Did payroll records and a reversing ledger entry prove that a fixed-asset entry was actually nontaxable labor?

Plain-English summary

Virginia upheld use tax on a vineyard business's fixed-asset entry labeled “2009 Capitalize Materials.” The business said the entry was really labor for developing vineyards and a garden and supplied a reversing ledger entry and payroll records.

Virginia found that evidence insufficient to show either that the original classification was wrong or that it had been corrected on the depreciation schedule. Following P.D. 93-77, the Department requested amended federal and Virginia corporate returns showing removal of the property from depreciation. The business supplied only its original returns.

Without the amended returns, the taxpayer did not meet its burden of proof and the assessment remained.

Citations and references

• Va. Code § 58.1-205 1
• P.D. 93-77

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-64

Original ruling text

May 2, 2018

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 November 2009 through December 2014. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer was an agricultural business focused on growing grapes for the production of wine. The Taxpayer is no longer in business, and the business has been formally dissolved. As a result of the Department's audit, the auditor assessed use tax on a fixed asset transaction identified as “2009 Capitalize Materials.” No documentation was made available during the audit to provide details about the transaction. The Taxpayer contests the inclusion of this line item in the audit and maintains that the line item is for labor associated with the development of vineyards and a garden. The Taxpayer provides documentation in support of its position and has remitted a payment of *, which it contends is the correct liability.

DETERMINATION

The Taxpayer contends that the contested transaction was erroneously recorded in its general ledger as capitalized materials. To support this, the Taxpayer provides documentation that shows an entry in its general ledger intended to record correctly the transaction as capitalized labor. The Taxpayer also provides payroll records to support that the contested transaction is associated with labor. The reversing general ledger entry and the payroll records provided by the Taxpayer are not evidentiary of an erroneous entry to the fixed asset account for capital expenses, or if an erroneous entry, was made that such entry has been corrected.

In order to make a determination in this instance, Public Document (P.D.) 93-77 (3/22/93) is instructive. In P.D. 93-77, the taxpayer maintained that it mistakenly classified the purchase of phone system additions and office phones as fixed assets instead of resale inventory on its company books. The taxpayer contested the assessment of tax on these purchases in the audit. The Tax Commissioner ruled that as evidence that the classification of the property as fixed assets was in fact erroneous, the Department would accept copies of amended federal and Virginia income tax returns that may have been filed in order to remove the property from the corporation's depreciation schedule.

Similarly, in this case the Taxpayer's amended federal and Virginia corporate income tax returns, showing that the erroneous entry has been corrected on the Taxpayer's depreciation schedule, would need to be reviewed by the Department. To that end, the Department asked the Taxpayer to provide its 2009 amended federal and Virginia corporate income tax returns showing that the capitalized materials had been removed from the Taxpayer's depreciation schedule. After numerous requests, the Taxpayer provided its original returns filed for the 2009 tax year, but not the amended federal and Virginia returns requested. As is the case with the general ledger and payroll documentation, the 2009 original returns provided by the Taxpayer are insufficient to conclude that the inclusion of the contested transaction in the audit is incorrect. The line item at issue will remain in the audit because the Taxpayer has not met the requirements of P.D. 93-77 to provide its amended returns for review by the Department. Furthermore, the Taxpayer has not met the burden of proof requirement set out in Virginia Code § 58.1-205 1 that the classification of the general ledger entry at issue is erroneous and that such classification has been corrected.

The information provided is not sufficient to revise the audit and adjust the assessment. Accordingly, the assessment as issued is correct and outstanding balance remains due and payable. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the bill is paid within 30 days of the bill date. Please 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 section and the public document 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 determination, you may contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1190.P