trailer leases which
Auto Dealers and Auto Repair Shops (Rev. 10/97)
Page - 6
"[I]t has been determined that [plans] which identify the seller, dealer or
manufacturer as the guarantor, (the party generally identified as 'We' in
the contract), against certain specified motor vehicle breakdowns, are not
considered contracts of insurance subject to licensure or regulation by the
Bureau of Insurance. This is true . . . notwithstanding that such contracts
might also be issued through an insurance agent or underwritten by an
insurance company which is licensed or regulated by the Bureau."
"[T]he total sales price of all extended warranty plans and/or vehicle
service contracts issued by Virginia automobile dealers is subject to tax
. . . at the time of sale to customers and the dealers must report such tax
collected to the department when filing their monthly retail sales and use
tax returns." Plans are subject to the retail sales tax - not the DMV tax.
Prior to January 1, 1996, plans were subject to the retail sales tax at
100% of the total charge to the customer. After January 1, 1996, plans
are taxed at one-half (50%) of the total charge. (Refer to Virginia Tax
Bulletin 95-8.) The auditor will have to take this statute change into
account when extrapolating a purchase sample including taxable plans.
This can be accomplished by using the Multisam program.
H. Motor Vehicles are Subject to the Retail Tax when No DMV Tax is Paid
Some parts departments have every exemption certificate they have ever
Auto Dealers and Auto Repair Shops (Rev. 10/97)
Page - 9
C. Cash Sales
It is not unusual to find parts tickets which have "Cash Sale" as the only
customer identification. This is acceptable for taxable sales but not for
exempt sales. If the dealer cannot identify the specific customer of an
exempt cash sale, such sale should be assumed to have been subject to
the retail sales tax and included in the audit.
D. Cash Discounts
A motor vehicle dealer's auto repair shop sales are almost always
accounted for separately. Auto repair shop sales are usually divided into
three areas: (1) the repair of vehicles for which the customer is
responsible for payment, (2) warranty repairs for which the vehicle
manufacturer, dealer or issuer of an extended warranty plan or vehicle
service contract is responsible for payment and (3) internal repairs which
include any work on the dealer's own vehicles or motor vehicles in the
new and/or used inventories. Auto repair shops usually invoice their
customers on repair orders or R.O.s. One repair order could conceivably
include all three areas. In this instance, many dealers print separate
repair orders for each area using the same repair order number. The
customer usually only sees the price details for those items for which he
pays. Repair orders usually have their own numbering sequence and are
filed by repair order number. This can impact a sales sample since repair
orders can sometimes remain open for weeks before the repair is
completed. The auditor may need to examine earlier numbers to find
repair orders which were closed during the sample period. The auditor
should also check that all periods within the sample are included to
ensure that a package of repair orders was not used out of sequence.
Since revenue figures should be readily available for auto repair sales, it
is appropriate to use them and the Multisam program during the audit
write-up to project any auto repair liability. Code such sales in the key
field to a unique "S#" (#=1-5) as they are entered to designate this area of
the audit.
There are many exemption certificates which may be accepted for vehicle
repairs. Governments, nonprofit schools and common carriers are
examples of customers who can present valid exemption certificates.
Auto Dealers and Auto Repair Shops (Rev. 10/97)
Page - 11
Most motor vehicle dealers offer coupon or other discount programs. The
auditor needs to verify that such discounts are being accounted for
correctly. Often the discount is credited to separately stated labor so
there is no retail sales tax impact. If the offer is for a free service such as
an oil change, then the dealer becomes responsible for consumer use tax
on any supplies (oil and filter) withdrawn from an exempt resale inventory.
Sublet repairs occur when the dealer sends a part from a customer's
vehicle or the vehicle itself to be worked on at another repair shop. Some
dealers also show towing charges in this category. The dealer should
provide the sublet shop with an ST-10 if tpp is involved. If the sublet
repair is strictly labor (i.e., grinding valves by a machine shop) and is
described as such on the repair order, then no retail sales tax applies to
the sublet repair. If the sublet repair is for both parts and labor and only
one price is quoted on the repair order, then retail sales tax must be
charged on the entire sublet repair. A good method of accounting for
sublet repairs is for the dealer to itemize the sublet parts (which do not
have to be identified as sublet) in the parts sales area of the repair order.
The customer is then taxed on the correct (and often marked-up) price.
In this method, only exempt sublet repair labor or services are shown in
Auto Dealers and Auto Repair Shops (Rev. 10/97)
Page - 12
the sublet area of the repair order. If the dealer erroneously pays tax to
the sublet shop, he is not relieved from charging his customer the retail
sales tax. On a first audit, however, the auditor may choose to pick up
the difference in retail sales tax (as taxable measure) between the
amount of tax paid to the sublet repair shop and the tax which the
customer should have been charged. This method should be utilized only
if the dealer (who benefits from it) is willing to pull the necessary sublet
shop invoices to verify the amount of retail sales tax paid. Alternatively
and in subsequent audits, if the sublet is not identifiable as a service only
charge, the entire amount should be picked up as taxable in the audit until
the dealer can prove otherwise. Since no credit is allowed for any tax
paid to the sublet business, the dealer can be advised to seek a refund of
any such tax directly from the sublet company.
If retail sales tax was charged at the time of sale of an extended warranty
plan or vehicle service contract (plan), and the plan requires that the
customer pay a deductible amount for a covered repair, such deductible
amount is not subject to the retail sales tax. Likewise, if the dealer bills
the issuer of such a taxed plan for reimbursement, there is no retail sales
tax due. Plan transactions become extremely complicated because they
seldom cover all of the repairs. Obviously, parts not covered by the plan
are taxable to the vehicle owner.
Most internal repair orders are for the preparation of vehicles for sale.
Because the parts and accessories used in this activity are exempt under
the resale exemption, no consumer use tax liability exists. There will be
Auto Dealers and Auto Repair Shops (Rev. 10/97)
Page - 13
relatively few internal repair orders for company owned vehicles (i.e., a
tow truck, parts truck or executive vehicle). TPP listed on these repair
orders is subject to consumer use tax. Since internal repair orders
frequently show prices at cost, the taxable amount is usually easy to
determine. The internal repair order is often the only record of the
withdrawal of these items for the dealer's own use. However, the auditor
must be aware that a dealer may have paid tax at the time of purchase on
some items shown on an internal repair order.
Unless either of these two methods are used, the items listed above
would continue to be treated as consumable shop supplies.
J. Shop Supplies
Motor vehicle repair shops and dealers are required to pay retail sales tax
or accrue and remit consumer use tax on consumable supplies used in
repairing or servicing customer vehicles. Repair shops often attempt to
recoup such costs by charging customers an amount (usually a
percentage of the labor charges) called "shop supplies." Tax should not
be charged to the customer for such shop supplies. Items normally
considered shop supplies are cleaning supplies (including rags, drop
cloths, floor sweep, mops and buckets); paper/plastic seat covers; work
clothes, tools, equipment and machinery used in repair work (including
repair and replacement parts and supplies for that equipment); soaps,
degreasers, and thinners; and sand paper, steel wool, and emery cloth;
and other similar items that are not transferred to customers.
Most motor vehicle dealers track body shop sales separately. Body shop
sales are divided into non-taxable services (i.e., the painting of a vehicle)
and taxable sales of parts and accessories. Customers are usually
invoiced on repair orders or R.O.s which normally use a numbering
sequence different than those in the dealer repair shop. Repair orders
are normally filed in numerical sequence. As with auto repair shops, this
can impact the sales sample since body shop repair orders can
sometimes remain open for months before the repair is completed. The
auditor may need to examine earlier numbers to find repair orders which
were closed during the sample period. The auditor should also check that
all periods within the sample are included to ensure that a package of
repair orders was not used out of sequence. Since revenue figures
should be readily available for auto body sales, it is appropriate to use
them and the Multisam program during the audit write-up to project any
auto repair liability. Code such sales in the key field to a unique "S#"
(#=1-5) as they are entered to designate this area of the audit.
C. Shop Supplies
As with auto repair shops, a separately stated charge for shop supplies
(usually a percentage of the labor charges) is often invoiced to the
customer to recoup the cost of consumable items incurred by the motor
vehicle refinisher. These shop supply charges are not taxable to the
customer. This is true even after December 1996 when the issue of
transferable bulk supplies was addressed. Because motor vehicles
Auto Dealers and Auto Repair Shops (Rev. 10/97)
Page - 16
Refer to the sublet repair discussion in section VI. Sublet charges are
usually more substantial in body shops - particularly when accident
damage repairs are involved.
F. Insurance Transactions
Purchases by auto body shops are always taxable except for parts for
resale and sublet work which are itemized on the repair order. The
auditor should verify that retail sales tax has been paid on expensive
machines such as frame straighteners, color match computers and paint
booths.
Most motor vehicle dealers are highly computerized. While the original
parts tickets, repair orders and other sales documents are usually readily
available, it is often easier to examine existing computer printouts. Dealer
personnel may be flexible enough to create reports or printouts of the
exact information which an auditor requests. Instead of buying preprinted
forms, dealers routinely have computers directly print parts tickets and
repair orders. Computers have made auditing faster if for no other reason
than the documents are always legible. Computers, however, can mask
obvious programming errors. Most auto dealers use an industry wide
system of account codes. Someone at the dealer probably entered the
tax status of each code into the computer. This can result in retail sales
tax never being charged on certain codes. The auditor could find, for
example, that parts sales to employees are never taxed.
C. Purchase Records
1987, DMV removed "mobile office" from the definition of "motor vehicle"
but specifically imposed a 2% tax on the sales price of each mobile office
sold in Virginia. Since mobile offices are no longer defined as motor
vehicles, the DMV tax on motor vehicle rentals has not applied since
1987. If the 2% DMV tax was paid at the time of purchase of a mobile
office by the owner, then the lease or rental is not subject to the 4.5%
retail sales tax. Conversely, if the 2% DMV tax was not paid at the time
of purchase by the owner, then the monthly charges for the mobile office
rental are subject to the 4.5% retail sales tax. The burden of proof rests
with the lessee (person using the mobile office) as described in P.D. 96-
157.
Code of Virginia § 58.1-609.3(10) states that the retail sales tax does not
apply to "[p]arts, tires, meters and dispatch radios sold or leased to
taxicab operators for use or consumption directly in the rendition of their
services." It was the intent of the General Assembly to limit the scope of
exemption for taxicab operators. 23 VAC 10-210-990(E) further limits the
exemption by stating that "[a]ccessories, maintenance materials, and all
other tangible personal property purchased by a taxicab operator are
subject to the retail sales and use tax." Since the term "parts" is not
specifically defined, it must be read in the context of the rest of the statute
thereby taking on a very narrow connotation. For example P.D. 89-115
ruled that paint purchased by a taxi company to maintain its fleet of cabs
was not exempt from retail sales tax. If the dealer has not previously
been informed by the department of the limited nature of the exemption
and had an ST-20 exemption certificate at the time of the sale, such
certificate should be considered to have been accepted in good faith.
Code of Virginia § 58.1-609.7(6) states that the retail sales tax does not
apply to "[s]pecial equipment installed on a motor vehicle when
purchased by a handicapped person to enable such person to operate
the motor vehicle." Under Virginia's strict interpretation of statutes, the
equipment must be purchased by the handicapped person and also
enable the person to operate the vehicle. Therefore, the purchase of a
wheelchair lift by parents of a handicapped youngster which allows the
child to ride in a vehicle does not fall within the statute. If an ST-10B
exemption certificate was on file at the time of an improper exempt sale of
special equipment, such certificate should be considered to have been
Auto Dealers and Auto Repair Shops (Rev. 10/97)
Page - 20
accepted in good faith if the dealer has not previously been informed by
the department of the limited nature of the exemption.
K. Litter Tax
Motor vehicle dealers are liable for the $10.00 annual litter tax since the
tax is imposed on any person who wholesales, distributes or retails motor
vehicle parts. If the dealer services drink and/or snack machines
available to the general public, the additional $15.00 tax (imposed on a
wholesaler, distributor or retailer of groceries, soft drinks or carbonated
waters) applies. If the dealer only receives a commission from a vending
company, the additional $15.00 would not apply.
L. Tire Tax
The auditor should be aware of the tire tax status of the dealer. Many
dealers do not inventory tires and sublet work to retail tire stores. In this
case it is proper for the dealer to pay the tire tax to the tire store. If the
dealer has significant retail tire sales, a tire tax registration is required.
(Refer to the tire tax statutes, regulations and tax bulletins for details.)
I. History
II. References
III. General
A. Sales. The sales and use tax does not apply to the retail sale of any
publication issued daily, or regularly at average intervals not exceeding
three months, except that newstand sales of the publications are taxable.
B. Purchases. The sales and use tax does not apply to purchases of
equipment, printing or supplies used directly to produce a publication as
defined below whether sold at retail or distributed at no cost.
C. Definitions.
IV. Procedures
Thus, when reviewing purchases, the auditor should follow the guidelines
for auditing manufacturers and processors. Items used in pre-production
activities, or used indirectly in production, cannot be purchased exempt of
the tax by publishers.
Newspapers, Etc.
Page - 3
and
and
Objective: Discuss the application of sales and use tax as it applies to who is a
dealer and if a dealer has nexus.
I. References
II. General
A. Nexus describes the amount and degree of business activity that must
be present before a state can require that an entity collect sales and
1
use tax on sales made in that state. The amount of activity or
connection that is necessary to create nexus is defined by state statute
and/or regulation and case law. When there is a dispute about nexus
that is not resolved at the audit appeal level, the case may progress to
the state court and then to the Supreme Court of the United States.
Sales and use tax nexus decided by the courts is based on the
wording of the state’s law and how it relates to the Commerce Clause.
The Commerce Clause is contained in Article I, Section 8 of the U.S.
Constitution. It empowers Congress to regulate interstate commerce
and commerce with foreign countries; and is used as a basis for
judicial review of state actions by the Supreme Court. At the federal
level, the court decides if the state’s law is a burden to interstate
commerce. Cases appealed to the Supreme Court have only recently
began to deal with the states’ power to require companies who have a
significant economic impact in their state to register and collect sales
and use tax. See copies of court cases provided at the end of this
procedure.
B. Sales or use tax is collectible from all persons who meet the definition
of a dealer and who have sufficient activity within the Commonwealth
to establish nexus.
D. E-Commerce Implications
Common situations where nexus is established include physical
presence by employees or agents in the state (although sporadic or
temporary presence may in some cases may not be enough to
establish nexus); agency nexus where the out-of-state seller hires in-
2
state third party contractors to perform certain activities; affiliate nexus
where the in-state activities of a registered dealer create nexus for an
out-of-state affiliate making sales in the dealer’s state; and economic
nexus where the of the out-of-state entity poses a significant economic
presence in the state through advertising. No nexus cases have been
tried in Virginia courts. Case Law from other states has been included
to provide a view of the issues as seen from their prospective.
3
III. Procedures
4
B. If dealer status can be established, then look at nexus requirements. A
dealer shall be deemed to have sufficient activity within the
Commonwealth to require registration under §58.1-613 if he:
1. Maintains or has within this Commonwealth, directly or through
an agent or subsidiary, an office, warehouse, or place of business
of any nature;
2. Solicits business in this Commonwealth by employees,
independent contractors, agents or other representatives;
3. Advertises in newspapers or other periodicals printed and
published within this Commonwealth, on billboards or posters
located in this Commonwealth, or through materials distributed in
this Commonwealth by means other than the United States mail;
4. Makes regular deliveries of tangible personal property within this
Commonwealth by means other than common carrier. A person
shall be deemed to be making regular deliveries hereunder if
vehicles other than those operated by a common carrier enter this
Commonwealth more than twelve times during a calendar year to
deliver goods sold by him;
5. Solicits business in this Commonwealth on a continuous, regular,
seasonal, or systematic basis by means of advertising that is
broadcast or relayed from a transmitter within this Commonwealth
or distributed from a location within this Commonwealth;
6. Solicits business in this Commonwealth by mail, if the
solicitations are continuous, regular, seasonal, or systematic and if
the dealer benefits from any banking, financing, debt collection, or
marketing activities occurring in this Commonwealth or benefits
from the location in this Commonwealth of authorized installation,
servicing, or repair facilities;
7. Is owned or controlled by the same interests which own or
control a business located within this Commonwealth;
8. Has a franchisee or licensee operating under the same trade
name in this Commonwealth if the franchisee or licensee is
required to obtain a certificate of registration under § 58.1-613; or
9. Owns tangible personal property that is rented or leased to a
consumer in this Commonwealth, or offers tangible personal
property, on approval, to consumers in this Commonwealth.
5
person has sufficient contact with the Commonwealth to be
required to register under § 58.1-613:
1. The ownership or leasing by that person of tangible or
intangible property located at the Virginia premises of the
commercial printer which is used solely in connection with the
printing contract with the person;
2. The sale by that person of property of any kind printed at and
shipped or distributed from the Virginia premises of the
commercial printer;
3. Activities in connection with the printing contract with the
person performed by or on behalf of that person at the Virginia
premises of the commercial printer; and
4. Activities in connection with the printing contract with the
person performed by the commercial printer within Virginia for
or on behalf of that person.”
6
intended to be disseminated primarily to consumers located in this
Commonwealth, he must collect and report the applicable tax. This
closes the loophole, so to speak, of the advertising paragraph
explained earlier. While the out-of-state advertiser may not meet
dealer/nexus qualifications, he must pay the tax on printed
advertising directed at Virginia consumers.
Request that they register for the future and negotiate what will be
done for the past. Discuss with supervision whether a three or six year
statute will apply and what steps will be taken if an agreement cannot
be reached on the handling of the past.
C. If Virginia tax has been collected in error on a Virginia sale, the entity
is automatically a dealer under §59.1-612 B(8). The tax must be paid
to Virginia (Code of Virginia §58.1-625).
7
IV. Exhibits
8
SAMPLE DEALER/NEXUS QUESTIONAIRE
1) Is the business registered for any other Virginia tax such as withholding or corporate?
2) Has the business filed any types of returns with VA (specify type of tax)?
3 Is the business registered with the State Corporation Commission, State Contractors Board, or
any locality (Business License)?
4) Is there an office, agency, warehouse, or other business location owned or leased in VA?
5) Does the business have employees, representatives or independent contractors who perform
any of the following activities in VA:
a) Solicit orders with or without authority to approve?
b) Manage territories or perform marketing surveys?
c) Sell tangible personal property?
d) Make collections on regular or delinquent accounts?
e) Repossess items or property of the business?
f) Offer technical assistance and training to customers before or after the sale?
g) Repair, service, or replace faulty or damaged goods?
h) Install or assemble its products?
i) “License” software for use in the state?
j) Oversee the installation of the business' products by its customers or users of its
products?
k) Pick up damaged or returned merchandise from customers?
l) Coordinate delivery of merchandise?
m) Deliver replacement parts?
n) Conduct credit investigations or arrange for credit and financing for purchasers of its
products?
o) Resolve or assist in resolving any product, credit, shipping or similar complaint arising
from the purchase or use of its products?
p) Maintain displays of products or refill displays?
q) Accept returned merchandise for customers?
r) Collect deposits on sales?
s) Make "on the spot" sales of company products?
t) Carry out engineering or design functions?
u) Advise customers or distributors as to minimum inventory levels, remove obsolete,
damaged or outdated goods?
v) Receive and resolve complaints?
9
6) Does the business own or lease real property in VA?
7) Does the business own or lease tangible personal property located in VA?
8) Does the business rent or lease tangible personal property to others who then use the property
in VA?
12) Does the business have a standard form of written agreement with sales representatives? If
so, please provide a copy.
13) Is the business a member of an affiliated group of corporations? If so, does the business file a
consolidated or combined return in VA?
14) Does the business have display merchandise in leased space in VA?
15) Do employees have samples in VA? If yes, then what is the average value of samples in VA?.
16) Does the business provide sales or service manuals to customers, distributors, or agents?
17) Does the business advertise in VA? If so, what kinds of advertising media are used?
19) Does the business have any employees or representatives who use their home in VA:
a) As a business address?
b) To receive business calls?
c) To store inventory or sold goods until delivery?
d) To maintain books/records?
e) To house company property?
10
b) Services?
c) Intangible property?
32) Does the business have agents or independent contractors selling products in VA? If so, are
they allowed to sell or promote competitors' services?
33) Does the business select repair facilities in VA where customers can have products serviced
or repaired?
34) Is the business a partner, limited partner or affiliate of any entity that has operations, conducts
business, or owns real property in VA?
11
B. Ruling Letter Synopsis
12
inconsequential, as the T/P actively solicits the retail sales and
receives the orders from consumers.
(PD 95-111) More than three sales in a year creates nexus for the
collection of tax.
13
(PD 97-45) T/P, an out-of-state contractor who is an affiliate of a VA
company, is liable for the tax on the cost price of materials that it
furnishes and installs in connection with a real property construction
contract in VA. The state will allow a credit against VA taxes for
any taxes properly paid on tangible personal property acquired in
another state.
14
sales within the state. The fact that the TP makes periodic visits to
customers as part of its consulting service does not, in itself, create
nexus with VA.
(PD 98-161) A T/P who contracts to furnish and install modular
homes is a real property contractor and remains solely liable for the
tax on the cost price of all tangible personal property incorporated
into realty. The tax collected from the customer is erroneously or
illegally collected and must be transmitted to the Tax Commissioner
unless refunded to its customers.
(PD 99-60) The T/P, a North Carolina retailer of golf carts, charged
the 6% NC tax in error on sales delivered to Va. The T/P made
more than 12 deliveries in all years involved so nexus was
established. Any tax collected on Va. sales must also be remitted
to Va. The T/P may obtain a refund from NC for taxes erroneously
paid.
15
(00-61) Twelve or more deliveries per year by other than common
carrier creates nexus. Out-of-state dealer delivers by common
carrier and his own vehicle. Dealer also sets up tangible personal
property delivered. Dealer proposes registration prospectively.
Ruling states must investigate magnitude of sales.
(00-137) Although the Taxpayer did not have sufficient contact with
Virginia during the audit period to establish nexus, it was a
registered dealer. Nexus is not an issue when a taxpayer voluntarily
registers to collect the tax. As a registered dealer under Code of
Virginia §58.1-615, the Taxpayer is required to collect and remit the
tax on all taxable transactions.
16
(01-115) Sales of optional software support agreements to reseller
by manufacturer are exempt to reseller. Other nexus questions
answered with regard to sales of computer hardware, software &
support agreements by manufacturer to out-of-state reseller who
sells to end user in VA.
17
C. Ruling Letters
18
Rulings of the Tax Commissioner
Document 89-102
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Erroneously collected tax
Topics: Collection of Tax; Taxability of Persons and Transactions
Date Issued: 03/23/1989
Dear****************
This will reply to your letter dated December 15, 1988, in which you
submitted an application for correction of assessment in the above
referenced case for the period November 1985, through July 1988.
FACTS
19
the tax has since been refunded to the purchaser or
credited to his account. (Emphasis added).
Based upon Virginia Retail Sales and Use Tax Regulation §630-10-
27(A), the Taxpayer erroneously collected sales tax from its customers.
However, the department's assessment reflects only the difference
between the tax collected from customers and the amount of tax paid at
the time materials were purchased by the Taxpayer.
For the future, the Taxpayer should take the tax paid on materials into
account when submitting bids or pricing contracts. The Taxpayer should
not pass on the tax directly to its customers as it did during the current
audit period.
Sincerely,
W. H. Forst
Tax Commissioner
20
Rulings of the Tax Commissioner
Document 89-299
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Erroneous collection of tax
Topics: Collection of Delinquent Tax
Date Issued: 11/01/1989
November 1, 1989
Dear****************
This will reply to your letter of May 19, 1989 in which you request the
state of Virginia's policy on the erroneous collection and remittance of
state sales and use tax.
The erroneous collection and remittance of the Virginia sales and use
tax is addressed in §58.1-625 of the Virginia Code and §630-10-24 of
the Virginia Retail Sales and Use Tax Regulations. §58.1-625 of the
Code states, in part, "any dealer collecting the sales or use tax on
transactions exempt or not taxable under this chapter shall transmit to
the Tax Commissioner such erroneously or illegally collected tax unless
or until he can affirmatively show that the tax has since been refunded
to the purchaser or credited to his account." Subsection C of Regulation
630-10-24 also deals with the erroneous collection of the tax on
nontaxable transactions and states the following:
All sales and use tax collected by a dealer is held in trust for
the state. Therefore, any dealer collecting the sales or use
tax on nontaxable transactions must remit to the
Department of Taxation such erroneously or illegally
collected tax unless he can show that the tax has been
refunded to the purchaser or credited to the purchaser's
account.
Subsection D of this same section goes on further to state,
"any dealer who collects tax in excess of a 4 1/2% rate or
who otherwise overcollects the tax,... must remit any
amount overcollected to the state on a timely basis."
As can be seen from the above, Virginia does allow a refund to the
21
dealer of any sales and use tax which has been erroneously collected
and remitted to the state. However, the dealer must provide proof to the
state that the tax has been refunded to the purchaser or credited to the
purchaser's account. Refunds cannot be authorized unless the request
is made within three years from the due date of the return.
If you should have any further questions, please feel free to contact this
department.
Sincerely,
W. H. Forst
Tax Commissioner
22
Rulings of the Tax Commissioner
Document 91-286
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Dealers; Dealer With Representatives in Virginia
Topics: Taxability of Persons and Transactions
Date Issued: 11/08/1991
November 8, 1991
Dear*********************
This will reply to your letter of September 27, 1991 in which you seek a
ruling on applicability of the sales and use tax to sales made by one of
your clients in Virginia.
FACTS
23
If you have any further questions about this matter, please contact the
department.
Sincerely,
W. H. Forst
Tax Commissioner
24
Rulings of the Tax Commissioner
Document 91-314
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Out-of-state dealer
Topics: Persons Subject to Tax; Property Subject to Tax
Date Issued: 12/30/1991
Dear ******************
This will reply to your letter of April 19, 1991 requesting information on
the application of the sales and use tax to a transaction involving the
sale of tangible personal property between Company P (a Virginia
purchaser), Company R (based in Canada) and Company W (based in
the U.S. outside of Virginia).
FACTS
25
Company R is not subject to the tax as it is an exempt sale for resale,
provided adequate records are maintained.
Sincerely,
W. H. Forst
Tax Commissioner
26
Rulings of the Tax Commissioner
Document 92-136
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Publishing and Broadcasting; Puzzle Magazine
Topics: Taxability of Persons and Transactions
Date Issued: 08/10/1992
Dear**************
This will reply to your letter of December 23, 1991 seeking a ruling on
behalf of an unidentified client (the "Taxpayer") regarding possible sales
and use tax collection responsibilities.
FACTS
27
this Commonwealth, tangible personal property."
Other taxes for which the state may claim nexus: Under Public Law 86-
272, codified at 15 U.S.C.A. §381, Virginia is prohibited from imposing
an income tax on a taxpayer if its only business activities within a state
during the taxable year are the solicitation of orders for the sale of
tangible personal property. Thus, if the Taxpayer's only activities in
Virginia will be the sales of its product to purchasers in Virginia by
representatives of the telemarketing company, the Taxpayer would be
exempt from the Virginia income tax even though it may have income
from Virginia sources.
28
While, the Taxpayer's magazines are shipped to customers at intervals
of four to six weeks, a book of puzzles cannot be deemed to be a
written compilation of information and thus does not qualify as an
exempt publication.
W. H. Forst
Tax Commissioner
29
Rulings of the Tax Commissioner
Document 93-25
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Nexus; Dealer defined
Topics: Taxability of Persons and Transactions
Date Issued: 02/11/1993
Dear ****
This will reply to your letter in which you seek correction of sales and
use tax assessment for **** (the Taxpayer).
FACTS
The auditors maintain that the Taxpayer is eligible for audit for several
reasons, but primarily because (i) it has been registered with the
department for the collection of the use tax on sales made to Virginia
customers since October 1. 1988; (ii) the Taxpayer utilizes sales
personnel in Virginia and (iii) the Taxpayer makes deliveries into Virginia
in its own vehicles.
The Taxpayer maintains that it does not have nexus with Virginia and
thus is not required to collect the tax on sales to Virginia customers. In
addition, the Taxpayer maintains that the assessment is excessive and
arbitrary.
DETERMINATION
30
I will address the Taxpayer's concerns below:
Dealer defined - Va. Code §58.1-612 provides that the sales and use
tax shall be collectible from all persons who are dealers. as defined
therein, who have sufficient contact with the Commonwealth to require
registration for collection of the tax. Subdivision (B)(3) provides that the
term "dealer" shall include every person who "[s]ells at retail, or who
offers for sale at retail, or has in his possession for sale at retail, or for
use, consumption or distribution, or for storage to be used or consumed
in Commonwealth, tangible personal property."
The Taxpayer has been making sales to Virginia customers for number
of years. In fact, it voluntarily registered with the department and began
collecting and remitting the Virginia use as of October 1, 1988. Further,
the Taxpayer uses sales personnel to solicit and take orders in Virginia
and makes deliveries of tangible personal property to Virginia in its own
vehicles. Thus, in spite of the Taxpayer's contention that it is not a
"dealer" does meet the definition of "dealer" as defined above.
Reasonableness of assessment - The Taxpayer maintains that
department's assessment is excessive and arbitrary and requests that
the proposed assessment be set aside as erroneous.
Sincerely,
W. H. Forst
Tax Commissioner
31
Rulings of the Tax Commissioner
Document 93-141
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Advertising and deliveries in Virginia
Topics: Taxability of Persons and Transactions
Date Issued: 06/07/1993
June 7, 1993
Dear*********
This will reply to your letter of August 8, 1991 in which you protest a
recent statutory assessment to your client, ************ (the "Taxpayer"),
for the period April 1988 through March 1991.
FACTS
The auditors maintain that the Taxpayer is eligible for audit for several
reasons, but primarily because (I) it has been registered with the
department for the collection of the use tax on sales made to Virginia
customers since October 1981, (ii) the Taxpayer advertised in the******
"Richmond Edition" of the USA Today which is published and printed in
Virginia, and (iii) furniture sold by the Taxpayer is generally delivered to
Virginia customers by a contract carrier hired by the Taxpayer.
The Taxpayer maintains that it does not have nexus with Virginia and
thus is not required to collect the tax on sales to Virginia customers. In
addition, the Taxpayer maintains that the assessment is excessive.
DETERMINATION
32
I will address each of the grounds for audit along with the Taxpayer's
concerns below:
Dealer defined - Va. Code §58.1-612 provides that the sales and use
tax shall be collectible from all persons who are dealers, as defined
therein, who have sufficient contact with the Commonwealth to require
registration for collection of the tax. Subdivision (B)(3) provides that the
term "dealer" shall include every person who "[s]ells at retail, or who
offers for sale at retail, or who has in his possession for sale at retail, or
for use, consumption, or distribution, or for storage to be used or
consumed in this Commonwealth, tangible personal property."
Advertisements in the USA Today - Va. Code §58.1-612 also sets forth
various standards defining what constitutes "sufficient contact" to
require registration. It provides that a dealer who "advertises in
newspapers or other periodicals printed and published within this
Commonwealth,..." is deemed to have sufficient contact. The fact that
the Taxpayer advertised in the********* "Richmond Edition," a regional
edition of the USA Today which is published and printed in Virginia,
further supports its liability for tax collection.
The Taxpayer maintains that the purchaser "hires" the carrier to deliver
the goods to his/her designated destination. The payment for such is by
the purchaser and thus it is the purchaser, not the Taxpayer, who is
causing delivery to be made into Virginia. The Taxpayer maintains
33
further that purchasers are billed directly by the delivery company and
generally write separate checks, one to the Taxpayer and one to the
delivery company, when furniture is delivered on a C.O.D. basis. It
provided copies of invoices which illustrated shipping charges paid by
purchasers.
34
contractors.
While the invoices and bills of lading provided by the Taxpayer which
were issued by the delivery company and other carriers indicate that
customers themselves paid the carrier for the shipping, that is not the
controlling point (rather the carrier acts as an agent and confers nexus).
In any event, these are too few in number to show if this was the normal
method of operation. Furthermore, while you maintain that the
customers themselves and not the Taxpayer actually contracted with
the delivery company, there is no evidence to indicate that this was the
case. From the information provided, it appears that the Taxpayer
arranged the shipping.
Furthermore, since the Taxpayer is making deliveries into the state via
contract carrier which the Taxpayer hires, first use of the merchandise is
attributable to the Taxpayer in Virginia, and thus the transactions are
taxable under subdivision B of VR 630-10-51. This provides that "[t]he
tax applies to the first use in Virginia of tangible personal property
purchased elsewhere in a transaction which would have been taxed had
the transaction occurred in Virginia, regardless of the fact that such
property may have been, or may be used in interstate commerce...."
In addition, by imposing use tax collection responsibilities on the
Taxpayer, the department is not imposing a "toll charge," since the tax
is collectible from Virginia residents purchasing furniture from the
Taxpayer. This same use tax would be due from the Virginia purchaser
even if the furniture were shipped by common carrier.
The Taxpayer also suggests that the ruling in P.D. 90-49 (3/20/90) does
not support the department's assessment. P.D. 90-49 specifically states
35
that the taxpayer was delivering furniture into Virginia by means other
than common carrier. More specifically, the taxpayer was delivering the
furniture in its own vehicles and had made considerable sales into
Virginia. In the instant case, while the Taxpayer shipped furniture into
Virginia via contract carrier, the department has always considered this
type of carrier to fall within the "other carrier" language of the statute. In
addition, the Taxpayer had made regular and substantial sales to
Virginia residents. Thus, P.D. 90-49 does support the assessment.
Thus, in light of the information provided to date, I find that the Taxpayer
meets the nexus requirement under the above provisions.
Sincerely
W. H. Forst
Tax Commissioner
36
Rulings of the Tax Commissioner
Document 93-240
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Interstate transactions; Nexus requirement
Topics: Taxability of Persons and Transactions
Date Issued: 12/28/1993
Dear***************
This will reply to your letter of August 7, 1992, in which you have
requested an interpretation of the impact of the decision of the United
States Supreme Count in Quill Corporation v. North Dakota, 112 S. Ct.
1904 (1992) on the assessment issued for*********(the "Taxpayer")
during the periods April, 1991 through June, 1992. We have treated
your letter as an application to the Tax Commissioner to correct an
assessment of retail sales and use tax filed in accordance with Va.
Code §58.1-182l.
FACTS
The audit revealed that between April of 1991, and June of 1992, the
Taxpayer sold and delivered more than*****worth of furniture to
customers in Virginia. Neither Virginia nor any other state's retail sales
and use tax was collected by the Taxpayer on these sales. The
Taxpayer's state of residence also imposes a retail sales and use tax
The Taxpayer maintains that it does not have sufficient nexus with
Virginia, and is thus not required to collect the Virginia use tax on sales
37
delivered into Virginia. The Taxpayer has also requested that its status
as an out-of-state dealer be terminated.
DETERMINATION
I will address the issues of the case, and the Taxpayer's grounds for
protest below:
Dealer defined. Va. Code §58.1-612 provides that the use tax shall be
collectible from all persons who are dealers, as defined therein, who
have sufficient contact with the Commonwealth. As provided in Va.
Code §58.1-612 B 3, dealers are defined to include every person who:
Sells at retail, or who offers for sale at retail, or who has in
his possession for sale at retail, or for use, consumption, or
distribution, or for storage to be used or consumed in this
Commonwealth, tangible personal property.
Va. Code §58.1-612 C provides that a dealer shall be deemed to have
sufficient activity within the Commonwealth to require registration if he:
2. Solicits business in this Commonwealth by employees,
independent contractors, agents or other representatives;
38
Virginia's laws define a dealer, the responsibility of a dealer to collect
and remit the use tax, and the requirements for registration with the
department. The Taxpayer has failed to fully cooperate with the audit
process, and has refused to provide adequate evidence as to the extent
of its activities in Virginia. However, the evidence available indicates
that the Taxpayer is a dealer as defined by Virginia law, therefore the
Taxpayer is responsible for the collection and remittance of the use tax.
39
The bright-line test to determine physical presence with a state has
been extended beyond maintaining a place of business within a state.
The United States Supreme Court's decision in General Trading Co., v.
State Tax Commission of Iowa, 322 U.S. 335, 64 S. Ct. 1028 (1944)
held that the presence of traveling salesmen in a state constitutes
sufficient nexus to impose use tax collection responsibilities. The
requirement to collect Iowa's use tax was upheld regardless of the fact
that General Trading Co. did not maintain a branch, office, or
warehouse in Iowa.
The courts have also indicated that a de minimis level of activity will not
constitute sufficient nexus to impose responsibility for use tax collection.
In Miller Bros. Co. v. State of Maryland, 347 U.S. 340 (1954) the United
States Supreme Court held that where the activities of a Delaware
retailer did not exceed the occasional delivery of goods sold at an out-
of-state store, with no solicitation other than the incidental effects of
general advertising, Maryland could not require the collection of their
sales tax. The decision was distinguished from General Trading by the
failure of Miller Bros. Co. to invade or exploit the consumer market in
Maryland. However, Miller Bros. dealt with sporadic sales into a
neighboring state. In Miller Bros., an assessment of only $365 was
generated over a four year period. The Court did not bar the imposition
of use tax responsibility where the requisite physical nexus exceeds a
de minimis level of activity within the state.
In its decision in Scripto Inc. v. Carson, 362 U.S. 207 (1960), the U. S.
Supreme Court reinforced its decision in General Trading. The Court
found the activities of independent contractors within a state constituted
sufficient nexus to compel the collection of use tax by a dealer, and to
require the payment of such tax by the dealer if he fails to collect it. The
40
Court's decision in Scripto was distinguished from that reached in Miller
Bros. by the regular exploitation of markets within a state, and the
knowledge that the goods sold were to be used and enjoyed within the
taxing state.
The bright-line test for the substantial nexus required under the
Commerce Clause is satisfied by a pattern of continuous and regular
delivery by other than common carrier. The decision in National
Geographic made it clear that the physical presence creating nexus
does not need to be directly related to sales activities. Furthermore, I
find that the level of activities, intentional exploitation of Virginia
markets, and economies realized in sales to Virginia customers
distinguish the instant case from Miller Bros. Co., where occasional
delivery and incidental advertising were held to he insufficient to create
nexus.
In conclusion, I find that the Taxpayer has the requisite nexus to impose
use tax collection responsibilities, and meets the definitions of a dealer
as defined in the Code of Virginia.
W. H. Forst
Tax Commissioner
41
Rulings of the Tax Commissioner
Document 94-10
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Interstate transactions; Nexus with Virginia
Topics: Taxability of Persons and Transactions
Date Issued: 01/07/1994
January 7, 1994
Dear**************
This will reply to your letter of August 24, 1993 in which you request a
ruling regarding Virginia's nexus standards for sales and use tax
purposes.
FACTS
RULING
42
Va. Code §58.1-612 (copy enclosed) sets forth the "nexus requirements
which give the Commonwealth the authority to require dealers to
register for collection and remittance of the sales tax. The statute
provides in part that a dealer shall be deemed to have sufficient activity
within the state to require registration if he: (1) maintains or has within
Virginia, directly or through an agent or subsidiary, an office,
warehouse, or place of business of any nature; or (2) makes regular
deliveries of tangible personal property within this Commonwealth by
means other than common carrier. A person is deemed to be making
regular deliveries if vehicles other than those operated by a common
carrier enter this Commonwealth more than twelve times during a
calendar year.
It is not clear from your letter the exact relationship between Corporation
Z and the subcontractors installing the tangible personal property. If an
agency relationship exists, and the subcontractor maintains a place of
business in Virginia, Corporation Z is deemed to have nexus with
Virginia and is required to register to collect the tax. Under Virginia law,
two factors are necessary in order for an agency relationship to be
established. First, the agent must be subject to the principal's control,
with regard to the work to be done and the manner of performing it.
Actual control is not the test; it is the right to control that is
determinative. Second, the work has to be done on the business of the
principal or for his benefit.
Similarly, your letter does not indicate the manner in which the tangible
personal property is delivered to Corporation Z's Virginia customers. If
Corporation Z makes deliveries of its goods into Virginia more than
twelve times per year by means other than common carrier, it is
required to register to collect the Virginia sales tax. If Corporation Z
does not make deliveries sufficient in number and scope to require
registration, and if it does not meet any of the other nexus requirements
in Va. Code §58.1-612, it may voluntarily register with the department
for the collection of the tax as a service to its customers.
43
You request that if nexus is established, may Corporation Z remit sales
tax on a transaction basis due to the sporadic nature of their business in
Virginia.
W. H. Forst
Tax Commissioner
44
Rulings of the Tax Commissioner
Document 94-62
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Application of sales and use taxes; Dealers
Topics: Taxability of Persons and Transactions
Date Issued: 03/15/1994
Dear******************
This will reply to your letter of June 23, 1992, in which********* (the
"Parent") is contesting the sales and use tax assessment for the period
April 1, 1986 through December 31, 1991, against **********(the
"Subsidiary").
FACTS
The Subsidiary, which was acquired by the Parent during the audit
period, maintained an office in Virginia until May 1989. During that time,
it was engaged primarily in purchasing and selling cable and broadcast
air time in order to market various specialized products for
manufacturers and other clients through direct response television
advertising programs. The programs were generally produced by the
clients and broadcast on television during time slots which the
Subsidiary purchased in blocks from cable television networks or non-
cable television stations. The Subsidiary entered into arrangements with
third party vendors to perform telemarketing services, (i.e., receiving
orders from customers who purchased the client's products and making
credit card payment arrangements), fulfillment services (i.e., filling and
shipping the customer orders), and customer services (i.e. handling
customer complaints). The credit card company remitted receipts from
customer sales, less a company fee, to the Subsidiary. After the
receipts from the credit card company were reduced by the Subsidiary's
commission, the difference was remitted to the client.
The Parent contends that the Subsidiary did not act as a retailer or
45
make retail sales within the meaning of the sales and use tax statute
since they did not have the ability to transfer either title or possession of
products. In addition, the contracts with their clients were for services
essentially the same as those which might be provided by a commission
agent soliciting sales in Virginia.
DETERMINATION
46
As a representative, agent, or solicitor, of an out-of--state
principal, solicits, receives and accepts orders from persons
in this Commonwealth for future delivery and whose
principal refuses to register as a dealer under §58.1-613.
(Emphasis added.)
Sincerely,
Danny M. Payne
Acting Tax Commissioner
47
Rulings of the Tax Commissioner
Document 94-205
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Nexus requirements; Out-of-state seller
Topics: Taxability of Persons and Transactions
Date Issued: 06/30/1994
Dear*************
This will reply to your letter of June 18, 1993 in which you request a
ruling on the obligations of an out-of-state manufacturer/dealer to collect
sales tax on items sold to Virginia residents.
48
"manufactures or produces tangible personal property for sale at retail,
for use, consumption, or distribution, or for storage to be used or
consumed in this Commonwealth..."
Va. Code §58.1-612 also sets forth the "nexus" requirements which give
the Commonwealth the authority to require dealers to register for
collection and remittance of the sales tax. The statute provides in part
that a dealer shall be deemed to have sufficient activity within the state
to require registration if he (1) maintains or has within Virginia, directly
or through an agent or subsidiary, an office, warehouse, or place of
business of any nature; or (2) makes regular deliveries of tangible
personal property within this Commonwealth by means other than
common carrier. A person is deemed to be making regular deliveries if
vehicles other than those operated by a common carrier enter this
Commonwealth more than twelve times during a calendar year.
Your letter does not indicate the manner in which the tangible personal
property is delivered to the Virginia residents through the Virginia
dealer. If the manufacturer makes deliveries of its goods into Virginia
more than twelve times per year by means other than common carrier, it
is required to register to collect the Virginia sales tax. If the
manufacturer does not make deliveries sufficient in number and scope
to require registration, and if it does not meet any of the other nexus
requirements in Va. Code § 58.1-612, it may voluntarily register with the
department for the collection of the tax as a service to its customers.
You also ask what the result would be if the manufacturer maintains a
retail sales store in Virginia that is not involved in the transaction at
issue. Under Va. Code §58.1-612(C)(1), as long as a place of business
of any nature is maintained in Virginia by the manufacturer, it is deemed
to have sufficient activity in Virginia to require registration and collection
of the tax on its sales to Virginia residents. This position is consistent
with the U.S. Supreme Court's decision in National v. California Bd. of
Equalization, 430 U.S. 551 (1977), in which it was ruled that the seller
was required to collect California's use tax even though its physical
presence in California was limited to two small offices, unrelated to the
taxable sales.
However, it appears that the actual "sale" is between the national
organization and its members. Your letter states that orders are first
received by the national organization and that the price of the product to
members of the national organization is the cost of the product plus a
49
markup added by the national organization. This markup added by the
national organization indicates that there is a sale for resale made by
the manufacturer to the national organization. In such a case, the
manufacturer would be drop shipping goods in Virginia, and the national
organization would be deemed the dealer under Va. Code §58.1-612
and required to collect the tax if it has sufficient nexus with Virginia.
Based on the facts presented, it appears that the Virginia dealer is the
agent of the manufacturer. Furthermore, delivery to the customer is
made by means other than by common carrier. Under Va. Code §58.1-
612, the manufacturer has sufficient presence in Virginia and would be
required to collect the tax on its sales to Virginia residents.
The fact that the manufacturer has a retail store in Virginia does not
change the result, but rather is another indication that the manufacturer
has sufficient activity in Virginia to require it to register and collect tax on
sales to Virginia residents. This is true even if the retail store plays no
role in the sales in question.
I would note that in both transactions, the sales tax may be collectible
from the Virginia dealer, as it satisfies the definition of "dealer" by
possessing tangible personal property for distribution in Virginia. See
Va. Code §58.1-612(B)(3).
If you have any other questions regarding this matter, please contact
the department.
Sincerely,
Danny M. Payne
Tax Commissioner
50
Rulings of the Tax Commissioner
Document 94-266
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Advertising; Interstate transactions; Packaging; Resales; Promotional and
advertising materials for marketing cosmetics
Topics: Taxability of Persons and Transactions
Date Issued: 08/26/1994
Dear*****
This will reply to your letter of June 15, 1993 in which you seek
correction of sales and use tax assessed to ******* "the Taxpayer" for
the period March, 1987 through February, 1993.
FACTS
51
Alternatively, the Taxpayer contends that the displays qualify for the
packaging exemption provided under Va. Code §58.1-609.3(2)(iv) while
the gifts with purchase qualify for the resale exemption as items
marketed with the sale of the regular cosmetic products. Additionally, a
portion of the assessed tax constitutes labor and overhead associated
with in-house advertising and thus exempt under Virginia Regulation
(VR) 630-10-3.
DETERMINATION
The Taxpayer contends that its position is consistent with the above and
supported by the U.S. Supreme Court's opinion in Quill Corporation v
North Dakota, 112 S. Ct. 1904 (1992) and Complete Auto Transit. Inc. v.
Brady, 430 U.S. 274 (1977), both of which held that business must have
substantial nexus within the state in order for such state to impose its
use tax.
52
public to sample the product before purchase. The Taxpayer does not
require the return of the displays or testers and as such, no use is
demonstrated by the Taxpayer. Of course, had employees or
representatives of the Taxpayer made use of the items in Virginia prior
to their transfer to the retailers, the tax would apply.
The gifts with purchase and the portion of the samples packaged with
the product for ultimate sale to customers both constitute items
marketed with the product being sold and as such, qualify under the
resale exemption provided in Va. Code §58.1-602.
While the Taxpayer is involved in the promotion of its cosmetics in
Virginia by means of its sales force and by placement of certain
promotional and advertising items in Virginia, such activities are
deemed insufficient to impose the use tax as intended under Virginia
Code §58.1-604 and the cited caselaw. This is because the sales force
does not make any use of the items in Virginia prior to their transfer to
the retailers. Therefore, in accordance with my findings the assessment
will be abated.
Sincerely,
Danny M. Payne
Tax Commissioner
53
Rulings of the Tax Commissioner
Document 95-111
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Occasional sales, mergers; Concert sales of T-shirts and beverages
Topics: Taxability of Persons and Transactions
Date Issued: 05/09/1995
May 9, 1995
Dear*****************
This will reply to your letter of March 17,1995 in which you seek a ruling
on the tax status of sales made by your organization, ********** the
"Taxpayer".
FACTS
Code of Virginia § 58.1 -609.10(2) exempts from the sales and use tax
occasional sales of tangible personal property. Interpreting this Code
section, Virginia Regulation (VR) 630-10-75, states in part that "[t]he
term 'occasional sale' means...[a] sale by a person who is engaged in
sales on three or fewer separate occasions within one calendar year."
Applying the above regulation, the Taxpayer was correct in not
collecting the tax on sales made during its prior concert series.
However, since it will hold more than three concerts this year, it will be
required to register as a dealer with the department and collect and
remit the tax on all sales made during such concerts. In effect, the
54
Taxpayer will be holding itself out as a retailer and may be in
competition with businesses or other organizations which are required
to collect the tax due to their sales activities. As a registered dealer,
however, the Taxpayer may purchase items for resale exempt of the tax
using a resale exemption certificate, Form ST-10. 1 am enclosing a
copy of P.D. 90-39 (3/19190) which addresses this issue and copies of
the dealer registration form (Form R-1) and instructions (Form R-4).
Sincerely,
Danny M. Payne
Tax Commissioner
55
Rulings of the Tax Commissioner
Document 95-250
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Vendor/seller liability; Voluntarily registered dealer
Topics: Collection of Delinquent Tax
Date Issued: 09/29/1995
Dear****************:
This will reply to your letter in which you seek correction of sales and
use tax assessed to your client,**********(the "Taxpayer"), for the period
January, 1991 through December, 1993.
FACTS
56
previous department ruling, P.D. 93-141 (6/7/93). The auditor has
terminated the Taxpayer's registration effective January 1, 1994.
The Taxpayer protests the tax and asserts that it has fully complied by
not charging the tax and shifting the responsibility for payment of the tax
to the purchaser since a contractor is required to pay the use tax on
their purchases of property used and consumed in the performance of
real property contracts in Virginia. The Taxpayer further contends that
the penalty should not be applied to the audit assessment since the
Taxpayer filed zero returns based on its belief that it was not required to
collect the tax.
DETERMINATION
I must agree with the auditor's assessment of the tax based on the
above ruling. At the point in which the Taxpayer voluntarily registered
with the department, it was required to collect the tax on Virginia sales
until such time as it provided written notification of termination of the
registration. See Code of Virginia § 58.1-613, copy enclosed, which sets
forth the filing requirements for dealers in Virginia.
The Taxpayer's contention that contractors are required to pay the use
tax on purchases of property used in real property contracts is correct
as provided in Code of Virginia § 58.1-610. Notwithstanding, such
requirement does not relieve the Taxpayer or any other registered
dealer of its responsibility to collect and remit the tax on Virginia
transactions subject to the tax.
Based on the facts presented, the Taxpayer does not engage in
sufficient activity in Virginia to meet the requirements for nexus.
However, it is my understanding that the Taxpayer's parent company is
engaged in certain activities in Virginia which create sufficient nexus
and that the Taxpayer sells property to its parent for use in the
performance of Virginia real property contracts. As a service to its
parent and other customers who may purchase items for use in the
performance of Virginia real property contracts, the Taxpayer may wish
57
to reconsider its decision to discontinue collecting Virginia tax.
Otherwise, its parent and other customers will be required to remit
Virginia use tax.
In accordance with the determination set forth, the Taxpayer will receive
a revised "Notice of Assessment" to reflect the adjustment for penalty
and will include interest accrued through the date of the letter of protest.
The assessment should be paid within 30 days to avoid the accrual of
additional interest charges.
Sincerely,
Danny M. Payne
Tax Commissioner
58
Rulings of the Tax Commissioner
Document 96-112
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Interstate transactions; Film projectors purchased out-of-state
Topics: Taxability of Persons and Transactions
Date Issued: 05/31/1996
Dear***********
This is in response to your correspondence seeking correction of a
sales and use tax audit assessment on behalf of ***** (the Taxpayer).
FACTS
The Taxpayer is a video staging, projection and production company
providing audio-visual services for entertainment events. An audit for
the period October 1990 through July 1993 resulted in an assessment
of sales and use tax on untaxed purchases of projectors, other fixed
assets, and various supply items.
DETERMINATION
59
operator is considered a nontaxable service transaction. See PD's 89-
139 (4/28/89) and 96-48 (4/15/96), copies enclosed.
Projectors: Since the projectors at issue were brought into Virginia for
use or storage in Virginia, they are subject to the use tax either on their
cost price or fair market value, depending on when they were first
brought into Virginia. Although the Taxpayer disputes the tax assessed
on the projectors, Code of Virginia § 58.1-205 places the burden of
proof upon the Taxpayer to show that the tax assessed on the cost price
of the projectors is improper. As such, the assessment is deemed
correct unless convincing evidence establishes otherwise.
It is my understanding that the purchase invoices reviewed by the
auditor show that the projectors were delivered by the suppliers directly
to the Taxpayer in Virginia. In such instances, there is no doubt that the
Virginia retail sales and use tax applies to the cost Price of the
projectors.
Notwithstanding the foregoing, if the Taxpayer can show that any of the
projectors at issue were delivered to the Taxpayer at its Delaware
warehouse and were first brought into Virginia six months or more after
60
acquisition, the audit will be revised to change the assessment of tax
from the cost price of the projectors to the fair market value at the time
such items were first brought into Virginia.
Sincerely,
Danny M. Payne
Tax Commissioner
61
Rulings of the Tax Commissioner
Document 96-339
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Services; Repair and installation; Maintenance contracts
Topics: Taxability of Persons and Transactions
Date Issued: 11/20/1996
Dear**************
In your letter, you seek correction of the retail sales and use tax
assessment issued to **********(the Taxpayer). I apologize for the delay
in responding to your letter. Copies of all references are enclosed.
FACTS
The Taxpayer is located outside Virginia and offers full service computer
systems and media software and services for the broadcasting industry.
An audit for the period February 1992 through January 1995 resulted in
an assessment of sales tax on untaxed sales made prior to and after the
effective date of its use tax registration.
62
software or updates and enhancements thereof.
DETERMINATION
For these reasons, I find basis to remove all of the tax and interest
assessed prior to April 1, 1993 from the department's audit assessment.
Under separate cover, the Taxpayer will receive a revised bill for the
balance owed of ******************The payment and the revised bill
should be sent to Department of Taxation, ATTN:*************Post Office
Box 1880, Richmond, Virginia 23218-1880,
within the next 30 days.
Sincerely,
63
Danny M. Payne
Tax Commissioner
64
Rulings of the Tax Commissioner
Document 97-45
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Construction; Using and consuming contractor
Topics: Taxability of Persons and Transactions
Date Issued: 02/06/1997
February 6, 1997
Dear*********************
This will reply to your letter in which you request a ruling as to the
application of the retail sales and use tax to your client (the "Taxpayer")
and an out-of-state affiliated corporation (the "Affiliate") of the Taxpayer.
FACTS
65
Scenario I
Scenario ll
RULING
As provided in your letter, the Taxpayer and the Affiliate are both
principally fabricating for their own use in real property construction
contracts and are paying tax on the raw material cost price in their
respective states. In Virginia, a subcontractor takes on the role of the
using and consuming party to the contract and is liable for the tax on
tangible personal property being installed. Keeping this in mind, I will
address the Virginia sales and use tax application to Scenario I and ll
66
separately below.
Scenario I
The Taxpayer has contracted with the Affiliate to furnish and install
fabricated tangible personal property. This classifies the Affiliate as a
using and consuming contractor with respect to real property
construction and would subject the Affiliate to the tax on all fabricated
materials going into the project. It is the policy of the department to
allow an out-of-state contractor a credit against Virginia taxes for any
taxes properly paid on property acquired in another state. As provided,
the Affiliate has paid the sales tax on all raw materials in its state of
domicile. Due to the fact the sales tax in the Affiliate's state of domicile
is higher than the use tax rate in Virginia, I find that the Affiliate incurs
no additional Virginia tax liability. It should be noted, however, if the
Affiliate paid sales tax on material costs at a rate less than the 4 1/2%
Virginia use tax rate, the Affiliate would be obligated to pay a
complementary use tax to equal the 4 1/2% Virginia rate.
Scenario ll
67
Sincerely,
Danny M. Payne
Tax Commissioner
68
Rulings of the Tax Commissioner
Document 97-81
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Interstate transactions; Nexus
Topics: Taxability of Persons and Transactions
Date Issued: 02/19/1997
Dear******************
This will reply to your letter in which you seek correction of the retail
sales and use tax audit of your client, ********* (the "Taxpayer"), for the
period of June 1990 through May 1996.
FACTS
DETERMINATION
69
Subsection C.4 of this statute provides that the following activity shall be
sufficient to require collection of the Virginia tax by the dealer.
Makes regular deliveries of tangible personal property within
this Commonwealth by means other than common carrier. A
person shall be deemed to be making regular deliveries
hereunder if vehicles other than those operated by a
common carrier enter the Commonwealth more than twelve
times during a calendar year to deliver goods sold by him.
Sincerely,
Danny M. Payne
Tax Commissioner
70
Rulings of the Tax Commissioner
Document 97-266
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Nexus; Out-of-state vendors; Construction; Retailer v. contractor
Topics: Taxability of Persons and Transactions
Date Issued: 06/13/1997
Dear********
FACTS
The Taxpayer disagrees with the auditor's position and states that
because of its classification as a retailer under Code of Virginia § 58.1-
71
610(D), and because it has no established nexus within Virginia, the
assessment is in error.
DETERMINATION
72
require it to register and collect the tax.
Sincerely,
Danny M. Payne
Tax Commissioner
73
Rulings of the Tax Commissioner
Document 97-276
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Nexus; Out-of-state vendors; Mail order photography
Topics: Taxability of Persons and Transactions
Date Issued: 06/18/1997
Dear*****************
This will reply to your letter in which you seek a determination if
**********(the "Taxpayer") has nexus in Virginia for sales and use tax
purposes.
FACTS
RULING
74
The facts presented by the Taxpayer indicate that sufficient nexus does
not exist with Virginia to require it to collect and remit use tax. The
Taxpayer does not meet any of the nexus criteria found in Code of
Virginia § 58.1-612(C). The Taxpayer should be aware that a change in
its Virginia business activities could alter this ruling. The Taxpayer may
wish to continue collecting use tax as a courtesy to its customers since
the customers would be liable for consumer use tax on purchases of
photographs from the Taxpayer.
If you have additional questions concerning this matter, please contact
*********** in the Office of Tax Policy at***************
Sincerely,
Danny M. Payne
Tax Commissioner
75
76
Rulings of the Tax Commissioner
Document 97-306
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Telecommunications; Telecommunications equipment used by Internet provider
Topics: Taxability of Persons and Transactions
Date Issued: 07/18/1997
Dear*****************
FACTS
RULING
77
to the location.
78
The Taxpayer maintains POP locations in Virginia in order to provide
Internet access services to customers. As a service provider, the
Taxpayer is deemed the user and consumer of all tangible personal
property used in Virginia in the provision of the services. See Title 23 of
the Virginia Administrative Code (VAC) 10-210-4040.
Code of Virginia § 58.1-604 imposes the use tax on the "use and
consumption of tangible personal property in this Commonwealth, or the
storage of such property outside the Commonwealth for use or
consumption in this Commonwealth...." The Taxpayer, in accordance
with the Code, is subject to the use tax on the cost price of the
telecommunications switching and routing equipment placed in use at
the Virginia POP locations. The Taxpayer must pay the Virginia tax at
the time of purchase; however, if the vendor fails to collect the tax or is
not registered to collect the Virginia tax, the Taxpayer must remit such
tax directly to the department using Form ST-7. See 23 VAC 10-210-
030.
Other Services/Products
The following incidental services and products are offered by the
Taxpayer to customers, generally at no extra cost.
79
which is processed by the Taxpayer using its own software. The
customer may also create a web site using hypertext markup language
(HTML) which does not require any processing by the Taxpayer. In both
instances, the customized web site is stored on a computer outside
Virginia.
In the event the Taxpayer provides products in tangible form (i.e., CD-
Rom (compact disc), diskette, etc.) to Virginia customers, a “sale" of
tangible personal property would occur and the transaction would be
subject to the tax. "Sale" is defined in Code of Virginia § 58.1-602 as
"any transfer of title or possession, or both, exchange, barter, lease or
rental, conditional or otherwise, in any manner or by any means
whatsoever, of tangible personal property....” Because the Taxpayer has
a physical presence in Virginia through its POP locations, the Taxpayer
would be required to collect the Virginia tax on sales of any products
provided in tangible form. This is consistent with prior rulings of the
department which distinguish between information provided in tangible
80
form and that which is provided electronically. See P.D. 91-224
(9/23/91) and P.D 95-68 (3/30/95).
Conclusion
Based on the facts presented and the additional information provided,
the Taxpayer's provision of Internet access services and incidental
services and products to customers in Virginia does not involve the
exchange of tangible personal property and therefore the transactions
constitute nontaxable service transactions. The Taxpayer is not required
to collect the Virginia tax on the flat monthly fee charged to its
customers for such services. The Taxpayer maintains a physical
presence in Virginia and as a service provider is deemed the user and
consumer of all tangible personal property used and consumed in the
provision of services. The Taxpayer, therefore, is subject to the use tax
on the cost price of the telecommunications equipment used at the
Virginia POP locations.
The ruling in this case is consistent with recent rulings issued by the
department dealing with Internet related transactions. The department,
in Public Document (P.D.) 97-213 (4/30/97) addressed certain services
provided via the Internet. In addition, P.D. 97-117 (3/6/97) addressed
the provision of a map service via the Internet; and most recently, the
department, in P.D. 97-239 (5/23/97), addressed the creation and
placement of a web site on the Internet. In all three instances, the
department deemed the transactions nontaxable service transactions
and the taxpayers were not required to collect the Virginia tax on the
charges for such services.
81
additional questions, please contact *********at*************.
Sincerely,
Danny M. Payne
Tax Commissioner
82
Rulings of the Tax Commissioner
Document 97-402
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Application of sales and use taxes; Out-of-state vendors.
Topics: Taxability of Persons and Transactions
Date Issued: 10/03/1997
October 3, 1997
Dear******************
This is in reply to your letter in which you seek correction of sales and
use tax assessed to **************** ("Taxpayer") for the period July 1992
through September 1996. I apologize for the delay in responding to your
letter.
FACTS
The taxpayer is a ***** corporation. The taxpayer makes and sells large
specialty signs, the type which are typically attached to commercial
buildings displaying the name and logo of the company doing business
there.
The taxpayer hires independent contractors to install the signs it sells.
Between July 1992 and October 1995, on nine occasions, the taxpayer
hired independent contractors to install signs in Virginia. The taxpayer
delivered some or all these nine signs to its Virginia customers. The
taxpayer provided blueprints, the location of installation, and an install-
by date to the independent contractors performing installation. The
taxpayer billed its customers for materials and installation labor and
expenses. Independent contractors billed the taxpayer for installation
work performed.
The taxpayer did not collect use tax on the signs it sold and delivered in
Virginia. As a result, the taxpayer was assessed use tax on materials
separately stated on its invoices and was involuntarily registered as an
83
out-of-state dealer.
DETERMINATION
Under Code of Virginia § 58.1-612 (copy enclosed), the retail sales and
use tax is collectible from all persons who are dealers. A dealer is
defined in that section and includes every person who "sells at retail . . .
or who has in his possession for sale at retail, or for use, consumption,
or distribution, or for storage to be used or consumed in this
Commonwealth, tangible personal property." The taxpayer clearly
qualifies as a "dealer" § 58.1-612.
The taxpayer must also have sufficient activity within Virginia as set out
in Code of Virginia § 58.1-612(C) before it can be assessed with a use
tax. The facts presented indicate that sufficient nexus does not exist
with Virginia. In this case, the taxpayer maintains no office, warehouse
or other place of business in Virginia. The taxpayer does not advertise
in Virginia nor does it solicit business in Virginia through employees,
independent contractors, agents, or other representatives. Sales efforts
take place in **** .
For these reasons, the assessment will be abated and your registration
canceled.
If you have any questions, please call **** in the Office of Tax Policy at
******.
Sincerely,
84
Danny M. Payne
Tax Commissioner
85
Rulings of the Tax Commissioner
Document 97-459
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Out-of-state computer maintenance company.
Topics: Taxability of Persons and Transactions
Date Issued: 11/18/1997
Dear***************
This is in reply to your letter of October 22, 1997, in which you request a
ruling on the application of sales and use tax to your client (Company A)
which provides computer maintenance to its customers.
FACTS
RULING
Maintenance Contracts
The application of the tax to maintenance contracts is set forth in Title
23 of the Virginia Administrative Code (VAC) 10-210-910. The
regulation provides that contracts which provide for both repair or
replacement parts and repair labor represent a sale of tangible personal
property and are subject to the tax. Code of Virginia § 58.1-609.5(9)
provides that effective January 1, 1996, maintenance contracts which
provide for both repair or replacement parts and repair labor are subject
to tax based on 50% of the total charge for such contracts. See the
86
enclosed Tax Bulletin 95-8.
Nexus
While Company A is clearly a "dealer" as defined in Code of Virginia §
58.1-612(B), Company A does not appear to have "sufficient activity"
within Virginia requiring it to register for the collection and remittance of
the sales or use tax. As Company A does not appear to meet any of the
other nexus requirements in the foregoing statute, it may voluntarily
register with the department for the collection of the tax as a service to
its customers. Without such registration, Company A's customer will be
responsible for the accrual and remittance of use tax on the purchase of
the maintenance contract. I have enclosed a registration form and
instructions should Company A be required to register in the future or
should they decide to voluntarily register for the collection of the tax.
I trust that our response has addressed your concerns in some manner.
If you should have any additional questions regarding this matter,
please contact ******** of the department's Office of Tax Policy at ******.
Sincerely,
Danny M. Payne
Tax Commissioner
87
Rulings of the Tax Commissioner
Document 98-147
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Application of sales and use taxes; Visits by out-of-state dealer did not establish
nexus
Topics: Taxability of Persons and Transactions
Date Issued: 10/09/1998
October 9, 1998
Dear*************:
This will reply to your letter in which you request a ruling regarding
Virginia's retail sales and use tax nexus standards as they would apply
to your client (the "Taxpayer''). I apologize for the delay in responding to
your letter.
FACTS
RULING
Under Code of Virginia Sec. 58.1-612, copy enclosed, the sales tax is
collectible from all persons who are dealers. That same section defines
the term "dealer'' to include every person who offers tangible personal
property for sale at retail in Virginia. The Taxpayer clearly qualifies as a
"dealer'' under this definition.
88
which give the Commonwealth the authority to require a business to
register for the collection and remittance of the Virginia sales tax. Based
on the information presented, the Taxpayer does not meet any of the
nexus criteria found in Code of Virginia Sec. 58.1-612(C). The fact that
the Taxpayer makes periodic visits to its customers as a part of its
consulting service does not, by itself, create nexus with Virginia.
However, if the Taxpayer's employees, agents or other representatives
solicit sales while in Virginia, nexus is created.
I trust the foregoing has responded to your inquiry. If you have any
further questions regarding this issue, you may contact ***** of the
department's Office of Tax Policy at *****.
89
Rulings of the Tax Commissioner
Document 98-161
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Modular home installation by contractor; "Cost price"
Topics: Collection of Delinquent Tax
Date Issued: 10/20/1998
October 20, 1998
Dear *****
FACTS
90
price, or something in between.
Retail sales. When the Taxpayer sells modular home sections to a final
purchaser without any installation service element, the transaction is for
the taxable retail sale of tangible personal property. In such instances,
the Taxpayer would be acting as a retail dealer required to register to
charge and collect the sales tax on the gross sales price for remittance
to the department. However, from the information presented, this type of
situation does not appear to apply to the Taxpayer for the period of
audit.
91
sales price charged by the manufacturer. The Taxpayer is also liable for
the sales or use tax on the cost price of materials which it purchases in
connection with real property construction contracts. From the
information received, it is apparent that the Taxpayer is engaged as a
real property contractor with regard to the modular homes at issue.
92
incurred by the seller of the property. Rather, all expenses and profits
charged in connection with retail sales of tangible personal property are
subject to the retail sales tax imposed by Code of Virginia § 58.1-603.
Manufacturing Exemption
The Taxpayer is considered a real property contractor when it contracts
to sell and install modular homes. Therefore, it is not entitled to any of
the production exemptions as noted in 23 VAC 10-210-410(F). This is
because the Taxpayer exclusively engages in real property contracts.
To be entitled to the production exemptions, the Taxpayer would need
to be principally or primarily fabricating tangible personal property for
sale at retail or resale (i.e., making sales primarily without installation)
and satisfy the minimum criteria of an industrial manufacturer as set out
by 23 VAC 10-210-920. However, the Taxpayer is not manufacturing
modular units for sale at retail or resale and, therefore, is not entitled to
93
the production exemptions.
Conclusion
Based on all of the foregoing, I find no basis in which to revise the
assessments at issue. Accordingly, the assessments are correct as
issued. I note that one of the assessments has not been paid *****
therefore, the Taxpayer will soon receive an updated notice of
assessment under separate cover. To preclude further interest charges,
***** should be paid in full within the next 45 days.
94
If you have any questions about this response, please contact ***** of
my tax policy staff at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
95
Rulings of the Tax Commissioner
Document 99-26
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Exemption certificates and direct pay permits; Burden of proof
Topics: Collection of Delinquent Tax; Exemptions
Date Issued: 03/15/1999
This is in reply to your letter in which you seek correction and refund of
the department's sales and use tax assessment issued to ***** (the
"Taxpayer''), for the period July 1995 through April 1998. I note that the
entire assessment has been paid.
FACTS
DETERMINATION
Code of Virginia § 58.1-623(A), copy enclosed, states that:
All sales or leases are subject to the tax until the contrary is
established. The burden of proving that a sale, distribution,
lease, or storage of tangible personal property is not taxable
is upon the dealer unless he takes from the taxpayer a
certificate to the effect that the property is exempt under this
chapter.
96
the Tax Commissioner that such certificate is no longer
acceptable.
In the instant case, the Taxpayer made untaxed sales to certain
customers. It may be that these customers are industrial manufacturers,
and, if so, these customers may have used the contested items directly
and exclusively in an exempt ***** manufacturing activity. It is difficult,
however, for the department to exempt such sales based on the seller's
assumptions and suppositions as to how its products will be used. This
is true even when other customers use the seller's products in an
exempt manner.
It is for this reason that certificates of exemption and direct pay permits
are so vitally important to retail sales and use tax transactions.
Certificates of exemption allow customers to purchase property exempt
of the tax based on the customer's knowledge of its own business
activity and how purchased property will be used.
Based on the information currently before me, I find that the assessment
is correct. However, I will pend this case for an additional 60 days to
allow the Taxpayer an opportunity to provide certificates of exemption or
direct payment permit numbers relating to the contested sales. These
documents may be sent to ***** at the department's Office of Tax Policy,
Post Office Box 1880, Richmond, Virginia 23218-1880. If you have any
questions regarding this matter, please contact ***** of the department's
Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
97
Rulings of the Tax Commissioner
Document 99-60
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Erroneously collected tax; Out-of-state dealer
Topics: Collection of Delinquent Tax
Date Issued: 04/09/1999
April 9, 1999
Dear *****
This will reply to your letter in which you seek correction of the retail
sales and use tax audit of ***** (the "Taxpayer'') for the period of
January 1994 through February 1998.
FACTS
The Taxpayer is an out-of-state dealer of golf carts and golf cart parts.
The Taxpayer delivered golf carts and parts to customers in the state of
Virginia and erroneously charged its Virginia customers the 6% North
Carolina retail sales tax. As a result of the recent audit, the Taxpayer
was assessed the erroneously collected North Carolina tax. The
Taxpayer believes that the Virginia customer, i.e., the ultimate
consumer, is responsible for the 4 1/2% consumer use tax on all out-of-
state purchases, and the Taxpayer should not be held liable for the
erroneously collected North Carolina sales tax. The Taxpayer is
requesting that the audit be revised accordingly.
DETERMINATION
98
common carrier enter this Commonwealth more than twelve
times during a calendar year to deliver goods sold by him.
Based on the information provided, the Taxpayer makes more than
twelve deliveries into Virginia during the calendar year. For this reason,
the Taxpayer is required to register as a Virginia dealer and collect the
tax on Virginia deliveries.
In the present case, the dealer collected the 6% North Carolina sales
tax on transactions subject to the Virginia sales tax. Title 23 Virginia
Administrative Code (VAC) 10-210-340, copy enclosed, addresses the
collection of the tax by dealers and Subsection D of this regulation
provides the following:
Overcollection of the tax. Any dealer who collects tax in
excess of a 4 1/2% rate or who otherwise overcollects the
tax, except as may be authorized under the bracket system
or the special provisions relating to vending machine sales,
must remit any amount overcollected to the state on a
timely basis.
Since the Taxpayer had sufficient activity in the state to require
registration as a dealer as provided in Code of Virginia § 58.1-612, any
taxes collected by the Taxpayer on sales delivered into Virginia are
legally due to Virginia. This is supported by Code of Virginia § 58.1-625,
copy enclosed, which provides that "all sums collected by a dealer as
required by this chapter shall be deemed to be held in trust for the
Commonwealth.''
Based on the above, I find that the Taxpayer was properly assessed for
tax collected and not remitted. The Taxpayer may wish to obtain a
refund from North Carolina of North Carolina sales tax erroneously
collected and remitted on taxable Virginia transactions. If you should
have any questions, please contact ***** Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
99
Rulings of the Tax Commissioner
Document 99-94
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Nexus; Factors required for agency relationship
Topics: Taxability of Persons and Transactions
Date Issued: 04/30/1999
Dear****************
This will reply to your letter in which you seek correction of the retail
sales and use tax audit assessment issued to ***** (the "Taxpayer'') for
the period of May 1992 through January 1998. I apologize for the delay
in responding to your letter.
FACTS
100
with Virginia during the periods at issue.
DETERMINATION
Based on the above, the audit assessment will be abated in its entirety.
If you should have any questions, please contact *****, Office of Tax
Policy, at *****.
Sincerely,
101
Danny M. Payne
Tax Commissioner
102
Rulings of the Tax Commissioner
Document 99-187
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Deficiency assessments, asphalt supplier and paving contractor located in
Virginia
Topics: Collection of Delinquent Tax
Date Issued: 07/15/1999
Dear*******
In your letter of June 2, 1999, you request correction of the retail sales
and use tax audit assessment issued to ***** (the "Taxpayer'').
FACTS
DETERMINATION
103
tangible personal property in Virginia when the Virginia sales or use tax
is not paid at the time the property is purchased. Under subsection 3 of
the Code of Virginia Sec. 58.1-604 which imposes the use tax, "[a]
transaction taxed under Sec. 58.1-603 (the statute imposing the sales
tax) shall not also be taxed under this section, nor shall the same
transaction be taxed more than once under either section.'' (Insert
added). In this case, the transactions at issue have not been taxed
under either the sales or use tax statutes cited above. Rather, the facts
show that the Maryland vendor collected a 5% sales tax from the
Taxpayer and remitted it to Maryland, not Virginia. Accordingly, no
Virginia sales and use tax has been charged or remitted to Virginia for
the transactions at issue.
104
To avoid further interest charges, the assessment should be paid in full
within 45 days of the date of this letter. If not already done so, the
Taxpayer should request the Maryland vendor to refund the Maryland
sales tax erroneously collected on the transactions at issue.
If you have any questions about this response, please contact ***** of
my tax policy staff at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
105
Rulings of the Tax Commissioner
Document 00-53
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Internet/electronic commerce; Nexus; Out-of-state vendors; Use of Internet
servers and web hosting services
Topics: Taxability of Persons and Transactions
Date Issued: 04/14/2000
April 14, 2000
Dear ****
This will reply to your letter of March 21, 2000, in which you seek a
ruling on behalf of ***** (the "Taxpayer").
FACTS
106
The Taxpayer requests a ruling whether it will become subject to
Virginia sales and use tax collection obligations if its websites are
hosted on servers located in Virginia at web hosting facilities. The
Taxpayer requests that the department's ruling address both the
"managed hosting" service and "co-location hosting" service
alternatives.
RULING
Under Code of Virginia § 58.1-612, the sales tax is collectible from all
persons who are dealers. That same section defines the term "dealer"
to include every person who "[s]ells at retail, or who offers for sale at
retail, or who has in his possession for sale at retail, or for use,
consumption, or distribution, or for storage to be used or consumed in
this Commonwealth, tangible personal property." The Taxpayer clearly
qualifies as a "dealer" under § 58.1-612.
makes deliveries into Virginia more than twelve times during a calendar
year by means other than common carrier.
The department does not deem nexus to exist for an out-of-state seller
whose only presence in Virginia is the use of a computer server to
create or maintain a site on the Internet. Accordingly, nexus will not be
107
established for out-of-state vendors whose only presence is the use of
computer servers provided to them under a Virginia "managed hosting"
service. Nor will nexus be established for out-of-state vendors whose
only presence is the use of computer servers owned by them in
connection with a Virginia "co-location hosting" service.
The Taxpayer does not meet the nexus requirement in Code of Virginia
§ 58.1-612 and is not required to collect and remit Virginia sales and
use tax. The Taxpayer's Virginia customers are required to remit the
consumer use tax on the cost price of tangible personal property
purchased from the Taxpayer (unless such purchases are exempt under
the law).
If you have any questions regarding this letter, please contact ****** in
the department's Office of Tax Policy via e-mail at *****@tax.state.va.us
or by phone at *****
Sincerely,
Danny M. Payne
Tax Commissioner
108
Rulings of the Tax Commissioner
Document 00-61
Number:
Tax Type: Corporation Income Tax; Retail Sales and Use Tax
Brief Description: Nexus; Out-of-state vendors with deliveries into Virginia
Topics: Taxability of Persons and Transactions
Date Issued: 04/26/2000
April 26, 2000
Re: Ruling Request: Corporate Income and Sales and Use Tax
Dear ****
FACTS
Product X is delivered into Virginia 25% of the time via common carrier
and 75% of the time on the Taxpayer's trucks. The delivery drivers
unpack and set up Product X. On average, the Taxpayer's trucks enter
Virginia twelve times per year to make deliveries of Product X. Usually,
delivery is made to more than one customer per trip. All accessory items
are shipped by common carrier. You indicate that 90% of these
accessories are sold for resale.
The Taxpayer does not offer warranties on Product X, but does honor
the manufacturer's warranty. The Taxpayer's employees come into
Virginia approximately five times per year to provide warranty service
and about twice every three years to repair an item not covered under a
manufacturer's warranty for a fee. Generally, the Taxpayer does not
make separate trips to Virginia to repair items. Rather, delivery drivers
stop to make the repairs on their way to or from delivery destinations in
Virginia.
109
The Taxpayer believes that its activities in Virginia are incidental to the
solicitation and delivery of its products or are de minimis. As such, the
Taxpayer's position is that it is not liable for Virginia income tax or
required to register for the collection of Virginia sales and use taxes.
You are requesting that the department rule whether the Taxpayer is
liable for Virginia income tax and/or required to collect Virginia sales and
use tax.
DETERMINATION
Income Tax
Code of Virginia § 58.1-400 imposes income tax "on the Virginia taxable
income for each taxable year of every corporation organized under the
laws of the Commonwealth and every foreign corporation having
income from Virginia sources." Generally, a corporation will have
income from Virginia sources if there is sufficient business activity within
Virginia to make any one or more of the applicable apportionment
factors positive. The existence of positive Virginia apportionment factors
clearly establishes income from Virginia sources.
Public Law ("P.L.") 86-272, codified at 15 U.S.C.A. §§ 381-384, does
prohibit a state from imposing a net income tax where the only contacts
with a state are a narrowly defined set of activities constituting
solicitation of orders for sales of tangible personal property. The
department limits the scope of P.L. 86-272 to only those activities that
constitute solicitation, are ancillary to solicitation, or are de minimis in
nature. See Wisconsin Department of Revenue v. William Wrigley, Jr.,
Co.,112 S. Ct. 2447 (1992).
While ruling that "delivery" into Virginia using one's own trucks did not
exceed the protection afforded by P.L. 86-272 in Commonwealth v.
National Private Truck Council, 253 Va. 74, 480 S.E.2d 500 (1997), the
Virginia Supreme Court conceded that the term "may be disputed in a
particular factual situation." Because you have provided no description
110
as to what Product X is or any explanation of the set up process, the
department cannot make a definitive ruling as to whether or not the set
up process exceeds the protection afforded under P.L. 86-272.
In the instant case, the Taxpayer's drivers effect repairs, either under
warranty or for a fee, on roughly half of the delivery trips made into
Virginia. Setup services are performed with every Product X delivered to
Virginia by the Taxpayer's drivers. Taken as a whole, the department
concludes these activities constitute a continuous pattern of activity,
which is not de minimis, and not considered trivial additions to the
Taxpayer's business carried on in Virginia. Thus, it appears that
Taxpayer is subject to Virginia income tax.
Sales and Use Tax
Under Code of Virginia § 58.1-612, the sales tax is collectible from all
persons who are dealers. That same section defines the term "dealer"
to include every person who "[s]ells at retail, or who offers for sale at
retail, or who has in his possession for sale at retail, or for use,
consumption, or distribution, or for storage to be used or consumed in
this Commonwealth, tangible personal property." The Taxpayer clearly
qualifies as a "dealer" under § 58.1-612.
111
trucks enter Virginia twelve times per year to make deliveries. If I
understand you correctly, there are some years during which the
Taxpayer makes more than twelve such deliveries, thus establishing
nexus with Virginia. Public Document 97-81 (2/19/87) further addresses
this issue.
Proposed Resolution
You note that the Taxpayer has made a good faith effort to determine
whether it is liable for Virginia taxes based on the above facts. In this
regard, the Taxpayer has previously telephoned the department but
received conflicting responses to its verbal inquiries. Accordingly, you
propose that in the event the Tax Commissioner determines the
Taxpayer is liable for Virginia income tax and/or required to collect
Virginia sales and use tax, that such determination have prospective
application.
I will certainly consider the Taxpayer's proposed resolution. In this
respect, the department has frequently entered into voluntary
registration agreements with out-of-state businesses. Before making a
final acceptance, however, l will need additional information, including a
more detailed understanding of the Taxpayer's Virginia activities and
some sense of the volume of sales to Virginia customers.
If you have any questions regarding this letter, please contact ****
(income tax) or **** (sales and use tax) in the department's Office of Tax
Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/26768(I/O)
112
delegate to Janie E. Bowen, Assistant Tax Commissioner, the authority
to sign for me any and all documents, including, but not limited to,
affidavits, warrants, rulings, appeals, offers in compromise and sales tax
revocations.
Danny M. Payne
Tax Commissioner
113
Rulings of the Tax Commissioner
Document 00-77
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Internet and catalogue gift purchases; Situs of sale
Topics: Exemptions; Property Subject to Tax
Date Issued: 05/12/2000
May 12, 2000
Dear ****
This will reply to your letter in which you seek correction of the retail
sales and use tax audit of your client, ***** (the "Taxpayer"), for the
period of May 1996 through March 1999.
FACTS
The Taxpayer was audited and assessed Virginia sales and use tax on
orders (1) taken by the Taxpayer's employees located outside Virginia
from customers who have provided them with a Virginia billing address,
(2) orders filled by the Taxpayer from outside Virginia, and (3) shipped
by the Taxpayer to customers' locations outside Virginia. The Taxpayer
is taking exception to these transactions being held taxable and
requests that the audit assessment be abated. The Taxpayer believes
that purchases by a Virginia customer from an out-of-state company
and shipped directly to third party recipients located outside Virginia are
not subject to Virginia tax. The Taxpayer is also disputing the
methodology used by the auditor in calculating the percentage of
taxable transactions in relationship to total gross sales in Virginia and
also requests waiver of audit penalty.
DETERMINATION
114
Under Code of Virginia § 58.1-612, copy enclosed, the sales tax is
collectible from all persons who are dealers. The same section defines
the term "dealer" to include every person who offers tangible personal
property for sale at retail in Virginia. The fact that the Taxpayer qualifies
as a licensed Virginia dealer is not in dispute in this case. The tax
application to certain retail transactions conducted by the Taxpayer's
out-of-state website and catalogue business is at issue.
Sincerely,
115
Danny M. Payne
Tax Commissioner
116
Rulings of the Tax Commissioner
Document 00-137
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Vendor registration; Lack of nexus
Topics: Returns/Payments/Records
Date Issued: 07/31/2000
July 31, 2000
Dear ****
FACTS
Further, you maintain that effective 1992, you changed the method of
delivery to your Virginia customers. In this regard, you indicate that for
the current audit period you used, and continue to use, common carriers
with whom the Taxpayer has no financial or other relationship. It is your
contention that by using these common carriers, none of the Taxpayer's
sales to Virginia customers are taxable, regardless that the Taxpayer
was a registered dealer. Accordingly, although the Taxpayer filed
monthly returns during the period it was registered, it did not collect and
remit the tax on any of its sales to Virginia customers.
In effect, the Taxpayer believes it was required to collect the tax only on
117
those Virginia sales for which it had nexus. In this respect, the Taxpayer
maintains it was never informed to collect the tax on all sales to Virginia
customers. Further, the Taxpayer maintains it contacted the
department's Customer Service representatives and was told that being
a registered dealer did not require the Taxpayer to collect sales tax on
sales delivered via common carrier.
DETERMINATION
Although the Taxpayer did not have sufficient contact with Virginia
during the audit period to establish nexus, it was a registered dealer.
Nexus is not an issue when a taxpayer voluntarily registers to collect the
tax. As a registered dealer under Code of Virginia §58.1-615, the
Taxpayer is required to collect and remit the tax on all taxable
transactions. This issue is addressed in Public Documents 93-141
(6/7/93) and 97-440 (10/31/97).
There are other points you raise in your letter which I will address. First,
none of your Virginia customers were assessed by the department
during the current audit period. I understand that one of your customers
was contacted in 1998. Based on that contact, the audit staff realized
you were not collecting tax on sales delivered to Virginia. Accordingly,
the current audit was scheduled. Further, I have spoken with the
department's Customer Service staff regarding the July 30 and July 31,
1998 phone conversations. Although one of the representatives you
spoke with cannot recall the specific conversation, there was complete
understanding that a registered dealer was liable to collect and remit the
Virginia tax on all taxable sales, regardless that the registered dealer
does not have nexus. He was also aware that there are a number of
out-of-state vendors who voluntarily registered with Virginia and who
collect and remit the tax on sales to their Virginia customers, regardless
that these out-of-state vendors almost exclusively deliver their products
via common carrier or U.S. mail. Again, once an out-of-state dealer
voluntarily registers, nexus is no longer an issue.
In this case I find that the assessment is correct. Because of the delay
in responding to your appeal, interest will be accrued on the
118
assessment only through the date of your letter. No additional interest
will accrue provided the assessment is paid within 45 days afrom the
date of this letter.
If you have any questions regarding this letter, please contact ***** in
the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
119
Rulings of the Tax Commissioner
Document 00-193
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Call center in Virginia; Right to control
Topics: Collection of Tax; Taxability of Persons and Transactions
Date Issued: 10/20/2000
October 20, 2000
Dear ****
FACTS
You indicate the Taxpayer has no physical presence in Virginia. The
Taxpayer sells tangible personal property to Virginia customers. Orders
may be placed via telephone, catalog or website. Distribution and call
center services are handled by an unrelated third party fulfillment
service provider located outside Virginia. Products and catalogs are
shipped from an out-of-state distribution center to customers via
common carrier or the United States mail. The Taxpayer indicates that
the third party fulfillment service provider does not solicit orders, but
merely accepts orders.
The third party fulfillment service provider has notified the Taxpayer that
it intends to reroute the calls to a new call center located within Virginia.
You ask if the use of a call center in Virginia by the third party fulfillment
service provider will give the Taxpayer sufficient activity within Virginia
to require it to register for the collection and remittance of the Virginia
retail sales and use tax.
RULING
Code of Virginia § 58.1-612 lists several definitions of the term "dealer."
Pursuant to subsection B(2) of this statute, the term "dealer" includes
any person who "imports or causes to be imported into this
Commonwealth tangible personal property from any state or foreign
country, for sale at retail, for use, consumption, or distribution, or for
120
storage to be used or consumed in this Commonwealth." Based on the
facts presented, the Taxpayer qualifies as a "dealer" under this
definition.
121
department's Office of Tax Policy at * * *
Danny M. Payne
Tax Commissioner
122
Rulings of the Tax Commissioner
Document 01-105
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Who is Responsible for Securing Exemption Certificate
Topics: Exemptions; Taxpayers
Date Issued: 08/16/2001
Dear *****
This is in response to your letter of May 21, 2001, in which you request
a ruling on the sales and use tax collection responsibilities of third
parties assigned to collect lease payments or payments on a conditional
sale. Copies of cited sources are enclosed.
FACTS
Leases
123
person who leases tangible personal property to consumers in Virginia
is deemed a dealer. Pursuant to Code of Virginia § 58.1-613, every
dealer is required to register for the collection and remittance of the
sales tax to the department. Generally, a lessor is responsible for
collecting and remitting the sales tax to the department based on the
gross proceeds derived from the lease of tangible personal property,
without deduction whatsoever for any expenses or commissions paid to
others in connection with the lease.
For example, the master lease agreement states that "all rights of
Lessor hereunder may be assigned by Lessor ...." (Emphasis added.)
Moreover, the assignment document presented reveals that "FOR
VALUE RECEIVED ,...(the) Assignor ...sells, assigns and transfers to
...Assignee...all of Assignor's rights to and a security interest in
...1)...(the) Master Lease Agreement ...2) the Assignor's interest in and
to the collateral as specified in the ...lease...and 3) all monies identified
as rental payments payable, or to become payable, under the Lease or
with respect to the collateral as specified in the ...lease...." (Inserts and
emphasis added.)
Conditional Sale
In defining the term "sale," Code of Virginia § 58.1-602 provides that "[a]
transaction whereby the possession of property is transferred but the
seller retains title as security for the payment of the price shall be
deemed a sale." Such transactions are typically known as "conditional
sales." In this regard, Section 1-28 of the 1979 Virginia Retail Sales and
124
Use Tax Regulations provides that "[a]ny person making conditional,
charge or installment sales must report the total selling price and pay
the applicable tax for the taxable period in which the contracts of sale
are entered into." The same policy still holds true today.
As seller, the retail merchant is the party that the department would
generally look to for the collection and remittance of the sales tax on a
conditional sale of tangible personal property. In these transactions, the
full amount of sales tax must be collected up-front and remitted to the
department on or before the twentieth day of the month following the
month in which the sales tax became due. However, if the seller fails to
collect the sales tax, the Virginia consumer becomes directly liable for
remitting the use tax to the department based on the cost price of the
item.
Certificates of exemption
125
I trust that the foregoing answers your questions. If you have any
questions about this response, please contact ***** of the department's
Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
126
Rulings of the Tax Commissioner
Document 01-115
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Nexus; computer equipment, software
Topics: Basis of Tax; Collection of Tax; Property Subject to Tax
Date Issued: 09/19/2001
Dear *****
127
presumption is incorrect, the answers to the questions presented below
may differ.
RULING
Question #1. Are sales to the reseller recognized as exempt sales for
resale?
Question #2. How does the tax apply to optional hardware maintenance
agreements sold to resellers when the Taxpayer performs repair
services at the end-user site or at the Taxpayer's location outside
Virginia?
The tax applies only when the hardware maintenance agreement is sold
at retail to the ultimate consumer. In this instance, the retail transaction
is between the reseller and its customer, i.e., the end-user. Thus, the
Taxpayer should not collect the sales tax from the reseller provided it
has obtained a properly completed resale exemption certificate from the
reseller.
Question #3. How does the tax apply to an optional software support
agreement providing for technical consulting services and updates?
The department has traditionally held that such agreements are (i)
taxable when any updates are transferred on a tangible medium such
as a disk, tape, etc., or (ii) exempt if all updates are transferred by
electronic means only. See P.D. 98-19 (2/9/98).
128
certificate from the reseller. See Title 23 of the Virginia Administrative
Code (VAC) 10-210-280.
Question #5. What is the taxable base used to calculate the tax if the
Taxpayer is required to collect the sales tax in any of the above
transactions?
There is no taxable base for the Taxpayer because it is selling its
product at wholesale to the reseller. In the event that the reseller is
registered to collect the sales tax, the reseller would be obligated to
collect the tax. See 23 VAC 10-210-1090. Otherwise, if the reseller has
no nexus with Virginia and has not voluntarily registered with the
department as a service to its Virginia customers, no collection of the
sales or use tax should be made by the reseller. Rather, in these
instances, it is the ultimate responsibility of the end-user to report and
pay the use tax based on the sales price charged by the reseller.
If you have any questions about this response, please contact **** in the
department's Appeals and Rulings Office at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
129
Rulings of the Tax Commissioner
Document 02-113
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Online digital identification service to companies, nexus
Topics: Exemptions; Property Subject to Tax
Date Issued: 07/26/2002
Dear *****:
This is in reply to the letter from ***** seeking a ruling on the application
of the Virginia retail sales and use tax to services provided by your client
(the "Company"). I apologize for the delay in the department's response.
FACTS
The Company has sufficient physical contact with Virginia and has
established nexus for sales and use tax purposes. The Company
questions the application of the tax to its charges for the digital ID
service and raises three issues for consideration: (1) Are digital IDs
tangible personal property subject to the Virginia sales tax? (2) If a
digital ID is considered tangible software, is it "custom" or prewritten?
(3) Is the transfer of digital IDs over the Internet taxable data
processing?
RULING
130
Services v. Tangible Personal Property
131
house use and subsequently sold or leased to unrelated third parties."
You have clarified that the Company is not making sales of computer
software in providing its digital ID service. It is not clear, however,
whether the Company purchases computer software for use in Virginia
to provide its digital ID service. Any purchases of custom software by
the Company for use in Virginia in providing its services would be
exempt. Conversely, as a service provider, the Company is liable for the
tax on its purchases of tangible prewritten computer software used in
Virginia to provide its digital ID service. Purchases of prewritten
software that are transmitted to the Company online would be exempt,
provided there is no exchange of tangible personal property. P.D. 99-80
(4/21/99).
Data Processing
It has been the department's long-standing policy that the "true object"
of data processing services that transfer information by means of
microfiche, computer tape, or hardcopy are nontaxable services. P.D.
96-184 (7/26/96). Clearly, data processing services that involve the
transfer of data online where there is no transfer of tangible personal
property would also be a nontaxable service. In this case, there is
insufficient information to determine whether the Company's digital ID
service would be considered data processing services. In any event, the
Company's online provision of its digital ID services is not deemed a
taxable sale.
This ruling is based on the facts as presented. Any variation of the facts
from those presented may lead to a different result. The Code of
Virginia, regulations and public documents cited are available online in
the Tax Policy Library section of the Department of Taxation's web site,
located at www.tax.state.va.us. If you have additional questions, you
may contact ***** in the Office of Policy and Administration, Appeals and
Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
132
Rulings of the Tax Commissioner
Document 04-4
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Virginia Public Procurement Act, Vendor designated a "prohibited source" for
state purchasing
Topics: Appropriateness of Audit Methodology; Collection of Tax
Date Issued: 01/23/2004
Dear *****:
This will reply to your letter of December 24, 2003, in which you seek
correction
of a determination by the Department that your client, ***** (the
"Taxpayer") is prohibited from doing business with the state of Virginia
as an approved vendor under Va. Code § 2.2-4321.1.
FACTS
133
customers but was not registered to collect and remit Virginia sales and
use tax. The Taxpayer did not provide a complete response to the
questionnaire, and the Department was unable to determine if the
affiliate was subject to the provisions of Va. Code § 58.1-612. After
several unsuccessful attempts to obtain a completed questionnaire from
the Taxpayer, the Department issued a determination on December 8,
2003, stating that the Taxpayer should be designated a "prohibited
source" for state purchasing. The Department notified the Department of
General Services to remove the Taxpayer from its list of vendors
approved to do business with Virginia state agencies.
134
and that vendor or affiliate is not registered to collect Virginia
sales and use tax, the law prohibits state agencies from doing
business with the vendor. In this case, it is clear that the Affiliate
meets the definition of "dealer." The question to be addressed is
whether the Affiliate meets any of the criteria under Va. Code §
58.1-612(C).
Sincerely,
Kenneth W. Thorson
Tax Commissioner
135
Rulings of the Tax Commissioner
Document 04-38
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Use of trading software to facilitate individual stock trading on various national
stock exchanges.
Topics: Basis of Tax; Property Subject to Tax
Date Issued: 07/28/2004
Located in ********* (“State A”) with no offices (in Virginia), the Taxpayer
develops software that is licensed to brokers and other end users in
Virginia and elsewhere. These licenses generally grant authority to end
users to use trading software to facilitate individual stock trading on
various national stock exchanges. You present a number of factual
scenarios, which are addressed below.
RULING
Software licenses
136
"shipped to the customer's location via common carrier, Internet or
personally delivered by an employee of the Taxpayer."
The Department has long held that the sale of computer software
transferred in tangible form (e.g., CD-ROM) is the taxable sale of
tangible personal property. In contrast, computer programs transmitted
electronically (e.g., over telephone lines, keyed directly into a computer
through its keyboard or downloaded from the Internet) are deemed to be
nontaxable transactions because there is no transfer of tangible
personal property. The application of the retail sales and use tax to the
various facts and questions presented is as follows:
• Initial and monthly license fees for prewritten software
transferred on a tangible medium (e.g., CD-ROM) and charged to
a broker or sublicense:
o Standard package fees – taxable
• Initial fee - taxable
• Minimum monthly fee or per order
fee – taxable
o Optional trade chart package fee - taxable
o Optional island book package fee - taxable
o Optional back office (reconciler) fee - taxable
o Optional historical data updates fee - taxable
• Initial and monthly license fees for prewritten software
downloaded from the Internet or otherwise electronically
transferred to the customer and no tangible software medium is
furnished to the customer:
o Standard package fee - exempt
Initial fee – exempt
Minimum monthly fee or per order fee - exempt
o Optional trade chart package fee – exempt
o Optional island book package fee – exempt
o Optional back office (reconciler) fee – exempt
o Optional historical data updates fee - exempt
• Charge for quote server or other computer hardware sold,
leased or rented for use in connection with downloaded (exempt)
software - taxable
• Charge for accessing real-time quotes via third party lines -
exempt
• In the event a broker sublicenses the software to an end user,
the fee is generally taxable unless transferred electronically. No
137
resale exemption applies because the broker is authorized to use
the software in its business. If a registered dealer, the Taxpayer
should collect and remit the tax on the sublicense fee if there is a
transfer of tangible property.
• Electronic information service charges - generally exempt
o Island book fee - follow above tax treatment for license fees
o Exchange fee - exempt, if separately stated on the customer's
invoice
o Market data feeds combined with a taxable license fee –
taxable
o Market data feeds combined with an exempt license fee –
exempt
o Charts and graphs fee - follow above tax treatment for license
fees
o Internet workstation fee - follow above tax treatment for license
fees
• Miscellaneous fees for services - taxability generally depends
upon whether charged in connection with the sale, lease or rental
of tangible personal property:
o Regardless of whether separately stated or not, the following
fees are taxable [unless charged in connection with electronically
downloaded software only]:
Internet order fee
Late count charge
Late payment fee
Administrative information tracking fee
Communication server connectivity fee
Order fee
Minimum order fee
Back office license fee
Contract change fee
o Installation labor or service fee - exempt if separately stated on
the customer's invoice
Resale certificates
The trading software site license grants a license to a licensee "to use
the Software solely for the purposes set forth in Exhibit "B" for
Licensee's customers at Licensee's principal office." A licensee is
generally a broker. Exhibit B lists the different software packages
available, such as the standard package and other packages for trade
138
charts, island book pricing, back office (reconciler), and historical data
updates. Although the broker may not use the software to execute
trades, it does use the software in its operations in the provision of
access services to its customers. The taxability of the software will
depend upon the method of delivery to the licensee. If electronically
delivered to the broker and no tangible medium is transferred, the
software is exempt. If delivered by tangible means to the broker, the
software is taxable.
Subsection A of Title 23 of the Virginia Administrative Code ("VAC") 10-
210-5010 sets out that "[c]harges made by stockbrokers for providing
consultation, trading stocks, securities and commodities and similar
transactions are charges for professional services and are not subject to
the tax." Subsection B of the above regulation provides that
"[s]tockbrokers are the consumers of all tangible personal property used
in their operations and must pay the tax on all such property at the time
of purchase."
Under Va. Code § 58.1-612, the sales tax is collectible from all persons
who are dealers. That same section defines the term "dealer" to include
every person who "[i]mports or causes to be imported into this
Commonwealth tangible personal property from any state or foreign
country, for sale at retail, for use, consumption, or distribution, or for
storage to be used or consumed in this Commonwealth." The Taxpayer
clearly qualifies as a "dealer" under Va. Code § 58.1-612.
The same statute also sets out the activities sufficient to require a
dealer to register for the collection and remittance of the Virginia retail
sales and use tax. The statute provides in part that a dealer shall be
deemed to have sufficient activity in Virginia if the dealer solicits
business in Virginia by employees, independent contractors, agents or
139
other representatives. Nexus is also established if the dealer makes
deliveries into Virginia more than twelve times during a calendar year by
means other than common carrier. In addition, nexus is established if
the dealer owns tangible personal property that is rented or leased to
consumers in Virginia or offers tangible personal property, on approval,
to consumers in Virginia.
140
the Department's Office of Policy and Administration, Appeals and
Rulings, at **********.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
141
Rulings of the Tax Commissioner
Document 04-129
Number:
Tax Type: Retail Sales and Use Tax
Brief Description: Taxpayer claims that the charges for a computer software license and consulting
services are not taxable
Topics: Manufacturing Exemption
Date Issued: 09/16/2004
Dear *****:
This is in response to your letter seeking correction of the sales and use
tax assessment issued to ***** (the "Taxpayer") as a result of an audit
for the period March 1999 through February 2002. I apologize for the
delay in the Department's response. I also want to thank you for
providing the English translation of the German documents at issue.
FACTS
The Taxpayer manufactures abrasive rolls, sheet belts and discs for
furniture manufacturers and others. An audit resulted in the assessment
of tax on certain fixed assets and on charges for a computer software
license and consulting services.
The Taxpayer claims that the charges for a computer software license
and consulting services are not taxable. The contested charges were
billed by the Taxpayer's German parent company ("Parent"), which had
obtained a prewritten computer software license from a German vendor
on behalf of all users in the Parent's international group. To implement
the software, the Parent also received consulting services from the
same German vendor. This software was subsequently installed and
implemented at the Taxpayer's Virginia location. As a result, the
Taxpayer was billed by the Parent for its proportionate share of the
Parent's cost for the software license and consulting fees. I understand
that the Taxpayer received the software in March 1999 and "went live
with the system on November 1, 1999." I also understand that the
software is used to perform administrative functions only.
142
The Taxpayer maintains that the licensing and consulting work
(between the German vendor and Parent) are set out in separate
documents and are completely independent of each other. Accordingly,
the Taxpayer claims that the consulting services billed to it by the
Parent are "not in connection with the sale of software" and are not
taxable. The Taxpayer also maintains that "most of the services were
performed in Germany and have no nexus with Virginia."
The Taxpayer further maintains that the software license charge is not
taxable because it is merely a reimbursement to the Parent "for its
portion of the costs associated with the system." The Taxpayer
contends that the charges invoiced by the Parent "are simply an
intercompany transfer to maintain accurate accounting."
The Taxpayer indicates that it had assistance from the Parent and an
outside consultant to implement the software in Virginia. I understand,
however, that the charges made by the outside consultant were not
included in the audit. The Taxpayer also disputes the hardware costs
because sales tax was paid. I understand, however, that the hardware
costs were also not included in the audit.
DETERMINATION
143
billing documents, it is established that the Taxpayer purchased a
bundled software system consisting of software and services, thus
making a clear connection between the software and services.
A close review of the billing records presented reveals that they are too
vague to establish an exemption from the tax pursuant to Va. Code §§
58.1-609.5(2) [relating to exempt installation labor] and 58.1-609.5(6)
[relating to exempt software modification labor charges]. Furthermore,
the contested "external consulting" charges appear to consist of taxable
and exempt service charges. For example, the Outline Consulting
Contract has provisions for four types of services: (1) organizational and
managerial consulting, (2) software alterations and/or additions or
support, (3) interface installation, and (4) training. It is not possible from
the documentation provided to determine the specific amounts of
exempt services. In these instances, a lump-sum charge consisting of
both taxable and exempt services is deemed taxable. I understand that
the Taxpayer has not provided an exempt and taxable breakdown of the
contested service charges although the Department's auditor requested
such information. Absent credible evidence showing the breakdown of
the specific amounts of installation labor and software modification labor
that was billed to the Taxpayer by the Parent in connection with the
contested charges, I find no basis for revising the audit.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
144
D. Case Law Synopsis
Quill Corp v. North Dakota – U. S. Supreme Court case; Quill is a leading mail
order retailer of office supplies. North Dakota’s Department of Revenue asserted
that Quill, by virtue of its sales in North Dakota, created a substantial economic
presence in the state by being the sixth largest supplier of office products in the
state, and, therefore, was liable for collecting use tax. The Supreme Court of
North Dakota agreed. The Supreme Court, however, did not agree. Case
contains at length discussion of Commerce Clause and Due Process Clause as
well as what consititutes more than minimal contact.
145
nursing homes has nexus due to their substantial activities in the state. Arizona
Court of Appeals found in favor of DOR.
Comptroller v. Royal Transport, Inc. & Furnitureland South, Inc. – Circuit Court
for Anne Arundel County in Maryland found that a North Carolina furniture dealer
and their delivery company are liable for use tax. The delivery company
accepted cash on delivery payments, set up and installed furniture, repaired
furniture and facilitated returns for the store, which was owned by mutual
interests.
146
E. Case Law
147
SCRIPTO v. CARSON, 362 U.S. 207 (1960)
362 U.S. 207
SCRIPTO, INC., v. CARSON, SHERIFF, ET AL. APPEAL FROM THE
SUPREME COURT OF FLORIDA. No. 80.
Argued February 24, 1960. Decided March 21, 1960.
Appellant, a Georgia corporation, has no office or place of business in Florida
and no property or regular full-time employees there; but it does have in Florida
ten brokers, wholesalers or jobbers who solicit sales of appellant's products on a
commission basis and forward orders to Georgia, where they are accepted and
whence the goods are shipped to Florida residents. Held: A Florida statute which
levies a tax on the use of such products in Florida and makes appellant
responsible for its collection from Florida purchasers is not repugnant either to
the Commerce Clause of the Constitution or to the Due Process Clause of the
Fourteenth Amendment. General Trading Co. v. State Tax Comm'n, 322 U.S.
335 , followed. Miller Bros. Co. v. Maryland, 347 U.S. 340 , distinguished. Pp.
207-213. 105 So.2d 775, affirmed.
George B. Haley, Jr. argued the cause for appellant. With him on the brief was
Ernest P. Rogers. Joseph C. Jacobs, Assistant Attorney General of Florida,
argued the cause for appellees. With him on the brief were Richard W. Ervin,
Attorney General of Florida, and Sam Spector, Special Assistant Attorney
General.
105 So.2d 775. We noted probable jurisdiction. 361 U.S. 806 . We agree with the
result reached by Florida's courts.
148
In its Adgif operation, appellant does not [362 U.S. 207, 209] (1) own, lease, or
maintain any office, distributing house, warehouse or other place of business in
Florida, or (2) have any regular employee or agent there. 2 Nor does it own or
maintain any bank account or stock of merchandise in the State. Orders for its
products are solicited by advertising specialty brokers or, as the Supreme Court
of Florida called them, wholesalers or jobbers, who are residents of Florida. At
the time of suit, there were 10 such brokers - each having a written contract and
a specific territory. The somewhat detailed contract provides, inter alia, that all
compensation is to be on a commission basis on the sales made, provided they
are accepted by appellant; repeat orders, even if not solicited, also carry a
commission if the salesman has not become inactive through failure to secure
acceptable orders during the previous 60 days. The contract specifically provides
that it is the intention of the parties "to create the relationship . . . of independent
contractor." Each order is to be signed by the solicitor as a "salesman"; however,
he has no authority to make collections or incur debts involving appellant. Each
salesman is furnished catalogs, samples, and advertising material, and is actively
engaged in Florida as a representative "of Scripto for the purpose of attracting,
soliciting and obtaining Florida customers" for its mechanical advertising
specialties. Orders for such products are sent by these salesmen directly to the
Atlanta office for acceptance or refusal. If accepted, the sale is consummated
there and the salesman is paid his commission directly. No money passes
between the purchaser and the salesman - although [362 U.S. 207, 210] the latter
does occasionally accept a check payable to the appellant, in which event he is
required to forward it to appellant with the order.
As construed by Florida's highest court, the impost levied by the statute is a tax
"on the privilege of using personal property . . . which has come to rest . . . and
has become a part of the mass of property" within the State. 105 So.2d, at 781. It
is not a sales tax, but "was developed as a device to complement [such a tax] in
order to prevent evasion . . . by the completion of purchases in a non-taxing state
and shipment by interstate commerce into a taxing forum." Id., at 779. The tax is
collectible from "dealers" and is to be added to the purchase price of the
merchandise "as far as practicable." In the event that a dealer fails to collect the
tax, he himself is liable for its payment. The statute has the customary use tax
provisions "against duplication of the tax, an allowance to the dealer for making
the collection, and a reciprocal credit arrangement which credits against the
Florida tax any amount up to the amount of the Florida tax which might have
been paid to another state." Id., at 782. Florida held appellant to be a dealer
under its statute. "The application by that Court of its local laws and the facts on
which it founded its judgment are of course controlling here." General Trading
Co. v. State Tax Comm'n, 322 U.S. 335, 337 (1944).
The question remaining is whether Florida, in the light of appellant's operations
there, may collect the State's use tax from it on the basis of property bought from
appellant and shipped from its home office to purchasers in Florida for use there.
Florida has well stated the course of this Court's decisions governing such levies,
and we need but drive home its clear understanding. There must be, as our
149
Brother Jackson stated in Miller Bros. Co. v. Maryland, 347 U.S. 340, 344 -345
(1954), "some definite link, some minimum [362 U.S. 207, 211] connection,
between a state and the person, property or transaction it seeks to tax." We
believe that such a nexus is present here. First, the tax is a nondiscriminatory
exaction levied for the use and enjoyment of property which has been purchased
by Florida residents and which has actually entered into and become a part of
the mass of property in that State. The burden of the tax is placed on the ultimate
purchaser in Florida and it is he who enjoys the use of the property, regardless of
its source. We note that the appellant is charged with no tax - save when, as
here, he fails or refuses to collect it from the Florida customer. Next, as Florida
points out, appellant has 10 wholesalers, jobbers, or "salesmen" conducting
continuous local solicitation in Florida and forwarding the resulting orders from
that State to Atlanta for shipment of the ordered goods. The only incidence of this
sales transaction that is nonlocal is the acceptance of the order. True, the
"salesmen" are not regular employees of appellant devoting full time to its
service, but we conclude that such a fine distinction is without constitutional
significance. The formal shift in the contractual tagging of the salesman as
"independent" neither results in changing his local function of solicitation nor
bears upon its effectiveness in securing a substantial flow of goods into Florida.
This is evidenced by the amount assessed against appellant on the statute's 3%
basis over a period of but four years. To permit such formal "contractual shifts" to
make a constitutional difference would open the gates to a stampede of tax
avoidance. See Thomas Reed Powell, Sales and Use Taxes: Collection from
Absentee Vendors, 57 Harv. L. Rev. 1086, 1090. Moreover, we cannot see, from
a constitutional standpoint, "that it was important that the agent worked for
several principals." Chief Judge Learned Hand, in Bomze v. Nardis Sportswear,
165 F.2d 33, 36. The test is simply the nature and extent of the activities of the
appellant [362 U.S. 207, 212] in Florida. In short, we conclude that this case is
controlled by General Trading Co., supra. As was said there, "All these
differentiations are without constitutional significance. Of course, no State can tax
the privilege of doing interstate business. See Western Live Stock v. Bureau, 303
U.S. 250 . That is within the protection of the Commerce Clause and subject to
the power of Congress. On the other hand, the mere fact that property is used for
interstate commerce or has come into an owner's possession as a result of
interstate commerce does not diminish the protection which he may draw from a
State to the upkeep of which he may be asked to bear his fair share." 322 U.S.,
at 338 .
Nor do we believe that Florida's requirement that appellant be its tax collector on
such orders from its residents changes the situation. As was pointed out in
General Trading Co., this is "a familiar and sanctioned device." Ibid. Moreover,
we note that Florida reimburses appellant for its service in this regard.
Appellant earnestly contends that Miller Bros. Co. v. Maryland, supra, is to the
contrary. We think not. Miller had no solicitors in Maryland; there was no
"exploitation of the consumer market"; no regular, systematic displaying of its
products by catalogs, samples or the like. But, on the contrary, the goods on
which Maryland sought to force Miller to collect its tax were sold to residents of
150
Maryland when personally present at Miller's store in Delaware. True, there was
an "occasional" delivery of such purchases by Miller into Maryland, and it did
occasionally mail notices of special sales to former customers; but Marylanders
went to Delaware to make purchases - Miller did not go to Maryland for sales.
Moreover, it was impossible for Miller to determine that goods sold for cash to a
customer over the counter at its store in Delaware were to be used and enjoyed
in Maryland. This led the Court to conclude [362 U.S. 207, 213] that Miller would be
made "more vulnerable to liability for another's tax than to a tax on itself." 347
U.S., at 346 . In view of these considerations, we conclude that the "minimum
connections" not present in Miller are more than sufficient here.
Footnotes
[ Footnote 1 ] The pertinent provisions of this statute are: "212.06 Same; collectible from dealers; dealers
defined; dealers to collect from purchasers; legislative intent as to scope of tax. - "(1) The aforesaid tax at
the rate of three per cent of the retail sales price, as of the moment of sale, or three per cent of the cost
price, as of the moment of purchase, as the case may be, shall be [362 U.S. 207, 208] collectible from all
dealers as herein defined on the sale at retail, the use, the consumption, the distribution and the storage for
use or consumption in this state, of tangible personal property. "(2) . . . (g) `Dealer' also means and includes
every person who solicits business either by representatives or by the distribution of catalogs or other
advertising matter and by reason thereof receives and accepts orders from consumers in the state, and such
dealer shall collect the tax imposed by this chapter from the purchaser and no action either in law or in
equity on a sale or transaction as provided by the terms of this chapter may be had in this state by any such
dealer unless it be affirmatively shown that the provisions of this chapter have been fully complied with."
[ Footnote 2 ] Appellant Scripto does employ one salesman but he handles its regular line of products and
has no connection with Adgif. The Florida courts found that his presence was not relevant to the
determination of whether appellant was included within the terms of the statute. [362 U.S. 207, 214]
151
U.S. Supreme Court
NATIONAL GEOGRAPHIC v. CAL. EQUALIZATION BD., 430 U.S. 551 (1977)
430 U.S. 551
NATIONAL GEOGRAPHIC SOCIETY v. CALIFORNIA BOARD OF
EQUALIZATION
APPEAL FROM THE SUPREME COURT OF CALIFORNIA
No. 75-1868.
152
Philip M. Plant, Deputy Attorney General of California, argued the cause for
appellee. With him on the brief were Evelle J. Younger, Attorney General, and
Ernest P. Goodman, Assistant Attorney General. *
[ Footnote * ] Harold T. Halfpenny filed a brief for the Direct Mail/Marketing
Assn., Inc., as amicus curiae urging reversal. Louis J. Lefkowitz, Attorney
General, Samuel A. Hirshowitz, First Assistant Attorney General, and Philip
Weinberg, Assistant Attorney General, filed a brief for the State of New York as
amicus curiae urging affirmance.
MR. JUSTICE BRENNAN delivered the opinion of the Court.
Appellant National Geographic Society, a nonprofit scientific and educational
corporation of the District of Columbia, maintains two offices in California that
solicit advertising copy for the Society's monthly magazine, the National
Geographic Magazine. However, the offices perform no activities related to the
Society's operation of a mail-order business for the sale from the District of
Columbia of maps, atlases, globes, and books. Orders for these items are mailed
from California directly to appellant's Washington, D.C., headquarters on
coupons or forms enclosed with announcements mailed to Society members and
magazine subscribers or on order forms contained in the magazine. Deliveries
are made by mail from the Society's Washington, D.C., or Maryland offices.
Payment is either by cash mailed with the order or after a mailed billing following
receipt of the merchandise. Such mail-order sales to California residents during
the period involved in this suit aggregated $83,596.48. [430 U.S. 551, 553]
California Rev. & Tax. Code 6203 (West Supp. 1976) requires every "retailer
engaged in business in this state and making sales of tangible personal property
for storage, use, or other consumption in this state" to collect from the purchaser
a use tax in lieu of the sales tax imposed upon local retailers. The California
Supreme Court held that appellant is subject to the statute as a "`retailer
engaged in business in this state,'" because its maintenance of the two offices
brings appellant within the definition under 6203 (a) that includes "`[a]ny
retailer maintaining . . . an office . . . .'" 16 Cal. 3d 637, 642, 547 P.2d 458, 460-
461 (1976). Section 6204 makes the retailer liable to the State for any taxes
required to be collected regardless of whether he collects the tax. 1 See Bank of
[430 U.S. 551, 554] America v. State Bd. of Equalization, 209 Cal. App. 2d 780,
793, 26 Cal. Rptr. 348, 355 (1962).
The question presented by this case is whether the Society's activities at the
offices in California 2 provided sufficient nexus between the out-of-state seller
appellant and the State - as required by the Due Process Clause of the
Fourteenth Amendment and the Commerce Clause - to support the imposition
upon the Society of a use-tax-collection liability pursuant to 6203 and 6204,
measured by the $83,596.48 of mail-order sales of merchandise from the District
of Columbia and Maryland. The California Supreme Court held that the imposition
of use-tax-collection liability on the Society violated neither Clause, 16 Cal. 3d
637, 547 P.2d 458 (1976). 3 We noted probable jurisdiction. 429 U.S. 883
(1976). We affirm. [430 U.S. 551, 555]
153
I
All States that impose sales taxes also impose a corollary use tax on tangible
property bought out of State to protect sales tax revenues and put local retailers
subject to the sales tax on a competitive parity with out-of-state retailers exempt
from the sales tax. H. R. Rep. No. 565, 89th Cong., 1st Sess., 614 (1965). The
constitutionality of such state schemes is settled. Henneford v. Silas Mason Co.,
300 U.S. 577, 581 (1937); Monamotor Oil Co. v. Johnson, 292 U.S. 86 (1934). 4
But the limitation of use taxes to consumption within the State so as to avoid
problems of due process that might arise from the extension of the sales tax to
interstate commerce, see, e. g., Nelson v. Sears, Roebuck & Co., 312 U.S. 359,
363 (1941); Monamotor Oil Co. v. Johnson, supra, at 95, does not avoid all
constitutional difficulties. States necessarily impose the burden of collecting the
tax on the out-of-state seller; the impracticability of its collection from the
multitude of individual purchasers is obvious. Miller Bros. Co. v. Maryland, 347
U.S. 340, 343 (1954). However, not every out-of-state seller may constitutionally
be made liable for payment of the use tax on merchandise sold to purchasers in
the State. The California Supreme Court concluded, based on its survey of the
relevant decisions of this Court, that the "slightest presence" of the seller in
California established sufficient nexus between the State and the seller
constitutionally to support the imposition of the duty to collect and pay the tax.
The California court stated, 16 Cal. 3d, at 644, 547 P.2d, at 462:
"We are satisfied that from the above cited decisions [430 U.S. 551, 556] the following principle
can be distilled and we thus hold: Where an out-of-state seller conducts a substantial mail order
business with residents of a state imposing a use tax on such purchasers and the seller's connection
with the taxing state is not exclusively by means of the instruments of interstate commerce, the
slightest presence within such taxing state independent of any connection through interstate
commerce will permit the state constitutionally to impose on the seller the duty of collecting the
use tax from such mail order purchasers and the liability for failure to do so." (Emphasis supplied.)
Our affirmance of the California Supreme Court is not to be understood as implying agreement
with that court's "slightest presence" standard of constitutional nexus. Appellant's maintenance of
two offices in the State and solicitation by employees assigned to those offices of advertising copy
in the range of $1 million annually, Tr. of Oral Arg. 6, establish a much more substantial presence
than the expression "slightest presence" connotes. Our affirmance thus rests upon our conclusion
that appellant's maintenance of the two offices in California and activities there adequately
establish a relationship or "nexus" between the Society and the State that renders constitutional the
obligations imposed upon appellant pursuant to 6203 and 6204. 5 This conclusion is supported by
several of our decisions.
The requisite nexus was held to be shown when the out-of-state sales were
arranged by the seller's local agents working in the taxing State, Felt & Tarrant
Co. v. Gallagher, 306 U.S. 62 (1939); General Trading Co. v. Tax Comm'n, [430
U.S. 551, 557] 322 U.S. 335 (1944), and in cases of maintenance in the State of
local retail store outlets by out-of-state mail-order sellers. Nelson v. Sears,
Roebuck & Co., supra; Nelson v. Montgomery Ward, 312 U.S. 373 (1941). In
Scripto, Inc. v. Carson, 362 U.S. 207 (1960), the necessary basis was found in
the case of a Georgia-based company that had "10 wholesalers, jobbers, or
`salesmen' conducting continuous local solicitation in Florida and forwarding the
resulting orders from that State to Atlanta for shipment of the ordered goods,"
154
id., at 211, although maintaining no office or place of business in Florida, and
having no property or regular full-time employees there.
Standard Pressed Steel Co. v. Washington Rev. Dept., 419 U.S. 560 (1975), is
also instructive. That case involved a direct tax upon the gross receipts of a
foreign corporation resulting from sales to a State of Washington customer, and
not imposition of use-tax-collection duties. Although "a vice in a tax on gross
receipts of a corporation doing an interstate business is the risk of multiple
taxation . . .," id., at 563, see Monamotor Oil Co. v. Johnson, supra, a concern
not present when only imposition of use-tax-collection duty is involved, Standard
Pressed Steel held that maintenance in the taxing State of a single employee, an
engineer whose office was in his Washington home and whose primary
responsibility was to consult with the Washington-based customer regarding its
anticipated needs for the out-of-state supplier's product, established a sufficient
relation to activities within the State producing the gross receipts as to support
imposition of the tax. It is particularly significant for our purposes in this case
that the Court characterized as "frivolous" the argument that the seller's in-state
activities were so thin and inconsequential that the tax had no reasonable
relation to the protection and benefits conferred by the taxing State, for the
employee "made possible the realization and continuance of valuable contractual
relations between [the seller and its Washington customer]." [430 U.S. 551, 558]
419 U.S., at 562 . Other fairly apportioned, non-discriminatory direct taxes have
also been sustained when the taxes have been shown to be fairly related to the
services provided the out-of-state seller by the taxing State. Complete Auto
Transit, Inc. v. Brady, ante, p. 274; General Motors Corp. v. Washington, 377
U.S. 436 (1964); Northwestern Cement Co. v. Minnesota, 358 U.S. 450 (1959);
Memphis Gas Co. v. Stone, 335 U.S. 80 (1948); Wisconsin v. J. C. Penney Co.,
311 U.S. 435, 444 (1940).
The case for the validity of the imposition upon the out-of-state seller enjoying
such services of a duty to collect a use tax is even stronger. See Norton Co. v.
Illinois Rev. Dept., 340 U.S. 534, 537 (1951). The out-of-state seller runs no risk
of double taxation. The consumer's identification as a resident of the taxing State
is self-evident. The out-of-state seller becomes liable for the tax only by failing or
refusing to collect the tax from that resident consumer. Thus, the sole burden
imposed upon the out-of-state seller by statutes like 6203 and 6204 is the
administrative one of collecting it. Compare McLeod v. Dilworth Co., 322 U.S.
327 (1944) (sales tax), with Scripto, Inc. v. Carson, supra, and General Trading
Co. v. Tax Comm'n, supra. See also American Oil Co. v. Neill, 380 U.S. 451, 454 -
455 (1965).
Two decisions that have held fact patterns deficient to establish the necessary
nexus to impose the duty to collect the use tax highlight the significance of the
inquiry whether the out-of-state seller enjoys services of the taxing State. Miller
Bros. Co. v. Maryland, 347 U.S. 340 (1954), struck down a Maryland assessment
against a Delaware store near the border between the two States. The store had
made over-the-counter sales to Maryland residents and occasionally shipped or
155
delivered goods by truck into that State. The store advertised in Delaware by
newspaper and radio, and some of these advertisements reached Maryland
residents. These advertisements were sometimes supplemented with [430 U.S.
551, 559] "flyers" mailed to customers, some of whom lived in Maryland. The
Court concluded that Maryland could not satisfy the due process requirement. In
addition to the almost total lack of contacts between Maryland and the Delaware
store - Marylanders went to Delaware to make purchases, the seller did not go to
Maryland to make sales - the seller obviously could not know whether the goods
sold over the counter in Delaware were transported to Maryland prior to their
use. See Scripto, Inc. v. Carson, supra, at 212.
National Bellas Hess, Inc. v. Illinois Rev. Dept., 386 U.S. 753 (1967), presented
the question in the case of an out-of-state seller whose only connection with
customers in the taxing State was by common carrier or mail. Illinois subjected
appellant Bellas Hess, a national mail-order house centered in Missouri, to use
tax liability based upon mail-order sales to customers in that State. Bellas Hess
owned no tangible property in Illinois, had no sales outlets, representatives,
telephone listings, or solicitors in that State, and did not advertise there by radio,
television, billboards, or newspapers. It communicated with potential customers
by mailing catalogues throughout the United States, including Illinois, twice a
year and occasionally supplemented this effort by mailing out "flyers." All orders
for merchandise were mailed to Bellas Hess' Missouri plant, and the goods were
sent to customers by mail or common carrier. Bellas Hess held that,
constitutionally, the basis for the requisite nexus was not to be found solely in
Bellas Hess' mail-order activities in the State. The Court's opinion carefully
underscored, however, the "sharp distinction . . . between mail order sellers with
retail outlets, solicitors, or property within [the taxing] State, and those [like
Bellas Hess] who do no more than communicate with customers in the State by
mail or common carrier as part of a general interstate business." Id., at 758.
Appellant Society clearly falls into the former category. [430 U.S. 551, 560]
II
The Society argues, however, that its contacts with customers in California were
related solely to its mail-order sales by means of common carrier or the mail,
that the two offices played no part in that activity, and that therefore this case is
controlled by Bellas Hess. 6 The Society argues in other words that there must
exist a nexus or relationship not only between the seller and the taxing State,
but also between the activity of the seller sought to be taxed and the seller's
activity within the State. We disagree. However fatal to a direct tax a "showing
that particular transactions are dissociated from the local business . . .," Norton
Co. v. Illinois Rev. Dept., supra, at 537; American Oil Co. v. Neill, supra;
Connecticut Gen. Life Ins. Co. v. Johnson, 303 U.S. 77 (1938), such dissociation
does not bar the imposition of the use-tax-collection duty. 7 It is true that Sears,
Roebuck and Montgomery Ward, relied on by appellant, involved fact patterns
that included proof of assistance by local operations of the mail-order business.
Sears maintained 12 retail stores in the taxing State and was qualified to do
156
business there. Sears' agents in the States, although not directly involved in the
solicitation of the mail-order sales, at times assisted in processing such orders.
The holding that Sears could not avoid use-tax liability did not, however, turn on
that fact. The holding, rather, was that the fact Sears' business was
departmentalized - the mail-order and retail stores operations were separately
administered - did not preclude the finding of sufficient nexus. Montgomery
Ward, a companion case to Sears, [430 U.S. 551, 561] Roebuck, presented a
somewhat similar fact pattern. There the local retail stores engaged in local
advertising of the mail-order merchandise. But here again we disagree that this
fact was crucial to the Court's decision. Even if, as the Society argues, the fact
patterns of Sears and Montgomery Ward may be regarded as the equivalent of
the in-state solicitation by local agents found sufficient to supply the nexus for
imposition of the use-tax-collection duty in Felt & Tarrant Co. v. Gallagher, 306
U.S. 62 (1939), see also Scripto, Inc. v. Carson, 362 U.S. 207 (1960) (local
solicitation by commission "salesmen"); General Trading Co. v. Tax Comm'n, 322
U.S. 335 (1944) (traveling salesmen sent into taxing State); Bowman v.
Continental Oil Co., 256 U.S. 642 (1921) (local distributor and dealer); and
Monamotor Oil Co. v. Johnson, 292 U.S. 86 (1934) (local refining, storage, and
distributing facilities), the relevant constitutional test to establish the requisite
nexus for requiring an out-of-state seller to collect and pay the use tax is not
whether the duty to collect the use tax relates to the seller's activities carried on
within the State, but simply whether the facts demonstrate "some definite link,
some minimum connection, between [the State and] the person . . . it seeks to
tax." Miller Bros. v. Maryland, 347 U.S., at 344 -345. (Emphasis added.) Here the
Society's two offices, without regard to the nature of their activities, had the
advantage of the same municipal services - fire and police protection, and the
like - as they would have had if their activities, as in Sears and Montgomery
Ward, included assistance to the mail-order operations that generated the use
taxes.
The Society's reliance on Miller Bros. Co. v. Maryland, supra, is also misplaced.
The sales with respect to which Maryland sought to impose upon Miller the duty
to collect its tax were of goods sold to residents of Maryland at Miller's Delaware
store, although Miller made occasional deliveries in Maryland. Moreover, the lack
of certainty that the merchandise sold over the counter to Maryland customers in
[430 U.S. 551, 562] Delaware was transported to Maryland prior to its use militated
against a finding of adequate nexus with respect to those purchases. Scripto,
Inc. v. Carson, supra, at 212-213. The relational defect between the taxing State
and the person or property sought to be taxed; therefore obviated any relevance
of a relationship between the State and the out-of-state retailer.
We conclude that the Society's continuous presence in California in offices that
solicit advertising for its magazine provides a sufficient nexus to justify that
State's imposition upon the Society of the duty to act as collector of the use tax.
157
Affirmed.
THE CHIEF JUSTICE and MR. JUSTICE REHNQUIST took no part in the
consideration or decision of this case.
Footnotes
[ Footnote 1 ] The relevant sections of the Cal. Rev. & Tax. Code provide: 6203 (West Supp. 1976).
"Except as provided by Sections 6292 and 6293 every retailer engaged in business in this state and making
sales of tangible personal property for storage, use, or other consumption in this state, not exempted under
Chapters 3.5 or 4 of this part, shall, at the time of making the sales or, if the storage, use, or other
consumption of the tangible personal property is not then taxable hereunder, at the time the storage, use, or
other consumption becomes taxable, collect the tax from the purchaser and give to the purchaser a receipt
therefor in the manner and form prescribed by the board. . . . . . "`Retailer engaged in business in this state'
as used in this and the preceding section means and includes any of the following: "(a) Any retailer
maintaining, occupying, or using, permanently or temporarily, directly or indirectly, or through a
subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or
place, warehouse or storage place or other place of business." 6204 (West 1970). "The tax required to be
collected by the retailer and any amount unreturned to the customer which is not tax but was collected from
the customer under the representation by the retailer that it was tax constitutes debts owed by the retailer to
this state." The magazine is exempted from sales and use taxes as a "periodical." 6362.
[ Footnote 2 ] The offices are in San Francisco and Los Angeles and have been maintained since 1956.
Each office was originally staffed with one salesman and one secretary, but each office has since increased
its personnel to four. The basic function of the offices is to solicit advertising for the magazine, 16 Cal. 3d,
at 640, 547 P.2d, at 459-460. Sales of advertising copy by the two offices aggregate about $1 million
annually. Tr. of Oral Arg. 6. During a nine-month period from August 1, 1963, to May 6, 1964, appellant
Society also used these offices to make over-the-counter sales, upon which sales taxes were paid, of maps,
atlases, globes, and books totaling $679.20 for the San Francisco office and $2,161.85 for the Los Angeles
office. The California Supreme Court found it unnecessary to consider these sales in determining whether
sufficient nexus was shown since the Society's office activities sufficed in its view adequately to prove
sufficient nexus. 16 Cal. 3d, at 641 n. 6, 547 P.2d, at 460 n. 6. We are of the same view.
[ Footnote 3 ] Although appellant's potential liability exceeds $180,000 and covers a nine-year period, ibid.,
the assessment by the California Board of Equalization for the years involved in this case is $3,838.76,
including interest and penalties. Appellant paid the assessment under protest and sued for its refund in State
Superior Court and recovered a judgment. The California Court of Appeal, First Appellate District,
affirmed. 121 Cal. Rptr. 77 (1975). The California Supreme Court reversed and sustained the assessment.
16 Cal. 3d 637, 547 P.2d 458 (1976).
[ Footnote 4 ] Henneford obviated the necessity for legislation sought by the National Association of State
Tax Administrators in the 73d through 76th Congresses to permit States to extend their sales taxes to
certain interstate transactions. See H. R. Rep. No. 565, 89th Cong., 1st Sess., 613-615 (1965). Some 45
States and the District of Columbia require out-of-state sellers to collect use taxes on sales made to state
residents. Brief for Direct Mail/Marketing Assn. as Amicus Curiae 4.
[ Footnote 5 ] Appellant Society argues that under the California Supreme Court's "slightest presence" test
6203 and 6204 could be applied even if the Society maintained no offices in the State but merely owned a
parking lot. But the sections were applied to appellant only because it maintained the offices. Appellant
was therefore only subject to the law because it fell within "retailer engaged in business in this state" as
defined in 6203 (a).
[ Footnote 6 ] Appellant conceded at oral argument that Bellas Hess would have required reversal in the
absence of the proof of maintenance of the two offices. Tr. of Oral Arg. 29, 34-35.
[ Footnote 7 ] Contrary to appellant's argument, Brief for Appellant 6, the fact that it has not registered to
do business in California is not determinative against the validity of the application of 6203 and 6204. See
General Trading Co. v. Tax Comm'n, 322 U.S. 335 (1944); Felt & Tarrant Co. v. Gallagher, 306 U.S. 62
(1939).
MR. JUSTICE BLACKMUN, concurring in the result.
158
I am not at all convinced that the Court's facile distinction of Miller Bros. Co. v. Maryland, 347 U.S. 340
(1954), on the ground that in that case "the seller obviously could not know whether the goods sold over the
counter in Delaware were transported to Maryland prior to their use," ante, at 559, and that there was a
"lack of certainty that the merchandise sold over the counter to Maryland customers in Delaware was
transported to Maryland prior to its use," ante, at 561 and this page, is a proper and acceptable distinction. I
thought that one of the factual difficulties of Miller, in the focus of the present case, was the Delaware
seller's own delivery of goods to Maryland, some by common carrier and some by the seller's own truck.
347 U.S., at 341 -342. Indeed, Miller Bros. stipulated that during the taxable period, it delivered or paid a
common carrier to deliver $9,500 worth of merchandise to customers in Maryland ($8,000 through use of
its truck, $1,500 by common carrier). Id., at 350-351, n. 5. Miller Bros. exhibited no uncertainty as to the
destination of those goods. [430 U.S. 551, 563]
The Court appears to find an additional distinction in the fact that the goods in Miller Bros. were "sold to
residents of Maryland at Miller's Delaware store," ante, at 561. If the Court intends thereby to rest a
distinction on the fact that the sales were made out of State, I am at a loss to follow its reasoning. By
definition, a use tax is imposed only on sales made out of State. In short, Miller Bros. is not so easily
explained away.
Thus, it seems to me, we have another instance where this Court's past decisions in the tax area are not fully
consistent. See Complete Auto Transit, Inc. v. Brady, ante, p. 274, and its development from its immediate
predecessor, Colonial Pipeline Co. v. Traigle, 421 U.S. 100, 101 (1975).
In any event, I find myself in accord with the Court's result in the present case. If, as I suspect, the result
today is not fully consistent with the result in Miller, I am content to let Miller go. [430 U.S. 551, 564]
159
SUPREME COURT OF THE UNITED STATES
No. 91-194
160
well as interest and penalties) on all such sales made after July
1, 1987. The trial court ruled in Quill's favor, finding the case
indistinguishable from Bellas Hess; specifically, it found that
because the State had not shown that it had spent tax
revenues for the benefit of the mail order business, there was
no "nexus to allow the state to define retailer in the manner it
chose." App. to Pet. for Cert. A41.
The North Dakota Supreme Court reversed, concluding that
"wholesale changes" in both the economy and the law made it
inappropriate to follow Bellas Hess today. 470 N. W. 2d, at 213.
The principal economic change noted by the court was the
remarkable growth of the mail order business "from a relatively
inconsequential market niche" in 1967 to a "goliath" with annual
sales that reached "the staggering figure of $183.3 billion in
1989." Id., at 208, 209. Moreover, the court observed,
advances in computer technology greatly eased the burden of
compliance with a " `welter of complicated obligations' "
imposed by state and local taxing authorities. Id., at 215
(quoting Bellas Hess, 386 U. S., at 759-760).
Equally important, in the court's view, were the changes in the
"legal landscape." With respect to the Commerce Clause, the
court emphasized that Complete Auto Transit, Inc. v. Brady,
430 U.S. 274 (1977), rejected the line of cases holding that the
direct taxation of interstate commerce was impermissible and
adopted instead a "consistent andrational method of inquiry
[that focused on] the practical effect of [the] challenged tax."
Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445 U.S. 425,
443 (1980). This and subsequent rulings, the court maintained,
indicated that the Commerce Clause no longer mandated the
sort of physical presence nexus suggested in Bellas Hess.
Similarly, with respect to the Due Process Clause, the North
Dakota court observed that cases following Bellas Hess had
not construed "minimum contacts" to require physical presence
within a State as a prerequisite to the legitimate exercise of
state power. The State Court then concluded that "the Due
Process requirement of a `minimal connection' to establish
nexus is encompassed within the Complete Auto test" and that
the relevant inquiry under the latter test was whether "the state
has provided some protection, opportunities, or benefit for
which it can expect a return." 470 N. W. 2d, at 216.
Turning to the case at hand, the State Court emphasized that
North Dakota had created "an economic climate that fosters
demand for" Quill's products, maintained a legal infrastructure
that protected that market, and disposed of 24 tons of catalogs
and flyers mailed by Quill into the State every year. Id., at 218-
219. Based on these facts, the court concluded that Quill's
"economic presence" in North Dakota depended on services
and benefits provided by the State and therefore generated "a
constitutionally sufficient nexus to justify imposition of the
purely administrative duty of collecting and remitting the use
tax." Id., at 219. [n.2]
161
As in a number of other cases involving the application of state
taxing statutes to out of state sellers, our holding in Bellas Hess
relied on both the Due Process Clause and the Commerce
Clause. Although the "two claims are closely related," Bellas
Hess, 386 U. S., at 756, the clauses pose distinct limits on the
taxing powers of the States. Accordingly, while a State may,
consistent with the Due Process Clause, have the authority to
tax a particular taxpayer, imposition of the tax may nonetheless
violate the Commerce Clause. See, e. g., Tyler Pipe Industries,
Inc. v. Washington State Dept. of Revenue, 483 U.S. 232
(1987).
The two constitutional requirements differ fundamentally, in
several ways. As discussed at greater length below, see infra,
at Part IV, the Due Process Clause and the Commerce Clause
reflect different constitutional concerns. Moreover, while
Congress has plenary power to regulate commerce among the
States and thus may authorize state actions that burden
interstate commerce, see International Shoe Co. v.
Washington, 326 U.S. 310, 315 (1945), it does not similarly
have the power to authorize violations of the Due Process
Clause.
Thus, although we have not always been precise in
distinguishing between the two, the Due Process Clause and
the Commerce Clause are analytically distinct.
" `Due process' and `commerce clause'
conceptions are not always sharply separable in
dealing with these problems. . . . To some extent
they overlap. If there is a want of due process to
sustain the tax, by that fact alone any burden the
tax imposes on the commerce among the states
becomes `undue.' But, though overlapping, the two
conceptions are not identical. There may be more
than sufficient factual connections, with economic
and legal effects, between the transaction and the
taxing state to sustain the tax as against due
process objections. Yet it may fall because of its
burdening effect upon the commerce. And,
although the two notions cannot always be
separated, clarity of consideration and of decision
would be promoted if the two issues are
approached, where they are presented, at least
tentatively as if they were separate and distinct,
not intermingled ones." International Harvester Co.
v. Department of Treasury, 322 U.S. 340, 353
(1944) (Rutledge, J., concurring in part and
dissenting in part).
Heeding Justice Rutledge's counsel, we consider each
constitutional limit in turn.
The Due Process Clause "requires some definite link, some
minimum connection, between a state and the person, property
or transaction it seeks to tax," Miller Bros. Co. v. Maryland, 347
162
U.S. 340, 344-345 (1954), and that the "income attributed to
the State for tax purposes must be rationally related to `values
connected with the taxing State.' " Moorman Mfg. Co. v. Bair,
437 U.S. 267, 273 (1978) (citation omitted). Here, we are
concerned primarily with the first of these requirements. Prior to
Bellas Hess, we had held that that requirement was satisfied in
a variety of circumstances involving use taxes. For example,
the presence of sales personnel in the State, [n.3] or the
maintenance of local retail stores in the State, [n.4] justified the
exercise of that power because the seller's local activities were
"plainly accorded the protection and services of the taxing
State." Bellas Hess, 386 U. S., at 757. The furthest extension
of that power was recognized in Scripto, Inc. v. Carson, 362
U.S. 207 (1960), in which the Court upheld a use tax despite
the fact that all of the seller's in state solicitation was performed
by independent contractors. These cases all involved some
sort of physical presence within the State, and in Bellas Hess
the Court suggested that such presence was not only sufficient
for jurisdiction under the Due Process Clause, but also
necessary. We expressly declined to obliterate the "sharp
distinction . . . between mail order sellers with retail outlets,
solicitors, or property within a State, and those who do no more
than communicate with customers in the State by mail or
common carrier as a part of a general interstate business." 386
U. S., at 758.
Our due process jurisprudence has evolved substantially in the
25 years since Bellas Hess, particularly in the area of judicial
jurisdiction. Building on the seminal case of International Shoe
Co. v. Washington, 326 U.S. 310 (1945), we have framed the
relevant inquiry as whether a defendant had minimum contacts
with the jurisdiction "such that the maintenance of the suit does
not offend `traditional notions of fair play and substantial
justice.' " Id., at 316 (quoting Milliken v. Meyer, 311 U.S. 457,
463 (1940)). In that spirit, we have abandoned more formalistic
tests that focused on a defendant's "presence" within a State in
favor of a more flexible inquiry into whether a defendant's
contacts with the forum made it reasonable, in the context of
our federal system of government, to require it to defend the
suit in that State. In Shaffer v. Heitner, 433 U.S. 186, 212
(1977), the Court extended the flexible approach that
International Shoe had prescribed for purposes of in personam
jurisdiction to in rem jurisdiction, concluding that "all assertions
of state court jurisdiction must be evaluated according to the
standards set forth in International Shoe and its progeny."
Applying these principles, we have held that if a foreign
corporation purposefully avails itself of the benefits of an
economic market in the forum State, it may subject itself to the
State's in personam jurisdiction even if it has no physical
presence in the State. As we explained in Burger King Corp. v.
Rudzewicz, 471 U.S. 462 (1985):
163
"Jurisdiction in these circumstances may not be
avoided merely because the defendant did not
physically enter the forum State. Although
territorial presence frequently will enhance a
potential defendant's affiliation with a State and
reinforce the reasonable foreseeability of suit
there, it is an inescapable fact of modern
commercial life that a substantial amount of
business is transacted solely by mail and wire
communications across state lines, thus obviating
the need for physical presence within a State in
which business is conducted. So long as a
commercial actor's efforts are `purposefully
directed' toward residents of another State, we
have consistently rejected the notion that an
absence of physical contacts can defeat personal
jurisdiction there." Id., at 476 (emphasis in
original).
Comparable reasoning justifies the imposition of the collection
duty on a mail order house that is engaged in continuous and
widespread solicitation of business within a State. Such a
corporation clearly has "fair warning that [its] activity may
subject [it] to the jurisdiction of a foreign sovereign." Shaffer v.
Heitner, 433 U. S., at 218 (Stevens, J., concurring in judgment).
In "modern commercial life" it matters little that such solicitation
is accomplished by a deluge of catalogs rather than a phalanx
of drummers: the requirements of due process are met
irrespective of a corporation's lack of physical presence in the
taxing State. Thus, to the extent that our decisions have
indicated that the Due Process Clause requires physical
presence in a State for the imposition of duty to collect a use
tax, we overrule those holdings as superseded by
developments in the law of due process.
In this case, there is no question that Quill has purposefully
directed its activities at North Dakota residents, that the
magnitude of those contacts are more than sufficient for due
process purposes, and that the use tax is related to the benefits
Quill receives from access to the State. We therefore agree
with the North Dakota Supreme Court's conclusion that the Due
Process Clause does not bar enforcement of that State's use
tax against Quill.
Article I, § 8, cl. 3 of the Constitution expressly authorizes
Congress to "regulate Commerce with foreign Nations, and
among the several States." It says nothing about the protection
of interstate commerce in the absence of any action by
Congress. Nevertheless, as Justice Johnson suggested in his
concurring opinion in Gibbons v. Ogden, 9 Wheat. 1, 231-232,
239 (1824), the Commerce Clause is more than an affirmative
grant of power; it has a negative sweep as well. The clause, in
Justice Stone's phrasing, "by its own force" prohibits certain
state actions that interfere with interstate commerce. South
164
Carolina State Highway Dept. v. Barnwell Bros., Inc., 303 U.S.
177, 185 (1938).
Our interpretation of the "negative" or "dormant" Commerce
Clause has evolved substantially over the years, particularly as
that clause concerns limitations on state taxation powers. See
generally, P. Hartman, Federal Limitations on State and Local
Taxation §§ 2:9-2:17 (1981). Our early cases, beginning with
Brown v. Maryland, 12 Wheat. 419 (1827), swept broadly, and
in Leloup v. Port of Mobile, 127 U.S. 640, 648 (1888), we
declared that "no State has the right to lay a tax on interstate
commerce in any form." We later narrowed that rule and
distinguished between direct burdens on interstate commerce,
which were prohibited, and indirect burdens, which generally
were not. See, e. g., Sanford v. Poe, 69 F. 546 (CA6 1895),
aff'd sub nom. Adams Express Co. v. Ohio State Auditor, 165
U.S. 194, 220 (1897). Western Live Stock v. Bureau of
Revenue, 303 U.S. 250, 256-258 (1938), and subsequent
decisions rejected this formal, categorical analysis and adopted
a "multiple taxation doctrine" that focused not on whether a tax
was "direct" or "indirect" but rather on whether a tax subjected
interstate commerce to a risk of multiple taxation. However, in
Freeman v. Hewit, 329 U.S. 249, 256 (1946), we embraced
again the formal distinction between direct and indirect
taxation, invalidating Indiana's imposition of a gross receipts
tax on a particular transaction because that application would
"impos[e] a direct tax on interstate sales." Most recently, in
Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 285 (1977),
we renounced the Freeman approach as "attaching
constitutional significance to a semantic difference." We
expressly overruled one of Freeman's progeny, Spector Motor
Service, Inc. v. O'Connor, 340 U.S. 602 (1951), which held that
a tax on "the privilege of doing interstate business" was
unconstitutional, while recognizing that a differently
denominated tax with the same economic effect would not be
unconstitutional. Spector, as we observed in Railway Express
Agency, Inc. v. Virginia, 358 U.S. 434, 441 (1959), created a
situation in which "magic words or labels" could "disable an
otherwise constitutional levy." Complete Auto emphasized the
importance of looking past "the formal language of the tax
statute [to] its practical effect," Complete Auto, 430 U. S., at
279, and set forth a four part test that continues to govern the
validity of state taxes under the Commerce Clause. [n.5]
Bellas Hess was decided in 1967, in the middle of this latest
rally between formalism and pragmatism. Contrary to the
suggestion of the North Dakota Supreme Court, this timing
does not mean that Complete Auto rendered Bellas Hess
"obsolete." Complete Auto rejected Freeman and Spector's
formal distinction between "direct" and "indirect"taxes on
interstate commerce because that formalism allowed the
validity of statutes to hinge on "legal terminol ogy,"
"draftsmanship and phraseology." 430 U. S., at 281. Bellas
165
Hess did not rely on any such labeling of taxes and therefore
did not automatically fall with Freeman and its progeny.
While contemporary Commerce Clause jurisprudence might not
dictate the same result were the issue to arise for the first time
today, Bellas Hess is not inconsistent with Complete Auto and
our recent cases. Under Complete Auto's four part test, we will
sustain a tax against a Commerce Clause challenge so long as
the "tax [1] is applied to an activity with a substantial nexus with
the taxing State, [2] is fairly apportioned, [3] does not
discriminate against interstate commerce, and [4] is fairly
related to the services provided by the State." 430 U. S., at
279. Bellas Hess concerns the first of these tests and stands
for the proposition that a vendor whose only contacts with the
taxing State are by mail or common carrier lacks the
"substantial nexus" required by the Commerce Clause.
Thus, three weeks after Complete Auto was handed down, we
cited Bellas Hess for this proposition and discussed the case at
some length. In National Geographic Society v. California Bd.
of Equalization, 430 U.S. 551, 559 (1977), we affirmed the
continuing vitality of Bellas Hess' "sharp distinction . . . between
mail order sellers with [a physical presence in the taxing] State
and those . . . who do no more than communicate with
customers in the State by mail or common carrier as part of a
general interstate business." We have continued to cite Bellas
Hess with approval ever since. For example, in Goldberg v.
Sweet, 488 U.S. 252, 263 (1989), we expressed "doubt that
termination of an interstate telephone call, by itself, provides a
substantial enough nexus for a State to tax a call. See National
Bellas Hess . . . (receipt of mail provides insufficient nexus)."
See also D. H. Holmes Co. v. McNamara, 486 U.S. 24, 33
(1988); Commonwealth Edison Co. v. Montana, 453 U.S. 609,
626 (1981); Mobil Oil Corp. v. Commissioner of Taxes, 445 U.
S., at 437; National Geographic Society, 430 U. S., at 559. For
these reasons, we disagree with the State Supreme Court's
conclusion that our decision in Complete Auto undercut the
Bellas Hess rule.
The State of North Dakota relies less on Complete Auto and
more on the evolution of our due process jurisprudence. The
State contends that the nexus requirements imposed by the
Due Process and Commerce Clauses are equivalent and that
if, as we concluded above, a mail order house that lacks a
physical presence in the taxing State nonetheless satisfies the
due process "minimum contacts" test, then that corporation
also meets the Commerce Clause "substantial nexus" test. We
disagree. Despite the similarity in phrasing, the nexus
requirements of the Due Process and Commerce Clauses are
not identical. The two standards are animated by different
constitutional concerns and policies.
Due process centrally concerns the fundamental fairness of
governmental activity. Thus, at the most general level, the due
process nexus analysis requires that we ask whether an
166
individual's connections with a State are substantial enough to
legitimate the State's exercise of power over him. We have,
therefore, often identified "notice" or "fair warning" as the
analytic touchstone of due process nexus analysis. In contrast,
the Commerce Clause, and its nexus requirement, are
informed not so much by concerns about fairness for the
individual defendant as by structural concerns about the effects
of state regulation on the national economy. Under the Articles
of Confederation, State taxes and duties hindered and
suppressed interstate commerce; the Framers intended the
Commerce Clause as a cure for these structural ills. See
generally The Federalist Nos. 7, 11 (A. Hamilton). It is in this
light that we have interpreted the negative implication of the
Commerce Clause. Accordingly, we have ruled that that Clause
prohibits discrimination against interstate commerce, see,e. g.,
Philadelphia v. New Jersey, 437 U.S. 617 (1978), and bars
state regulations that unduly burden interstate commerce, see,
e. g., Kassel v. Consolidated Freightways Corp. of Del., 450
U.S. 662 (1981).
The Complete Auto analysis reflects these concerns about the
national economy. The second and third parts of that analysis,
which require fair apportionment and non discrimination,
prohibit taxes that pass an unfair share of the tax burden onto
interstate commerce. The first and fourth prongs, which require
a substantial nexus and a relationship between the tax and
State provided services, limit the reach of State taxing authority
so as to ensure that State taxation does not unduly burden
interstate commerce. [n.6] Thus, the "substantial nexus"
requirement is not, like due process' "minimum contacts"
requirement, a proxy for notice, but rather a means for limiting
state burdens on interstate commerce. Accordingly, contrary to
the State's suggestion, a corporation may have the "minimum
contacts" with a taxing State as required by the Due Process
Clause, and yet lack the "substantial nexus" with that State as
required by the Commerce Clause. [n.7]
The State Supreme Court reviewed our recent Commerce
Clause decisions and concluded that those rulings signalled a
"retreat from the formalistic constrictions of a stringent physical
presence test in favor of a more flexible substantive approach"
and thus supported its decision not to apply Bellas Hess. 470
N. W. 2d, at 214 (citing Standard Pressed Steel Co. v.
Department of Revenue of Wash., 419 U.S. 560 (1975), and
Tyler Pipe Industries, Inc. v. Washington State Dept. of
Revenue, 483 U.S. 232 (1987)). Although we agree with the
State Court's assessment of the evolution of our cases, we do
not share its conclusion that this evolution indicates that the
Commerce Clause ruling of Bellas Hess is no longer good law.
First, as the State Court itself noted, 470 N. W. 2d, at 214, all of
these cases involved taxpayers who had a physical presence in
the taxing State and therefore do not directly conflict with the
rule of Bellas Hess or compel that it be overruled. Second, and
167
more importantly, although our Commerce Clause
jurisprudence now favors more flexible balancing analyses, we
have never intimated a desire to reject all established "bright
line" tests. Although we have not, in our review of other types
of taxes, articulated the same physical presence requirement
that Bellas Hess established for sales and use taxes, that
silence does not imply repudiation of the Bellas Hess rule.
Complete Auto, it is true, renounced Freeman and its progeny
as "formalistic." But not all formalism is alike. Spector's formal
distinction between taxes on the "privilegeof doing business"
and all other taxes served no purpose within our Commerce
Clause jurisprudence, but stood "only as a trap for the unwary
draftsman." Complete Auto, 430 U. S., at 279. In contrast, the
bright line rule of Bellas Hess furthers the ends of the dormant
Commerce Clause. Undue burdens on interstate commerce
may be avoided not only by a case by case evaluation of the
actual burdens imposed by particular regulations or taxes, but
also, in some situations, by the demarcation of a discrete realm
of commercial activity that is free from interstate taxation.
Bellas Hess followed the latter approach and created a safe
harbor for vendors "whose only connection with customers in
the [taxing] State is by common carrier or the United States
mail." Under Bellas Hess, such vendors are free from state
imposed duties to collect sales and use taxes. [n.8]
Like other bright line tests, the Bellas Hess rule appears
artificial at its edges: whether or not a State may compel a
vendor to collect a sales or use tax may turn on the presence in
the taxing State of a small sales force, plant, or office. Cf.
National Geographic Society v. California Bd. of Equalization,
430 U.S. 551 (1977); Scripto, Inc. v. Carson, 362 U.S. 207
(1960). This artificiality, however, is more than offset by the
benefits of a clear rule. Such a rule firmly establishes the
boundaries of legitimate state authority to impose a duty to
collect sales and use taxes and reduces litigation concerning
those taxes. This benefitis important, for as we have so
frequently noted, our law in this area is something of a
"quagmire" and the "application of constitutional principles to
specific state statutes leaves much room for controversy and
confusion and little in the way of precise guides to the States in
the exercise of their indispensable power of taxation."
Northwestern States Portland Cement Co. v. Minnesota, 358
U.S. 450, 457-458 (1959).
Moreover, a bright line rule in the area of sales and use taxes
also encourages settled expectations and, in doing so, fosters
investment by businesses and individuals. [n.9] Indeed, it is not
unlikely that the mail order industry's dramatic growth over the
last quarter century is due in part to the bright line exemption
from state taxation created in Bellas Hess.
Notwithstanding the benefits of bright line tests, we have, in
some situations, decided to replace such tests with more
contextual balancing inquiries. For example, in Arkansas
168
Electric Cooperative Corp. v. Arkansas Pub. Serv. Comm'n,
461 U.S. 375 (1983), we reconsidered a bright line test set forth
in Public Utilities Comm'n of R. I. v. AttleboroSteam & Electric
Co., 273 U.S. 83 (1927). Attleboro distinguished between state
regulation of wholesale salesof electricity, which was
constitutional as an "indirect" regulation of interstate
commerce, and state regulation of retail sales of electricity,
which was unconstitutional as a "direct regulation" of
commerce. In Arkansas Electric, we considered whether to
"follow the mechanical test set out in Attleboro, or the balance
of interests test applied in our Commerce Clause cases."
Arkansas Electric Cooperative Corp., 461 U. S., at 390-391.
We first observed that "the principle of stare decisis counsels
us, here as elsewhere, not lightly to set aside specific guidance
of the sort we find in Attleboro." Id., at 391. In deciding to reject
the Attleboro analysis, we were influenced by the fact that the
"mechanical test" was "anachronistic," that the Court had rarely
relied on the test, and that we could "see no strong reliance
interests" that would be upset by the rejection of that test. Id.,
at 391-392. None of those factors obtains in this case. First, the
Attleboro rule was "anachronistic" because it relied on formal
distinctions between "direct" and "indirect" regulation (and on
the regulatory counterparts of our Freeman line of cases); as
discussed above, Bellas Hess turned on a different logic and
thus remained sound after the Court repudiated an analogous
distinction in Complete Auto. Second, unlike the Attleboro rule,
we have, in our decisions, frequently relied on the Bellas Hess
rule in the last 25 years, see supra, at 11, and we have never
intimated in our review of sales or use taxes that Bellas Hess
was unsound. Finally, again unlike the Attleboro rule, the Bellas
Hess rule has engendered substantial reliance and has
become part of the basic framework of a sizeable industry. The
"interest in stability and orderly development of the law" that
undergirds the doctrine of stare decisis, see Runyon v.
McCrary, 427 U.S. 160, 190-191 (1976) (Stevens, J.,
concurring), therefore counsels adherence to settled precedent.
In sum, although in our cases subsequent to Bellas Hess and
concerning other types of taxes we have not adopted a similar
bright line, physical presence requirement, our reasoning in
those cases does not compel that we now reject the rule that
Bellas Hess established in the area of sales and use taxes. To
the contrary, the continuing value of a bright line rule in this
area and the doctrine and principles of stare decisis indicate
that the Bellas Hess rule remains good law. For these reasons,
we disagree with the North Dakota Supreme Court's conclusion
that the time has come to renounce the bright line test of Bellas
Hess.
This aspect of our decision is made easier by the fact that the
underlying issue is not only one that Congress may be better
qualified to resolve, [n.10] but also one that Congress has the
ultimate power to resolve. No matter how we evaluate the
169
burdens that use taxes impose on interstate commerce,
Congress remains free to disagree with our conclusions. See
Prudential Insurance Co. v. Benjamin, 328 U.S. 408 (1946).
Indeed, in recent years Congress has considered legislation
that would "overrule" the Bellas Hess rule. [n.11] Its decision not
to take action in this direction may, of course, have been
dictated by respect for our holding in Bellas Hess that the Due
Process Clause prohibits States from imposing such taxes, but
today we have put that problem to rest. Accordingly, Congress
is now free to decide whether, when, and to what extent the
States mayburden interstate mail order concerns with a duty to
collect use taxes.
Indeed, even if we were convinced that Bellas Hess was
inconsistent with our Commerce Clause jurisprudence, "this
very fact [might] giv[e us] pause and counse[l] withholding our
hand, at least for now. Congress has the power to protect
interstate commerce from intolerable or even undesirable
burdens." Commonwealth Edison Co. v. Montana, 453 U.S.
609, 637 (1981) (White, J., concurring). In this situation, it may
be that "the better part of both wisdom and valor is to respect
the judgment of the other branches of the Government." Id., at
638.
The judgment of the Supreme Court of North Dakota is
reversed and the case is remanded for further proceedings not
inconsistent with this opinion.
It is so ordered.
Notes
1
In the trial court, the State argued that because Quill gave its
customers an unconditional 90 day guarantee, it retained title to
the merchandise during the 90 day period after delivery. The
trial court held, however, that title passed to the purchaser
when the merchandise was received. See App. to Pet. for Cert.
A40 A41. The State Supreme Court assumed for the purposes
of its decision that that ruling was correct. 470 N. W. 2d 203,
217, n. 13. The State Supreme Court also noted that Quill
licensed a computer software program to some of its North
Dakota customers that enabled them to check Quill's current
inventories and prices and to place orders directly. Id., at 216-
217. As we shall explain, Quill's interests in the licensed
software does not affect our analysis of the due process issue
and does not comprise the "substantial nexus" required by the
Commerce Clause. See infra n. 8.
2
The court also suggested that, in view of the fact that the
"touchstone of Due Process is fundamental fairness" and that
the "very object" of the Commerce Clause is protection of
interstate business against discriminatory local practices, it
would be ironic to exempt Quill from this burden and thereby
allow it to enjoy a significant competitive advantage over local
retailers. 470 N. W. 2d, at 214-215.
3
Felt & Tarrant Mfg. Co. v. Gallagher, 306 U.S. 62 (1939).
170
4
Nelson v. Sears, Roebuck & Co., 312 U.S. 359 (1941).
5
Under our current Commerce Clause jurisprudence, "with
certain restrictions, interstate commerce may be required to
pay its fair share of state taxes." D. H. Holmes Co. v.
McNamara, 486 U.S. 24, 31 (1988); see also Commonwealth
Edison Co. v. Montana, 453 U.S. 609, 623-624 (1981) ("[i]t was
not the purpose of the commerce clause to relieve those
engaged in interstate commerce from their just share of [the]
state tax burden even though it increases the cost of doing
business") (internal quotation and citation omitted).
6
North Dakota's use tax illustrates well how a state tax might
unduly burden interstate commerce. On its face, North Dakota
law imposes a collection duty on every vendor who advertises
in the State three times in a single year. Thus, absent the
Bellas Hess rule, a publisher who included a subscription card
in three issues of its magazine, a vendor whose radio
advertisements were heard in North Dakota on three
occasions, and a corporation whose telephone sales force
made three calls into the State, all would be subject to the
collection duty. What is more significant, similar obligations
might be imposed by the Nation's 6,000 plus taxing
jurisdictions. See National Bellas Hess, Inc. v. Department of
Revenue of Ill., 386 U.S. 753, 759-760 (1967) (noting that the
"many variations in rates of tax, in allowable exemptions, and in
administrative and record keeping requirements could entangle
[a mail order house] in a virtual welter of complicated
obligations") (footnotes omitted); see also Shaviro, An
Economic and Political Look at Federalism in Taxation, 90
Mich. L. Rev. 895, 925-926 (1992).
7
We have sometimes stated that the "Complete Auto test,
whileresponsive to Commerce Clause dictates, encompasses
as well . . . Due Process requirement[s]." Trinova Corp v.
Michigan Dept. of Treasury, 498 U. S. ___, ___ (1991) (slip op.
12). Although such comments might suggest that every tax that
passes contemporary Commerce Clause analysis is also valid
under the Due Process Clause, it does not follow that the
converse is as well true: a tax may be consistent with Due
Process and yet unduly burden interstate commerce. See, e.
g., Tyler Pipe Industries, Inc. v. Washington State Dept. of
Revenue, 483 U.S. 232 (1987).
8
In addition to its common carrier contacts with the State, Quill
also licensed software to some of its North Dakota clients. See
supra n. 1. The State "concedes that the existence in North
Dakota of a few floppy diskettes to which Quill holds title seems
a slender thread upon which to base nexus." Brief for
Respondent 46. We agree. Although title to "a few floppy
diskettes" present in a State might constitute some minimal
nexus, in National Geographic Society v. California Bd. of
Equalization, 430 U.S. 551, 556 (1977), we expressly rejected
a " `slightest presence' standard of constitutional nexus." We
therefore conclude that Quill's licensing of software in this case
171
does not meet the "substantial nexus" requirement of the
Commerce Clause.
9
It is worth noting that Congress has, at least on one occasion,
followed a similar approach in its regulation of state taxation. In
response to this Court's indication in Northwestern States
Portland Cement Co. v. Minnesota, 358 U.S. 450, 452 (1959),
that, so long as the taxpayer has an adequate nexus with the
taxing State, "net income from the interstate operations of a
foreign corporation may be subjected to state taxation,"
Congress enacted Pub. L. 86-272, codified at 15 U.S.C. § 381.
That statute provides that a State may not impose a net income
tax on any person if that person's "only business activities
within such State [involve] the solicitation of orders [approved]
outside the State [and] filled . . . outside the State." 15 U.S.C. §
381. As we noted in Heublein, Inc. v. South Carolina Tax
Comm'n, 409 U.S. 275, 280 (1972), in enacting § 381,
"Congress attempted to allay the apprehension of businessmen
that `mere solicitation' would subject them to state taxation. . . .
Section 381 was designed to define clearly a lower limit for the
exercise of [the State's power to tax]. Clarity that would remove
uncertainty was Congress' primary goal." (Emphasis supplied.)
10
Many States have enacted use taxes. See App. 3 to Brief for
Direct Marketing Association as Amicus Curiae. An overruling
of Bellas Hess might raise thorny questions concerning the
retroactive application of those taxes and might trigger
substantial unanticipated liability for mail order houses. The
precise allocation of such burdens is better resolved by
Congress rather than this Court.
11
See, e. g., H. R. 2230, 101st Cong., 1st Sess. (1989); S. 480,
101st Cong., 1st Sess. (1989); S. 2368, 100th Cong., 2d Sess.
(1988); H. R. 3521, 100th Cong., 1st Sess. (1987); S. 1099,
100th Cong., 1st Sess. (1987); H. R. 3549, 99th Cong., 1st
Sess. (1985); S. 983, 96th Cong., 1st Sess. (1979); S. 282, 93d
Cong., 1st Sess. (1973).
172
Current, Inc. v. State Board of Equalization
Related corporation's liability for use tax collection. -- A corporation who had no physical presence in
California was not required to collect use tax under former subdivision (g) based on the physical presence of a
related corporation in California. Current, Inc. v. State Board of Equalization (1994) 24 Cal.App.4th 382.
173
IN THE SUPREME COURT OF THE STATE OF KANSAS
No. 83,802
1. BOTA is a specialized agency that exists to decide taxation issues, and its
decisions are given great weight and deference when it is acting in its area of
expertise.
2. The Commerce Clause has been interpreted by the United States Supreme
Court to be both an affirmative grant of power to Congress to regulate
commerce between the states and an implied prohibition on the states to do the
same.
4. It is well settled that under the Commerce Clause a state may not subject a
business to tax unless the business has a substantial nexus within the state.
Substantial nexus requires a finding of physical presence in the taxing state.
Appeal from Board of Tax Appeals. Opinion filed December 8, 2000. Affirmed.
Richard L. Cram, of the Kansas Department of Revenue, argued the cause and
was on the briefs for appellant Kansas Department of Revenue.
174
David Clauser, of the Kansas Department of Revenue, and Paull Mines, Sheldon
H. Laskin, and H. Beau Baez III, of Washington, D.C., appeared on the amicus
curiae brief for Multistate Tax Commission.
S. Lucky Defries, of Coffman, Defries & Nothern, of Topeka, and Stephen P. B.
Kranz, Diann L. Smith, William D. Peltz, Bobby L. Burgner, and J. Hugh
McKinnon, of Washington, D.C., appeared on the amicus curiae brief for
Committee on State Taxation.
S. Lucky Defries, of Coffman, Defries & Nothern, of Topeka, and Peter J. Brann,
and George S. Isaacson, of Brann & Isaacson, LLP, of Lewiston, Maine, appeared
on the amicus curiae brief for Direct Marketing Association, Inc.
175
registered with the Kansas Secretary of State as a foreign corporation doing
business in the state of Kansas.
From April 1, 1992, to March 31, 1996, inclusively (audit period), Intercard
technicians made 11 visits to Kinko's stores in Kansas to install card readers
purchased from Intercard. The 11 contacts Intercard had with Kinko's stores in
Kansas occurred during 3 months of the 48-month audit period. The contacts
totaled 44 hours. Intercard has not sent technicians into Kansas since the
installation of the 11 card readers was completed.
No solicitation took place in Kansas during the audit period regarding the
products sold by Intercard. The sale of card readers to Kinko's stores in Kansas
resulted from a master contract negotiated between Kinko's and Intercard
outside Kansas. Intercard did not send employees, agents, or sales
representatives into Kansas to solicit sales.
On May 21, 1996, KDR conducted a field audit of Intercard's books. KDR
determined that Intercard's installation of the card readers was a substantial
nexus sufficient to support the imposition of the collection and remittance
requirements of the Kansas Compensating Tax Act. As a result of the audit, KDR
sent Intercard notices of assessment of Kansas retailers' sales tax of $399,
including penalties and interest, and retailers' compensating use tax of $13,297,
including penalties and interest. The additional Kansas retailers' sales tax
assessment was based on amounts invoiced by Intercard for work its technicians
performed in Kansas to install 11 card readers. The additional Kansas retailers'
compensating use tax assessment was based on Intercard's sales of tangible
personal property to customers located in Kansas during the audit period.
Intercard neither billed nor collected retailers' sales or compensating use tax
from customers in connection with any of the transactions noted in the audit
report.
176
Intercard appealed KDR's determination to the Kansas Secretary of Revenue.
The Secretary upheld the assessment. Intercard appealed to the BOTA. BOTA
found that Intercard did not have substantial nexus with the state of Kansas and
reversed the Secretary's determination. KDR appealed to this court. Direct
Marketing Association, Inc., and the Committee on State Taxation submitted
amicus curiae briefs in support of Intercard, and the Multistate Tax Commission
(MTC) submitted an amicus curiae brief in support of KDR's position.
BOTA is a specialized agency that exists to decide taxation issues, and its
decisions are given great weight and deference when it is acting in its area of
expertise. However, if BOTA's interpretation is erroneous as a matter of law,
appellate courts will take corrective steps. In re Tax Appeal of Univ. of Kan.
School of Medicine, 266 Kan. 737, 749, 973 P.2d 176 (1999) (citing In re Tax
Appeal of Boeing Co., 261 Kan. 508, 515, 930 P.2d 1366 [1997]).
BOTA's order abating the sales and compensating use taxes assessed by KDR
found:
"[P]ursuant to the first prong of Complete Auto [Transit, Inc. v. Brady], 430 U.S.
[274,] 280, [51 L. Ed. 2d 326, 97 S. Ct. 1076, reh. denied 430 U.S. 976 (1977)],
the Taxpayer's activities in Kansas must establish a substantial nexus with the
state in order for the assessment levied pursuant to K.S.A. 79-3701 et seq. to be
constitutional as applied to the Taxpayer. The Board finds in this case, that the
Taxpayer's activities in Kansas do not constitute a substantial nexus with Kansas.
The Taxpayer's eleven visits to Kansas during the four-year audit period do not
transcend the slightest physical presence test of Quill [Corp. v. North Dakota,
504 U.S. 298, 315 n. 8, 119 L. Ed. 2d 91, 112 S. Ct. 1904 (1992)] and National
Geographic [v. Cal. Equalization Bd., 430 U.S. 551, 556, 51 L. Ed. 2d 631, 97 S.
Ct. 1386 (1977)]. These visits were very minor activities in the Taxpayer's
business, both in time spent and in revenue generated. They were in response to
customer requests; had there been no requests, the Taxpayer would have had
no physical contacts with the state. The Taxpayer initiated none of the contacts
and did not use the contacts to promote the sales of its products. The Board
finds no evidence that the installation activities in Kansas created a market for
the card readers that were sold previous to each installation. Furthermore, the
Taxpayer's undisputed testimony is that its physical contact with Kansas ended in
March of 1994, roughly halfway through the audit period. The Board finds that
the Taxpayer's contacts with Kansas were isolated and sporadic and did not
establish a substantial nexus. The Board finds because the Department's
assessment of compensating use tax is based on activity which does not
establish a substantial nexus with the state, the Due Process Clause has been
violated as well. The Department's assessment is invalid pursuant to the rule set
out in Quill, because the Taxpayer's 'connections with the State are not
substantial enough to legitimate the State's exercise of power over him.' 504
U.S. at 312."
177
APPLICABLE KANSAS TAX STATUTES
"the privilege of using, storing, or consuming within this state any article of
tangible personal property. . . . All property purchased or leased within or
without this state and subsequently used, stored or consumed in this state shall
be subject to the compensating tax if the same property or transaction would
have been subject to the Kansas retailers' sales tax had the transaction been
wholly within this state."
The compensating use tax is a tax imposed upon the purchaser of tangible
personal property, but the retailer is charged with the duty of collecting the tax
from the consumer. K.S.A. 79-3705a. Every retailer doing business in this state
and making sales of tangible personal property for use, storage or consumption
in this state, not exempted under the provisions of the use tax act, shall at the
time of making such sales, whether within or without the state, collect the tax
imposed by this act from the purchaser, and give the purchaser a receipt for the
payment. K.S.A. 79-3705c.
178
Substantial Nexus
KDR asserts that Intercard's 11 installations of card readers in Kansas during the
audit period establish a substantial nexus with the State of Kansas, subjecting
Intercard to the collection and remittance requirements of the Kansas
compensating use tax. KDR asserts that BOTA erroneously applied a substantial
physical presence requirement and improperly minimized the significance of
Intercard's installation activities in Kansas. KDR argues that BOTA's
characterization of Intercard's contacts with Kansas as "very minor activities in
the Taxpayer's business, both in time spent and in revenue generated" is
contrary to the facts.
The MTC, in its amicus curiae brief, argues that the United States Supreme
Court's determination in Quill Corp. v. North Dakota, 504 U.S. 298, 119 L. Ed. 2d
91, 112 S. Ct. 1904 (1992), affirms a "safe harbor" for vendors whose only
connection with the taxing state is by common carrier or the United States mail.
MTC asserts that Intercard's activities in Kansas went outside the safe harbor,
thereby exposing Intercard to imposition of the Kansas compensating use tax.
The Committee on State Taxation takes issue with the MTC's simplification of the
nexus issue and analysis of the United States Supreme Court decisions. The
Direct Marketing Association states that Intercard's connection with Kansas is
insubstantial and warns that if random, fortuitous physical contacts are sufficient
to constitute a substantial nexus, interstate commerce will suffer as companies
face burdens of calculating and collecting sales and compensating use taxes for a
myriad of jurisdictions across the country.
In Scripto v. Carson, 362 U.S. 207, 211-12, 4 L. Ed. 2d 660, 80 S. Ct. 619
(1960), the United States Supreme Court held that Florida could constitutionally
impose upon a Georgia seller the duty of collecting a state use tax upon the sale
of goods shipped to customers in Florida. In that case, Scripto had 10
wholesalers, jobbers, or salesmen conducting continuous local solicitation in
Florida and forwarding the resulting orders from that state to Georgia for
shipment of the ordered goods. Subsequently, in Quill, 504 U.S. at 306, the
Court stated that Scripto represented the furthest constitutional reach to date of
a state's power to deputize an out-of-state retailer as its collection agent for a
use tax.
In Bellas Hess, 386 U.S. 753, Bellas Hess, a mail-order house, was incorporated
in Delaware, had its principal place of business in Missouri, and was licensed to
do business only in Delaware and Missouri. Bellas Hess did not maintain a place
of business in Illinois or have agents or representatives in Illinois to sell or take
orders, deliver merchandise, accept payments, or service merchandise; it did not
own tangible property, real or personal, in Illinois; it had no telephone listing in
Illinois; and it did not advertise its merchandise for sale in newspapers, on
179
billboards, or by radio or television in Illinois. Orders for Bellas Hess merchandise
were mailed to and accepted at its Missouri plant. Its merchandise was sent to
Illinois customers by mail or by common carrier. Bellas Hess mailed catalogs to
its Illinois customers twice a year; an occasional advertising flyer was mailed to
past and potential Illinois customers, and its sales to Illinois customers were
$2,174,744 during the approximately 15 months for which the taxes in issue
were assessed. Under Bellas Hess, the United States Supreme Court created a
"safe harbor" for vendors "whose only connection with customers in the [taxing]
State is by common carrier or the United States mail." It stated that such
vendors were free from state-imposed duties to collect sales and use taxes. See
Quill, 504 U.S. at 315. The Bellas Hess court fully underscored the "sharp
distinction . . . between mail order sellers with retail outlets, solicitors, or
property within [the taxing] State, and those [like Bellas Hess] who do no more
than communicate with customers in the State by mail or common carrier as part
of a general interstate business." Bellas Hess, 386 U.S. at 758.
Ten years after Bellas Hess, in Complete Auto Transit, Inc. v. Brady, 430 U.S.
274, 51 L. Ed. 2d 326, 97 S. Ct. 1076, reh. denied 430 U.S. 976 (1977), the
United States Supreme Court adopted a four-part test for determining whether a
state tax on an interstate business is valid under the Commerce Clause. A
Michigan corporation engaged in the business of transporting motor vehicles by
motor carrier for General Motors Corporation. General Motors assembled vehicles
outside Mississippi that were destined for dealers within the State. The vehicles
were shipped by rail to Jackson, Mississippi, where, usually within 48 hours, they
were loaded onto Complete Auto's trucks and transported to the Mississippi
dealers. Complete Auto was paid on a contract basis for the transportation from
the railhead to the dealers. The Supreme Court stated it would sustain a tax
under the Commerce Clause only where the tax is "applied to an activity with a
substantial nexus with the taxing State, is fairly apportioned, does not
discriminate against interstate commerce, and is fairly related to the services
provided by the State." Complete Auto, 430 U.S. at 279. It noted that the second
and third parts of the analysis, requiring fair apportionment and
nondiscrimination, prohibit taxes that pass an unfair share of the tax burden onto
interstate commerce. The first and fourth prongs, which require a substantial
nexus and a relationship between the tax and state-provided services, limit the
reach of state taxing authority so as to ensure that state taxation does not
unduly burden interstate commerce. See Quill, 504 U.S. at 313.
In National Geographic v. Cal. Equalization Bd., 430 U.S. 551, 556, 51 L. Ed. 2d
631, 97 S. Ct. 1386 (1977), the United States Supreme Court declined to adopt a
test for physical presence that would be met by "slightest presence." In that
case, a nonprofit society, which maintained two offices in California to solicit
advertising for its magazine but performed no activities related to the society's
mail-order business for the sale of various items from the District of Columbia
office, was required by California to collect California use tax from California
180
purchasers. The court found that imposition of the use tax collection burden did
not violate due process or the Commerce Clause because the society's
continuous presence in California and its two offices provided a sufficient nexus
between the society and the state to justify imposition of the use tax collection
liability. 430 U.S. at 554-56.
The Court determined that even though there was no relationship between
National Geographic's solicitation of magazine advertising and its mail-order
business, California was not precluded from imposing the duty to collect use tax
for mail-order sales. 430 U.S. at 560. The Court distinguished collection taxes
from direct taxes. It noted that a showing that particular transactions are
dissociated from the local business is fatal to a direct tax. On the other hand,
such dissociation does not bar the imposition of the use-tax-collection duty
because such a tax, unlike a direct tax, requires only a connection between the
taxing state and the entity it seeks to tax. 430 U.S. at 560-61.
In Tyler Pipe Industries v. Dept. of Revenue, 483 U.S. 232, 251, 97 L. Ed. 2d
199, 107 S. Ct. 2810 (1987), the United States Supreme Court held that having
resident sales representatives in the taxing jurisdiction to establish and maintain
the market constituted a sufficient nexus to impose Washington state business
and occupation tax on its sales. KDR asserts that Tyler appears to replace or
supplement the United States Supreme Court's previous analysis of "substantial
nexus." The Tyler court stated: "[T]he crucial factor governing nexus is whether
the activities performed [in Washington] on behalf of the taxpayer are
significantly associated with the taxpayer's ability to establish and maintain a
market in this state for the sales." 483 U.S. at 250-51.
It is important to note that the tax at issue in Tyler was a direct tax on the
manufacturer and that the Supreme Court was applying a Washington tax
statute and the implementing administrative rule which specifically defined
"nexus" as ''the activity carried on by the seller in Washington which is
significantly associated with the seller's ability to establish or maintain a market
for its products in Washington." See Wash. Admin. Code (WAC) 458-20-193(f).
Unlike the compensating use tax at issue in this case, the business and
occupation tax at issue in Tyler was a direct tax imposed on virtually all business
activities carried on within the state. See Simpson Inv. Co. v. Revenue, 141
Wash. 2d 139, 149, 3 P.3d 741.
In Quill, the United States Supreme Court noted that, like Bellas Hess, Quill
involved a state's attempt to require an out-of-state mail-order house that had
neither outlets nor sales representatives in the state to collect and pay a use tax
on goods purchased for use within the state. The Supreme Court noted that in
Bellas Hess it held that a similar Illinois statute violated the Due Process Clause
of the Fourteenth Amendment and created an unconstitutional burden on
interstate commerce. There it ruled that a "seller whose only connection with
181
customers in the State is by common carrier or the United States mail" lacked
the requisite minimum contacts with the state. 386 U.S. at 758; see Quill, 504
U.S. at 301.
In Quill, the Supreme Court of North Dakota had declined to follow Bellas Hess
because "the tremendous social, economic, commercial, and legal innovations" of
the past quarter century had rendered its holding obsolete. 504 U.S. at 301. The
United States Supreme Court noted that it would have to either reverse the
Supreme Court of North Dakota or overrule Bellas Hess. While the Supreme
Court agreed with much of the state court's reasoning, it took the former course.
504 U.S. at 301-02. It held that while the Due Process Clause no longer
presented a "physical presence" bar to state taxation, that bar persisted in the
Commerce Clause. The Quill Court observed that the nexus requirements of due
process emanate from a concern over the fundamental fairness of a state's
asserting jurisdiction. It stated the Commerce Clause, however, is concerned
with the effect of state action on the national economy. While fundamental
notions of fair play and substantial justice no longer prevented North Dakota
from exerting personal jurisdiction over Quill, the safe harbor for vendors under
the Bellas Hess rule continued to further the ends of the dormant Commerce
Clause. It concluded that physical presence still was a prerequisite for a state to
impose a use tax collection duty on an out-of-state vendor. 504 U.S. at 312-15.
The Court found that Quill's ownership of floppy diskettes in North Dakota that
allowed customers to place orders for out-of-state sales constituted the "slightest
presence" but did not rise to the level of a substantial nexus because the
Commerce Clause required more than "minimal nexus" for a state to impose
collection burdens on a vendor. 504 U.S. at 315, n. 8.
The Quill Court, therefore, reaffirmed the rule that a state may not impose a use
tax collection duty on an out-of-state vendor whose only connection with the
state is through a common carrier or the United States mail. 504 U.S. at 314-15.
This "bright line, physical presence" rule was first set out in the court's 1967
decision in Bellas Hess, 386 U.S. at 758. The continuing value of a bright line rule
in this area of law and the doctrine and principles of stare decisis indicate that
the Bellas Hess rule remains good law. Quill, 504 U.S. at 317.
Justice White stated in his concurring opinion in Quill that "[r]easonable minds
surely can, and will, differ over what showing is required to make out a 'physical
presence' adequate to justify imposing responsibilities for use tax collection."
Therefore, "the vagarities of 'physical presence' will be tested to their fullest in
our courts." 504 U.S. at 330-31.
Some state courts have minimized the concept of substantial physical presence
to uphold imposition of use tax collection and duties on out-of-state companies.
KDR relies on such a case, Orvis Co. v. Tax Tribunal, 86 N.Y.2d 165, 630
182
N.Y.S.2d 680, 654 N.E.2d 954 (Ct. App. 1995), to support its argument that
Intercard's contacts with Kansas constitute a substantial nexus.
The New York Court of Appeals held that both Orvis and VIP had failed to prove
they had less than a slight presence in New York. In so doing, the court held that
Quill requires merely "demonstrably more than a 'slightest presence'" to meet
the nexus requirements of the Commerce Clause. In reaching this conclusion, the
court rejected the "substantial physical presence" requirement formulated by the
New York Appellate Division, stating:
"We do not read Quill Corp. v. North Dakota to make a substantial physical
presence of an out-of-State vendor in New York a prerequisite to imposing the
duty upon the vendor to collect the use tax from its New York clientele. The
Appellate Division erroneously applied that exacting standard in both cases." 86
N.Y.2d at 170.
The Orvis court cited National Geographic as its source for the "more than
slightest presence" standard. 86 N.Y.2d at 178. In National Geographic the
United States Supreme Court stated, in response to the California court's
adoption of a "slightest presence" standard for finding a substantial nexus:
183
It was from this statement by the United States Supreme Court that the Orvis
court adopted a "more than slightest presence" as the standard for finding a
substantial nexus. We believe that the Orvis court missed the point that the
Supreme Court was making about National Geographic's presence, i.e., that it
had a "much more substantial presence than a 'slightest presence' in the taxing
state.
"The true holding Quill Corp. v. North Dakota can best be understood by
considering the case in the context of its position in the evolution of Supreme
Court doctrine limiting the authority of a State to assess or impose a duty to
collect taxes arising out of the economic activity of a foreign business engaged in
interstate commerce." 86 N.Y.2d at 170..
"[B]oth the literal language of the Quill decision and consideration of its place in
the evolution of Supreme Court Commerce Clause jurisprudence refute the
Appellate Division's conclusion, urged by Orvis and VIP here, that 'Quill . . .
increased the requisite threshold of in-State physical presence from any
measurable amount of in-State people or property to substantial amounts of in-
State people or property.' [Citation omitted.] Quill simply cannot be read as
equating a substantial physical presence of the vendor in the taxing State with
the substantial nexus prong of the Complete Auto test, as the Appellate Division's
interpretation would require." 86 N.Y.2d at 176.
"We think the foregoing survey of the decisional law discloses the true import of
the physical presence requirement within the substantial nexus prong of the
Complete Auto test under contemporary Commerce Clause analysis. While a
physical presence of the vendor is required, it need not be substantial. Rather, it
must be demonstrably more than a "slightest presence." [Citation omitted.] And
it may be manifested by the presence in the taxing State of the vendor's
property or the conduct of economic activities in the taxing State performed by
the vendor's personnel or on its behalf." 86 N.Y.2d at 178.
The Orvis court ignores the Quill holding that sufficient physical presence is a
necessary element of the nexus required for a state to impose a use tax
collection duty. Economic presence cannot negate this requirement. The Quill
Court was wholly unconcerned with any economic benefit resulting from the
continuous physical presence of a "few floppy diskettes" in North Dakota. Rather,
Quill affirmed the "bright line" rule of Bellas Hess that the Commerce Clause
protects out-of-state vendors from the imposition of use tax requirements where
those vendors have no physical presence in the taxing state. The Quill Court
admitted that the bright line test appears artificial at its edges:
"Whether or not a State may compel a vendor to collect a sales or use tax may
turn on the presence in the taxing State of a small sales force, plant, or office.
184
[Citation omitted.] This artificiality, however, is more than offset by the benefits
of a clear rule. Such a rule firmly establishes the boundaries of legitimate state
authority to impose a duty to collect sales and use taxes and reduces litigation
concerning those taxes. This benefit is important, for as we have so frequently
noted, our law in this area is something of a 'quagmire' and the 'application of
constitutional principles to specific state statutes leaves much room for
controversy and confusion and little in the way of precise guides to States in the
exercise of their indispensable power of taxation.' [Citation omitted.]" Quill, 504
U.S. at 315-16.
The Michigan Court of Appeals adopted the reasoning of Orvis in Magnetek, Inc v
Treasury Dep't, 221 Mich. App. 400, 562 N.W.2d 219 (1997). Magnetek did not
involve sales or use taxes, but a direct tax on the corporation. The Michigan
Department of Treasury had assessed single business tax liability to Magnetek
Controls, Inc. (Magnetek), a Michigan based manufacturer. The issue was
whether Magnetek was required to apportion certain sales to the states in which
it did business or whether those sales were allocable to Michigan. Central to the
issue was the fact that Magnetek's managers annually traveled into each of the
several states for approximately 2 weeks of solicitation-related activities.
Independent commission agents handled the sale of merchandise in the target
states.
The Michigan court initially focused on whether this enterprise qualified as a type
of small sales force that Quill suggested would establish physical presence. The
court stated: "The dispositive question becomes whether plaintiff's employees by
virtue of the annual two weeks of solid sales effort, along with the activity of
independent sales representatives permanently located in the states and selling
plaintiff's lines along with those of other companies, qualify as the kind of 'small
sales force' that the Supreme Court suggested would suffice." 221 Mich. App. at
408. The court then focused on the rationale of Orvis:
"Of the many precedents cited by both parties from other jurisdictions applying
Quill, we find In re Orvis co., Inc. v. Tax Appeals Tribunal of the State of New
York, 86 NY2d 165, [630 N.Y.S.2d 680,] 654 NE2d 954 (1995), most instructive.
After a complete review of Quill in the context of Bellas Hess and other Supreme
Court precedents, the court in Orvis rejected the taxpayer's claim that Quill
increased the in-state physical presence requirement of the substantial nexus
analysis to require '"'substantial amounts of in-State people or property.'"'
[Citation omitted.] The court in Orvis noted that neither Bellas Hess, Quill, or
surrounding Supreme Court cases express 'any insistence that the physical
presence of the interstate vendor be substantial. . . .' [Citation omitted.] Further
requiring that physical presence be substantial would 'destroy the bright-line rule
the Supreme Court in Quill thought it was preserving'; it would require a
'weighing of factors such as number of local visits, size of local sales offices,
intensity of direct solicitations, etc.' to determine whether there was 'substantial'
185
physical presence in the target state. [Citation omitted.] Finally, the court in
Orvis, supra at 178, noted that in a recent case, Oklahoma Tax Comm. v.
Jefferson Lines, Inc., 514 US [175]; 115 SCt 1331; 131 LEd2d 261 (1995), the
Supreme Court 'did not apply a substantial physical presence test, but instead
strictly utilized the substantial nexus prong of the Complete Auto test without
even passing reference to the substantiality of the physical presence of the
vendor . . . in the taxing State.'" 221 Mich. App. at 410-11.
The Magnetek court applied the Orvis standard of "more than a slightest
presence." Based on that analysis, the Michigan court found that Magnetek had
sufficient physical presence to make it susceptible to imposition of a tax
obligation by those states, notwithstanding Commerce Clause restrictions. Sales
by Magnetek to taxpayers in those states during the audit period could not be
attributed to Michigan for purposes of single business tax liability. 221 Mich. App.
at 411-12.
In Koch Fuels, Inc. v. Clark, 676 A.2d 330 (R.I. 1996), Koch, a Delaware
corporation headquartered in Wichita, Kansas, was engaged in the sale and
distribution of fuel oil. On several occasions between 1982 and 1984, Koch sold
fuel oil to New England power for the generation of electricity in Rhode Island.
The fuel oil sold to the Rhode Island company originated in Texas, Pennsylvania,
or Massachusetts. All shipments were delivered by common carriers using barges
or vessels.
The terms of each of the sales contracts were negotiated and agreed upon in
telecommunications between Koch's representatives in Texas or New Jersey and
New England Power's representatives in Massachusetts. The Rhode Island
company received invoices for and paid the purchase price of the fuel oil outside
Rhode Island. The terms of each of the sales contracts were f.o.b. Providence,
indicating that title possession and risk of loss surrounding the fuel-oil shipments
passed from Koch to the Rhode Island company in the State of Rhode Island.
Koch did not have employees in Rhode Island, nor rent, lease, or own real
property within Rhode Island. Koch did, however, register to do business in
Rhode Island and paid Rhode Island corporate taxes for the years it sold fuel oil
to New England Power.
186
The Rhode Island Supreme Court first determined that Koch's activities fell
outside the "safe harbor" of mere "communication with its customers in the State
by mail or common carrier." 676 A.2d at 334. Based on Koch's complete control
over the oil shipments, the exclusive nature of the common carrier's contract, the
unique nature of the cargo, and the fact that the sales were consummated upon
delivery in Rhode Island, the Koch court determined that Koch's activities created
a physical presence within Rhode Island sufficient to satisfy the substantial nexus
requirement of the Complete Auto test. 676 A.2d at 334.
After briefs were filed, KDR submitted additional authority to support its position.
One case cited by KDR as additional authority, Town Crier, Inc. v. Department of
Revenue, 315 Ill. App. 3d 286, 733 N.E.2d 780 (2000), a Wisconsin retailer,
Town Crier, Inc., (Town Crier), contested the assessment of Illinois use tax. The
Illinois Department of Revenue argued that Town Crier had a taxable nexus in
Illinois by delivering furniture to Illinois customers in Town Crier vehicles and by
installing window treatments in Illinois. Town Criers sales records revealed that,
for the sampling period, over 50 percent of its gross sales constituted sales of
merchandise delivered into Illinois. During the audit period, Town Crier had
made at least 54 deliveries of merchandise to Illinois. Of the 54 deliveries, 30
were made in Town Crier's vehicles and 24 were made by common carriers.
Town Crier had installed window dressings in Illinois on five occasions. The
Illinois court concluded:
"By making deliveries into Illinois in its own vehicles, plaintiff has established a
regular presence in Illinois that enhanced its ability to establish and maintain a
market for its furniture sales. Plaintiff could have avoided use tax collection
responsibilities in Illinois by merely restricting its deliveries in this state to
common carriers or by refusing to deliver goods and supply services to Illinois.
However, instead of using these safe harbors, plaintiff chose to send its own
personnel into Illinois on multiple occasions and to reap the benefits from doing
so. By repeatedly making deliveries and performing installations in Illinois,
plaintiff's presence was demonstrably more than slight. Thus we find there was a
substantial nexus with plaintiff's activities and the State of Illinois, satisfying the
first requirement of the Complete Auto test. 315 Ill. App. 3d at ___, 733 N.E.2d
at 786.
187
transactions with Arizona nursing homes. The majority of Care's Arizona
transactions were conducted by mail or telefax orders. Care had one salesperson
assigned to Arizona., who lived in California during the audit period.
On seven occasions in the 7-year audit period, the Care salesperson took 1- to 2-
day trips to Arizona to follow up on business prospects. Some sales resulted from
the trips. Training was provided to Care's Arizona customers by personnel from
Care who went to the nursing home site once. The training sessions lasted one
to several days, depending on the number of computer programs involved. The
cost of the training was insignificant compared to the cost of the hardware and
software purchased by the nursing homes. Trainings were held in Arizona 80 out
of 1370 days covered by the audit, amounting to approximately 21 days per
year.
The Care court relied on the Supreme Court's declaration in Tyler Pipe Industries
v. Dept. of Revenue, 483 U.S. 232, 97 L. Ed. 2d 199, 107 S. Ct. 2810 (1987),
that the crucial determination in Commerce Clause nexus requirements was
whether the business activities in the State were significantly associated with
establishing and maintaining a market for the business' sales. 197 Ariz. at ___, 4
P.3d at 473. Finding that Care's in-state activities were associated with
establishing and maintaining a market for the business' sales in Arizona, the
court found a substantial nexus.
Kansas Case
In In re Tax Appeal of Scholastic Book Clubs, Inc., 260 Kan. 528, 920 P.2d 947
(1996), this court considered the question of whether Scholastic Book Clubs, Inc.
(Scholastic), an out-of-state based business that sold books ordered through
Kansas elementary school teachers, had established a sufficient nexus with
Kansas to subject it to the Kansas compensating use tax. The Scholastic court
found that by soliciting orders, accepting payments and shipping merchandise to
teachers for distribution to the student purchasers, Scholastic had made the
Kansas teachers its implied agents. 260 Kan. at 541. The Scholastic court applied
the test set out in Bellas Hess and Quill and concluded that Scholastic's use of
implied agents, the Kansas teachers, to sell its product to Kansas students
provided a substantial nexus sufficient for the State to impose the collection and
remittance duties of the use tax upon Scholastic. 260 Kan. at 546.
188
Bellas Hess, 386 U.S. at 758. A slightest presence is not sufficient to establish a
substantial nexus, National Geographic, 430 U.S. at 556, but some states have
found that "more than a slightest presence" is sufficient. Orvis, 86 N.Y.2d at 178.
The physical presence requirement may turn on the presence in the taxing state
of a small sales force, plant, or office. Quill, 504 U.S. at 315.
189
IN THE COURT OF APPEALS
STATE OF ARIZONA
DIVISION ONE
Plaintiff-Appellant,
v.
CARE COMPUTER SYSTEMS, INC., a Washington corporation,
Defendant-Appellee.
1 CA-TX 98-0003
DEPARTMENT T
O P I N I O N Filed 7-25-00
___________________________________
Appeal from the Arizona Tax Court
Cause No. TX 95-00642
The Honorable William J. Schafer, III, Judge
190
N O Y E S, Judge
¶1 The Arizona Department of Revenue (“ADOR”) assessed a
retail transaction privilege tax on Care Computer Systems, Inc.
("Care"). After the State Board of Tax Appeals vacated the assessment,
ADOR appealed to the Tax Court, which granted summary judgment to Care
on grounds that Care did not have “a substantial nexus with Arizona
warranting a transaction privilege tax.” ADOR then filed this appeal.
Our jurisdiction is conferred by Arizona Revised Statutes Annotated
section 12-2101(B) (1994), and our decision is guided by Arizona
Department of Revenue v. O’Connor,Cavanagh, Anderson, Killingsworth &
Beshears, P.A., 192 Ariz. 200,963 P.2d 279 (App. 1997). We reverse and
remand with directions to grant judgment to ADOR.
¶2 The material facts in this appeal from summary judgment
are not in dispute. Our standard of review is accordingly de novo on
questions of law and the application of legal principles to the
undisputed facts. See Brink Elec. Constr. Co. v. Arizona Dep’t of
Revenue, 184 Ariz. 354, 358, 909 P.2d 421, 425 (App. 1995).
¶3 The parties have acknowledged the relevance of O’Connor
to their dispute. After ADOR filed its notice of appeal, the parties
filed a joint motion to stay the appeal because, they reasoned, “the
main issue in dispute in the [Care] case, i.e., the degree of nexus
necessary for Arizona to constitutionally assess its Transaction
Privilege Tax, is the exact same issue that is
currently before the Arizona Supreme Court on the Department’s Petition
for Review in the O’Connor case.” We granted the stay. After the
supreme court denied review of O’Connor, we vacated the stay.
¶4 Both parties also acknowledge that Complete Auto Transit,Inc. v.
Brady, 430 U.S. 274 (1977), articulates the applicable test for state
tax compliance with the “dormant” or “negative” Commerce Clause. After
reviewing its earlier cases, the Complete Auto Court stated:
These decisions . . . have sustained a tax against
Commerce Clause challenge when [1] the tax is applied to
an activity with a substantial nexus with the taxing
State, [2] is fairly apportioned, [3] does not discriminate
against interstate commerce, and [4] is fairly related to the services
provided by the State. Id. at 279. Both sides further agree that the
main dispute here is whether Care’s business activities had a
“substantial nexus” with Arizona.
¶5 In O’Connor, as here, the question was whether Arizona
activities of an out-of-state vendor created a sufficient nexus with
Arizona to permit Arizona to impose retail transaction privilege taxes.
192 Ariz. at 201-02, 963 P.2d at 280-81. The out-of-state vendor,
Dunbar Furniture, Inc., built custom workstations for an Arizona
customer, the O’Connor law firm. Dunbar had no property, employees,
offices, or showrooms in Arizona, although an Arizona retailer did
serve as its independent representative on occasion. All negotiations
between O’Connor and Dunbar took place in Arizona, either in person or
by telephone.
During that time, Dunbar employees brought two prototype
workstations to Arizona and assembled them for review by O’Connor.
Under the parties’ contract, title to the workstations passed to
O’Connor when they were delivered, and the risk of loss passed to
O’Connor when they were installed. See id. at 202, 963 P.2d at 281.
Dunbar employees delivered the workstations to Arizona. A
191
local retailer installed them under contract with Dunbar and under
supervision of a Dunbar factory representative. On three occasions
thereafter, Dunbar sent employees to the O’Connor offices on warranty
claims. See id. at 203, 963 P.2d at 282.
¶6 ADOR audited O’Connor and assessed use taxes on its
workstation purchases. O’Connor protested the tax and prevailed at the
administrative level on the theory that, because Dunbar’s sales were
subject to Arizona retail transaction privilege taxation, O’Connor was
not liable for use taxation. The tax court ruled for ADOR. See id. We
reversed the tax court. See id. at 208, 963 P.2d at 287. Relying on
Standard Pressed Steel Co. v. Department
of Revenue of Washington, 419 U.S. 560 (1975); Complete Auto, 430 U.S.
274; National Geographic Society v. California Board of Equalization,
430 U.S. 551 (1977); Tyler Pipe Industries, Inc. v. Washington State
Department of Revenue, 483 U.S. 232 (1987); and Quill Corp. v. North
Dakota By and Through Heitkamp, 504 U.S. 298 (1992), we held that the
activities performed in Arizona by and on
behalf of Dunbar were significantly associated with Dunbar’s ability to
“establish and maintain” a market in Arizona for the sales. O’Connor,
192 Ariz. at 206, 963 P.2d at 285. The court’s “establish and maintain”
expression was taken from the following section of Tyler Pipe: “As the
Washington Supreme Court determined, ‘the crucial factor governing
nexus is whether the activities performed in this state on behalf of
the taxpayer are significantly associated with the taxpayer’s ability
to establish
and maintain a market in this state for the sales.’” 483 U.S. at 250.
¶7 We begin our analysis in the present appeal by rejecting
Care’s argument that a retail transaction privilege tax requires a
higher level of nexus with the taxing state than does a use tax. This
argument is based on cases that were decided when state taxes on
interstate commerce were per se unconstitutional. See General Trading
Co. v. State Tax Comm'n of Iowa, 322 U.S. 335, 338 (1944); McLeod v.
J.E. Dilworth Co., 322 U.S. 327, 330 (1944). Later cases based on that
same philosophy included Freeman v. Hewit, 329 U.S.
249 (1946), and Spector Motor Service, Inc. v. O’Connor, 340 U.S. 602
(1951). Those two cases were expressly overruled in 1977 by Complete
Auto, which upheld a privilege tax assessment on an interstate
business’s gross receipts from the taxing state. 430 U.S. at 288-89.
[T]he Court in Complete Auto did not merely overrule
Spector, it also explicitly rejected the formalistic
Commerce Clause doctrine that provided the foundation for
the Spector rule. Thus, the court repudiated the
“underlying philosophy . . . that interstate commerce
should enjoy a sort of ‘free trade’ immunity from state
taxation.” The Court likewise disapproved Freeman v.
Hewit’s “blanket prohibition against any state taxation
imposed directly on an interstate transaction.”
1 Jerome R. Hellerstein & Walter Hellerstein, State Taxation ¶4.11[1],
at 4-46 (3d ed. 1998).
¶8 We now decide whether a sufficient nexus existed between
Care’s business activities and Arizona to subject Care to Arizona’s
retail transaction privilege tax. In answering that question, we focus
on whether the activities performed on Care’s behalf in Arizona were
“significantly associated with the taxpayer’s ability to establish and
maintain a market in this state for the sales.” Tyler Pipe, 483 U.S. at
250.
¶9 Care is a Washington corporation that sells and licenses
192
computer hardware and software to nursing homes throughout the United
States. Care does not own or lease any real property in Arizona, it
does not maintain any inventory in Arizona, it does not maintain a
business address in Arizona, and it does not have any employees,
independent contractors, or agents based or residing in Arizona.
¶10 During the audit period, Care engaged in approximately
180 transactions with Arizona nursing homes. Because Care dealt
primarily with nursing home chains, most of its business resulted from
mail orders initiated by other nursing homes in the chains. The vast
majority of Care’s Arizona transactions were conducted by mail or
telefax. Two of the transactions were leases and the rest were sales.
One lease was for a general ledger program; the other
was for three programs and a computer. At the end of both lease terms,
the lessees bought the leased goods, and Care credited seventy-five
percent of the lease payments to the sales prices. The two
transactions, including credited lease payments, totaled $21,720.39.
The non-credited rental payments totaled $2,488.47.
¶11 Care had one salesperson assigned to Arizona. He lived
in Irvine, California, throughout the audit period. His sales efforts
focused almost exclusively on southern California. Although Arizona was
part of his territory, the salesperson did not initiate sales
relationships in Arizona. On seven occasions in the seven-year audit
period, however, the Care salesperson took one- to two-day trips to
Arizona to follow up on business prospects. Some sales and licenses
resulted from these trips.
¶12 Care required that all customer contracts be approved by a
corporate officer in Washington before the goods were shipped. All
goods were shipped from Care’s home office in Washington,F.O.B. origin,
either by common carrier or U.S. mail. Title to hardware, software,
forms, and supplies sold by Care thus passed to the customer in
Washington on delivery to the common carrier or the U.S. Postal
Service. By definition, however, title to products that Care leased or
licensed to its customers did not pass to the customers. Approximately
$105,000 of Care’s income from Arizona transactions during the audit
period consisted of software
licensing fees.
¶13 Regarding the training provided by Care to its Arizona
customers, Care Executive Vice President Jerry Nelson averred:
Personnel from this company go to the nursing home
site, in almost every case, only once. This is to
conduct the initial training which may last from one to
several days, depending on the number of programs involved. The
training representative is dispatched from our home office or another
service office, and returns immediately upon completion of the
training. . . . The cost of the training is insignificant compared to
the cost of the hardware and software; e.g., the list price of a
computer system consisting of the hardware and basic accounting
software would run approximately $20,000, whereas the training for such
a purchase would cost approximately $1,400. Not all sales involve
training at the customer site. . . . [S]ales to a chain of homes may
entail training only once at a central site for a number of homes; or a
nursing home may simply opt to do its own training with the help of the
user documentation. A review of the business records of our company
indicates that we had a training representative in Arizona at widely
separated junctures 80 days out of the total 1370 days covered by the
audit, July 1, 1987 through March 31, 1991. This amounts to
approximately 21 [sic] days per year.
193
Essentially, all the subsequent support for the
computer system is rendered on an interstate basis
involving the mail or telephone. . . . It is extremely
rare for our personnel to go back on site after the
initial training, largely because the telephone support
suffices.
¶14 Although Care’s Arizona activity was of relatively low
volume, “the volume of local activity is less significant than the
nature of its function on the out-of-state taxpayer’s behalf.”
O’Connor, 192 Ariz. at 208, 963 P.2d at 287. In our opinion, the volume
and function of Care’s Arizona activity equal or exceed that seen in
O’Connor. Dunbar, the out-of-state vendor in O’Connor, had an Arizona
market of one customer, with which it engaged in seventeen
transactions. Care had an Arizona market of one industry,
with which it engaged in about 180 transactions. Dunbar maintained no
post-sale ownership of property in Arizona; Care did so with licenses
and leases. Care permanently assigned a salesperson to cover Arizona;
Dunbar did not. Care routinely sent training personnel into Arizona;
Dunbar did not, although it did send in employees to do warranty work.
¶15 The trips by Care’s salesperson to Arizona were intended to, and
did, result in additional sales of Care products. The trips by Care
trainers to Arizona were in part intended to, and presumably did,
increase the satisfaction level of Arizona customers and encourage
other members of that nursing home chain to buy Care products. The Care
leases in Arizona were few in number and duration, but they could, and
did, develop into outright sales.
We therefore conclude that the function and effect of the Arizona
activities by Care and Dunbar were the same, that the factual
differences between the two cases are therefore not material, and that
the result of the “substantial nexus” analysis should be the same in
each case.
¶16 In addition to O’Connor, ADOR relies on Brown’s
Furniture, Inc. v. Wagner, 665 N.E.2d 795, 798, 803 (Ill. 1996)(holding
that vendor with no office, plant, or sales force in Illinois but who
advertised there and made 942 deliveries there in ten months had
substantial nexus with Illinois); Magnetek Controls, Inc. v. Revenue
Division, Department of Treasury, 562 N.W.2d 219, 224 (Mich. App. 1997)
(finding substantial nexus from managers’ regular travel to other
states to assist independent sales
1 Overruling recognized in Department of Revenue v. Moki
Mac River Expeditions, Inc., 160 Ariz. 369, 373-74, 773 P.2d 474,478-79
(App. 1989), disapproved in part on other grounds, Wilderness World,
Inc. v. Department of Revenue, 182 Ariz. 196,200, 895 P.2d 108, 112
(1995).
10 representatives and attend trade shows); and Orvis Co. v. Tax
Appeals Tribunal of State of New York, 654 N.E.2d 954, 961 (N.Y. 1995)
(holding that visits by company personnel to New York for sales and
customer relations created substantial nexus). Care asserts that those
cases concerned use or sales taxes that vendors had to collect from
customers, not transaction privilege or other excise taxes for which
the vendors were themselves liable. The
assertion is correct, but those cases are nevertheless relevant because
they applied the Complete Auto test and focused on whether the
taxpayers’ activities established a “substantial nexus” with the taxing
states.
¶17 Care relies on State Tax Commission v. Murray Co. of
194
Texas, 87 Ariz. 268, 350 P.2d 674, vacated, 364 U.S. 289, op. on
remand, 89 Ariz. 61, 358 P.2d 167 (1960),1 a case that is mainly of
historical interest because it was decided when taxation of interstate
commerce was still precluded. Care also relies on City of Phoenix v.
West Publishing Co., 148 Ariz. 31, 712 P.2d 944 (App.
1985). That case relied on Murray, preceded Tyler Pipe, drew no
distinction between the Due Process and Commerce Clause nexus
requirements, and did not address the “crucial factor” articulated by
Tyler Pipe, namely, whether West’s business activities in Phoenix were
significantly associated with establishing and maintaining a market in
Phoenix for its sales. Had West Publishing focused on that crucial
factor, the case might have been decided differently. We therefore
distinguish Murray and West Publishing. Although a comparison of the
facts here to the facts there does support Care, that support
evaporates when one acknowledges the intervening evolution in Commerce
Clause law.
195
within Arizona, it argues that ADOR cannot impose a transaction
privilege tax on it. We do not agree with that argument. Because
“Arizona’s use tax thus functions primarily as a complement to the
retail transaction privilege tax,” O’Connor, 192 Ariz. at 204, 963
P.2d at 283, Care’s argument, if true, means that ADOR could have
imposed a use tax on Care’s Arizona customers pursuant to A.A.C. R15-5-
2308, which provides that “[p]urchases made from vendors not
maintaining a place of business in this state to Arizona customers are
subject to the Use Tax.” That argument, however, was rejected
by O’Connor.
¶19 In O’Connor, where ADOR imposed a use tax on the Arizona customer
because the vendor did not maintain a place of business in Arizona,
this court applied the Complete Auto test and the Tyler Pipe “crucial
factor” and held that ADOR could not impose a use tax on the customer--
because it could have imposed a retail transaction privilege tax on the
vendor. O’Connor, 192 Ariz. at 204-08, 963 P.2d at 283-87. That holding
illustrates that the vendor’s place of business is an overly simplistic
test in light of current Commerce Clause jurisprudence regarding
taxation. That the regulation in question specifies that vendors
maintaining a place of business in Arizona are subject to the sales tax
does not necessarily mean that other vendors are not subject to the
sales tax.
¶20 In Brink Electric, this court rejected an argument similar to the
one that Care makes here. 184 Ariz. at 360, 909 P.2d at 427. In that
case, the taxpayer argued that A.A.C. R15-5-608, which stated that
“[i]nstallation of equipment which becomes permanently attached in a
plant or other structure is taxable as a contracting activity,” stood
for the proposition that there could be no “contracting” with respect
to equipment that did not become
permanently attached. This court disagreed and held that “[t]he
regulation certainly includes permanent attachment of equipment to a
structure within the scope of contracting, but does not purport to
exclude other real property improvements.” Id. at 360 n.6, 909 P.2d at
427 n.6.
¶21 Similarly, while A.A.C. R15-5-2307 certainly says that a taxpayer
who maintains a place of business in Arizona will be subject to the
transaction privilege tax, it does not purport to exclude a taxpayer
who does not maintain a place of business from the tax. In fact,
several cases (including Brink Electric) have found a taxpayer that did
not maintain a place of business in Arizona subject to the transaction
privilege tax. Arizona State Tax Commission v. Ensign, 75 Ariz. 220,
227, 254 P.2d 1029, 1033 (1953), for example, held that an out-of-state
taxpayer that did
not maintain a place of business in Arizona, but that sold and
installed deep well turbine pumps in the state, was subject to the
transaction privilege tax on in-state sales because the elements of the
sales were effected in Arizona. See also Centric-Jones Co. v. Town of
Marana, 188 Ariz. 464, 478, 937 P.2d 654, 668 (App. 1996) (upholding a
transaction privilege tax on an out-of-state contractor for
construction work performed on a portion of the Central Arizona Project
located within the Town of Marana even
though the contractor's offices were located in Denver, Colorado); Moki
Mac, 160 Ariz. at 373-75, 773 P.2d at 478-80 (holding that a Utah river
rafting business that did not maintain a place of business in Arizona
nevertheless had enough activities in Arizona to establish a sufficient
constitutional nexus to justify imposing the transaction privilege tax
on its gross receipts); Arizona Dep't
196
of Revenue v. Hane Constr. Co., 115 Ariz. 243, 245-46, 564 P.2d 932,
934-35 (App. 1977) (holding that an out-of-state contractor that did
not maintain a place of business in Arizona but performed work on an
Indian reservation had sufficient business activity in Arizona to be
subject to the transaction privilege tax on its contracting income),
rev'd on other grounds, State of Arizona, ex rel., Arizona Dep't of
Revenue v. Blaze Constr. Co., 190 Ariz. 262,
272, 947 P.2d 836, 846 (App. 1997), rev'd, 526 U.S. 32, 39 (1999).
¶22 Arizona’s sales tax and use tax are complementary; they
are intended to reach all applicable transactions, either by imposing a
sales tax on the seller or a use tax on the purchaser. As the
“maintaining a place of business” definition expands with
constitutional interpretation, the reach of the sales tax necessarily
expands, and the reach of the use tax necessarily contracts, as
evidenced by the holding and result in O’Connor. On facts not
materially different from those in the present case, O’Connor held that
the use tax would not apply because the sales
tax would apply. We follow that analysis here, and we reach the same
result. Because the State cannot impose the use tax on Care’s customers
on the present facts and in light of the constitutional principles
stated in O’Connor, the State can lawfully impose a sales tax on Care.
¶23 Reversed and remanded with directions to enter judgment
for ADOR.
CONCURRING:
THOMAS C. KLEINSCHMIDT, Judge
197
is an overly simplistic test in light of current Commerce Clause
jurisprudence regarding [sales] taxation.” Ante ¶ 19. In other words,
ADOR is not constitutionally obliged to confine its sales taxing
authority to vendors who maintain a place of business within Arizona;
rather, it has constitutional leeway under current jurisprudence to
impose sales taxes upon vendors who do not maintain a place of business
within Arizona. Accordingly, the majority reasons, whatever regulations
needlessly confine sales taxing authority so narrowly may be ignored.
¶27 By taking this approach, my colleagues achieve a curious result.
They effectively invalidate R15-5-2306, -2307, and –2308 for taxing too
narrowly — for failing to tax sales to the full extent that the
Commerce Clause permits. This is curious because it reverses ordinary
constitutional analysis. Ordinarily when courts find a statute or
regulation incompatible with the Constitution, they find that it
exceeds constitutional constraints.
Here the opposite pertains; my colleagues render ADOR’s sales tax
regulations inoperative because they bite off less than ADOR is
constitutionally permitted to chew.
¶28 I disagree with this approach. That ADOR might have
adopted more comprehensive sales tax regulations is beside the point.
The immediate question is not whether ADOR might
constitutionally adopt broader regulations but whether ADOR must follow
the narrower regulations that it has adopted and has not seen fit to
change.
¶29 There are good reasons why Arizona law requires
administrative agencies to follow their own rules and regulations. Our
Administrative Procedure Act (“APA”) not only requires the publication
of existing agency rules and regulations, see A.R.S. §§41-1011, -1012,
but also the publication of a monthly register concerning “proposed
repeals, makings or amendments of rules.”
A.R.S. § 41-1013 (1999). The APA provides for public notice and comment
before the adoption or amendment of agency rules. See A.R.S. §§ 41-1021
through -1036 (1999). The APA also requires the filing of an “economic,
small business and consumer impact statement,” A.R.S. §§ 41-1055 (1999)
and 41-1056(A)(6) (Supp. 1999) and screening by a governor’s regulatory
review council before a proposed regulation takes effect. See A.R.S. §
41-1051 (Supp.
1999); A.R.S. §§ 41-1052 through -1053 (1999). Explaining this process,
this court stated, “APA rulemaking requires public notice, and the
opportunity for public participation and comment, to ensure that those
affected by a rule have adequate notice of the agency’s proposed
procedures and the opportunity for input into the consideration of
those procedures.” Carondelet Health Svcs., Inc. v. Arizona Health Care
Cost Containment System Admin., 182 Ariz.
221, 226, 895 P.2d 133, 138 (App. 1994).
¶30 Through publication of current rules and notice of
amendments, an agency not only permits members of the public to comment
on impending changes, but also to consult the evolving body of rules
and regulations, determine the agency’s approach to circumstances that
its rules and regulations define, and order their affairs accordingly.
And the purpose of permitting the public to order its affairs in
accordance with published regulations is particularly keen for tax
regulations that govern
commercial transactions. When the parties to commercial
198
transactions factor likely taxes into pricing decisions, they should do
so in the confidence that the taxing authority will tax as its
published regulations say it will tax, and not as it might tax under a
different, unproposed, unapproved, and unadopted regulatory scheme.
¶31 In consequence, I see no need to embark on the quest for elusive
nexus to resolve this case. On the far simpler ground that ADOR has
failed to follow its own regulations, I would affirm. Because my
colleagues have opened the subject of nexus, however, I will make one
further point.
¶32 Whatever the substantive validity of Commerce Clause case
jurisprudence before Complete Auto, the law then had the virtue of
clarity. The earlier case law imposed a “blanket prohibition against
any state taxation imposed directly on an interstate transaction.” Ante
¶ 7. In Complete Auto, however, the Court made “substantial nexus” the
touchstone of taxation of interstate transactions. And in Tyler Pipe,
the Court defined “sufficient nexus” to include those activities
“significantly associated with
the taxpayer’s ability to establish and maintain a market in [the
taxing] state for the sales.” Ante ¶ 8 (quoting Tyler Pipe, 483 U.S. at
250).
¶33 I do not hold the majority responsible for the Tyler Pipe standard.
They are stuck with it as are we all. To apply that standard to these
facts and those of O’Connor, however, shows it to add bulk without
nourishment to the law. What, other than ad hoc pronouncement,
distinguishes an activity significantly associated with the taxpayer’s
ability to establish and maintain a sales market from an activity not
significantly associated with that ability? One is hard pressed to say.
The best the court can do is
conclude by comparative analysis that, if the attenuated
circumstances of O’Connor meet that standard, so must the equally
attenuated circumstances of this case. And so, validating the taxation
of one attenuated transaction after another after another, the courts
erode the general standard of substantial nexus into something very
insubstantial indeed.
¶34 “Substantial nexus” is a swamp we should stay out of in
this case. If ADOR amends its regulations to detach sales taxes from
the terra firma of the vendor’s place of business, there will be time
enough to gauge nexus. Until then, we should hold ADOR to regulations
on the books.
¶35 For the foregoing reasons, I respectfully dissent.
NOEL FIDEL, Presiding Judge
199
200
201
202
203
204
205
206
207
208
209
210
211
212
213
214
Therefore, in the case as in the Quill case, summary judgment was properly granted in favor of the vendor
as the taxing state failed to show that the vendor had a substantial nexus with the state, as required by the
Commerce Clause. For the foregoing reasons, I would affirm the judgment of the trail court.
215
10/22/03
Petitioner, Royal Transport, Inc., has appealed from final determinations of the
Respondent, Comptroller of the Treasury, assessing sales and use tax in the amount of
$737,044.01, plus interest and penalty for the period July 1, 1997 through June 30,2001.
Petitioner moves this Court to set aside the assessments. A hearing was held on the
Petitioner's Motions to Dismiss and the Court allowed additional time for supplemental
memorandum and documents to be filed.
The assessments at issue emanate from actions taken by the Respondent against the
Petitioner and Furnitureland South, Inc., both foreign corporations, for failure to collect
sales and use tax on the sale and delivery of furniture in the State of Maryland. Those
initial actions and the facts supporting them are best summarized in the Court of Appeals
decision, Furnitureland South, Inc. et al v. Comptroller of the Treasury, 364 Md. 126
(2001).
In brief: Petitioner is a small commercial carrier, headquartered in North Carolina,
conducting for- hire trucking operations in interstate and foreign commerce pursuant to a
certificate of license issued by the Interstate Commerce Comnission. Petitioner's primary
customer during the period in question was Furnitureland South, Inc., (hereinafter
"Furnitureland") a nationwide furniture retailer. Petitioner was hired as a common carrier
to deliver Furnitureland's goods to customers nationwide, including Maryland.
Furnitureland did not collect sales or use taxes on furniture it sold to out-of-state
customers when shipped from North Carolina by for-hire motor carriers such as
Petitioner. Furnitureland was assessed for failure to collect the tax and due to its
relationship with Furnitureland, Petitioner was deemed by the Respondent to have nexus
with Maryland and also liable for sales and use tax.
The Court of Appeals in Furnitureland South, Inc., supra found that the Respondent had
failed to "invoke and exhaust the statutory administrative and judicial review remedies"
and therefore its attempt for a declaratory judgment was barred. As a result, the subject
assessments were issued and Petitioner asserts both federal statutory violations and
procedural defects exist to warrant dismissal.
First, Petitioner seeks dismissal on the grounds that a federal statute, the Interstate
Commerce Act, expressly prohibits the Respondent from compelling the Petitioner to
collect and remit sales and use tax. The statute at issue can be found in 49 U.S.C. §14501
(c), a 1995 amendment to the Airline Deregulation Act of 1978 (hereinafter "ADA "),
which provides,
216
Motor Carriers of Property. (1) General Rule. Except as provided in paragraphs (2) and
(3), a State, political subdivision of a State, or political authority of two or more States
may not enact or enforce a law, regulation, or other provision having the force and effect
of law related to a price, route, or service of any motor carrier. ..or any motor private
carrier, broker, or freight forwarder with respect to the transportation of property.
The tern "motor carrier' is defined as " a person providing motor carrier transportation for
compensation", 49 U.S.C. § 13102(13). Petitioner contends that Maryland's tax statute
compelling it to collect and remit tax during the course of delivery of property constitutes
a "law related to a price, route, or service" of Petitioner "with respect to the transportation
of property". Petitioner seeks broad construction of the "related to" language in the statute
to establish that the collecting and remitting of sales/use taxes from a motor carrier's
customers during the course of delivery falls within the parameters of the preemption
provision. Petitioner also asserts that the collection and remittance function the
Respondent seeks to impose on a motor carrier constitutes significant additional
"services" that it would have to perform.
Secondly, Petitioner contends that the Respondent has impinged upon its federal right to
deliver property in the State without restriction as mandated by the Interstate Commerce
Act and thus has violated Petitioner's civil rights. Petitioner seeks an award of damages,
including its reasonable attorneys fees, pursuant to 42 U.S.C. § 1983 to compensate the
motor carrier for the injury it has suffered as a result of the illegal enforcement of a state
statute in violation of federal law. Respondent counters that the ADA does not preempt
Maryland sales and use tax law. First, he points to case law involving ERISA statutes that
narrowly construes the "related to" language when it is applied to laws of general
applicability , (i.e. sales tax laws). According to the Respondent, the tax collection law is
one of general applicability to all vendors and Petitioner's increased burden, as a vendor,
to collect the tax is not significant enough to justify preemption. In addition, Respondent
examines the legislative history of the ADA as support. Specifically, noting that other
sections of the act place restrictions on the traditional authority of the state to tax,
Respondent asserts that if Congress had intended to restrict sales tax it would have
similarly placed that limitation in the act. Finally, Respondent directs us to language in
the legislative report accompanying the subject ADA provision that states "nothing in this
amendment is intended to change the application of State tax laws to motor carriers".
H.R. Coni Rep. 103-677.
As to the Petitioner's §1983 claim, Respondent contends that such actions l) are beyond
the limited jurisdiction of the Maryland Tax Court; 2) cannot be brought against a state
official acting in his official capacity; 3) can only be addressed after all administrative
remedies have been exhausted and 4) are not permissible in cases involving ADA
violations.
The Interstate Commerce Act protects "motor carriers" by way of preemption from state
laws or regulations that pertain to "a price, route or service" provided by the motor
ca1Tier. As previously noted, motor carrier is defined in the statue as "a person providing
motor carrier transportation for compensation."
217
Respondent insists that Petitioner, due to its wholly owned subsidiary status, is not a
motor carrier, but rather, upon delivering furniture within Maryland, becomes the agent
or representative of routes or services are preempted under § 41713 ...( a) narrower
interpretation would read the "related to" language out of the statute. Slip Opinion, p. 6.
In that one of the purposes of § 14501 was to place motor carrier on a level playing field
with the deregulated air carrier industry, 4 then the broad construction applied to the air
carrier preemption statute is equally applicable to the motor carrier preemption provision.
Next, the question becomes whether the imposition of the sales and use tax law relates to
a "service" performed by the Petitioner in its delivery operatiol1S. The Court in United
Parcel Service, Inc. supra at page 6, provides: "a sufficient nexus exists if the law
expressly references the air carrier's prices, routes or services, or has a 'forbidden
significant effect' upon the same, Id at 388" citing Morales. It is clear that the sales and
use tax law does not "expressly reference" a motor carrier's price, route or service.
However, Petitioner lists 11 additional services that must be performed due to the
Respondent's imposition of the tax collection and remittance obligation, which
significantly expands its motor carrier function; that is, the delivery of property. The
additional services are:
Petitioner's Motion to Dismiss, p. 8-9. Respondent disputes that these extra services as
being "significant", stating that Petitioner "performs many, if not all, these services in
conjunction with its 'standard delivery"'. Respondent's Memorandum of Law, p. 7.
218
However, Respondent fails to convince this Court that most, if not all, of the 11 listed
activities would not be required but for the tax-collection obligation sought to be imposed
on Petitioner.
The issue of their significance is resolved by the undisputed testimony, by way of
affidavit of Mr. Kenneth B. Hunt, President of Royal Transport, Inc. That affidavit, never
questioned by the Respondent, presented evidence that these 11 tax-collection steps are
not only expensive and burdensome to perform, but they "would materially delay,
complicate, and hamper the process of Royal picking up and loading the furniture in
North Carolina, initiating the transportation journey. ..delivering the furniture." Affidavit,
Paragraph 8. The burden imposed caused Petitioner 10 discontinue delivery operations
into Maryland, resulting in substantial financial losses. Affidavit, Paragraph 9.
We conclude that the Respondent's scheme has a significant effect on Petitioner's "prices,
routes or services". The significance to the Petitioner, or any motor carrier, expands
exponentially for each of the jurisdictions into which Petitioner delivers that may seek to
adopt the Respondent's approach. To force each motor carrier (i.e. UPS, Federal Express,
etc.) to be liable for collecting the sales taxes for the millions of sales transactions of its
customers is beyond daunting and burdensome.
4 SeeH.R. ConfRep 103-677, p85.
Respondent's reliance on legislative history must fail for two reasons. First, the
application of the sales and use tax to motor carriers is the same as to any other
purchaser/vendor in Maryland and has not been changed by the Respondent's scheme. As
footnoted, there is no dispute that Petitioner is liable for sales and use taxes for tangible
personal property it purchases and/or uses in Maryland. There has been no specific tax on
motor carriers affected by preemption. Second, examining the overall purpose of the
preemption statute leads us to conclude that the compelling of motor carriers to become
tax collectors for each and every taxing jurisdiction in which it operates results in the
chilling effect on the freight transportation industry that the preemption statutes were
enacted to prevent.
Based on the above analysis, we find that the Interstate Commerce Act expressly
prohibits the Respondent from compelling Petitioner to remit the sales and use tax on
which the Respondent's assessment is based. Accordingly, the Motion to Dismiss the
assessment on that basis is granted.
However, we agree with the Respondent in finding that an action under § 1983 is beyond
the jurisdiction of this Court (an administrative body) and properly resides in the judicial
courts.
Procedural Issue Petitioner also filed a Second Motion to Dismiss based on the
procedural defects asserted in similar Motions filed in the companion Furnitureland
South, Inc. (M.T.C. Nos. 02-SU-OO-0305 and 0306) appeals before this Court. Even
though those issues are moot as pertains to Petitioner due to the ruling above, we shall
incorporate by reference the rationale and reasoning of the Furnitureland Motions
decision (dismissing the first assessment) in the event the issue should return by action of
an
appellate Court.
219
Accordingly, for all of the above reasons, we shall pass an Order granting the Motion to
Dismiss the assessment made by Respondent against Petitioner.
220
10/22/03
FURNITURELAND SOUTH, INC. IN THE MARYLAND TAX
COURT V. COMPTROLLER OF THE TREASURY
NOS. 02-SU-OO-0305 & 02-SU-OO-0306
Petitioner, Furnitureland South, Inc., has appealed from formal determinations of the
Respondent, Comptroller of the Treasury, assessing sales and use tax in the amount of
$737,044.01, plus interest and penalty for the period July 1, 1997 through June 30,2001.
Petitioner moves this Court to set aside the assessments. A hearing was held on the
Petitioner's Motions to Dismiss and the Court allowed additional time for supplemental
documents to be filed.
The assessments at issue emanate from actions taken by the Respondent against the
Petitioner and Royal Transport, Inc. (hereinafter "Royal"), both foreign corporations, for
failure to collect sales and use tax on the sale and delivery of furniture in the State of
Maryland. Those initial actions and the facts supporting them are best summarized in the
Court of Appeals decision, Furnitureland South, Inc. et at v. Comptroller of the Treasury,
364 Md. 126 (2001).
In brief, Petitioner is a nationwide furniture retailer, headquartered in North Carolina.
Petitioner sold furniture throughout the United States, including Maryland and hired
Royal as a common carrier to deliver its goods to customers. Petitioner did not collect
sales or use taxes on furniture it sold to out-of-state customers when shipped from North
Carolina by for-hire motor carriers such as Royal. Both Petitioner and Royal were
assessed for failure to collect the tax. The Circuit Court for Baltimore City found that
sufficient nexus existed to establish the liability of Petitioner and Royal for the collection
of sales and use tax on the sales of furniture by Petitioner.
The Court of Appeals in Furnitureland South, Inc., supra found that the Respondent had
failed to "invoke and exhaust the statutory administrative and judicial review remedies"
and therefore its attempt for a declaratory judgment was barred.
The Assessments
Subsequent to the Court of Appeals ruling, on July 25, 2001, the Respondent issued an
assessment (hereinafter, the "2001 Assessment") for the period July 1,1997 through June
30,2001. Petitioner timely appealed and one of its arguments was that the Respondent
had failed to exhaust its administrative remedies prior to issuing the 2001 assessment. In
particular, Petitioner contended that before an assessment could be issued, the
Respondent was required to mail to Petitioner a notice and demand for the filing of a
sales and use tax return within 10 days.
In an effort to keep the issue of Petitioner's liability moving forward through the appeals
process, Respondent, on December 17, 2001, attempted to correct what may have been a
procedural defect by mailing to Petitioner a Notice and Demand for Tax Return. When
Petitioner responded by way of legal argument, Respondent issued a second assessment
221
(hereinafter the "2002 Assessment") on January 15, 2002 for the identical period as that
in the first assessment.
Petitioner asserts that failure of the Respondent to provide a "notice and demand" for tax
return filing warrants dismissal. § 13-103 of the Tax-General Article provides:
If a person or governmental unit fails to file a tax return as required under this article, the
tax collector shall mail the person or governmental unit a notice and demand for the
return that requires the person or governmental unit:
(1) for the sales and use tax, to file the return and to pay the tax within 10 days after
the date on which the notice was mailed.
If a return is not filed within the 10-day period, § 13-402 requires the Respondent to
"compute the tax by using the best information in its possession and to assess the tax due.
There is no question that a final "Notice and Demand" was not issued by the Respondent.
At hearing, the Court requested that Respondent submit any documents proving
compliance with § 13-402; i.e. that a demand to file a sales tax return within 10 days was
made to the Petitioner. The submission to the Court included correspondence pertaining
to the earlier Circuit Court declaratory judgment action. These included requests by the
Respondent to audit Petitioner, requests for information from Petitioner, requests for
statements from Petitioner, a determination that Respondent has found Petitioner to be an
out-of-state vendor and finally, pleadings and decisions from the Circuit Court case. The
submission clearly indicates an awareness of the Petitioner that the Respondent was
seeking to tax Petitioner's transactions. However, while Petitioner may have had "notice"
informally of possible future action by the Respondent, the requisite statutory procedure
for issuing assessments based on non- filing was not followed. As the Court of Appeals
stated:
In addition, § 13-303 authorizes the Comptroller to demand the filing of a sales and use
tax return. If the demand is not complied with, § 13-304 and 13-402 grant to the
Comptroller alternate remedies. Section 13-304 authorizes a judicial action to require the
filing of a return. Section 13-402(a) authorizes the Comptroller to make an assessment
utilizing the best information the Comptroller has, whatever that may be.
Even though Petitioner may have had some notice, its statutory right to file a return
within 10 days upon demand in order to avoid an assessment based on § 13-303 was
denied.
Respondent counters that based on past history and as seen by the document submission.
Petitioner would not have filed a return even if a demand had been issued as Petitioner
did not believe it was required to do so. In addition, the General Assembly has provided
procedural options to the Respondent in the administration of the sales and use tax law.
To assess upon failure to file a return upon demand is one such option. Another
procedure, to which the Respondent relies, depends on the availability or records for
222
inspection. § 11-504 requires vendors to keep complete and accurate records and will
make them available for inspection upon request of the Respondent. § 13-407 allows
Respondent, when the records are not kept pursuant to § 11-504, to compute the sales and
use tax and issue an assessment. Respondent claims that although requests were
repeatedly made, records have never been provided by Petitioner and thus, the resulting
assessment, issued pursuant § 13-407 is procedurally correct.
Respondent seeks to expand the assessment authority allowed under § 13-407 to those
vendors who have records and do not make them available. However, the clear language
of the statute provides for assessments only for failure to keep the records. If the General
Assembly had wanted to include persons who refuse to make records available in § 13-
407, it would have enacted the statutes similar to those dealing with the motor carrier tax.
§ 9- 209 (similar to the § 11- 504 sales and use tax records provision) mandates record
maintenance and retention and provides for inspection by the Respondent of motor
carriers as that term is defined. However, the companion provision for motor carriers, §
13-405(b), unlike § 13-407, allows the Respondent to assess "if a person fails to keep
records or to make records available to the Comptroller as required in § 9- 209..." From
the clear and unambiguous language of the provisions, the General Assembly limited the
scope of § 13-407 to only those vendors who did not keep records. As it is undisputed
that Petitioner kept records of its sales during the assessment period, Respondent's
attempt to assess pursuant to § 13-407 was erroneous.
Therefore, since no notice and demand was sent to Petitioner prior to the issuance of the
2001 Assessment, the Respondent failed to exhaust all administrative remedies. We shall
pass an Order granting the Petitioner's Motion to Dismiss the 2001 Assessment.
Petitioner moves to dismiss the 2002 Assessment claiming it is duplicative of the 2001
Assessment and that the Respondent has no statutory authority to issue identical
assessments against the same taxpayer. However, since the 2001 Assessment has been
dismissed, this issue is now moot.
Petitioner also argues that the later 2002 Assessment includes periods of time beyond the
permissible statute of limitations established under § 1102( a). Specifically, Petitioner
seeks the dismissal of a five-month period (July 1, 1997 through November 30, 1997).
However, Respondent correctly notes that subsection (b) of the limitations statute permits
"an action may be brought at any time if there is proof that the tax is not paid due to fraud
or gross negligence. Respondent is asserting either fraud or gross negligence and thus,
has the burden of proving those contentions at a trial on the merits. Therefore, the
limitations issue cannot be resolved by a preliminary motion and must wait until the trial
of fact has heard all of the evidence.
Accordingly, we shall pass an Order denying the Petitioner's Motion to Dismiss the 2002
Assessment and the matter shall be set for a trial on the merits.
223
BEFORE THE BOARD OF EQUALIZATION
OF THE STATE OF CALIFORNIA
In the Matter of the Petition for Redetermination under the Sales and Use Tax Law of
Borders Online, Inc.
SC OHA 97-638364
56270
Appearances:
For Petitioner: Scott L. Brandman
Attorney at Law
Douglas D’Agostino
Associate Director, Tax
For Sales and Use Tax Department: David H. Levine
Tax Counsel IV
For Appeals Section: Jeffrey G. Angeja
Tax Counsel III
MEMORANDUM OPINION
This opinion considers the merits of a petition for redetermination for the period
April 1, 1998, through September 30, 1999. At the Board hearing, petitioner
protested a determination related to petitioner’s sales to California purchasers.
Petitioner, an out-of-state corporation, makes online retail sales of tangible personal
property (e.g., primarily books, videos, music and gift items) via the Internet. The goods
petitioner sells to California purchasers are delivered by common carrier from outside
California. Petitioner alleges that it is a separate and distinct legal entity from Borders,
Inc. (hereafter Borders), an affiliated corporation that sells similar goods in “brick-and-
mortar” stores throughout California. Petitioner further alleges that it did not maintain,
occupy or use any place of business in California during the period in question. (See Rev.
& Tax. Code, § 6203, subd. (c)(1).)
In a letter dated July 29, 1999, the Sales and Use Tax Department (hereafter the
Department) informed petitioner that the Department had concluded that petitioner was a
retailer engaged in business in California and was obligated to collect use tax from
petitioner’s California customers. (See Rev. & Tax. Code, § 6203, subd. (a).) The
Department based its conclusion, at least in part, on the significance of a paragraph,
which petitioner had posted on petitioner’s web site under the heading of “RETURNS.”
The record of this matter reflects that this paragraph stated, in pertinent part, that: “You
may return items purchased at borders.com to any Borders Books and Music store within
30 days of the date the item was shipped. All returns must be accompanied by a valid
packing slip (your online receipt and shipping notification are not valid substitutes for a
packing slip on returns to stores). Gift items may be returned or exchanged if they are
accompanied by a valid gift packing slip. You may not return opened music or video
items, unless they are defective.”
Petitioner alleges that this paragraph first appeared on petitioner’s web site some time in
June of 1999. Petitioner further alleges that petitioner’s internal records reflect that this
paragraph was removed from petitioner’s web site on or around August 11, 1999. Thus,
petitioner apparently removed the paragraph in question shortly after petitioner received
notice that the Department considered this paragraph to be evidence that petitioner had a
use tax collection obligation under California law. Petitioner has not presented any
evidence that would establish that petitioner ever expressly disavowed, either publicly or
internally, the policy reflected by the paragraph in question.
224
Petitioner contends that, notwithstanding the restrictions stated in the posted paragraph,
petitioner’s customers could return merchandise at a Borders store without a valid
packing slip and receive a store credit. Additionally, petitioner admits that, throughout
the period in question, petitioner’s California customers could obtain cash refunds by
returning merchandise purchased from petitioner, together with a valid packing slip, to a
Borders store. In other words, petitioner’s customers’ ability to obtain such cash refunds
from Borders was not dependent on whether the paragraph at issue was posted on
petitioner’s web site. According to petitioner, Borders also provided return services to
individuals who had purchased merchandise from one of Borders’s or petitioner’s
competitors; however, Borders did not, and would not, provide cash refunds to customers
of Borders’s or petitioner’s competitors.
Petitioner alleges that any merchandise petitioner’s customers returned to Borders was
not sent back to petitioner but, instead, was added to Borders’s inventory. Petitioner
claims that Borders did not charge petitioner for return and exchange services. Finally,
petitioner further claims that Borders absorbed any losses associated with accepting
returns of defective merchandise from petitioner’s customers.
OPINION
With certain exceptions that are not relevant to this matter, Revenue and Taxation Code
section (hereafter Section) 6203 imposes a use tax collection obligation on “. . . every
retailer engaged in business in this state and making sales of tangible personal property
for storage, use, or other consumption in this state . . . .” Under subdivision (c)(2) of
Section 6203, the meaning of “retailer engaged in business in this state” includes:
225
petitioner expressly stated on its web site that Borders was petitioner’s authorized
representative for this purpose. Petitioner has submitted no evidence showing that
Borders ever objected to being designated as petitioner’s authorized representative or that
petitioner ever revoked this designation. Rather, the evidence shows that petitioner
removed the web site declaration of this designation in response to the Department’s July
29, 1999, letter, not because Borders’s status as petitioner’s authorized representative had
changed.
Although petitioner’s express web site declaration is sufficient to establish that Borders
was petitioner’s authorized representative for returns, in addition to this direct evidence,
circumstantial evidence sufficient to establish this fact also exists. Specifically, by
petitioner’s own admission, Borders provided unique and preferential return services to
petitioner’s customers. As discussed above, Borders purportedly would allow anyone to
exchange for store credit any merchandise Borders stocked, regardless of whether that
merchandise was purchased from Borders or petitioner or from one of their competitors.
Such exchange transactions presumably would result in little, if any, net loss for Borders
and would promote good will. However, even if petitioner were to establish, which
petitioner has not, that Borders’s practice of
1 The Department has not alleged that Borders, during the period at issue, engaged in any
activities on petitioner’s behalf in California that would constitute “delivering, installing,
assembling, or the taking of orders for any tangible personal property” as these terms are
used under subdivision (c)(2) of Section 6203.
Borders Online, Inc. SC OHA 97-638364; 56270 -4-accepting returns from petitioner’s
customers was wholly independent of petitioner’s published return policy, Borders’s
willingness to provide cash refunds to petitioner’s customers, when Borders refused to do
this for customers of Borders’s or petitioner’s competitors, indicates that Borders made
such refunds because Borders was petitioner’s authorized representative. While not
exhaustive of the circumstantial evidence indicating that Borders was petitioner’s
authorized representative for returns in California, Borders’s preferential treatment of
petitioner’s customers suffices to establish this fact.
As to the legal issue that remains, we conclude that, when accomplished through
an authorized representative, the taking of returns constitutes “selling” under subdivision
(c)(2) of Section 6203. Because neither the Sales and Use Tax Law in general, nor
Section 6203 in specific, contains a definition of “selling,” following the accepted canons
of statutory construction, we construe this term according to its common usage. In other
words, “selling” is inclusive of all activities that are an integral part of making sales.
When out-of-state retailers that make offers of sale to potential customers in
California authorize in-state representatives to take returns, these retailers acknowledge
that the taking of returns is an integral part of their selling efforts. Such an
acknowledgement comports with common sense because the provision of convenient and
trustworthy return procedures can be crucial to an out-of-state retailer’s ability to make
sales. This is especially evident in the realm of e-commerce.
For example, in this case, petitioner identified Borders as petitioner’s authorized
in-state representative for effecting the generous, convenient return policy petitioner
published on its web site. It is apparent that petitioner announced this favorable return
policy to induce potential customers, who might otherwise be wary of making purchases
from a remote seller, to place orders. Indeed, many potential online customers would not
226
place an order with an online retailer whose return policy was not worthy of confidence.
An online retailer’s ability to offer these potential customers convenient returns and
exchanges at nearby reputable “brick-and-mortar” stores, as petitioner did, would
assuredly help promote such confidence. Moreover, some online purchasers will not be
satisfied with their purchases. An online retailer that offers convenient, local return and
exchange options is much more likely to obtain repeat business from such purchasers.
The important role that an online retailer’s return policy plays in obtaining repeat
business further underscores how integral the taking of returns is to selling in e-
commerce transactions.
In Quill Corp. v. North Dakota (1992) 504 U.S. 298 [hereafter Quill], the United States
Supreme Court held that, pursuant to the Commerce Clause of the United States
Constitution, a state cannot impose a use tax collection obligation on out-of-state retailers
unless those retailers have “substantial nexus” with that state. The Quill court explained
that, to establish commerce-clause nexus, a state must show that the out-of-state retailer,
or a representative of the out-of-state retailer, has a sufficiently substantial physical
presence in the state to justify the imposition of a use tax collection obligation. (Ibid.) In
this case, petitioner had a substantial physical presence in California through the many
places of business and employees of Borders,
Borders Online, Inc. SC OHA 97-638364; 56270 -5-
petitioner’s authorized representative in this state for the purpose of selling tangible
personal property. Petitioner’s substantial physical presence in this state more than
suffices to establish that petitioner had commerce-clause nexus with California during the
period in question. (See ibid.)
In sum, both the direct and circumstantial evidence are sufficient to establish that
Borders, acting as petitioner’s authorized representative, performed return and exchange
activities in California. Such activities, when performed through an authorized
representative, are an integral part of selling tangible personal property. Thus, due to
Borders’s actions in California on petitioner’s behalf, petitioner was a “retailer engaged
in business in this state” during the period in question. Accordingly, the petition should
be denied as to these issues because petitioner was obligated to collect, and remit, use tax
from petitioner’s California customers. (Rev. & Tax. Code, §§ 6203, subds. (a) & (c)(2),
6204.)
Adopted at Sacramento, California, on September 26, 2001.
Claude Parrish , Chairman
John Chiang , Member
Johan Klehs , Member
Dean Andal , Member
Marcy Jo Mandel , Member*
*For Dr. Kathleen Connell, pursuant to Government Code section 7.9.
227
SALES AND USE TAX TRAINING
Nonprofit Organizations
Objective: Discuss the application of sales and use tax as it applies to nonprofit
organizations.
Reference Code Section 58.1-609.11, Subsections A through H
1. History
Effective July 1, 2004 All nonprofit organizations with IRS status 501 (c) (3) and
501 (c) (4), may qualify for an exemption if the following criteria are met.
Exemption Criteria:
1. Have Federal 501 (c) (3) or 501 (c) (4) status; or the organization may
qualify if it has annual gross receipts of less than $5,000 and is organized
for at least one of the purposes set forth in IRC Code Section 501 ( c ) ( 3 )
or ( c ) ( 4 ).
5. Entities required to file Federal Form 990 or 990EZ must provide a copy of
such
form to the Virginia Department of Taxation.
6. Entities not required to file Form 990 or 990 EZ, must provide the following:
b. Location where the financial records of the entity are available for
public
inspection.
1
The new exemption covers purchases of tangible personal property; however, a
new organization applying for an exemption may qualify for sales exemption if
they fall within the small category of organizations currently exempt on sales.
The new exemption granted by the Virginia Department of Taxation will cover
purchases of tangible personal property only, with the follwing exceptions:
Exceptions
Exempt from paying sales tax on taxable services (meals and hotel
accommodations). Grandfathered organizations currently exempt on taxable
services will continue to be exempt until their current exemption certificate
expires (2007). The 2005 General Assembly passed legislation allowing
organizations exempt from paying the tax on services as of June 30, 2003 to
continue to be exempt from such services provided they meet certain exemption
criteria.
The Virginia Department of Taxation, Non-Profit exemption group, will issue the
non-
Profit exemption letters to those organizations applying for the new exemption.
Example: SE9900112223CO6302008
1. Online at www.npo.tax.virginia.gov
2
2. Paper application that can be mailed or faxed to the Nonprofit Exemption
Team. The Nonprofit Exemption Team telephone number is: 804-377-
3712
Churches may continue to use the ST-13A Certificate of Exemption for the
limited purchases allowed under the ST-13A, or they may apply for an SE letter
of Exemption that would exempt the church on all purchases.
NOTE: OCR anticipates that most churches will elect to use the ST-13A
Certificate of Exemption. Churches are not required to have 501 (c) (3) status, or
required to file a Federal Form 990 or 990EZ, and are not required to be
registered with the Virginia Department of Consumer Services.
Refer to the Section on Churches for more detail explanations of the Sales and
Use Tax Exemption for Churches.
3
Audit Guidelines
1. Vendor should have copy of an (E) exemption letter for the organization,
or an ST-13A.
a. The (E) exemption letter will have the Exempt Status Code
information.
b. The ST-13A permits limited exemption.
1. Vendor should have a copy of the (SE) exemption letter for the
organization on file, or an ST-13A on file.
2. If no (SE) letter is on file, check the nonprofit database to see if the Non-
Profit
Exemption Team has approved the organization to be exempt.
4
1. Educational (SE) letter issued
Any organization that the Sunset Date for their exemption has not been reached
may continue to use the (E) letter, or provide a new (SE) certificate of exemption.
APPLICATION PROCEDUTRES FOR OBTAINING A SALES and USE TAX
EXEMPTION FOR NONPROFIT ORGANIZATIONS.
Organizations with gross receipts less than $5000, and organized for one of the
purposes under 501 (c) (3) or 501 (c) (4), may also qualify for a retail sales and
use tax exemption. You must attach a copy of the organization’s Articles of
Incorporation, Mission Statement, or Statement of Purpose that best describes
the organization’s charitable purposes.
5
The following questions must be completed when making application for the
nonprofit exemption. (See copy of blank questionnaire form at the conclusion of
this section.)
Question 1
Enter the full legal name of the organization.
Question 2
Enter the Federal Employer Identification Number (FEIN) for the organization. Do
not enter the dash mark.
Question 3
Enter the physical street, city, state, zip code, and e-mail address for the
organization. Your exemption certificate, and/or letter will be mailed to this
address.
Question 4
List the address of where the organization’s financial records are available for
public inspection, if different from the physical address.
Question 5
Enter the name, daytime phone number, title, and address; fax number, and e-
mail address of the contact person for the organization. This must be a person
who is knowledgeable about your organization’s financial records.
Question 6
Check the group that best describes the primary basis for the organization’s
current federal tax-exempt status.
Question 7
Recent legislation provides two options for a nonprofit church requesting a retail
sales and use tax exemption. Check the group that indicates your filing option.
6
baptisteries, food, disposable serving items, cleaning supplies, teaching
materials used in carrying out the work of the church. A non-profit church
electing to use Form ST 13-A, may not purchase construction and building
materials exempt of the tax.
• Stop here if you select this option, you are now ready to download
your certificate of exemption.
Question 9
Previous Year’s Annual Gross Revenue (AGR) – (a) Enter revenue received
from all sources during its annual accounting period before subtracting any costs
or expenses. If filed Federal Form 990 or Form 990 EZ, enter amount as
reported to the IRS. If you are a fiscal filer, enter the first month of your fiscal
year (same as the federal filing period).
***If the previous year’s total gross revenue is $250,000 or greater, attach a
financial audit performed by an independent Certified Public Accountant
(CPA). If the AGR is less than $5,000 you must attach a mission statement.
7
campaigns; (d) preparing and distributing fundraising manuals, instructions, and
other materials; (e) salaries; and (f) conducting special events that generate
contributions. If filed federal form 990, or form 990EZ, enter amount as reported
the IRS.
Question 10
Do not leave any fields blank, enter zero if the organization had no
purchases for a specific period.
8
postage/shipping, rent/mortgage payments, depreciation, and interest charges.
Estimates are acceptable. If a fiscal year filer, enter the federal filing period.
***Do not leave any fields blank, enter zero if the organization had no sales
for a specific period.
Question 11
If you are required to file a federal 990 or 990 EZ tax form, please check yes and
attach a copy of the form. If you are not required to file, please list the names,
addresses, and telephone numbers of only two members from the Board of
Directors.
Question 12
Charitable organizations that intend to solicit contributions with the
Commonwealth may be required to register with the Virginia Department of
Agriculture and Consumer Services (VDACS). If the organization is registered
to solicit contributions in Virginia, Please submit the documentation that reflects
registration with the Virginia Department of Agriculture and Consumer Services
(VDACS). You may contact VDACS at 804-786-1343 for more information or
visit their web site at http://www.vdacs.virginia.gov/allforms.html#Consumer.
CHECKLIST
Please make sure all questions are answered and that the following
documents are included with the application, if required.
______ Copies of Federal Form 990, Federal Form 990EZ, or substitute Form
9
ORGANIZATIONS MUST BE EXEMPT ON SALES AS OF JUNE 30, 2003, OR
QUALIFY WITHIN THE SAME CLASS AS AN ORGANIZATION THAT WAS
EXEMPT FROM COLLECTING SALES TAX ON JUNE 30, 2003.
Organizations:
Classifications:
10
such programs to elderly persons, and the food and food products sold by such
program participants to disabled or handicapped persons under the age of sixty.
11
association of which the regular membership is composed of such volunteer fire
departments or volunteer rescue squads, and construction materials to be
incorporated into reality when sold to and used by such organization, rather than
a contractor, in construction, maintenance, or repair of any property of such
organization.
16. School Fund Raising for Elementary or Secondary Schools (i.e. PTA)
Civic – Community
Service
A nonprofit elementary or secondary school, or Parent Teacher Association, or
other group associated with a nonprofit elementary or secondary school for use
in fund-raising activities, the net proceeds (gross receipts less direct expenses)
of which are contributed directly to the school or used to purchase certified
school equipment, and certified school equipment purchased by such group for
contribution directly to the school. For the purpose of this subdivision, “certified
school equipment” means equipment for which the Parent Teacher Association,
or other group has received certification from the school that it will accept as a
donation of equipment. The certification provided by the school shall be in
accordance with regulations promulgated by the Tax Commissioner.
Notwithstanding the other provisions of this subdivision, the tax shall not apply to
the sale of class rings, school photographs, and other fund-raising programs from
which a nonprofit elementary or secondary school receives a commission, or the
net proceeds after the payment of vendors, and other direct expenses.
12
education of the public in citizen cooperation with public authorities in crime
prevention and solution, provided such foundation is nonprofit.
Attachments:
Blank Copy of New or Renewal Application for Sales and Use Tax Exemption for
Nonprofit Organizations
Blank Copy of retail Sales and Use Tax Certificate of Exemption Letter Form
Listing of Public Document for Reference purposes
Current Tax Bulletin
13
OCCASIONAL SALES
Page - 1
Objective: Discuss the application of sales and use tax as it applies to occasional
sales.
I. References
II. General
A. The tax does not apply to an occasional sale provided the sale or
exchange is not one of a series of sales or exchanges sufficient in
number, scope, and character to constitute an activity requiring the
holding of a certificate of registration.
B. The occasional sale exemption is based the premise that persons not
regularly engaged in making retail sales should not be required to register
and collect the tax on occasional or isolated sales. A fundamental
characteristic of an occasional sale is that it lacks continuity and regularity
and it occurs without being expected or without design.
(2) A sale of tangible personal property not held or used by the seller in
the course of an activity for which he is required to hold a certificate
of registration.
(3) The sale or exchange of all or substantially all the assets of any
business.
III. Procedures
B. The transaction must first meet the "number, scope, and character"
criteria:
(1) The taxpayer must generally make sales on three or fewer occasions
each year.
OCCASIONAL SALES
Page - 3
If the taxpayer has made more than three sales in a calendar year,
the auditor must determine if the sales occurred unexpectedly and
without design, and were truly occasional in nature. If so, the
taxpayer becomes a dealer and is required to collect tax beginning on
the date of the fourth sale. If not, the taxpayer is a dealer effective on
the date of his first sale.
(3) The duration of a sale must be for no more than a few days.
Otherwise the taxpayer is deemed a retailer as he may be in
competition with businesses or other organizations required to collect
sales tax.
The Court stated that in the instant case, all the assets of a division
were sold pursuant to an orderly plan of liquidation - there was no
piecemeal disposition. Five packages, as determined by geographic
location, were sold over a nine-month period - there were not dozens
of buyers bidding over several years.
The Court determined that the scope and character of these sales fall
within the intent of the General Assembly to shield such transactions
from sales tax. As a result the orderly liquidation of a business over a
twelve-month period should qualify for the occasional sale exemption.
The property sold must not be used in the activity for which the dealer is
required to be registered. For example, a bank which holds a certificate
of registration for the sale of checks, checkbooks, and reclaimed property
may make an exempt occasional sale of data processing equipment used
by its Information Services Division.
In the case where a lessor sells all of its leased equipment, which
represents all of the lessor's assets, to the lessee, the terms of the lease
agreement will determine if the sale qualifies as an occasional sale. If the
equipment is sold through some provision in the lease agreement
allowing for the sale of the leased equipment prior to the end of the lease
period, it would not qualify as an occasional sale.
If the sale is made outside the terms of the lease contract, it would qualify
as an occasional sale as the equipment represented all the assets of the
lessor's leasing business.
D. The sale or exchange of all or substantially all the assets of any business
is an exempt occasional sale if the sale represents the sale of all or
substantially all the assets of the seller's business in Virginia. The seller
may continue to operate like businesses in other states.
(1) Each division must have a completely separate set of books which
are separately maintained.
(5) Each division must have its own fixed assets which are not used
interchangeably.
OCCASIONAL SALES
Page - 5
Objective: Discuss the application of sales and use tax as it applies to penalties
and interest.
I. References
II. General
C. In addition to the instances listed above for first generation audits, the
application of penalty on second and subsequent audits is generally
based upon the taxpayer's compliance ratio.
1. The compliance ratio is calculated by dividing the measure reported
by the total of the measure reported plus the measure found.
Measure reported does not include any measure on which tax was
paid directly to the vendor by the taxpayer. The purpose of the use
tax compliance ratio is to measure how well a taxpayer complied with
the Virginia tax laws requiring accruing and remitting the tax on
untaxed purchases.
4. NEW: The taxpayer can apply for penalty relief for all second and
subsequent audits using the alternative method of computing use tax
compliance. The alternative method allows taxpayers to include the
measure upon which sales tax was paid to vendors in the compliance
ratio calculation. The alternative method can be applied for all retail
sales and use tax audit assessments issued on and after October 1,
1999. The compliance ratio is calculated by dividing the use measure
reported plus the sales tax measure paid to vendors by the use
measure reported plus the sales tax measure paid to vendors plus the
deficiency. It is the taxpayer’s responsibility to compute the
Alternative Method calculations and provide the auditor with
documentation supporting the computation within 60 days of the
audit assessment. The taxpayer must compute the ratio based on a
review of the same period used to compute the compliance ratio. If the
compliance ratio computed under the alternative method meets or
exceeds the established threshold the penalty will not apply and
should be abated.
E. Fraud penalty of 50% will apply in cases where the taxpayer filed false or
fraudulent returns with the intent to defraud the Commonwealth. The
Code of Virginia states that under reporting gross sales, gross proceeds,
or cost price by 50% or more is prima facie evidence of intent to defraud.
In practice, it requires additional substantial evidence to support that the
taxpayer's under reporting was intentional.
If a taxpayer does not register to collect sales tax, but collects it, and does
not remit it, the fraud penalty will apply.
IV. Procedures
A. The sales and use tax audit program automatically calculates the
compliance ratio. The auditor should take care to ensure that the audit
reflects the correct payment record information and that the exceptions
have been properly coded. If gross sales must be altered for extrapolation
purposes, an adjusting entry needs to be made so that total taxable sales
reported is correct.
B. The sales and use tax audit program automatically calculates the
additional tax measure required for the taxpayer to achieve the Alternative
Method of Computing Use Tax Compliance.
C. The auditor should be aware that the audit sequence number does not
necessarily correspond with the audit generation. Using the wrong audit
generation number may result in an erroneous application or waiver of
penalty.
If the return on which the additional tax was paid is included in the audit
period, the payment should be excluded from the measure reported for
calculation of the compliance ratios.
E. Care and sound judgment should be used in the waiver of penalty except
as indicated by the taxpayer's compliance ratio. A change in personnel, a
change in vendors, or reorganization of a company does not represent
circumstances mitigating the application of penalty.
The mere fact that an area was not an issue on a prior audit does not
make it a new issue for penalty purposes. A change in the Department's
treatment of a certain area without proper publication (Tax Bulletin), or the
PENALTIES AND INTEREST
Page - 5
I. References
II. General
III. NEW: As of July 1, 2000 the following applies when auditing a Modular
Homes Manufacturer or Retailer:
This new law only applies to the Sale of Modular Homes or Buildings without
installation by the seller. Prior to July 1, 2000, a Modular Home Manufacturer or
Retailer should be audited as prescribed below.
• Does the taxpayer "set" the sections or units with their own employees or
do they subcontract it out?
• Are there any sales of sections or units that the taxpayer does not set?
Dual Role: If the taxpayer is doing both, sales with and without
installation, and if the taxpayer has a common raw materials inventory,
then the auditor needs to follow the primary purpose rule, that is based on
the gross receipts in determining the sales tax application. Basically, the
auditor needs to compare the receipts for the units or sections sold without
being set or installed by the taxpayer to the receipts for the sections or
units that were set or installed by the taxpayer. The primary purpose rule
would need to be used for each year in the audit period.
In reviewing the sales, the auditor should note any sales into the
S.E.A.T.A. states, especially the sales on which the taxpayer did not set or
install. The auditor should also advise the taxpayer that they might be
liable for additional sales tax on the materials used in out of state sales in
which the taxpayer did the setting.
For sales (without installation by the seller) as of July 1, 2000 forward, the
taxpayer would charge tax on only 60% of the selling price. If the taxpayer
paid tax on any of the materials that went into the manufacturing of the
modular home sold, then they would be due credit for those taxes only.
Once the determination has been made for sales, the purchase part of the
audit follows right along. If the taxpayer is a primarily a fabricator/seller,
then the manufacturing exemptions apply to materials, equipment,
machinery, etc. If the taxpayer is primarily a fabricator/contractor, then
there are no exemptions for material, machinery, equipment, etc. It is
possible for the taxpayer to be eligible for the manufacturing exemption
one year but not the next because an increase in installation sales may
cause its status to change to primarily that of a real property contractor. If
the taxpayer is deemed to be primarily a fabricator/seller in the first year of
the audit and purchases equipment used to build the units, the equipment
could be bought without the Virginia sales tax. If in the second year of the
audit, the taxpayer is acting primarily as a contractor, then the equipment
bought in the previous year would be subject to the sales tax on the fair
market value. If in the third year the taxpayer is primarily a
fabricator/seller, there are no provisions in the regulations for a credit on
the sales tax paid during the previous year on the equipment or
machinery.
However, as of July 1, 2000, the taxpayer is due a credit for sales and
use tax paid only on materials used in fabricating a unit or home sold
without installation.
payment permit (ST-21) allows the taxpayer to purchase items without the
Virginia sales tax. The taxpayer would be responsible to make sure that
the localities in which the items are purchased do not lose any local sales
tax.
Objective: Discuss the application of sales and use tax as it applies to: printing and
printers.
I. References
III. General
A. Sales of printing delivered in Virginia are generally subject to the sales tax.
However, an exemption exists for certain printed materials, other than
administrative supplies, stored for 12 months or less in Virginia for
distribution in other states.
IV. Procedures
charges made in connection with the sale of the printed matter (eg. plate
charges, imprinting charges, folding charges, etc.). The tax is also
applicable to custom printing charges in instances where the customer
furnishes the printing stock.
Purchases by the printer of items which become part of the printed matter
for sale or resale are not subject to the tax (eg. ink, printing stock, staples,
stapling wire, binding twine, glue, etc.). Purchases by the printer of items
used directly in the production of custom printing are similarly not subject
to the tax (eg. printing plates, dies and mats, printing presses and their
repair parts, typesetting, etc.). The tax does not apply to paper, ink, and
other materials furnished to a custom printer that will become a
component or ingredient part of products fabricated by the printer.
Below is a list of printed materials that would qualify for exemption when
stored in Virginia for 12 months or less and mailed to or distributed
outside of Virginia (this list is merely illustrative and is not designed to be
all inclusive):
A business prospectus;
existing letter copy in order to personalize the letter for each individual
recipient. Based on P.D. 97-65 and P.D. 97-387, when a customer
provides printing stock to a direct mail agency and the agency provides
personalization services which cause each printed piece to be unique in
nature, the transaction is deemed to be an exempt service. However, if
the direct mail agency provides the printing stock, the transaction would
be taxable. Most direct mail agencies will argue that their customers
provide all of the printing stock.
P.D. 96-380. Taxpayer held liable for the tax on stickers enclosed with
their product shipments. The stickers were provided free of charge to the
taxpayer's customers and were designed for placement in their
customer's automobile windows to display the taxpayer's business. In
this case, the stickers do not qualify as exempt promotional materials
since they only display the taxpayer's business and do not advertise
tangible personal property for sale. The stickers are considered to be
taxable "administrative supplies" since they are similar to business cards
that are used to display a taxpayer's business. Also, the total purchase of
the stickers is taxable regardless of the fact that the stickers may be
shipped to another state. First use of the stickers is deemed to be made
in Virginia.
P.D. 96-33 (see also P.D. 95-218). A printer was held liable for the tax on
a laser printer used to make proof copies of their printed product. Proof
copies are sent to the taxpayer's clients for approval. Once a proof is
approved or modified, the proof is sent to an image setter where a film is
produced from the image that will result in the making of the printing
Page - 6
P.D. 95-185. Taxpayer was not liable for the tax on promotional
brochures purchased from Virginia and out-of-state printers and delivered
directly to an out-of-state mailing house for distribution. In this particular
case, the taxpayer made no use of the brochures in Virginia. However,
the taxpayer is liable for the tax on promotional brochures purchased from
Virginia or out-of-state printers and delivered to a Virginia mailing house.
The tax would be due on that portion of the brochures mailed to Virginia
residents.
Taxpayer is also liable for the tax on a press cleaner used after every
press run to clean ink, grease and particles off of the press in order to
improve the quality of the newspaper printed. The cleaner is used once
at the end of the production day to clean the parts that have been
removed from the press. The cleaner, in this case, is not "actively and
continuously" used in maintaining exempt production machinery.
Finally, the taxpayer must pay tax on computers used by their editorial
staff to write their stories. The computers are used to enter news and
Page - 7
P.D. 97-54. The sale of printing and cutting dies by a box manufacturer
are taxable. Although the manufacturer could purchase the dies or the
materials used to make the dies exempt of the tax, since it used them
directly in manufacturing products for resale, subsequent sales of the dies
by the manufacturer were held taxable because they constituted retail
sales to customers who were not actually using the dies in an exempt
manufacturing process or for some other exempt purpose. See also P.D.
96-180 & P.D. 96-324.
P.D. 95-216. Taxpayer is liable for the tax on cutting, folding, and
converting charges made in connection with their purchase of printed
materials. These charges represent services in connection with the sale
of tangible personal property and are therefore taxable.
P.D. 97-65. The department has traditionally held that the printing of
multiple documents of a like nature qualify as the sale of tangible
personal property, even when such printing is performed on customer
owned paper stock. However, when a customer provides the printing
stock to a direct mail agency, and the agency performs data manipulation
or "personalization" services which causes each printed piece to be
unique in nature, the transaction is deemed to be an exempt service.
Page - 8
Objective: Discuss the application of sales and use tax as it applies to Public Utilities
I. References
II. General
Public utilities, as defined within sections 56-232 and 56-265.1 of the Code of
Virginia, which are engaged in the generation, transmission and/or distribution of
electricity, water, natural or manufactured gas are exempt from the tax. Prior to
September 1, 2004, these entities operated under a certificate of convenience
and necessity issued by the State Corporation Commission. Electric and gas
companies used the Uniform System of Accounts which can be found in the
FERC (Federal Energy Regulatory Commission) reference book. This book
details the accounts and what items should be a part of the account.
Please note that the company may use FERC accounts that are not listed in the
sales and use tax regulations section. This does not mean that those
accounts should not be reviewed and a ruling determination made as to its
taxability.
PUBLIC UTILITIES
Page - 2
Usually there are associated companies, subsidiaries and/or holding companies making
retail sales, intercompany/ intracompany transactions, as well as various services which
may be offered. These should be defined and determined so you will be able to make
an educated decision as to the taxability.
Exempt for purchases made for resale. Sales tax should be collected on all
sales unless an exemption certificate is received from the purchaser.
Footnote 4 is one you will refer to constantly as the accounts have such a
broad application. The application is analogous to manufacturing. The major
difference is that proration applies to public utilities. Preponderance does
not apply.
PUBLIC UTILITIES
Page - 3
Water and sewage companies as well as some gas distributors, may not use the
Uniform Systems of Accounts as provided by the Federal Energy Regulatory
Commission. If they have a certificate of convenience and necessity by the State
Corporation Commission and pay on their gross receipts, they are considered a
public service company and fall within these regulations.
Effective September 1, 2004, the retail sales and use tax exemption available to public
utilities for the purchase or lease of tangible personal property used or consumed
directly in the rendition of their public service was repealed. Those public utilities losing
their exemption included electric suppliers, telecommunications companies, certain
telephone companies, gas, water, and sewer utilities. In addition, to the extent public
utilities generating electric power, qualify for the manufacturing exemption under Code
of Va. 58.1-609.3(2), they will be prohibited from claiming the manufacturing exemption,
except for raw materials that are consumed in the production of electricity, including
fuel.
Transitional Rules
The following rules are provided to clarify when purchases or leases of tangible
personal property, previously exempt from the retail sales tax, are subject to the tax.
Taxable
Tangible personal property delivered to a purchaser and paid for on or after September
1, 2004, regardless of when the property was ordered.
Installment sales, when the date the contract is entered into are on or after September
1, 2004.
Exempt
Tangible personal property ordered, delivered and paid for prior to September 1, 2004.
Tangible personal property ordered and delivered prior to September 1, 2004 but paid
for on or after September 1, 2004.
Installment sales, when the date the contract is entered into is prior to September 1,
2004, regardless of when the property is delivered or when payment is made.
PUBLIC UTILITIES
Page - 4
Notwithstanding the September 1, 2004 repeal of the public utilities exemption, no sales
and use tax will be imposed on the lease payments for any tangible personal property
leased pursuant to a bona fide contract that was entered into before March 1, 2004,
provided that such tangible personal property was delivered to or placed into service by
a public utility on or before September 1, 2004.
Inventory on Hand
Tangible personal property purchased prior to September 1, 2004, under the public
utilities exemption, and placed in a tax-exempt inventory, will not lose its exempt status
with the repeal of the public utilities exemption effective September 1, 2004. Such
property will also maintain its exempt status upon the withdrawal from inventory and put
in use in a taxable manner.
Temporary Storage
Effective September 1, 2004, tangible personal property brought into and stored in
Virginia by a public utility, regardless of the fact the tangible personal property may be
used out-of-state in an exempt capacity is subject to tax. For example, if a public utility
has its central purchasing and warehousing operation in Virginia for its entire nationwide
operation, all tangible personal property warehoused in Virginia would be subject to the
Virginia sales and use tax, unless such property qualifies for an existing Virginia
exemption. Tax shall be accrued on such tangible personal property in the month the
property is acquired by the public utility and brought into Virginia and remitted by the
20th day of the month following the month of acquisition or importation into Virginia.
Effective September 1, 2004 all direct payment permits issued to public utilities losing
their exemption were cancelled. Holders of direct pay permits are required to notify
each of their vendors that the permit has been cancelled and future purchases are
subject to the tax.
Front-End Agreements
Any and all front-end agreements currently in force between TAX and any public utility
were cancelled effective September 1, 2004.
Other Exemptions
Other sales tax exemptions that may be available include, but are not limited to the
exemption for research and development, certified pollution control equipment, resale
and for tangible personal property for use or consumption by the Commonwealth, any
political subdivision of the Commonwealth, or the United States.
PUBLIC UTILITIES
Page - 5
5. Obtain sales tax returns, federal returns, Form 10k, FERC Form 1.
8. Questions would include: What type of sales do you make? How are
invoices retained and coded? How is inventory accounted for (purchases,
withdrawals, adjustments)? Where are the locations and the various
activities? Are there contractor relationships? Is there a laboratory? Are
there R & D projects?
Chart of accounts - the chart of accounts is usually the same as those listed
in our regulations book. They may have added an extension to represent a
specific area, location or department.
Review their accounts noting those which are both 100% taxable as well as
those footnoted as shown in the regs. Look them up in the FERC book to
find out what the account represents. For example: 184 in the regs indicate
"clearing accounts." Most of the companies use this account for their
vehicles. Account 107 is a construction work in process account. As you will
note, this account is not shown in our regs.
Determine the size of the records and what financial statements you will want
to use should you decide to sample the general expense purchases. This
would follow the same procedure as a regular sales and use tax audit.
If there are no invoices available, the check register, a detail general ledger
or purchase journal will be necessary. You also need to review the sales tax
payable account for accruals and the process it flows through to the return.
These are usually accounted for by a monthly report which shows the
item(s), the requisitioner and the cost. An allocation of expense is recorded
with a journal entry. You will need to review the list of items withdrawn as
well as the area or department to which the items are charged.
Public service companies feel that everything they use is part of the rendition
of their service. Which of course it is, but that does not of itself make it
exempt.
PUBLIC UTILITIES
Page - 7
Vehicles
A review of the type of vehicle will give you a reasonable guide. For
instance, a trencher, backhoe, thumper truck, bucket truck, cherry picker,
and crane will be exempt (unless you determine they are using them for
some other type of activity). The fuel that would be used for these types of
vehicles would be exempt as well.
The tractors, power saws, light trucks, automobiles, and vans would or could
be administrative. (If you determine they are using them in some exempt
function, then you will need to decide on a proration percentage. Be sure the
percentage is based on reasonable factors and is measurable.)
Any accessories, parts, or supplies purchased in bulk for stock would need to
be prorated unless there is an inventory log kept which could be used to
determine the vehicles these items were used on.
There are multiple uses for vehicles and equipment depending on the
company and the services provided. Some of the uses could be as follows:
Equipment
General purchases
Landscaping materials are taxable even though they insist that an open hole
is dangerous. We realize that they do not try to make it look pretty, but it is
not used or consumed immediately in the rendition of providing the service.
Stakes, marking flags, paint, ribbons, manuals, maps, markers, locks, pads
which are not attached to exempt equipment, numbers, tags, animal
protection items, fire and safety alarms and general maintenance items are
all considered taxable.
Capital
Usually the furniture, fixtures and administrative equipment are coded under
the 390 series. However, it is possible to have exempt items such as radios
for vehicles in one of these accounts.
Capital projects are usually those which require construction and are
capitalized at the completion of the project or the end of the accounting
period.
PUBLIC UTILITIES
Page - 9
The jobs can have blueprints, marking paint, stakes, security, safety and
other general items recorded in the capital account as part of the cost of the
job. Office trailer rentals, port-a-potty rentals, rental of equipment which
would be taxable. Materials for the construction of a building would be
taxable as would fences, gratings, foundations and other structures. Be
aware that there may also be items charged to the project from their
inventory which need to be reviewed as to their use and taxability.
Tours
Sales
Verify the sales tax reported to the sales tax payable account. Verify the
accuracy of the local tax and the various locations, if applicable.
If a refund was applied for from DMV for off-road fuel, ensure it has been
included on the sales tax return. Verify the deductions or exempt
transactions as well.
The revenue accounts are usually in the 400 series. Review these accounts
to determine the sources of revenue.
2. Obtain sales tax returns, federal returns, Form 10k, FERC Form 1.
5. Questions would include: What type of sales do you make? How are
invoices retained and coded? How is inventory accounted for (purchases,
withdrawals, adjustments)? Where are the locations and the various
activities? Are there contractor relationships? Is there a laboratory? Are
there R & D projects? Are there pollution control projects?
Chart of Accounts
Determine the size of the records and what financial statements you will want
to use should you decide to sample the general expense purchases. This
would follow the same procedure as a regular sales and use tax audit.
If there are no invoices available, the check register, a detail general ledger
or purchase journal will be necessary. You also need to review the sales tax
payable account for accruals and the process it flows through to the return.
These are usually accounted for by a monthly report which shows the
item(s), the requisitioner and the cost. An allocation of expense is recorded
with a journal entry. You will need to review the list of items withdrawn as
well as the area or department to which the items are charged. Items in
inventory purchased prior to September 1, 2004 are exempt until withdrawn
from inventory and put in use in a taxable manner.
Raw materials and fuel that are consumed in the production of electricity are
exempt. Rail car leases are taxable. These purchases may be both included
in the fuel purchases account.
PUBLIC UTILITIES
Page - 12
Tours
Sales
Verify the sales tax reported to the sales tax payable account. Verify the
accuracy of the local tax and the various locations, if applicable.
If a refund was applied for from DMV for off-road fuel, ensure it has been
included on the sales tax return.
Objective: Discuss the application of sales and use tax as it applies to radio and
television broadcasting.
I. History
1977. Code of Virginia §58-441.6 (j) Virginia Supreme Court Case (WTAR
Radio - TV Corporation v. Commonwealth of Virginia upheld that (1)
Broadcasting means transmitting a signal into the air. An exemption
continued to be allowed for equipment, parts or accessories used to
disseminate the signal into the air for a live broadcast. The Court Case also
upheld the Department's position that programming and pre-production
activities remained a taxable function. (2) The second issue concerned the
production of advertisements by a broadcasting company. The ruling stated
that the true object of a customer purchasing a taped advertisement was to
seek tangible personal property and not the service. (3) The Broadcaster
argued that the taped advertisement remained in their possession and was
available to the customer upon request.The Court deemed that the total
charge (including studio time, art work, dubs and acting (talent) would be
subject to sales tax.
Page 2
7/1/95. Code of Virginia §58.1- 609.6 (a,b) amended for the period July, 1995
through June 30,1997. Broad exemption provided to entities engaged in the
production, use, purchase, sale, or lease of audio visual tapes for licensure,
distribution, broadcast, commercial exhibition or reproduction or use in
producing another exempt audiovisual work. Examples of such entities
include, but are not limited to, program producers, (i.e., radio, television and
cable companies), film and audiovisual tape production companies,
advertisers and others. An exemption also extends to the equipment, parts
and accessories used or to be used in the production of exempt audio-visual
works.
II. References
C. Ruling Letters
• PD 87-219
• PD 88-331
• PD 93-96
• PD 94-51
G. Court Case
• WTAR - TV Corporation v. Commonwealth of Virginia
Page 3
III. General
B. Broadcasting has been defined as disseminating a signal into the air and
is considered an exempt function. Programming preparation and news
gathering activities remain taxable.
IV. Procedures
A. Sales
Broadcasters may produce and sell video tapes or films. The production
of the video tapes fall within two categories, media or non-media. Media
tapes are exempt from sales tax. Examples of media films include tv
advertising, made-for-tv movies, feature films, documentaries, radio
programs, etc.
B. Purchases
Note: The following procedures have been written in accordance with the
existing rules and regulations for broadcasters. The new exemption given
to audiovisual companies is a much broader exemption than the existing
exemption given to broadcasters. The equipment and accessories used
by broadcasters that also produce audiovisual tapes and films may have
multiple uses. Determining the taxable, exempt or proratable status of
such equipment and accessories may change.
General
Exempt Purchases
Taxable Purchases
Proratable Purchases
When the same equipment and accessories are used for transmitting the
signal as well as for news gathering, preparation and programming the
purchases should be prorated. Examples include, but are not limited to,
weather computers, routing equipment, cables, monitors, field cameras (if
shooting live and taped features), tape players and recorders, audio
equipment, and batteries.
Sales and Use Tax Audit Procedure
45_Cable Companies
Objective: Discuss the application of sales and use tax as it applies to Cable TV
Companies
I. History
3/19/80. Virginia Tax Bulletin 80-3; House Bill 960: The broadcasting
exemption was granted to Cable Companies.
7/1/95. For period July 1, 1995 through June 30, 1997, Code of Virginia
58.1-609.6(6) amended to allow for the exemption from tax for entities
engaged in the production, use, purchase, sale or lease of audiovisual tapes
for licenser, distribution, broadcast, reproduction or use in producing
another exempt audiovisual work. The exemption covers not only the
production services and incidental tangible personal property but also
equipment, parts, and accessories.
Most if not all of the cable companies also provide broadband internet service
and digital phone service. Please refer to the information on Internet service
providers and telecommunications for how these areas of their business shall
be treated. Remember that in September 2004 the telecommunications
industry lost their tax exempt status.
II. References
III. General
IV. Procedures
A. Sales
Cable companies are considered the providers of a service and any equipment
that is leased or rented is considered an inconsequential element of the service
and is not taxable. For example equipment rental such as satellite dishes,
converter boxes, or remote controls when included with cable services are
exempt from tax. Equipment that is leased or rented without the provision of
cable service is taxable.
B. Purchases
The chart of accounts is usually the best place to start identifying taxable
purchases. Cable companies purchase so many "high tech" items, often the
chart of accounts number is the only clue to its purpose. There are often
inventory accounts in the current assets section which are debited as supplies
and equipment are purchased. Locate the taxable accounts such as
installation parts; hardware accounts that would include cable ties and
conduits, also the equipment account for remote controls. The expense
accounts should also be reviewed for shop supplies and service materials.
Another useful tool when reviewing purchase invoices is the parts manuals.
Locate the employee who orders parts and equipment. They often have on
hand cable equipment books that not only describe the part, it's purpose, but
also include a sketch or picture. Hand-held remotes for example, may be listed
on the invoice by a stock number such as ABC-2005. You need to identify items
listed by a number, don't assume parts listed by a number are exempt. Now that
we have the internet available to us, it is also helpful to look up their vendors on
line to see pictures and explanations of items purchased. Search can be done
by vendor or item.
A tour of the cable facilities will also help identify taxable and non-taxable areas.
Exempt Purchases
Parts and accessories: Parts and accessories that render exempt equipment
more perfect in disseminating or distributing a signal are: transistors, integrated
circuits, amps, capacitors, inserters, positive traps, power supply equipment and
backup batteries, lock boxes, converter boxes, F-fitting boots, locking
terminators, strand and strand link, and advertising insertion equipment.
Housing such as the CATV pedestals including closures and stakes, breaker
boxes including their parts and accessories and junction boxes are also exempt.
Taxable Purchases
Equipment: Examples of taxable equipment are the air conditioning and heating
to maintain the integrity of the broadcasting equipment, computers and other
equipment used for administrative purposes, tools and testing equipment used
to locate cables, and hand-held remotes. Whereas the locking terminator is an
exempt item the locking terminator tool to install or remove one is taxable.
Parts and Accessories: Examples of parts and accessories that are taxable are:
attachments such as cable hangers and ties, installation parts and accessories
such as roka clips, drive pins, trim and cove molding, and wall plates,
locking and security mechanisms and attachments, drop tags, equipment racks
and equipment housing, grounding material, conduit which may be listed as
PVC or interduct, and strand maps. Also support brackets and hooks,
deadends, markers and negative traps that scramble the signal. The traps
when not identified as either positive or negative may be identified by the
channel number. You will need to ask which channels use negative traps.
The authority for the Sales and Use Tax exemption derives from 58.1-609.3(5) of the Code of
Virginia, which states:
The tax imposed by this chapter or pursuant to the authority granted in §§ 58.1-603, 58.1-604, 58.1-
605 and 58.1-606 shall not apply to the following:
“Tangible personal property purchased for use or consumption directly and exclusively in basic
research or research and development in the experimental or laboratory sense.”
From this code section derives the Sales and Use Tax Regulations, 23 VAC 10-210-3070B, which
states, in part:
“The tax does not apply to tangible personal property purchased or leased and used directly and
exclusively for research in the experimental or laboratory sense.”
“Basic research” means a systematic study or search in a scientific or technical field of endeavor
with the
ultimate goal of advancing knowledge or technology in that field. The development of a tangible
product
or process need not occur in basic research activities. Examples of basic research activities
include
medical, chemical, or biological experiments conducted in a laboratory environment.
“Direct use” means those activities which are an integral part of basic research or research and
development activities, including all steps of these activities, but not including secondary
activities such as
administration, general maintenance, product marketing, and other activities collateral to the
actual
research process.
“Exclusive use” means items are used solely in basic research or research and development
activities.
“Experimental sense” means work is conducted through tests, trials, tentative procedures, or
policies
adopted under controlled conditions to discover, confirm, or disprove something doubtful.
“Laboratory sense” means work is conducted in a place equipped for experimental study in a
science and
providing an opportunity for experimentation, observation, or practice in a field of basic scientific
or
traditional physical science research.
“Research” means basic research and research and development as defined in this section.
“Research and development” means a systematic study or search directed toward new
knowledge or new
understanding of a particular scientific or technical subject and the gradual transformation of this
new
knowledge or new understanding into a usable product or process. Research and development
must have as
its ultimate goal: (i) the development of new products; (ii) the improvement of existing products; or
(iii) the
development of new uses for existing products. Research and development does not include the
modification of a product merely to meet customer specifications unless the modification is
carried out
under experimental or laboratory conditions in order to improve the product generally or develop
a new use
for the product.
Research does not include testing or inspection of material or products for quality control; however, in
the case of an industrial manufacturer, processor, refiner or converter, testing and inspection for
quality control is deemed to be an exempt activity under 23 VAC 10-210-920. Additionally, research
does not include environmental analysis, testing of samples for chemical or other content, operations
research, feasibility studies, efficiency surveys, management studies, consumer surveys, economic
surveys, research in the social sciences, metaphysical studies, advertising, promotions, or research
in connection with literary, historical, or similar projects.
To qualify for the exemption, the tangible personal property leased or purchased must be “used
directly and exclusively” in an actual research process. This process should be in the “experimental or
laboratory sense.” The exemption begins with the handling and storage of raw materials and supplies
at the research facility and ending after the last step of the research process when the products of the
research process are stored at the research facility.
To be exempt the item, material, or supply must be used directly and exclusively in the research
process.
Some items may be required but may not be “used directly”. When a single item is used in both an
exempt and non-exempt activity, it is not deemed to be “used exclusively” in research activities and is
taxable. An example of this would be a computer system that is used to both analyze laboratory tests
to determine the validity of the laboratory findings, but also used to perform other regular functions,
such as management reports, grant reports, and other non-research activities. In this instance, the
computer would be taxable. Pro-ration, percentage of exempt usage or preponderance of use of an
item is not permitted.
An exception to the exclusitivety test is the “de minimis usage” rule. When research property is used
in a taxable manner, it will only be exempt from the tax if the taxable use is de minimis in nature.
Taxable use of the property is considered de minimis if the taxable usage of the property (1) does not
involve a continuous or ongoing operation; (2) does not follow a consistent pattern, i.e. weekly,
monthly, quarterly, etc.; (3) is occasional in nature occurring no more than three times; and (4) in
total, accounts for no more than three days.
An example of de minimis usage would be a computer used in research and to generate a one time
report that took three or less days to produce and is not an ongoing usage, i.e. monthly, weekly,
quarterly, etc. In this case, the use of the computer to generate this report would be considered de
minimis usage and the computer would not lose its exemption.
However, if this same computer is used weekly to produce a report, as required by the conditions of a
research grant, the usage would not be considered de minimis and the computer would lose its
exempt status.
If an item, which originally qualified for the exempt status, due to its direct and exclusive use, is used
in a taxable manner that is not considered de minimis, the use tax should be remitted on a Consumer
Use Tax Return, Form ST-7, based on the purchase price of the item. If the conversion of the item to
taxable use is six months after its original purchase date then the tax may be computed on the lower
of the purchase price or the fair market value at the time of the taxable use.
The tangible personal property must be purchased or leased by the person, firm, corporation, or entity
that actually performs the exempt research in order to quality for the sales tax exemption. If the
research equipment is purchased or leased by a party other than the person providing the research
activity, the item would be taxable. This is true even if the equipment is donated or loaned to an
exempt entity.
Following are examples of taxable and exempt items used in research activities. These lists are
exemplary and are not intended to be all inclusive.
1. Taxable:
a. Desks, chairs, copy machines, calculators, file cabinets, typewriters, etc., used by administrative
clerical personnel in support of research activities;
b. Desks, chairs, copy machines, file cabinets, work benches, storage cabinets used to store
research equipment, tools, and supplies, etc., used by research personnel;
c. Heating and cooling equipment used to maintain an optimum temperature in a research facility
when also used for general heating and cooling purposes;
d. Items used in the publication of research findings;
e. Items used in marketing new products resulting from research;
f. Computer hardware and taxable prewritten or modified software when used for administrative and
other activities collateral to actual research activities;
g. Equipment and supplies for cleaning or sterilizing items used directly in research activities either
before or after these activities;
h. Equipment and supplies used to produce items that will be used directly in research activities;
i. Technical books and journals purchased by a research facility for general reference and training
purposes, or to keep research personnel informed of current scientific advancements,
achievements, or events, and not purchased in connection with specific research activities.
Generally, a contractor is the user and consumer of all tangible personal property furnished to or by
him in connection with real property construction, reconstruction, installation, repair, and similar
contracts as provided in 23 VAC 10-210-410. However, tangible personal property furnished to or by
the contractor which will be used directly and exclusively in research is exempt from the tax. The
contractor may purchase this property exempt of the tax by furnishing to the vendor a properly
executed exemption certificate, Form ST-11A.
23 VAC 10-210-3074. Research; use of exemption certificates.
In making purchases for use in research, a person should furnish suppliers with a certificate of
exemption, Form ST-11. However, these certificates should not be used in making purchases of
items which are not directly and exclusively used in research. If the business gives a certificate of
exemption and then uses some of the property purchased for purposes other than research, the
business must remit the tax to the department as provided in 23 VAC 10-210-3071 D.
APPLICATION
There are numerous questions and situations that the auditor(s) must review with the taxpayer to fully
determine
the scope of the taxpayer’s lab activity and if this activity qualifies the taxpayer for the R&D or
research
exemptions.
Usually the R&D question applies to a manufacturer’s Virginia operations. So, the auditor should
determine if
the manufacturer has other locations and if so what is the nature of the research/lab activities done at
the other
locations. With many manufacturers their primary R&D site is not at a production site but at or near
their
corporate headquarters or in a technologically advanced area such as a university research facility..
Usually the
lab at the production site is testing for different reasons.
1. Testing of raw materials and incoming supplies to determine if the item meets the
manufacturer’s specifications. This is not R&D but may qualify as in process Quality Control
testing.
2. Testing to determine if the customer’s product can be produced with a different material
(maybe less costly) and still be within the customer’s contracted price.
3. Testing to determine if the product produced would work in the customer’s equipment. For
example, can the print cartridge be changed to work in a different model printer? The research
must produce a new product or a new use for the same product. In this instance neither
requirement is met. It is not a new product or new use because it is still performing the same
function.
4. Testing to determine that the manufacturer’s product will meet all marketing specifications.
(Does not qualify as R&D or Quality Control testing.)
The first thing the auditor must do is to determine why the taxpayer is conducting the testing.
Is it true R&D testing or some other type of testing? Such as those mentioned above and therefore
not qualifying for the R&D exemption.
.
Once the auditor verifies that the testing does meet the Sales and Use Regulations for R&D testing
(see above), then, the auditor must review the lab procedures to ensure that the equipment and
supplies purchased are being used directly and exclusively for the R&D testing.
1. Used directly. If the item is necessary, but is not used directly in conducting the lab tests, then
the item is not exempt. The auditor should review each individual purchased item to ensure it
meets this test. Furniture, storage cabinets, climate control equipment used for the comfort of
the employees would be taxable, since they are not directly used in the R&D process.
2. Used exclusively. This is another important test. If a piece of lab equipment is used both in
qualifying R&D research and in other non-qualifying testing, then the piece of equipment is not
tax exempt since the use of that equipment was not exclusively for R&D unless the de minimis
rule applies.
In summary, the auditor must ensure that the taxpayer conducting the R&D testing meets all of the
Sales and Use Regulations to qualify for the exemption. It is not a matter of what the taxpayer
considers their testing to be, but the regulation’s definition. The rules are complex and very specific.
The application will vary from industry to industry and from taxpayer to taxpayer. Keep in mind that
with the growth of technology and varying testing environments the application of the R&D exemption
can vary from audit to audit. With technological advances new relationships may be created in the
R&D field. These entities are partnering to provide R&D services to the client. In this case the
auditor must ensure that both entities meet all Sales and Use Tax requirements to determine which
part of the exemption applies, if any, to each entity.
SAMPLING
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Objective: Discuss the audit technique of sampling for compliance. Discuss audit
sampling and procedures for front-end agreements.
I. History
Sampling is an audit technique of significant value that is widely used in both
the public and private sectors for all types of audits where a detailed audit
would not prove beneficial either to the auditor or the client. When sampling
techniques are applied, the final results are usually within a narrow
percentage range of the actual amount that would have been determined by a
detailed audit. The purpose of the audit sample is to determine a factor for
errors within a representative selected period. Once the error factor is
determined, the factor is extrapolated over the entire audit period. The
purpose of the projection is to account for likely similar transactions on which
Virginia tax has not been paid.
II. References
C. Ruling Letters
PD 01-106 Record keeping
PD 01-96 Error Factor
PD 01-51 Credits Included In Sample
PD 01-50, PD 01-36 Isolated Transactions
PD 00-93, 01-130, 01-60 Withdrawals From Inventory
III. Definitions
“Population” refers to all similar transactions during an audit period. There may be
multiple populations in an audit. See also “Sample Base”.
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“Sample Period” means the portion of the audit period which is reviewed in detail in
order to project the findings over the entire audit period. Depending on the volume
of records, the sample period may be days, weeks, months or years.
“Sample Base” means the data chosen to reflect the sample period for projection
purposes over the audit period. Sample base usually conforms to the population of
the sample period; but may be any consistent data on which the dealer and the
auditor agree to use. For example, a sales audit with the month of May as the
sample period may use gross sales (population) for the month of May as sample
base to be used to arrive at an error factor to compute a liability/refund against gross
sales for the entire audit period. The use of sales (population) data as a sample
base in a purchase audit is an example of an agreed upon base.
“Block Sampling" means the use of all transactions in a selected period of time,
combination of time periods, numerical sequence, or alphabetical sequence as the
test period from which the sample is based.
"Error Factor" refers to the percentage of records sampled which do not comply
with the Virginia Retail Sales and Use Tax Regulations or the Code of Virginia. The
error factor is computed by dividing the additional taxable sales/purchases by the
gross sales/expense purchases reported for the period in question. Also known as
“margin of error”.
“Rollup Method” means to extrapolate the error factor evenly throughout the audit
period. This assumes no fluctuation in business and produces a measure that is the
same for all the periods in the audit. For example, a three-month sample in a three-
year (36 month) audit period produces an untaxed measure of $5,040.00. Rollup
method would extrapolate $1,680.00 per month or $60,480.00 measure for the
period.
"Fixed Assets" means depreciable property used in operating a business that will
not be consumed or converted into cash or its equivalent during the current
SAMPLING
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accounting period. Fixed assets also include property deducted under IRC Section
179. Assets may be deducted under IRC Section 179 if they are purchased for use
in the active conduct of a trade or business and meet certain criteria.
IV. General
Audit sampling is examining less than all of the records of an audit period to
determine the audit liability. Audit sampling is a technique used to compress the
time required to perform an audit, and to minimize the volume of records examined.
Sampling may be used in all types of audits. An audit period assessment that is
based on a sample period and assessed by the Department of Taxation is prima
facie correct and valid. The burden of proof that the sample is incorrect is upon the
taxpayer.
An auditor should thoroughly “think through” the use of samples before beginning
the audit. Audit sampling assumes that a rationally selected sample period is
representative of the audit population. Consideration should be given to fluctuation
in business and categories of transactions within the business as well as volume of
records. The objective should be to choose sample periods which are
representative of all transactions of the dealer in the audit period. Choose different
periods for the different tax areas, if necessary.
In very large audits, the Department of Taxation has software that can aid in
sampling. This software may be used with sales or purchases. An auditor
experienced with the “Invoice Capture Tool” is available to work with field auditors on
audits where the use of this software is beneficial. The software is used to stratify a
population, or divide the population into relatively homogeneous subgroups called
strata. These strata then may be sampled separately; the sample results may be
evaluated separately, or combined, to provide an error factor for the total population.
Whenever items of extremely high or low values or other unusual characteristics are
segregated into separate populations, each population becomes more
SAMPLING
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Fixed assets should not be included in the sampling procedure. These items are not
purchases that have recurred during the audit period. Asset purchases which are
expensed (IRC Section 179) should be detailed along with capitalized fixed assets.
The depreciation schedule should show expensed asset purchases. Cross check
Form 4562 from the federal income tax return; it will show the dollar value of Section
179 property and will clue the auditor to request purchase invoices for these items if
not seen elsewhere.
V. Procedures
Check the prior audit comments for the methods used by the prior auditor.
Research payment record and returns data to get information on taxable and exempt
sales and fluctuation of business. By entering data into the STAUDN returns data
screen, the program can be used to identify potential sample periods using various
criteria. Does the return data appear to be correct in that gross sales and exempt
sales are being reported on the return rather than just taxable sales? Ask the
question in the initial contact if there is doubt. This may affect the periods chosen for
sampling. Is there any familiarity with the nature of the business and the type of
customers (exempt versus taxable)? Is the taxpayer selling to industrial and
commercial customers? Are the invoice amounts on average small amounts? Is
this taxpayer a multi-state dealer? What portion of total sales are Virginia sales?
The auditor should use the initial contact to obtain information about the business
which will aid in the decision of whether or not to use sampling and the methods of
sampling which would be most effective to obtain an accurate result. Inquire about
the volume, nature & seasonality of the business, volume and organization of
SAMPLING
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Suggest to the taxpayer that a sample audit could be done to minimize the number
of records and time needed to do the audit. Time and effort are as important to the
taxpayer as they are to the auditor. Discuss sampling and share with the taxpayer
the statistics from the returns screen data. Ask the taxpayer to be thinking about
sample period(s) that would be representative of the overall business during the
proposed audit period and for which records are readily available. This will give him
period(s) to consider and time to evaluate the sampling concept.
At the beginning of the audit, review sampling again. By this time, you have
evaluated the possibilities and opportunities for sampling from your initial
conversation with the taxpayer. Now is the time to firm up the sample period and
consider methods. Be sure the dealer understands the mechanics of sampling and
agrees to the months selected. Remember that taking the time to fully explain how
the audit process works generates goodwill and makes finalization much easier for
both parties. When a sample is performed, a signed sample agreement from the
dealer detailing the sample period and extent of the sampling may be desirable.
Signed sample agreements can defuse later challenges to the validity of the sample.
The sample agreement should note the sample period and class of transactions
being sampled (sales, purchases). The auditor should inform the taxpayer or his
representative that signing a sample agreement does not jeopardize his right to
contest or appeal any portion of the audit with which he is not in full agreement.
Sample Design
Sample design covers the method of selection, the sample structure and plans for
analyzing and extrapolating the results. There are many ways in which a sample
can be selected. If the volume of invoices is small, larger sample periods may be
selected. Detail audits may be appropriate when they can be accomplished in a
short time frame. This allows the auditor to examine all facets of the business,
which may reveal other audit opportunities. A combination of methods may be the
answer, depending on the circumstances.
Records
Code of Virginia 58.1-633 requires every dealer “to keep and preserve suitable
records of the sales, leases, or purchases. . .and such other books of account as
may be necessary to determine the amount of tax due hereunder, and such other
pertinent information as may be required by the Tax Commissioner”. When a dealer
fails to maintain adequate records, the department is authorized by Code of Virginia
58.1-618 to use the best information available to reconstruct a dealer’s sales or
purchases to determine whether a tax liability exists. A sample of records on hand
may be used to reconstruct data for an audit. Cancelled checks, credit card
statements, bank deposits, items of public record, or statements by the taxpayer
may be used when there are no records available. Any sample projected on this
basis is considered prima facie correct.
Sales
How are the records organized? Block sampling is particularly useful in sales audits
and is the historical method used by department auditors. If sales invoices are
available by invoice number in date order, the sample period could be a block of
invoices less than a year. Monthly sales journals give flexibility to examine one-
month blocks and tie tax collected to returns. If the only invoice information
available is by customer by year, the auditor may have to examine an entire year of
invoices to see all invoices.
If the business is seasonal, both the auditor and the taxpayer must be satisfied that
the time block is representative.
If there are different categories of sales where dollar amounts fluctuate, such as
equipment sales, parts sales, and repair sales, you may want to use a combination
of sample methods or a combination of sample and detail methods.
Purchases
Review the chart of accounts to identify which accounts are used for charging
taxable purchases. Make a note of construction-in-progress and other suspense
accounts used to initially charge depreciable assets. These accounts should be
examined for yet to be capitalized assets and expenses that may be reclassified
later. Negotiation with the taxpayer may be necessary to separate the items to be
considered assets and those that may be included in the expense purchase sample.
Also note intercompany accounts which may contain charges not seen elsewhere.
The method used for sampling purchases should be determined by the size of the
taxpayer and their filing system. Many taxpayers file purchase invoices by vendor,
by year. The year may be calendar or fiscal. If the volume of records is small, a
one-year block sample may be advisable. By scheduling the audit near the end of
the first six months of the year, the use of a six-month sample period instead of an
entire year would be possible.
If purchase invoices are batched and filed by voucher number sequence or by pay
dates, there is much more flexibility in negotiating a sample period with the taxpayer
that is smaller than twelve months, and covering more than one year of the audit
period. Statistical sampling is a good choice where the number of transactions is
very large.
The general ledger detail or an accounts payable ledger for a chosen sample may
be used to select invoices to be examined. This can save time over looking at all the
invoices in a sample period. Use of the general ledger assures that you are seeing
all the transactions during a certain period. This can be valuable when there are
intercompany charges for which no invoice is present. Remember to consider
withdrawals from inventory, which may or may not show up on the books of the
taxpayer.
Unusual Items
There is always the possibility that isolated errors may occur which are not typical of
a taxpayer’s operations. For an item to be removed from an audit sample, a taxpayer
must establish that the transaction was an isolated event and not a normal part of its
operations. Allow the taxpayer to produce documentation that this was an isolated
event and not a part of his regular course of business.
Before any item of unusual circumstance is omitted from the sample, the auditor
should thoroughly analyze and discuss the situation with the Audit Supervisor.
Factors that should be taken into consideration before an item is excluded or
SAMPLING
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included are: the size of the item is excessive compared to the normal items and
occurs only at rare intervals; the sale or purchase is a type not ordinarily handled; or
the item involves some unusual circumstance. Consider expanding the sample or
reaching a compromise that would be fair to the taxpayer and to the Department of
Taxation.
Expense Purchases
Sometimes it is impossible to trace accruals from the return to an invoice. In these
instances, the best approach is to list all untaxed taxable purchases made during the
sample period and all untaxed taxable fixed assets acquired during the entire audit
period. Extrapolate the sample measure and give credit for the measure accrued on
a separate schedule. This should produce an audit liability that allows for the
following:
1. Inconsistent accrual of use tax.
If a rollup is done (not recommended for sales), the base would be the same number
for each of the months during the audit period. Rollups are used to project the same
measure amount (and audit liability) for each month throughout the audit period.
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This example has been prepared to provide an illustration of how the error factor is computed from the sampling procedure, how it
is applied to the sample base to determine the taxable measure, and the effects of “altering” the sample base.
In our example, the audit period is April 1998 – March 2001.
The taxpayer has provided a schedule of Accounts Payable debit TOTALS for each month of the audit period. These monthly
totals will be used as the “Sample Base” or “Population” for extrapolation purposes. AP debit totals are generally acceptable for
the base as they accurately reflect the trends and expenses for the company, and are readily available. From these monthly totals,
our sample months (high, low, avg.) were selected for review. From each sample month, general expense purchase invoices are
reviewed. All invoices where tax was not paid on the invoice or accrued and remitted to the State are listed as purchase
exceptions.
For our example, the total untaxed purchase exceptions from the sample months are $270,517.83.
Our sample months are: May 1999, Feb. 2000, and Jan. 2001
For our Original Computation, the sample “Population” from our sample period will be:
$270,517.83 = .019786189
$13,672,053.05
The error factor from the sample periods indicates the percentage of the total disbursements that were not taxed.
It is assumed that there will be a similar rate of error in the remainder of the months of the entire audit period.
Therefore, the error factor from the sample periods is applied to the “Sample Base” for the entire audit period to determine the
total taxable measure identified by the audit. With total AP for the audit period of $170,902,694.17, the extrapolated total of
$3,382,513.01 now becomes the taxable measure ($170,902,694.17 X .019786189).
For Computation Two, assume that the taxpayer requests that certain disbursements be removed from the extrapolation base, i.e.:
salary, insurance, etc. since these represent non-taxable amounts. For the example, assume that these monthly disbursements are
13% of the total.
The error factor the second computation will be as follows:
Period Total AP Debits Total Exceptions
9905 $2,732,334.91 $270,517.83
0002 $3,924,367.02 $11,894,686.15 Population
0101 $5,237,984.22
$11,894,686.15 Error Factor .022742746
Reducing the AP by 13%, the AP total is $148,685,343.93. The extrapolated taxable measure from Computation Two is
$3,381,513.01 ($148,685,343.93 X .022742746). No difference from Computation One. Although it would seem at first thought,
reducing the sample base will reduce the potential tax liability, the only thing that changes is the error factor. The net result is that
the error factor went up, and you are now essentially taking a bigger “Bite” out of a smaller pie.
The most important factor in determining the computation of the audit is the total of untaxed exceptions. This total is what will determine the
error factor to be used in the extrapolation of the sample base.
Penalty
b. The taxpayer has collected the sales tax, but failed to remit to the
Department of Taxation; or
c. There are indications of fraud in which the taxpayer has willfully evaded
reporting and remitting the tax to the Department of Taxation.
3. All subsequent generation audits. Penalty will be applied unless the taxpayer’s
compliance ratios meet or exceed 85% for sales tax and 85% for use tax.
Front-End Agreements have traditionally been used for taxpayers that are
manufacturers or holders of direct payment permits and are recurring three-year
cycle audit candidates. The agreement covers the expense purchase portion of
the audit. The taxpayer and the Department of Taxation agree that the tax will be
paid “on the front end” rather than at audit time.
An audit is done and areas are identified where compliance is not being met. In
the case of a manufacturer, the agreement may be to remit an additional amount of
use tax based on the error factor in the audit; or an additional amount or
percentage of use tax based on account transaction information. The direct
payment permit holder may agree to remit tax based on the error factor of the
audit, on accounts payable data, or, for certain accounts which were found to be
totally taxable, tax would be remitted on the activity in these accounts. A written
agreement is drafted and signed by both parties. In subsequent audits, the auditor
does limited “testing” to determine that the agreement is being followed. This
“testing” would also determine whether or not the percentages need to be adjusted
for the next audit cycle. Negotiations with the taxpayer would fix the agreement for
the subsequent audit period.
Fixed assets are audited in detail each audit period. Front End Agreements
substantially reduce the amount of time needed to complete an audit.
Invoice Capture Tool _____________________________________________ Policies and Procedures
Version 1.1
Last Modified:
OVERVIEW
The Invoice Capture Tool (ICT) program introduced by the Office of Compliance in January 2000 will
enhance the software that the Virginia field audit staff uses. The current audit process involves extensive
manual searching through taxpayer paper invoices. The ICT initiative will deliver software that will allow
ICT auditors to receive this information electronically from taxpayers. Furthermore, this new software will
significantly reduce the burden on the taxpayer, increase the accuracy of the audit, and decrease the time it
takes for an auditor to complete the audit.
This document outlines the Policies and Procedures for ICT Audit Program. The initial ICT rollout involves a
limited number of TAX audit personnel. Through increased usage of the ICT software, TAX may consider
expanding the ICT Audit Program. The purpose of the ICT Policies and Procedures is to provide a framework
for the limited ICT rollout. As the ICT program evolves, the Policies and Procedures should be updated to
incorporate any changes to the ICT Audit Program.
1
Invoice Capture Tool ____________________________________________ Policies and Procedures
The first stage of the ICT process involves the identification of audit candidates. The audit selection process
employed by OOC involves audit supervisors, district auditors, and the TAX Audit Selection program to
identify these candidates. Using the centralized audit selection program that will be employed by TAX, the
audit candidates may be assigned directly to the ICT Support Team (1ST) for assignment. Additionally,
referrals from district auditors and audit supervisors will be used to identify ICT audit candidates.
In addition to the centralized audit selection process, the following processes will also be used to identify
ICT audit candidates:
• Evaluate current audit inventory: All district supervisors and auditors will be encouraged
to evaluate their current audit inventory to identify taxpayers that may qualify for an ICT audit.
• Field audit leads: District supervisors and auditors should evaluate new audit leads to identify
taxpayers that may qualify for an ICT audit.
• Collection audit leads: All audit leads provided by collection officers should be evaluated.
• Audits at request of taxpayers: All taxpayers that request an electronic audit will be
considered potential ICT audit candidates. The ICT auditor and district auditor will evaluate
the feasibility of this request.
Upon being assigned to an audit engagement, the district auditor should immediately contact the taxpayer to
establish the audit schedule and arrange any pre-audit meetings. All field auditors will be trained on the
policies and procedures employed by TAX to identify and qualify ICT audit candidates. Additionally.
detailed documentation outlining these policies and procedures will accompany this training. The district
auditors will conduct their standard pre-audit conference and identify the potential for an ICT audit.
After the successful identification of an audit candidate, the district auditor must determine if the ICT
should be used to facilitate the audit process. It is the responsibility of the audit staff to determine if
individual audits can benefit from the use of the ICT. Field auditors should consider the following issues
when making this determination:
• Does the taxpayer have an automated chart of accounts?
• Is the taxpayer's general ledger updated from posted information?
• Is the taxpayer willing to download data?
• Does the taxpayer want to participate in an ICT audit?
• Will the use of the ICT reduce the amount of time needed to complete the audit?
• • Has the taxpayer's accounting system been consistent for a known period of time (i.e. consistent
accounting codes and methodology)?
2
Invoice Capture Tool ____________________________________________ Policies and Procedures
Upon the identification of a potential ICT candidate, the district auditor will arrange a meeting with the ICT
auditor and taxpayer to discuss the technical feasibility of using the 1CT on the audit. The district auditor
should directly contact an ICT auditor if they operate in the same district. Otherwise, the district auditor
should contact the IST, who will then identify an ICT auditor in a neighboring district. This audit team (the
District Auditor and ICT Auditor) will arrange a second pre-audit conference with the taxpayer to discuss the
technical feasibility of applying the ICT software to this audit engagement.
The following factors should be considered when analyzing the technical feasibility of the ICT audit.
2. Data Formats
The ICT software (IDEA) can work effectively with a wide may of data formats. These formats
include:
• Access • Excel
• Lotus 123 • SQL Server
• Oracle • Sybase
• Various accounting packages including • XBASE (the DBF format from dBASE,
Accpac, Simply accounting, Pegasus, Foxpro, and others)
Sage and many others
• Btriev
Most software applications can effectively export a flat, or ASCII, file type. The ICT auditor
should work with the taxpayer to identify a usable file format.
The largest file that IDEA can handle is 2.1 gigabytes, unless you are working with ODBC data
(application data - Excel and Access), in which case you can access files that are much larger.
The 2.1 gig limit is a function of the operating system rather than a limitation of IDEA. The 32-
bit version of IDEA will overcome this limitation. IDEA can handle files with up to 2.1 billion
records and files with up to 32,766 fields per record.
For additional information, view the IDEA website at www.cica.caiidea/v3faq.htm or the user manual
accompanying the IDEA software.
3
Invoice Capture Tool ____________________________________________ Policies and Procedures
The ICT auditor must ensure that the appropriate data is available to effectively conduct the audit.
ICT and district auditors should work with the taxpayer to identify the fields that are available
electronically.
The following fields are required to perform an audit based on gross sales:
1. Customer name or number
2. Amount of sale
3. Sales tax collected (if any)
4. Ship to location
5. Date of sale
6. Description of the item sold
As documented in Section IV: Technical Aspects of ICT Audit Process, many of these fields can
be directly imported into the S T A N exceptions list. Additionally, many of these fields can
facilitate the generation of an exceptions list in the ICT software but may not need to be imported
into STAUDN.
4
Invoice Capture Tool _____________________________________________ Policies and Procedures
Upon the successful identification of an ICT audit candidate from sources outside the district, the ICT auditor
will review the audit candidate with the District Audit Supervisor and will obtain approval from the IST to
proceed with the audit engagement. On the fifteenth day of each month, the ICT auditors will submit a list of
ICT audit candidates and an audit workplan to the 1ST. The 1ST will evaluate the list of ICT candidates and
will provide final approval of the use of the ICT tool for individual audit engagements.
Upon the successful identification of an ICT audit engagement within a district with an ICT auditor, the
ICT auditor will review with the district audit supervisor the audit to obtain approval from the IST. On the
fifteenth day of each month, the ICT engagement auditor(s) will submit a list of approved ICT audit
engagements to the 1ST. These audit engagements will be part of the ICT auditor's workplan.
Upon receiving the ICT audit candidate list from the ICT auditors, the IST will select the accounts that
should be worked using the ICT software. The 1ST will evaluate the feasibility and advantages of using the
ICT tool on the identified audit engagements, and will assign auditors to the approved ICT audit
engagements by the first day of each month.
The assignment of an ICT engaged audit will reside within the responsibility of the 1ST. An ICT auditor and
a district auditor will have previously reviewed the ICT candidate. Upon receiving an ICT audit
recommendation, the 1ST will work with the audit supervisors to assign the appropriate ICT auditor to
work on the assignment.
The 1ST will use the following criteria when approving an ICT audit candidate:
5
Invoice Capture Tool _____________________________________________ Policies and Procedures
III. ICT AUDIT TEAM AND ROLES OF INDIVIDUAL PLAYERS A. Key Players in the
The ICT audit process utilizes various personnel from the Office of Compliance. These individuals include:
District Audit Supervisor: Coordinate ICT audits with district audit plan.
• ICT Audit Staff Three auditors, one from Norfolk, Fairfax, and Richmond district offices. As the
ICT program expands, additional auditors will be added.
• ICT Support Team (1ST): Richard Dotson will perform the 1ST functions. B. Roles
and Responsibilities of Key Players in the ICT Audit Process 1. ICT Support Team (IST)
The primary objectives of the 1ST team will be to ensure the standardized use of the ICT software, to
identify new opportunities for the ICT software, and to manage the expansion of the ICT program.
Through the use of a centralized team, TAX can closely manage and assess the use of this new tool.
• (Dis)Approve the Use of ICT - Using feedback from other audits, information gathered by the
district auditor in the initial meeting with the taxpayer, and feedback from the ICT auditor, the
1ST will either approve or disapprove the use of the ICT on the engagement on all audits outside
of an ICT audit district.
The 1ST also approves the use of ICT on all audits within an ICT audit district. The
1ST will work with the District Audit Supervisor when scheduling ICT auditors.
• Assigns ICT Auditor - The IST will identify and assign an auditor trained to use the ICT
software in the corresponding district office, interstate office, or in an adjacent district office.
Typically the ICT auditor will provide an audit recommendation to the 1ST and will serve as
the ICT auditor for the recommended candidate. However, the 1ST may assign an ICT
auditor to potential audit candidates based on auditor availability and audit location.
6
Invoice Capture Tool _____________________________________________ Policies and Procedures
the 1ST. The 1ST uses this feedback to continuously refine the use of this resource.
• Informs Audit Supervisors of ICT Results and Auditor Schedule - The IST informs all Audit
Supervisors of ICT activities and programs. Additionally, the IST coordinates with all
district Audit Supervisors when deploying ICT auditors on ICT audit assignments.
The role of the ICT auditor involves a wide array of technical and analytical processes. Through
the course of the ICT training, auditors will learn to perform the tasks needed to electronically
capture the taxpayer data and perform the requisite analysis. These tasks include:
The ICT auditor will work with district auditors to perform the tasks needed to complete an audit.
In addition to the aforementioned technical roles, the ICT auditor will be responsible for:
• Working with field auditors to schedule ICT audits: Upon being notified of a
potential ICT audit engagement, the ICT auditor will work with the district auditor to
schedule a second pre-audit meeting. The ICT audit team should gather information
that will allow them to qualify the candidate as an ICT audit candidate. Additionally,
the audit team will determine the overall audit schedule during this session.
• Working with field auditors to recommend ICT audit candidates: Upon completion of
the second pre-audit conference, the ICT auditor should work with the field auditor to
determine if the ICT software will benefit the audit.
• Submit ICT audit reports and workplans to 1ST: On the fifteenth day of each
month, the ICT auditor should submit to the IST an ICT Audit
7
Invoice Capture Tool _____________________________________________ Policies and Procedures
Report and a work plan for the following month if proposed ICT assignments
have been scheduled.
• Obtains approval from 1ST to proceed with ICT software: The IST will provide the
ICT auditor and district auditor with an approval to proceed with the use of the ICT
software for individual audit engagements.
• Reviews results of ICT analysis with field auditor: After generating an exceptions list
using the ICT software, the ICT auditor will review the list with the district auditor.
The ICT auditor and district auditor will review the exceptions list, IDEA log file, and
any additional documentation to ensure the results meet the audit strateu defined by
the audit team. Additionally, this information may be included in the final audit
report.
• Imports data into STA UDN worksheet on the field auditor's laptop: Upon agreeing
on the exceptions list, the ICT auditor will assist the district auditor in importing
the exceptions list into the district auditor's STAUDN worksheet.
• Communicates and coordinates ICT activities with the appropriate district audit
supervisor: Prior to scheduling audit engagements, the ICT auditor should obtain
approval from the district audit supervisor.
District auditors serve as the primary auditor on all ICT audit engagements. As the primary
auditor, the district auditor will be responsible for:
District auditors serve as the primary link between the ICT Audit Program and taxpayers. To
support the use of the ICT software, district auditors need to communicate the benefits of ICT to
taxpayers and should continuously try to
8
Invoice Capture Tool_____________________________________________ Policies and Procedures
identify potential ICT candidates. Upon identifying a potential ICT candidate, the district auditor
should contact an ICT auditor to arrange a second pre-audit meeting. The district auditor and ICT
auditor will work together to determine the feasibility of applying the ICT software for audit
candidates.
As part of the ICT Audit Team, the district auditor works with the ICT auditor in the generation of
an exception list. With assistance from the ICT auditor, the district auditor will import the data into
the STAUDN audit template on their laptop computer. Furthermore, the district auditor completes
the remainder of the audit activities and presents the audit results to the taxpayer. Although district
auditors will not report directly to the 1ST in Richmond, they will participate in the assessment of
the audit results (e.g. benefits, issues, and recommendations).
A. Data Retrieval
During the second pre-audit conference, the ICT auditor and District Auditor will work with the
taxpayer's technical team to discuss the data retrieval requirements. The audit team should consider the
following:
• File format: The audit team should work with the taxpayer's technical team to identify an
acceptable format (Section I-C: Technical Feasibility of ICT Audit). To facilitate the data
importation process, the audit team should try to obtain a file in either an application file format (i.e.
Access or Excel) or in a fixed ASCII file layout.
• File si:e: The audit team must consider the file size limitations associated with a floppy diskette
(1.44 MB) and a superfloppy diskette (120
• These two storage devices will be available to the audit team when transferring files.
• Taxpayer willingness to work with superfloppy drive: When transferring data using a superfloppy
diskette, hardware drivers need to be installed on the source computer. Taxpayers must agree to
the use of an external superfloppy drive on their computer. Additionally, a representative of the
taxpayer's information system team should perform the installation process.
B. Data Analysis
When using the ICT software to generate an exceptions list, auditors should consider the following:
• Target a small percentage of transaction volume to achieve a high percentage of dollar coverage.
• Data analysis and manipulation will be performed on like transactions.
• Completeness testing on all areas of ICT audits must be performed on the front end of the data
manipulation process.
+ The ICT auditor will maintain a log of activities for each audit engagement, which details file
manipulations, file names, and data analysis. IDEA 3.0 produces a log file that tracks these activities.
• The ICT auditor will provide audit comments as they pertain to the data manipulation process.
Per the district auditor's discretion, these comments may be incorporated into the final audit
report. The ICT auditor will also maintain a copy of these comments in their own files
The methodology employed when analyzing taxpayer data will be established as the ICT Audit Program
matures. The ICT auditors should continuously communicate their data analysis strategies with one another.
Additionally, as data analysis strategies become
10
Invoice Capture Tool _____________________________________________ Policies and Procedures
identified and approved, they will be documented in the Data Analysis section of the ICT Policies and
Procedures.
The STAUDN audit worksheet contains a file importation feature. Using this feature, district auditors
can import ICT produced output (i.e. exceptions list) into STAUDN. This importation process will create
new records in the taxpayer exceptions list. Note that this process appends the existing exceptions list
and does not write over existing records.
Prior to importing the exceptions list into STAUDN, the ICT auditor must perform the following critical
steps:
• Review the exceptions list with the district auditor. It is essential that the ICT auditor and
district auditor agree on the exceptions list prior to importing it into STAUDN.
• Identify and rename fields in the ICT database to names recognized by STAUDN.
STAUDN will only import fields that have specific names. The following table lists the
fields that can be in the import file:
INVOICE_DATE Date
Date field holding Month, day, and Year Any valid date format This field cannot be left blank
of invoice (preferably 4-digit
year)
MEASURE Text Measure type for invoice Interface will have auditor
match values in this field to
STAUDN measures. Any
blank values in this field will
also be mapped to a STAUDN
LOCALITY Text Locality to use for distribution Must be blank or a valid
numeric locality code
INVOICE AMT Currency Amount on invoice #.#1# (can have '$' if This field cannot be left blank
needed)
ACCOUNT_NUM Text Account number that the taxpayer uses
ITEMS Text Description of Item on invoice
INVOICE_NUM Text 'Invoice number that the taxpayer uses
VENDOR_NAME f Text Vendor name If blank, the invoice will be
mapped to a new vendor
named "Imported"
COMMENTS Text Comments about invoice
BUSADDR1 Text Business Address line I {
BUSADDR2 Text Business Address line 2 _
CITY Text Vendor City
STATE Text Vendor State If blank, the state will be
assumed to be "VA'
ZIPCODE Text Vendor Zip ~ # # # # or
PHONE Text Vendor Phone #>~##
COUNTRY Text Vendor Country
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Invoice Capture Tool Policies and Procedures
(
UD1 Text Custom field 3
UD2 Text Custom field 2
NOTE: At a minimum, the INVOICE DATE and INVOICE_AMT fields must be included. My fields
included in the file that are not listed above will simply be ignored.
• Export the approved exceptions list to an Access 2.5 file. This feature is located under
File Export in the IDEA 3.0 software.
I
+ Identify the measures corresponding to individual exceptions. This procedure can be done
during either the file importation process via the File Importation Wizard or during the
generation of an exceptions list in the 1CT software.
After successfully importing the taxpayer data into STAUDN and concluding all audit activities, the
taxpayer data should be returned to the taxpayer in it's original format. Additionally, all manipulations of
the taxpayer data should be explained to the taxpayer placed onto the diskette sent into the TAX archive.
These manipulations include all IDEA 3.0 audit files.
12
Invoice Capture Tool _____________________________________________Policies and Procedures
A. Overview
The review of the effectiveness of the ICT Audit Program is the responsibility of the ICT Support Team
(1ST). To support the achievements of the ICT Audit Program, standard criteria has been developed to assist
the IST and TAX management in reviewing the effectiveness of the program. These criteria found in the
ICT Report of Audit Results, will compare the audit results obtained from "normal" audit review procedures
against those obtained from ICT audit review procedures.
At the completion of each ICT audit engagement, the ICT audit team will complete the ICT Report of Audit
Results. This Excel template, which will be installed on each of the ICT auditor laptop computer's, will be
submitted to the IST and other ICT auditors. Performance information gathered by the ICT auditor
corresponds to the ICT evaluation criteria and includes:
C. Criteria
The criteria used to evaluate the effectiveness of the ICT program includes:
1. Compare ICT audit results with previous audit results on all assignments using the ICT tool
• Total audit assessments
• Total audit hours used to complete the audit assignment
+ Total travel expenses used to complete the audit assignment
13
Invoice Capture Tool _____________________________________________Policies and Procedures
D. Assessing the Performance of ICT Audit Program
A set of compliance codes has been developed for the ICT Audit Program. Auditors should utilizes these
compliance codes when entering audit results into STARS so that management can effectively use the
codes and audit information to assess the performance of the ICT audit program. The compliance codes
established for the ICT Audit Program are:
130F FAFOR ICT
1301 SPFOR ICT
1302 BRFOR ICT
1303 DAFOR ICT
1304 PNF . ICT
1305 NOFOR ICT
1306 RIFOR ICT
1307 R O B ICT
1308 VAFOR ICT
1310 NRIBDCM ICT
1319 NRIADOM ICT
1320 NRIBFOR ICT
1329 NRIBFOR ICT
134F FAADJ ICT
1341 SPADJ ICT
1342 BRAD) ICT
1343 DAADJ ICT
1344 PNADJ ICT
1345 NOADJ ICT
1346 RIADJ ICT
1347 ROADJ ICT
1348 VAADJ ICT
1350 IBDOM ICT
1359 IADOM ICT
1360 IBFOR ICT
1369 IAFOR ICT
139F FADOM ICT
1391 SPDOM ICT
1392 BRDCtvf ICT
1393 DADOM ICT
1394 PNDOM ICT
1395 NODOM ICT
1396 RIDXM ICT
1397 RODCM ICT
1398 VADOM ICT
The 1ST and TAX management should utilize the compliance codes for the automated review of ICT
program results. The results of this analysis will assist TAX management in defining the future direction of
the ICT audit program, including the purchase of new hardware and software, the use of additional ICT
auditor resources, and the expansion of the ICT audit program into additional districts.
The ICT Audit Program involves many OOC resources. In addition to the ICT auditors, all Audit
Supervisors and district office personnel will be involved in this program. In an
14
Invoice Capture Tool _____________________________________________Policies and Procedures
effort to involve all relevant personnel in the ICT Audit Program, the ICT auditors and IST should
continuously inform TAX Management, Audit Supervisors, and District Auditors on the status and results of
the program. The ICT auditors will distribute appropriate reports to OOC and appropriate TAX personnel. In
this manner, the program will remain visible to all employees and will promote the increased usage of the
ICT tool.
15
Invoice Capture Tool _____________________________________________Policies and Procedures
16
Page - 1
SUCCESSOR LIABILITY
Objective: Discuss the application of sales and use tax as it applies to sale/quitting
a business.
I. References
II. General
Virginia Code 58.1-629 applies only to sales and use tax. Furthermore, it
applies only to those situations when a business is sold for a cash
consideration. Successor liability may not be imposed when a business is
sold for non-monetary assets such as stock or other property.
Page - 2
III. Procedures
Items to look for when you suspect you may have a successor problem:
SUCCESSOR LIABILITY
The policy of the Department of Taxation states that "in order to hold a successor of
a business liable for unpaid sales tax under the provisions of Section 58.1-629, a
sale must have taken place and purchase money must have changed hands. A
taxpayer taking over a business abandoned by former owner does not fulfill the
meaning of "successor" in that a sale of transfer of ownership did not take place and
purchase money did not change hands. Furthermore, exchange of non-money
items such as stock or land would not allow the Department to proceed against the
successor."
PARTNERSHIP
The liability of successor businesses depends on the facts. If a partnership adds or
subtracts partners but continues without dissolving ( and all creditors must be paid if
the partnership goes through dissolution) it is still liable for all debts and crimes
committed before the change. If the partnership is dissolved and sold to another set
of partners, the new partners may agree to assume the debts of the old, in which
case both the old partners and the new partnership may be liable for debts, but the
new partnership has no criminal liability.
Page - 3
CORPORATION
Objective: Discuss the application of sales and use tax as it applies to Services vs
Sales.
I. References
C. Ruling Letters
III. General
A. Charges for services generally are exempt from the retail sales and use
tax. However, services provided in connection with sales of tangible
personal property are taxable.
IV. Procedures
3. Separately stated labor or service charges for the repair, installation, application
or remodeling of tangible personal property
Objective: Discuss the application of sales and use tax as it applies to Schools and
Colleges, certain educational institutions and other institutions of learning.
I. References
II. General
A. When conducted not for profit. The tax does not apply to sales of tpp to
nonprofit schools, colleges and other institutions of learning for their use
or consumption and paid for out of their funds. An "other institution of
learning" must be similar to a college, that is, it must (a) employ a
professionally-trained faculty; (b) enroll and graduate students on the
basis of academic achievement; (c) prescribe courses of study; and (d)
provide instruction at regular intervals over a reasonable period of time.
The tax does apply to purchases by day care centers and other pre-grade
school establishments other than kindergartens, unless otherwise exempt
(church run).
Sales to institutions of learning owned and operated by the state have the
same status as other sales to the state for its use or consumption. Sales
of tpp to the United States, or to the Commonwealth of Virginia or its
political subdivisions, are exempt from the tax if the purchases are
pursuant to required official purchase orders to be paid out of public
funds. Sales made without the required purchase orders and not paid for
out of public funds are taxable. Sales to governmental employees for
their own consumption or use in carrying out official government business
are taxable.
Page - 3
C. Public school system. The tax does not apply to purchases by public free
schools for their use or consumption, provided purchases are made
pursuant to official purchase orders to be paid for out of public funds. The
tax applies to purchases not paid for out of public funds.
D. Sales. The exemption does not extend to sales by the institution (other
than school textbooks) For example, the institution must collect the tax
on retail sales of meals to students or others if the price of the meals is
not included in room, board or tuition charges or fees.***exception-see
school lunches, Section G.
Page - 4
1. On purchases of tpp paid for out of funds other than public funds or
funds of the nonprofit institution of learning, the tax applies if the tpp is for
the use of any school class, club, group, organization, association or
individual. Such items cannot be purchased under certificates of
exemption, and the tax must be paid to dealers. Examples would be :
yearbooks, class rings, graduation gowns and caps, photos, school
supplies, etc. for use by students.
2. The tax does not apply to purchases of tpp by a school, such as athletic
equipment, band instruments, etc. to be paid for out of school activity
funds if the purchases become the property of the school. These items
may be purchased under certificates of exemption.
G. School lunches. The tax does not apply to school lunches sold and
served to pupils and employees of schools and subsidized by
government at any level. Equipment and supplies purchased by a school
for its use in preparing and serving school lunches, and which become
the property of the school, can be purchased under certificates of
exemption.
H. School textbooks. The tax does not apply to school textbooks sold by a
local school board or its authorized agency. It also does not apply to
school textbooks for use by students attending a college or other
institution of learning not conducted for profit when sold (a) by such
institution or (b) by any other dealer (provided such textbooks are certified
by the institution as required course materials for its students).
I. The tax does not apply to tpp purchased for use, consumption, or sale at
retail by an elementary or secondary school conducted not for profit, or
Parent Teacher Association or other group associated with an elementary
or secondary school conducted not for profit for use in fund-raising
activities, the net proceeds of which are contributed directly to the school
or used to purchase certified school equipment, and certified school
equipment purchased by such groups for contribution directly to the
school.
Page - 5
The tax applies to sales of tpp to schools, colleges and other institutions
of learning when they are conducted for profit. They are required to pay
the tax to their vendors at the time of purchase, unless their purchases
are made for resale as dealers. All sales of tpp made by such institutions
are taxable. In addition, these institutions must collect the tax on any
retail sales of meals to students or others, if the price of the meals is not
included in room, board, or tuition charges or fees.
III. Procedures
The ST-12 should not be used for an exemption for a state other than
Virginia. (It's use is limited to the Commonwealth, political subdivisions of the
Commonwealth, or the Federal Government) The ST-13 should be used by
other states, provided they meet the criteria of the certificate.
Colleges and universities are not in this category and are taxable on
lodging and meals.
Ship Repair Training
Page - 1
I. History
Prior to July 1, 1994 - The code Section 58.1-608 3d and Section 630-10-98 of the
Virginia Rules and Regulations gave little detail into the auditing of ship repair
concerns and other waterborne businesses. The manufacturing section of the Code
and the Virginia Rules and Regulations was referenced when trying to determine
the taxable and exempt status of particular items. Other waterborne businesses
assumed a broad exemption for the purchase of consumable supplies and tools as
well as items of tangible personal property which become an integral part of a ship
or vessel.
July 1, 1994 And After - Virginia Regulation 630-10-98 detailed the statutory
exemption and its application. Many terms were defined in order to clarify the
exemption. Guidance was given to the ship repair industry in that although many
accommodation services are necessary to the repair process, tangible personal
property used in providing these services is taxable. Letter dated 6-20-96
The exemption provided to other waterborne concerns has also been confined to
the exact wording of the statute. New Virginia Rules and Regulations Section 10-
210-4050, Letter dated 7-31-95, P.D. 93-55.
II. References
III. General
Shipbuilding , Conversion, and Repair - A close reading of the statute details the
exemptions. The first exemption is for ships and/or vessels used or to be used
exclusively or principally in interstate or foreign commerce. The repairs and
alterations to such ships and/or vessels are exempt from the tax. Any item of
tangible personal property that becomes an integral part of such ships or vessels is
exempt from the tax. The second exemption concerns the supplies consumed
aboard ships or vessels which ply the high seas either in inter-coastal trade
between ports in this state and ports in other states of the United States or its
territories or possessions or in foreign commerce between Virginia ports in this state
and ports in foreign countries. These are two separate and distinct exemptions. A
ship or vessel may receive the interstate or foreign commerce exemption on ship or
vessel parts, but not receive the exemption on supplies because these ships or
vessels do not ply the high seas. Another exemption is for tangible personal
property used directly to repair these exempt ships or vessels. The important
implication within the wording of the statute is that a business does not have to be a
ship repair business to have the exemption on tangible personal property used
directly in building, converting, or repairing of such ships or vessels. Persons
engaged in the building, conversion, or repair of such vessels and/or ships, for
example, shipyards receive an exemption similar to the manufacturing exemption.
Shipyards receive an exemption for safety apparel given to workers directly involved
in the ship building, conversion, or repair process. There is an exemption for the
storage and handling of raw materials. Shipyards receive a broader exemption than
businesses that may repair exempt ships or vessels from time to time. The separate
exemptions will be dealt with below, as well as the general audit procedures for each
concern.
An exemption is provided for those items "directly" used in the building, conversion,
and repair of exempt ships or vessels. Many times all consumables and purchases
that are charged directly to a job by the repair yard are exempted from the tax. The
fact that an item can be directly charged to a job does not guarantee the tax
exemption. Most repair yards have been quite prudent with the proper taxing of
overhead accounts (with the exception of fuel oil). The direct charging of items to
particular jobs is an area with significant tax exposure. For example, tangible
personal property costed to temporary services including but not limited to: on site
and off site berthing, temporary illumination, temporary electrical service, temporary
phone service, and temporary sanitation service all constitute taxable areas. Items
of tangible personal property used in providing such services would be taxable to the
shipyard.
IV. Definitions
High Seas - That portion of the ocean which is beyond the territorial
jurisdiction of the United States. It does not include the
Chesapeake Bay, inter-coastal waterways, or inland rivers or
waterways.
Used Directly - Those items which are both indispensable to the building,
conversion, or repair process and which are used as an
immediate part of such process.
Ship Repair Training
Page - 4
V. Procedure
The size of the facility is paramount to understanding the areas of audit concern.
Large shipyards provide much more in the way of accommodation services than the
smaller "down river" repair facilities. Many times the smaller repair concerns act as
subcontractors to the larger yards.
The income areas of sales and services should be reviewed for possible tax liability.
As stated earlier a review of the contracts will identify taxable tasks. There may
exist repair transactions involving taxable ships or vessels. In this case tax should
be charged at retail on items which become an integral part of these ships or vessels
and tangible personal property which sails with these ships or vessels. Fabrication
labor involved in these transactions of taxable ships or vessels should also be taxed
at retail. Some examples of these taxable ships or vessels are: tugs and barges
owned by real estate contractors such as bridge builders, or pier and bulkhead
construction companies, diving and salvage ships or vessels, yachts, and ships
which leave a point in one state and return to that same point without docking in
another state (dinner cruises). Consumables and supplies used directly in repairing,
building, or converting the above taxable ships would still be exempt to the business
which is primarily involved in shipbuilding, conversion, and repair.
Ship repair facilities may also be involved in some transactions which do not meet
the definitions detailed in the statute. Miscellaneous sales of tangible personal
property and the sale of fabricated items need to be audited. Other services which
provide income to the yards such as the deactivation of a ship or vessel would be
considered a taxable service and all tangible personal property consumed in
providing this service would be taxable in that deactivation does not meet the
definition of repair, building, or conversion. In some ship repair and building facilities
service contracts with the government are conducted. These contracts are usually
Ship Repair Training
Page - 6
for design or testing services. These transactions fall under the federal government
contract guidelines.
Fuel oil is a major consumable supply for a ship building and/or repair facility. Diesel
fuel which is used to power exempt machinery would of course be tax exempt. Fuel
oil used to run the boilers which produce steam used throughout the yard present a
special problem. The steps to analyze fuel oil consumption are detailed below. If
the analysis concludes that a particular boiler is used primarily for a taxable
purposes then the boiler and its replacement parts would be taxable.
Fuel Oil - The following steps can be followed to determine the taxability of fuel oil
when auditing a ship building and/or repair facility.
1. Determine accurate figures to use for the basic of calculating total taxable fuel oil,
whether it be through actual invoices or monthly usage/cost reports to give you the
gallons and cost of the amount of fuel oil purchased.
2. Arrive at the audit period and then pick a representative calendar year to use as a
basis for comparison.
3. Determine the months of the year where the average mean temperatures below
55 degrees Fahrenheit. This can vary, based on audit site location, and it can be
concluded that any excess over the mean average amount used each month was
used strictly for heating purposes (shipboard, work buildings, and administrative
buildings).
4. Take the other months (those where the temperature is above 55 degrees
Fahrenheit), add the total amount of fuel oil purchased and divide by the same
number to arrive at the average mean amount of fuel oil each month that is used for
some purpose other than heating. This figure now becomes the average monthly
amount of fuel oil that will be used for the entire audit period.
5. Take all the "winter months" during the audit period and take the difference
between the total amount of fuel oil purchased and the mean amount to come up
with the taxable amount of fuel oil purchased during the audit period that can be
Ship Repair Training
Page - 7
directly linked to heating. You can then develop a monthly percentage in each of the
winter months that is directly related to heat usage.
6. Since the primary purpose of fuel oil usage at a ship repair facility is for the
production of steam, develop a comprehensive list of the various usage's of steam
that the fuel oil is used for and determine the taxability of each.
7. From the list you come up with, determine a taxable percentage and an exempt
percentage to apply to the monthly mean average amount for each month of the
audit period. For the winter months, add the additional amount that was developed
earlier and was determined to be heat related.
8. This now becomes the total amount of taxable fuel oil used during the audit
period and these monthly amounts can be either cumulative or individually broken
down into percentages by taking the amount of taxable monthly fuel oil and dividing
that by the total amount purchased during the month.
Other Waterborne Commerce - The definitions listed above are important when
dealing with other waterborne industries. A complete understanding of a business's
operation is necessary. Vessel/ship logs detail the voyage history. This history
must be analyzed to determine the application of the interstate/foreign commerce
exemption as well as the high seas exemption. A ship or vessel which transverses
the Chesapeake Bay, inter-coastal waterways, or inland rivers or waterways, but
does not leave Virginia waters does not receive any of the exemptions detailed
above. A waterborne operation must be analyzed ship by ship and vessel by vessel.
A ship or vessel which transverses the Chesapeake Bay, inter-coastal waterways, or
inland rivers and waters, and delivers goods or people from one state to another
over 50 % of the time would be exempt on items which become an integral part of
the ship or vessel, and on tangible personal property used directly in the building,
repairing, or converting of such vessels or ships. However, supplies consumed
aboard such ships or vessels (i.e. provisions for the crew, cleaning supplies, and fuel
to operate machinery) would be taxable since these ships or vessels do not ply the
high seas in inter-coastal trade or foreign commerce. Fuel used for propulsion of the
ships would be exempt for all ships under the marine diesel statute.
Signs (Manufacturing versus Contracting)
Page - 1
I. History
II. References
B. (1) Old Virginia Retail Sales And Use Tax Regulations 630-10-
100 (Sign manufacturers and painting), 630-10-63 (Manufacturing and
processing), and 630-10-27 (Contractors respecting real estate).
(2) New Virginia Retail Sales and Use Tax Regulations 23 VAC
10-210-4070 (Sign manufacturers and painting), 23 VAC 10-210-920
(Manufacturing and processing), and 23 VAC 10-210-410 (Contractors
respecting real estate).
III. Generally
There are two conditions that are available to sign manufacturers where
sections (C) and (D) above apply that may act as an aid in their tax exposure
to the State of Virginia.
IV. Procedures
Sign Contractors
Sign contractors are responsible for following the basic rules as they
apply in the Virginia Retail Sales And Use Tax Regulations 630-10-27 (23
VAC 10-210-410 - new). When it is necessary for the auditor to make
reference to the application of the law, this can be found in the Code Of
Virginia Title 58.1-610.
Sign Contractor/Retailer
Objective: Discuss the application of sales and use tax as it applies to the statute
of limitations.
I. References
II. General
B. The statute of limitations for the assessment of sales and use tax may be
expanded to six years if a false or fraudulent return has been filed, or the
taxpayer has failed to file a return and reasonable cause exists that the
taxpayer was required to file a return.
III. Procedures
A. For all sales and use taxes, if no returns have been filed, the statute is six
years.
For taxpayers that have been registered for less than three years, the
statute may be extended to a maximum of six years if it is determined that
the taxpayer was liable for the collection and/or remittance of taxes prior
to registration.
STATUTE OF LIMITATIONS
Page - 2
If it is determined within the three year statute that the taxpayer failed to
file a return for a period in which tax was due, the audit period may be
extended to six years, but including only those months for which no return
was filed.
B The fact that related corporations have filed returns does not prevent the
Department from extending the statute beyond three years for an entity
that has failed to file any returns.
G. If an audit assessment is revised and the revision lowers the liability, the
existing assessment should not be abated in full and a new assessment
issued. Periods covered by the new assessment may be out of statute on
the date that the new assessment is issued. Rather, the existing
assessment should be abated down to the correct liability. (see P.D 00-
056)
TELECOMMUNICATION
Page - 1
I. History
Prior to January 1, 1989: Both cellular phone and paging companies were
taxable on purchases of equipment and supplies.
September 1, 2004: The retail sales and use tax exemption available to
public service corporations, a.k.a. public utility companies, for the purchase or
lease of tangible personal property used or consumed directly in the rendition
of their public service was repealed for telecommunications companies (as
defined in Code of Virginia Section 58.1-400.1), and certain telephone
companies.
II. References
III. General
A. Pre-September 1, 2004:
B. Post-September 1, 2004:
A. Pre-September 1, 2004:
B. Post-September 1, 2004:
IV. Procedures
A. Telephone Utilities.
The auditor should ensure that purchases of taxable items have not been
misclassified by the taxpayer using an exempt account number. Should
this problem occur, it will be necessary to review purchases charged to
exempt account numbers in order to identify any misclassifications.
Certain companies may not use the "Uniform System of Accounts for
Telephone Utilities." In those cases, all asset and expense accounts
should be examined to verify if the purchases are utilized directly in the
rendition of providing communications service.
The vendor invoice will not always include a full description of the item
being purchased. In those instances, the taxpayer's purchase order
TELECOMMUNICATION
Page - 5
The taxpayer may have remitted use tax through either a direct payment
permit or on a consumer use tax return. Accruals of use tax should be
traced on a sample basis to the returns in order to verify payment of the
tax.
B. Paging Companies.
Since paging companies did not enjoy the retail sales and use tax
exemption provided to public utilities after July 1, 1995, they are not
affected by the repeal of the public service exemptions as of September
1, 2004.
In Scenario 1, tax would apply to the total sales price of the phone. In
Scenario 2, the tax only applies to the discounted sales price (Ref. P.D.
96-361). In Scenario 3, the retailer is required to remit use tax on the
cost price of the telephone withdrawn from the resale inventory (Ref. P.D.
96-361).
Because of the rapidly changing nature of this industry, the auditor should
seek guidance from the audit supervisor and evaluate whether
prospective compliance on a first audit is necessary. Prospective
compliance would not be justified if the taxpayer received a timely ruling
on the matter, or if the law, regulations, or other public documents are
reasonably clear on the tax application.
E. Digital PCS
Taxable:
Exempt:
No sales and use tax will be imposed on the lease payments for any
tangible personal property leased pursuant to a bona fide contract that
was entered into on or before March 1, 2004, provided that such tangible
personal property was delivered to or placed into service by a public
service corporation on or before September 1, 2004. A “bona fide”
contract is one that includes specific set terms and a payment schedule
with a fixed duration.
Extension of Contracts:
The extension of a bona fide leasing contract does not constitute a new
contract and such equipment would remain exempt if the original contract
is extended, provided the original contract was entered into on or before
March 1, 2004 and the extension is executed prior to September 1, 2004.
Extension of a bona fide contract after September 1, 2004 constitutes a
new contract and property leased under that contract will become
taxable.
Other changes in the terms of the contract, e.g., pricing, lease payments,
finance charges, etc., will not change the exempt status of the tangible
personal property provided the original contract was entered into on or
before March 1, 2004 and the change to the bona fide contract is
executed prior to September 1, 2004. Changes in terms occurring on or
after September 1, 2004 shall be viewed as a new contract for purposes
of taxation.
Assignment of a Contract:
Inventory on Hand:
Temporary Storage:
Objective: To discuss the application of sales and use to Motor Vehicle Carriers
of Property.
History:
The 2001 General Assembly revised and reenacted those sections of the Virginia
Code that deal with property and passengers operating for-hire on an intrastate
basis by enacting Chapter 596. The bill was based on the recommendations of
the Motor Carrier Reform Task Force of the Department of Motor Vehicles. The
specifics for Motor Carriers of Property is contained Chapter 21 of Title 46 of the
Virginia Code while those for passengers are contained in Chapter 20.
References:
Discussion:
Deregulation of various industries, including the trucking industry, has led to the
situation where rates are not controlled or set by government agencies. Carriers
of property by motor vehicle that are not subject to rate regulations are free to
charge what the market will bear in a fully competitive environment, and the
original rationale for the exemption no longer exists.
Conclusion:
In PD 05-31 the Tax Commissioner takes the position that in order for a motor
vehicle common carrier of property to qualify for the exemption available prior to
September 1, 2004, it must be a public service corporation “authorized to
transport passengers or property as a common carrier.” The Commissioner does
not accept the new registration requirements of FMCSA as a replacement for the
former ICC certification. Any common carriers who were not public service
corporations possessing ICC or SCC authorizations to transport passengers or
property are not entitled to the former exemption for motor vehicles of property
under Va. Code 58.1-609.3 (3).
Procedure:
If the carrier is registered for consumer use or sale/use tax and filing returns for
periods in which there was a liability throughout the 36 months immediately prior
to the beginning of the audit then the audit period will be three years. If the
carrier is not registered or fails to file a return for a period in which a liability
exists in the 36 months immediately prior to the beginning of the audit then the
audit period may be extended to six years
The bulk of the tangible personal property used by a motor vehicle carrier of
property can be grouped into four general areas of usage: administrative;
maintenance and repair; transport of property; and, storage and temporary
deposit. Following is a description of each type of activity.
In the area of repair and maintenance activity, close attention should be paid to
the following types of previously exempt purchases after September 1, 2004:
In the area of transport activity the following types of purchases should be closely
scrutinized after September 1, 2004
In the areas of storage and temporary deposit activity close attention should be
paid the following types of purchases that are associated with the function of
temporary deposit before September 1, 2004
Motor Vehicle Carriers of Property
Page 6
Forklifts
Hand trucks
Packing materials
Crates
Dollies
Heating and cooling equipment used to maintain commodity at a constant
temperature
Of course purchases in these areas for carriers who lack the necessary ICC and
SCC authorization and therefore do not qualify for the exemption will be taxable
before and after September 1, 2004
Page - 1
Objective: Discuss the application of sales and use tax as it applies to VENDING MACHINE
SALES; GENERALLY, DEALERS; REPORTING PROCEDURES,,
I. History
Effective July 1,1982 ,dealers engaged in the business of placing personal property
through vending machines were required to report under a new method. Vending
machine dealers were required to file on the cost price or manufactured cost of tangible
personal property sold at 1% more than the regular sales tax rate in effect. The dealers
were now required to report on personal property sold using Form VM-2. New dealers
should complete an application, Form VM 1 for each city or county in which machines
are placed.
Prior to July 1, 1982 dealers engaged in the business of placing vending machines
were taxed at the regular sales tax rate on the gross taxable sales (total selling
price of the items dispensed) using Form ST-9. Dealers were required to have a sales
tax registration for each city or county in which machines are placed.
II. References
D. Virginia Tax Bulletin Sales and Use Tax Policy Statement 82-1, (June 1, 1982)
Sales and Use Tax Policy Statement 82-6, (June 1, 1982)
III. General A. Dealers engaged in the business of placing vending machines and selling
tangible personal property through them are required to compute tax at
5.5% on the cost price of items purchased for sale through the vending
machines. 58.1-614 (A) & (B) Vending machine dealers file a special
return to report sales tax (Form VM-2)
C. Dealers who are unable to maintain satisfactory records to determine the cost
price of goods purchased or manufactured, may submit a written request to the
Commissioner for authorization to remit upon gross receipts which takes
into account the inclusion of the 4.5% sales tax. 58.1-614 (D)
Dealers who are authorized for this method must file the standard return
(Form ST-9).
D. Dealers who are engaged in the business of placing vending machines, all of
which are under contract to nonprofit organizations, may deduct sales of
10 cents or less from gross receipts and divide the remaining balance by
1.045 to determine the amount of taxable sales upon which the tax is due and
payable. 58.1-614 (C) Dealers who qualify for this method must file the
standard sales tax return (Form ST-9)
E. Dealers are required to file seperate returns for each locality which vending
machines are placed unless the dealer has permission to file a consolidated
return.
F. Dealers who are not engaged in the business of placing vending machines, but
who use vending machines in their places of business must report tax on
gross taxable sales.
Page - 3
IV. Procedures
2. It is clear that true Vending Machine businesses who place their goods for sale,
should operate under the guidlelines provided under VAC 10-210-6040, 41, 42,
in regards to reporting sales.taxes. An in depth analysis is often necessary as
these dealers may have trouble determining just how to compute tax based on
the true cost price of items purchased for sale. Dealers may take unauthorized
deductions from their cost of goods(e.g.,premium brand income).
Credits allowed include inventory shortages, trade or other discounts which
are netted against the invoice price.
4. Purchases or leases of vending machines and repair parts are subject to the
use tax at 4.5% and are considered tangible personal property consumed and
not for resale. A careful review of this area should be completed to assure
that compliance is being met.
I. History
Prior to July 1,1987 The Department deemed veterinarians to be engaged
in professional services. The veterinarian was to be the taxable consumer of all
tangible personal property used in providing their service. If a veterinarian went
beyond the rendition of their professional service and sold goods at retail he had
to register for the sales tax and collect the tax from his/her customer if an
inventory of tangible personal property was maintained to sell certain items
independent of an office visit. The sale of identical products would be treated
differently depending if an office visit or examination was part of the transaction
(SEE BULLETIN 86-4). The logistic of the above procedure as well as the
auditing of such a business proved to be quite difficult. After July 1, 1987 House
Bill 1594 of the 1987 General Assembly stated that the tax should be paid on the
cost price of controlled drugs as well as medicines, which are required to be
dispensed on the prescription of a licensed veterinarian. These items may in turn
be sold at retail exclusive of the tax regardless of whether the sale of such items
is in conjunction with an office visit or examination. The only requirement is that
the tax be paid on the cost price of the controlled drugs or prescribed medicines.
Also, prescription diets fall into the same category as controlled drugs or
prescribed medicines. The veterinarian would of course continue to pay the tax
on consumable supplies and all capital purchases
The above changes made by House Bill 1594 had no effect on the sale of
soaps, flea powders, leashes, collars, pet foods, and similar products. Such
items should be purchased tax exempt and the tax collected at the full retail
amount whether or not such sale is in conjunction with an office visit or
examination.
All medicines, drugs, supplies, and equipment will be treated the same from
one veterinarian to the other, in that the nature of the product determines how it
is treated for tax purposes. Any withdrawal from an exempt retail inventory for
kennel services or grooming services should be taxed at cost and the tax
reported on line two of the ST-9.
II. References
III. Definitions
CONTROLLED DRUGS – DRUGS WHICH ARE KEPT UNDER LOCK AND KEY
SUCH AS NARCOTICS AND /OR AMPHETIMINES
Procedure
Objective: Discuss the application of the 2% Virginia Watercraft Sales and Use Tax
(Watercraft Tax) and the 4.5% Virginia Retail Sales and Use Tax (Retail Tax).
I. History
1/1/82 to 7/1/87. Watercraft were exempted from the retail tax by Code of
Virginia § 58.1-609(9) and became subject to the 2% watercraft tax. There
was no maximum tax.
7/1/90 and after. The watercraft tax cap is increased to $2,000. Based on
the maximum tax limitation, all watercraft with a sales price of $100,000 or
more are subject to a maximum tax of $2,000.
II. References
58.1-609.1(6) Retail tax exemption for motor fuels, diesel fuel, and
clean special fuels for use in a boat or ship, upon which
a fuel tax is refunded.
58.1-609.1(9) Exempts watercraft as defined in § 58.1-1401 from the
retail tax.
58.1-609.2(4) Commercial waterman exemption from the retail tax.
Watercraft Tax vs. Sales Tax (Rev. 10/97)
Page - 2
58.1-1400 Title.
58.1-1401 Definitions.
58.1-1401.1 When motor deemed a watercraft.
58.1-1402 Tax levied.
58.1-1403 Basis of tax; estimate of tax; penalty for
misrepresentation.
58.1-1404 Exemptions
58.1-1405 Time for payment of tax.
58.1-1406 Dealers' certificates of registration.
58.1-1407 Retention of documents.
58.1-1408 Civil penalties and interest.
58.1-1409 Credit against tax.
58.1-1410 Disposition of funds.
4. There was no maximum tax cap when the watercraft tax was
enacted. Later a $1,000 cap was imposed and now the maximum
tax limitation is $2,000.
5. Motors used to power a watercraft and sold separately are now
taxed as watercraft.
6. The late payment penalty has been increased to 6% per month.
C. Ruling Letters
Virginia Tax Bulletin 94-9 Application of the Watercraft Sales and Use
Tax to the Sale of Boat Motors
III. General
All transactions subject to watercraft tax are exempt from the retail tax;
however, all watercraft not subject to the watercraft tax are subject to the
retail tax. It is the intent of the sales and use tax laws to tax all marine
vessels (unless otherwise exempt) according to one or the other tax rate
(2% or 4.5%) but not both.
D. Watercraft Dealers
Watercraft dealers are exempt from both the retail and watercraft taxes
on purchases of watercraft for resale and also on purchases of watercraft
for lease, charter or other use for compensation, but are subject to the
watercraft tax on the gross receipts from lease, charter or other use.
Gross receipts tax on the lease, charter or rental of watercraft is not
separately stated.
This training section deals with the application of the watercraft sales and use
tax (referred to as watercraft tax) and the retail sales and use tax (referred to
as retail tax). It is not the intention that auditors become familiar with all
aspects of the watercraft tax. Instead, it is more important that the auditor
know which tax applies and where to locate information needed to make the
correct determination. For watercraft tax, the primary data source is the
Chapter 14 of the Code of Virginia. Chapter 14 is relatively short and easier
to read than most statutes. The list of code sections is included to make
subjects easier to locate. Even though the watercraft tax regulations are
seriously out of date (refer to footnote ** above), they are still a valuable
source of information. A list of regulation titles is also included. Likewise, the
older ruling letters must be read with the realization that significant changes
have occurred in the years since 1982. While a few retail tax issues will be
addressed, watercraft tax will be the main focus of this training section.
The following definitions are taken from the Code of Virginia § 58.1-1401
unless otherwise identified and are expanded upon by additional information
contained in the regulation definitions or other sources.
Prior to 1/1/98 - "Dealer" means "any person who is in the regular business
of selling watercraft. Any person who has held five or more watercraft for
resale during the calendar year shall be deemed, for purposes of this chapter,
a 'dealer.'"
Watercraft Tax vs. Sales Tax (Rev. 10/97)
Page - 6
The regulation definition of dealer is more general and adds that "the
Commissioner may find such person to be a dealer." For the most part, a
watercraft dealer is governed by the laws pertaining to the Dept. of Game and
Inland Fisheries (DGIF). The decision to register with DGIF as a watercraft
dealer is generally not voluntary. That is, if a person meets the definition of a
“watercraft dealer” in Code of Virginia 29.1-801 (the Watercraft Dealer
Licensing Act), that person must register with DGIF.
"Gross receipts" means "the amount received for the lease, charter, or other
use of any watercraft. The term shall include hourly rental, maintenance, and
all other charges for use of any watercraft and charges for pilots crew, or
other services, unless separately stated on the invoice. The term shall also
include the amount by which the price estimated under § 58.1-1403 exceeds
the charge actually made."
"Sale price" means "the total price paid for a watercraft and all attachments
thereon and accessories thereto, exclusive of any federal manufacturer's
excise tax, without any allowance or deduction for trade-ins or unpaid liens or
encumbrances." The regulation definition of sale price includes additional
information. "The terms 'attachments thereon' and 'accessories thereto' as
used herein mean all [tpp] that is physically attached to watercraft, including
installation charges, or property that is customarily used in watercraft,
whether or not affixed to the structure of the watercraft, and which was
transferred in the same transaction as the watercraft as a part of the
watercraft sale. Such [tpp] transferred other than in the same transaction with
the watercraft will be subject to the . . ." retail tax. In addition, "[c]harges for
lettering and get-ready charges (cleaning, washing and preparing) are also
included in the sale price when made in the same transaction with the
watercraft transfer. However, excluded from the sale price are charges for
federal manufacturer's excise tax, registration and titling fees, insurance, and
gasoline, when separately stated on the invoice." Note that the base for
computing the watercraft tax excludes manufacturer's excise taxes, but not
retailer's excise taxes. Thus any federal "luxury tax" on a watercraft is
included in the base for computing the watercraft tax since it is classified as a
retailer's tax.
1401 and sold separately from such watercraft shall be deemed a watercraft
for purposes of this chapter."
VI. Procedures
Virginia Tax Bulletin 94-9 deals with the 1994 statute in which any motor
that powers a watercraft and sold separately from the watercraft, is itself
deemed a watercraft. The explanation is very good and the examples
clarify the intent of the statute. The auditor should read and understand
this bulletin because it has far reaching implications. A registered
watercraft dealer will only collect the 2% watercraft tax on such a motor.
A retail dealer still collects the 4.5% tax but the customer who purchased
the motor for a watercraft can obtain a partial refund from the Department
of Taxation by completing the "WCT Refund" request.
3. 2% of the gross receipts from the lease, charter or other use of any
watercraft by a registered dealer. Note: effective January 1, 1998
watercraft includes small motorboats and jet skis.
This code section also contains the $2,000 maximum tax limitation. The
regulation corresponding to the statute states that the current market
value includes "the cost of any modifications, improvements or additions
subsequent to initial acquisition." The regulation has paragraphs titled
"Each Transaction Taxable," "Requirement to be Titled," and "Current
Market Value." The regulation also contains a paragraph titled
"Occasional Sale" which states that the watercraft tax applies to an
occasional sale. "Occasional sale means a sale of a watercraft by
anyone not a dealer in watercraft."
Watercraft Tax vs. Sales Tax (Rev. 10/97)
Page - 9
1/1/98 and after: Any person who was the owner of a watercraft
which was not required to be titled prior to 1/1/98 can apply for a title
without incurring the watercraft tax.
G. Watercraft Records
Objective: Discuss the application of sales and use tax as it applies to SEATA.
I. History
II. General
III. Procedures
Page - 2
A. SEATA information should be gathered on all sales and use tax and
corporate income tax audits whenever the taxpayer conducts business in
any of the SEATA states.
If the taxpayer refuses to complete the form, the auditor should complete
the front as best as possible.
The bottom part of the back of the form contains a block for collecting
data related to specific transactions and should be completed if the
taxpayer conducts business in any SEATA state exceeding $250,000.
NOTE: The sales and use tax audit program allows the auditor to enter
transactions, and print a list of the transactions and an information
exchange form. Utilizing the audit program eliminates the need to
complete the blocks on the back of the Nexus Questionnaire.