Could a Virginia refreshment-service company reduce its sales-and-use-tax audit by showing that tax was paid or that transactions were exempt?

Subject

Refreshment service provider of gourmet coffee, vending machine snacks, ready-to-eat meals, and its own water filtration system

Plain-English summary

Virginia partly reduced the audit, but kept many items taxable because the refreshment-service company could not prove that tax had been paid or that an exemption applied. Additional documentation supported some adjustments; unsupported assertions did not.

For vending sales, computing tax on the cost price was not enough. Several worksheets listed the sales as exempt or showed no taxable sales, so the Department found no proof that the calculated tax was actually remitted. Some exempt-entity sales were removed only where the records supported the treatment.

The same evidence problem affected purchases and assets. Actual invoices were needed to verify vendor tax. Handwritten notes on capitalization printouts, an email saying tax was paid, and monthly estimated accruals that could not be tied to individual invoices did not establish payment. A purchase made by an exempt entity also remained taxable when the taxpayer reimbursed that entity and consumed the property itself.

The taxpayer raised additional theories involving resale, delivery charges, electronically delivered custom software, real-property work, professional services, out-of-state shipments, packaging, and over-accrued use tax. The Commissioner declined relief because the taxpayer supplied no supporting documentation for those contentions.

What this means for you

• Keep invoices, exemption support, sales worksheets, and return records that reconcile transaction by transaction.
• A tax calculation does not prove the tax reached the Department.
• Internal notes, estimates, or emails may be insufficient when the auditor needs the underlying invoice.
• An exempt purchaser's status does not protect property ultimately reimbursed and consumed by a taxable business.

Common questions

Did the company lose every issue? No. The Department adjusted parts of the audit where adequate documents supported the company's position.

Why did several vending-sales exceptions remain? The worksheets treated the amounts as exempt or omitted taxable sales, contradicting the claim that tax had been remitted.

Was an email enough to prove tax on an asset purchase? No. The stated amount did not match the then-applicable rate, and the invoice was not provided.

Citations and references

• 23 VAC 10-210-6041.
• Va. Code § 58.1-609.5.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-112

Original ruling text

June 26, 2008

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in reply to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period May 2001 through April 2004. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is a provider of refreshment services including gourmet coffee, vending machine snacks, ready-to-eat meals, and its own water filtration system. The Department audited the Taxpayer and issued an assessment for additional tax and interest. The Taxpayer disagrees with the Department's assessment, contending that the auditor erroneously held taxable certain sales and purchases of tangible personal property.

DETERMINATION

Non-Taxed Sales

The Taxpayer sold food and beverages through vending machines at multiple locations. The Taxpayer states that it calculated and remitted the sales tax based on the cost price of the items sold as required by Title 23 of the Virginia Administrative Code 10-210-6041. The Taxpayer contends that it provided documentation to support its sales and exemptions, which was not accepted by the Department's auditor. The Taxpayer has recently submitted documentation in support of its position and requests that the Department revise its assessment.

Based on the Taxpayer's presentation of additional documentation, adjustments to the sales at issue are required with the exception of the following line items:

Lines 3, 4, 5 and 6: The auditor assessed the tax on these items on the basis that they were unsupported exempt sales. The Taxpayer's adjustment schedule reflects that the tax was collected and remitted on these items. However, based on the Taxpayer's worksheet for the November 2003 sales and use tax return these items are listed as exempt sales. Based on the information that has been presented, the Taxpayer has not provided any documentation that supports its assertion that the tax has been paid to the Department.

Line 7: The auditor has verified that while the Taxpayer has computed the tax on the cost price of the vending merchandise, an examination of the Taxpayer's sales tax worksheet shows that the amounts were not listed as taxable sales and as a result the tax was not remitted.

Lines 11 and 12: As in Line 7, the auditor has verified that the Taxpayer has computed the tax on the cost price of the merchandise. However, an examination of the Taxpayer's sales tax worksheet shows no taxable sales for this location and as a result tax was not remitted.

Line 16: Based on the documentation presented, this item will be adjusted to remove those sales to exempt entities where tax was charged, collected and remitted. According to the sales tax worksheet prepared by the Taxpayer, the balance of the sales under invoices numbered *, , , , , , , , and ***, were reported as exempt sales. The Taxpayer contends that the tax was collected and remitted on these sales; however, the Taxpayer does not present any proof in light of its sales tax worksheet that such taxes were collected and remitted.

Non-Taxed Purchases - Tax Remitted to State

The Taxpayer disagrees with the auditor's assessment of tax on various supplies used or consumed in the course of its business, and the assessment of tax on the purchase of vending machines and other equipment. The Taxpayer states that in these transactions, it has paid the tax to its vendors or accrued the use tax and remitted such tax to the Department.

Based on the documentation submitted to the Department regarding the non­contested purchases, the Department's audit will be adjusted to remove those items noted on the Taxpayer's listing with the exception of the following items:

Line 11: Based on documentation presented, the vendor imposed tax on only one-half of the invoice amount as if the invoice was for the purchase of a maintenance agreement. A review of the invoice clearly reflects that the purchase is not a purchase of a maintenance contract but rather a purchase of tangible personal property. There is no basis for an adjustment of this issue.

Line 14: This purchase invoice reflects two items. One item for the copier usage has been properly taxed. The remaining item for a copier maintenance plan has not been subjected to the tax at 50% of the sales price. This adjustment represents the proper application of the tax.

Line 37: This item represents the purchase of tangible personal property by an exempt entity and normally would be an exempt transaction. In this instance, however, the Taxpayer has reimbursed the exempt entity for the purchase of tangible personal property used by the Taxpayer. Accordingly, as the property is consumed by the Taxpayer, no exemption applies.

Line 54: The Taxpayer's evidence does not account for the amount subjected to the tax in the auditor's purchases exception listing. The Taxpayer contends that it has estimated the tax in some instances based on monthly sales and the tax on this invoice was part of that estimate. Because the Taxpayer's monthly estimate of taxes does not provide a detail of the invoices used to develop the estimate, the auditor gave the Taxpayer a credit for its monthly estimate and held each invoice subject to the tax. There is no evidence to support that the tax was accrued and paid on this invoice. Accordingly, there is no basis to remove this item from the audit.

Asset Purchases

Based on the documentation submitted, the Department's audit will be adjusted for the asset purchases at issue with the exception of the following items:

Lines 24, 25 and 26: The documentation provided by the Taxpayer consists of three printouts from the Taxpayer's image retrieval system reflecting the capitalization of assets. On each printout is a handwritten notation "vendor charges tax on their invoices" or "tax included in invoice total from this vendor." While such statements may be true, the auditor must see the actual purchase invoice that reflects that the vendors included the charge for the tax. As the Taxpayer has not submitted such invoices for review, I find no cause to remove these purchases from the audit.

Line 31: The Taxpayer has not provided an invoice reflecting that the Virginia retails sales and use tax has been paid. The Taxpayer has submitted an electronic mail message that states that the tax was paid; however, the tax shown in the message exceeds the amount of tax that would have been charged based on the 4.5% rate in effect at that time. Accordingly, without the invoice to review, the auditor is unable to determine if the amount the Taxpayer contends was paid is the proper tax paid or even if it is Virginia tax. I find no basis to remove the purchase from the Department's audit.

Maintenance and Repair Contracts

During the audit period, the Taxpayer states that it properly paid tax on contracts with various vendors that provided both maintenance services and repair parts for equipment and software used in various facilities throughout Virginia. The Taxpayer has recently submitted documentation in support of its position and requests that the Department revise its assessment.

I have replied to the issues involving such agreements under the heading non­taxed purchases, lines 11 and 14.

Purchases for Resale

During the audit period, the Taxpayer states that it purchased tangible personal property that was ultimately resold to its customers, but which was held taxable in the Department's audit. The Taxpayer has not presented any documentation to support its contention that the items were purchased for resale.

Separately Stated Delivery Charges

During the audit period, the Taxpayer purchased tangible personal property that included delivery charges from various vendors. The Taxpayer contends that these charges were held taxable in the Department's audit. The Taxpayer has not presented any documentation to support its contention.

Electronic Delivery of Custom Software

During the audit period, the Taxpayer states that it purchased custom software from various vendors that was delivered in tangible form or was retrieved electronically depending upon the vendor. The Taxpayer has not presented any documentation to support its contention.

Real Property Improvements and Repairs

During the audit period, the Taxpayer utilized the services of real property contractors to repair and restore real property. The Taxpayer contends that it was held liable for the tax on tangible personal property utilized by the contractor in its real property construction services. The Taxpayer has not presented any documentation to support its contention.

Non-Taxable Services

During the audit period, the Taxpayer states that tax was imposed on purchase invoices for professional services not subject to the tax under Va. Code § 58.1-609.5. The Taxpayer has not presented any documentation to support its contention.

Items Shipped Out-of-State

During the audit period, the Taxpayer states that it purchased numerous items from its vendors who shipped the property directly out of the state and is therefore not subject to the tax. The Taxpayer has not presented any documentation to support its contention.

Wrapping and Packaging Supplies

During the audit period, the Taxpayer purchased labels, tags and other supplies used as part of the packaging for food sold to its customers. The Taxpayer states it also sold containers to customers of the type that restaurants use to package food products for sale or resale. The Taxpayer contends that the Department erroneously held these items subject to the tax. The Taxpayer has not presented any documentation to support its contention.

Other Non-Taxable Items

The Taxpayer contends that it purchased numerous items and services not otherwise listed that are not subject to the tax. The Taxpayer has not presented any documentation to support its contention.

Incorrect Tax Accrual Calculation

The Taxpayer states that it reconciles its monthly accrual of tax on transactions from its general ledger and that it over accrued the amount of use tax remitted with its monthly returns for several monthly filing periods. The Taxpayer has not presented any documentation to support its contention.

Missing Invoices

The Taxpayer disagrees with the assessment of tax on missing invoices. The Taxpayer states that it submitted invoices to the auditor for review and has recently provided additional invoices that were not available at the time of the Department's audit. This issue was addressed in the non-taxed purchases section of this response, with adjustments based on the submitted documentation.

CONCLUSION

Based on the foregoing, the audit assessment has been adjusted. I note that the Taxpayer has submitted payment of the deficiency based on discussions between the Taxpayer, the auditor and a member of the Department's Appeals staff. If there are additional balances due, an updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the updated bill is paid within 30 days from the date indicated on the bill statement.

The Code of Virginia sections and regulation cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this determination, please contact * of the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1050076344.Q