Did removing one floor-repair transaction from a Virginia restaurant audit eliminate the whole sales-tax assessment?

Plain-English summary

Virginia confirmed that the restaurant's floor-repair transaction had been removed and refunded, but rejected the request to erase more of the audit. The repair involved removal and replacement work using cement board, sealant, tile base, and epoxy grout. It was a service to real property, so the contractor was responsible for tax on the materials and the restaurant did not owe tax on the contractor's charge.

The taxpayer argued that this item had been projected across the audit period. The Department explained that it was a separately detailed transaction. The cited schedule used it only when allocating total measures among localities; it was not included in the projected measure used to calculate the audit error.

Removing the item reduced the audit and produced a refund of tax plus interest, paid through two checks. It did not eliminate the remaining assessment. The taxpayer had not proved error on the other items and was outside the 90-day period for raising additional audit issues.

What this means for you

• Real-property repair contractors generally pay tax on the materials they consume; the customer does not pay sales tax on the contracting service described here.
• A detailed audit item can be removed without changing the sample projection or the rest of the assessment.
• Read each audit schedule for its actual purpose before assuming an item was extrapolated.
• Preserve appeal deadlines and raise every disputed item within the applicable period.

Common questions

Q: Why was the floor-repair charge removed?
A: The contractor performed repair services to real property and was treated as the consumer of the materials.

Q: Was the floor-repair amount projected across the audit?
A: No. Virginia said it was separately detailed and not included in the projected measure.

Q: Did the taxpayer receive its refund?
A: The Department's records showed two checks for the tax and refund interest; one had been cashed and the other had been issued but not yet cashed.

Q: Could the taxpayer reopen other audit issues?
A: No. The ruling said the 90-day limitation barred new challenges to other matters for the audit period.

Citations and references

• Va. Code §§ 58.1-1821, 58.1-603, and 58.1-610.
• 23 VAC 10-210-410 G.
• The Department's August 2, 2012 determination, quoted and applied in P.D. 13-199.

Subject

Tax on tangible personal property purchased with respect to floor repair services.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-199

Original ruling text

October 31, 2013

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

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer") in which you seek correction of the retail sales and use tax assessment issued for the period April 2007 through January 2010. I apologize for the delay in responding to your correspondence.

FACTS

The Taxpayer operates as a national restaurant chain in Virginia. The Taxpayer was audited and issued an assessment by the Department. The Taxpayer filed an appeal, contesting the assessment of tax related to tangible personal property purchased with respect to floor repair services. The Taxpayer also contested the assessment of tax on charges for services to install an HVAC system and for legal fees. The Department issued a determination letter to the Taxpayer on August 2, 2012. In accordance with Va. Code § 58.1-603, Va. Code § 58.1-610 and Title 23 of the Virginia Administrative Code (VAC) 10-210-410 G, the transaction related to floor repair services was removed from the audit. The transactions related to the HVAC installation and the legal fees were deemed to be properly included in the audit.

DETERMINATION

In the Taxpayer's most recent letter, the Taxpayer again requests that the transaction related to the floor repair services be removed from the assessment. The Taxpayer maintains that the transaction at issue was improperly extrapolated across the audit period, and contends that the figure used in the audit cannot be substantiated by the Department. Further, in the Taxpayer's June 11, 2013 e-mail to the Department, the Taxpayer maintains that Schedule A-5 is proof that the amount derived from the flooring repair transaction was extrapolated over the entire audit.

This issue was addressed in the determination letter dated August 2, 2012:

The Taxpayer presents an invoice from a contractor for the purchase of flooring repairs. The invoice and accompanying cost estimate indicate the repairs include the installation of cement board, water sealant, new tile base and epoxy grout. The repairs included the removal of the existing tile, grout and drywall above the floor.

Based on the description included in the purchase invoice and cost estimate, the contractor is providing repair services with respect to real property. The foregoing authorities deem that contractors providing such services are subject to the tax on all materials and supplies used in the provision of its services. Accordingly, as the purchaser of such contracting services, the Taxpayer is not subject to the tax.

Based on this determination, a refund in the amount of * in tax plus refund interest relating to the floor repair issue will be issued to the Taxpayer.

The transaction related to the floor repair was not a part of the projection that was extrapolated across the audit. Rather, the transaction was detailed and scheduled as a separate measure in the audit. Schedule A-5 is used to determine the percentage of error for the localities and the percentage of the assessment that goes to each locality where the Taxpayer operates its business. The measure related to the floor repair transaction is not included in the projected measure amount listed on Schedule A-5. Rather, the measure related to the floor repair transaction is only included in the total measure per locality code to show the total amount of measure (projected and detailed) for the localities where the Taxpayer's businesses are located.

In accordance with the Department's determination letter, the transaction at issue has been removed from the audit. The audit includes three other exceptions lists that were used to determine the total measure and the taxable liability in the audit. The removal of the transaction at issue from the audit reduced the total measure but it did not result in the abatement of the entire assessment as issued. The adjustments to the audit as required in the determination letter have been made. Accordingly, no additional action with respect to this audit is required.

Refund

Based on the August 2, 2012 determination letter, the Taxpayer was due a refund totaling * in tax plus refund interest. The Department's records indicate that two checks were issued by the Department for the tax and refund interest due. The first check was issued for and was dated March 3, 2013. This check has been cashed by the Taxpayer. The second check was issued for ** and was dated September 12, 2013. As of the date of this letter, this check has not been cashed by the Taxpayer. This represents the total amount of refund due to the Taxpayer with respect to the floor repair issue that was raised in its appeal.

The Taxpayer did not demonstrate in its appeal that the tax was incorrectly assessed with respect to any other issues. The Taxpayer is barred by the 90-day statute of limitations from contesting any other matters related to the audit period at issue, as provided in Va. Code § 58.1-1821. Accordingly, the remainder of the assessment is correct as issued. This letter represents the final time the Department will address the tax assessment for the audit period at issue.

The Code of Virginia sections and regulation cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this response, you may contact * in the Office of Tax Policy, Appeals and Rulings at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5251588073.P