Were stage-equipment rentals exempt because a naval air station or nonprofit event organizer paid for them, and was the purchase sample invalid?

Plain-English summary

Virginia upheld use tax on stage-equipment rentals used to perform entertainment and production services. A service contractor is the taxable user and consumer of tangible personal property used in its work, even if title passes to a government customer or the contractor is reimbursed.

The company's unsigned agreement and unexplained ledger did not establish that the naval air station bought the equipment through official purchase orders paid from public funds. The company also invoiced the air station for staging and held the vendor invoice for the mobile stage and roof, supporting the conclusion that the company used the equipment in providing its services.

A nonprofit event organizer's exemption did not change that result. Its exempt status was nontransferable, and even direct payment to the rental vendor was treated as payment of the company's contracted event expense rather than the nonprofit's use of the equipment.

The purchase sample also stood. Some invoices presented on appeal had already been removed during the audit, and the company offered no evidence showing that the remaining sample was unrepresentative or invalid.

Common questions

Q: Does reimbursement by an exempt customer make a service contractor's equipment purchase exempt?
A: No. The ruling focused on who used and consumed the property in performing the service.

Q: What was required for the government-purchase exemption?
A: The ruling required official purchase orders and payment from public funds, which the submitted records did not establish.

Citations and references

• Va. Code §§ 58.1-604, 58.1-609.5(1), and 58.1-609.11.
• 23 VAC 10-210-690 and 23 VAC 10-210-693(C).
• Virginia Public Documents 95-198 (July 31, 1995) and 89-69 (March 21, 1986, as cited in the ruling).

Subject

Use tax assessed on equipment and supplies purchased and consumed by Taxpayer

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-130

Original ruling text

August 9, 2012

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

Dear *:

This reply is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you request correction of the retail sales and use tax assessment issued for the period May 2005 through December 2010. I apologize for the delay in responding to your inquiry.

FACTS

The Taxpayer provides entertainment, production and promotion services for various events. As a result of the Department's audit, use tax was assessed on equipment and supplies purchased and consumed by the Taxpayer in the provision of those services.

The Taxpayer protests the assessment and maintains that its stage equipment rentals qualify as exempt. The Taxpayer also contends that Public Document (P.D.) 95-198 (7/31/95) cited by the auditor, does not apply in this instance. Finally, the Taxpayer believes the sampling methodology used in the audit is faulty, maintaining that the assessed purchases were correctly taxed when purchased.

DETERMINATION

Government Contractors

Title 23 of the Virginia Administrative Code (VAC) 10-210-693 C provides in pertinent part:

The appropriate tax treatment of purchases of tangible personal property by persons who contract with the federal government, the state or its political subdivisions, is based upon whether the contract is for the sale of tangible personal property (e.g., a computerized data retrieval system) or for the provision of an exempt service (e.g., real property facilities management). If a transaction is for the sale of tangible personal property, a contractor may purchase the tangible personal property exempt of the tax using a resale exemption certificate, Form ST-10. The tangible personal property may be resold to the government exempt of the tax.

However, if a transaction is for the provision of services, the contractor is deemed to be the taxable user and consumer of all tangible personal property used in performing its services, even though title to the property may pass to the government or the contractor may be fully and directly reimbursed by the government or both.

Additionally, Title 23 VAC 10-210-690 provides:

Sales 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 out of public funds are taxable.

In P. D. 95-198, the taxpayer provided contracted entertainment services. In some instances, the taxpayer also provided pre-production arid on-site sound, light and crew management. It was ruled that the taxpayer was providing tax exempt services in accordance with Va. Code § 58.1-609.5 1 and thereby liable for the tax on the rental of tangible personal property used in the provision of those services.

In this instance, the Taxpayer contracted with a naval air station to provide staging and entertainment services. The Taxpayer was assessed use tax on stage equipment rentals, which it argues were paid by the naval air station. To support its contention, the Taxpayer presents its service agreement with the air station. The Taxpayer also presents a disbursement journal that it believes evidences the naval air station's payment of the stage equipment rentals. The Taxpayer states that the agreement clearly demonstrates that the naval air station directly pays all vendors used by the Taxpayer in the provision of its services. The Taxpayer also states that the stage equipment was used by the naval air station.

Although the Taxpayer presents an agreement between itself and the naval air station, the agreement is unsigned and does riot name the naval air station as the purchaser of services. Additionally, the Taxpayer presents no documentation that demonstrates the stage equipment rental was made as the result of official purchase orders. I am unable to determine the source of the ledger presented by the Taxpayer, nor am I convinced that the stage equipment was paid for using public funds. The agreement is merely a description of the services that the Taxpayer has agreed to provide and offers no evidence of the method of vendor requisition or payment. Accordingly, based on the documentation presented and in accordance with Title 23 VAC 10-210-690, the stage equipment rental does not qualify as an exempt government purchase.

Further, the Taxpayer presents an invoice that it submitted to the naval air station that includes the cost of "band shell/staging" for the event. However, the invoice amount for the "band shell/staging does not correspond to the amounts specified in the Taxpayer's protest for "stage equipment rentals". The Taxpayer has subsequently submitted an invoice from the vendor to the Taxpayer for "mobile staging and a load bearing roof” for the protested amount. The Taxpayer explains that the stage and roof cover (called a band shell) is the same as the "stage equipment rentals" referred to in the Taxpayer's protest letter. In regard to the differing amounts, the Taxpayer explains that both the actual invoice from the vendor and the naval disbursement journal indicate payment of a slightly higher amount than the protested amount. According to the Taxpayer, the auditor reviewed a proposed budget sheet for the "band shell/staging" and not the final invoice billed to the Taxpayer.

Notwithstanding the above explanation and in accordance with the above discussion and P.D. 95-198, the Taxpayer is deemed the user and consumer of the band shell/staging equipment in the provision of its entertainment services. See also P. D. 89-69 (3/21/86).

Based on the information presented and in accordance with the foregoing authorities, the Taxpayer was correctly assessed use tax on its rentals of stage equipment. Therefore, I find no basis to adjust the assessment for these purchases.

Nonprofit Organizations

A service organization (USO) contracted with a Virginia locality to sponsor a military celebration. The USO established a nonprofit organization to organize and execute the event. The nonprofit organization contracted with the Taxpayer to provide entertainment, promotion and production services.

In its appeal, the Taxpayer states that it acted on behalf of the non-profit organization when renting the assessed stage equipment and presents its agreement with the entity as support. The agreement states that all event expenses will be paid directly to the vendor or reimbursed by the nonprofit organization.

Virginia Code § 58.1-609.11 provides an exemption from the tax for any qualifying nonprofit organization that holds a valid exemption certificate from the Department. The statute exempts purchases of tangible personal property made by a qualifying nonprofit organization for its own use or consumption.

Although the nonprofit organization in this instance may qualify for the exemption, its exempt status is nontransferable. The General Assembly's intent is clear in its award of tax exempt status. The language of the law specifically grants the exemption only to the qualifying entity and offers no agency status to another party.

The agreement between the nonprofit event organization and the Taxpayer states in pertinent part: "[A]II expenses in any way pertaining to [the Taxpayer]'s obligation under this Agreement shall be considered Event expenses, ...to be paid/reimbursed by [the nonprofit organization] as such expenses are incurred and no later than ten (10) days after [the Taxpayer's] submission of supporting documents for such expense." Inserts added.

The Taxpayer offers additional documentation that demonstrates that the nonprofit organization paid the vendor for the stage equipment rental. However, the fact that the organizer may have directly paid for the stage equipment rental has no bearing on this issue. The event organizer's payment for the rental would simply be payment of contracted fees that does not constitute use. Based on the documentation presented, it is clear the stage equipment was used and consumed by the Taxpayer in the provision of its production and entertainment services. Accordingly, I find no reason to remove the stage equipment rental from the assessment.

Purchases

Virginia Code § 58.1-604 imposes the use tax on the cost price of each item of tangible personal property used and consumed in Virginia.

In its appeal, the Taxpayer presents several invoices for assessed items that evidence the correct tax being charged at purchase. However, as these purchases were previously removed from the assessment during the audit, I find no basis for adjustment.

Sampling Methodology

The Taxpayer protests the Department's sampling methodology and argues that all purchases were improperly assessed. The Taxpayer states the auditor's sample is faulty and requests a detailed audit based on several purchases it believes were assessed incorrectly. However, as discussed in the foregoing, review of the purchase invoices presented during the appeal indicated the protested amounts were previously removed from the assessment during the audit.

Despite the Taxpayer's contentions, I find no basis to invalidate the sample calculations. Before requiring that a detailed audit be conducted or a sample period be adjusted or extended, the Taxpayer must demonstrate that the sample is not representative of the audit period or that it is flawed in a manner that would invalidate the sample.

Further, sampling is used to determine tax liability when the volume of transactions is great. In this case, because the Taxpayer was not registered for sales tax or consumer use tax, the audit period was extended for five years. As the large volume of purchases made during the audit period made it impractical to perform a detailed audit, a statistical sample was used. Using statistical sampling when there is a large volume of transactions reduces compliance costs and time for both the Department and taxpayers without impacting on accuracy.

Although the Taxpayer requests a detailed audit, it presents no additional evidence to demonstrate the remaining purchases were improperly assessed or that a detailed audit is warranted in this instance. I find that the sampling methodology was applied properly.

CONCLUSION

Based on the foregoing, the assessment is correct. A revised bill, with interest accrued to date, will be mailed to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days of the date of the bill. The Taxpayer should remit payment within 30 days from the date of the bill to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *, Post Office Box 27203, Richmond, Virginia 23261-7203.

The Code of Virginia sections, regulations and public documents 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 about this determination, you may contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4815053982.M