Were equipment invoices labeled as low-rate-program fees taxable handling charges or excluded interest?

Subject

The low rate program fees listed on the invoices are interest charges

Plain-English summary

Virginia removed low-rate-program fees from a sales-and-use-tax audit after the invoices and finance contracts showed that the fees were interest on financed construction equipment. The auditor had initially treated the fees as taxable handling charges.

Virginia's definition of sales price excludes specified finance, carrying, service, or interest charges arising from credit extended under conditional sales or other deferred-payment contracts. Based on the documentation, the Commissioner concluded that the disputed fees fit that exclusion.

The noncontested assessment had already been paid. After removing the interest charges, the Department said the audit assessment would be paid in full.

What this means for you

• A fee's invoice label does not necessarily control its tax treatment; the underlying contract and economic character matter.
• Keep finance contracts and invoices showing that a separately identified fee is interest for deferred payment.
• Here, those records established that the fee was excluded from taxable sales price rather than a taxable handling charge.
• The ruling removed only the documented interest charges described in this audit.

Common questions

Q: Why did the auditor originally tax the fees?
A: The auditor concluded that the low-rate-program fees were handling charges.

Q: What evidence changed the result?
A: The taxpayer supplied invoices and finance contracts showing that the fees represented interest on the financed equipment.

Q: Does Virginia's sales price include these interest charges?
A: No. The ruling applied the statutory exclusion for specified finance and interest charges connected with deferred-payment sales.

Q: What was the audit result after the adjustment?
A: The fees were removed, and because the uncontested portion had been paid, the audit assessment was paid in full.

Citations and references

• Va. Code § 58.1-602.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-95

Original ruling text

June 18, 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 October 2000 through September 2006. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer provides underground and overhead utility services for the utility industry. During the audit period, the Taxpayer purchased construction equipment from a vendor. The Taxpayer financed the construction equipment for a period of 36 months. The vendor's invoice lists a low rate program fee on each invoice. As a result of the Department's audit, the auditor concluded that the fee is a handling charge and assessed the tax.

The Taxpayer contends that the low rate program fees listed on the invoices are interest charges. The Taxpayer has provided additional documentation in the form of finance contracts to support its contention that the interest charges are not subject to retail sales and use tax.

DETERMINATION

Virginia Code § 58.1-602 excludes from the definition of "sales price" the following charges: "finance charges, carrying, service charges or interest from credit extended on sales of tangible personal property under conditional sales contracts or other conditional contracts providing for deferred payments on the purchase price."

Based on a review of the invoices and finance contracts, the charges listed as low rate program fees represent interest charges in connection with the financing of the construction equipment. Accordingly, low rate program fees will be removed from the audit.

The audit will be revised as determined above. Based on the Department's records, the non-contested portion of the assessment has been paid in full. Therefore, after removal of the interest charges, this audit assessment will be paid in full.

The Code of Virginia section cited, along with other reference documents, 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 about this determination, you may contact the Department's Office of Tax Policy, Appeals and Rulings, at *.

Sincerely,

Janie E. Bowen

Tax Commissioner

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