My landscaping business was audited for six years instead of the usual three because I'd never registered for use tax, and the auditor won't remove items I say I already paid tax on, or leased equipment, or downloaded software -- can I fight any of this without documentation?

Plain-English summary

This ruling packs five separate documentation disputes into one audit, and every single one turns on the same lesson: a legal exemption or credit is worthless on appeal without paperwork proving you actually qualify for it -- and failing to register for use tax in the first place can cost you an extra three years of audit exposure.

The taxpayer, a landscaping business operating at multiple Virginia locations, was assessed tax and interest on five categories of items after a Department audit. As a real property contractor providing landscaping services, the business is treated by law as the taxable USER and CONSUMER of the plants, sod, mulch, and similar materials it installs (Va. Code § 58.1-610 A; 23 VAC 10-210-610; P.D. 07-171) -- meaning it owes sales tax on those purchases itself, and must remit use tax if a vendor didn't collect it.

On EACH disputed category, the business's arguments failed for lack of proof:

• Tax allegedly already paid: the business said tax had been paid on various contested transactions but couldn't produce invoices; a general claim that vendors "usually" collect tax on similar transactions isn't evidence that tax was paid on the SPECIFIC transactions at issue.
• Employee expense reimbursements: employees bought tangible property and were reimbursed by the business; without proof tax was paid (or that the items were bought and used entirely outside Virginia), the reimbursed purchases stayed in the audit.
• Leased equipment: Virginia taxes the lease/rental of tangible personal property (Va. Code § 58.1-603) unless the "true object" of the transaction was really a service, not the property itself (the true object test, 23 VAC 10-210-4040) -- the business never provided documentation showing the leases were really service arrangements.
• Electronically delivered software: Virginia doesn't tax prewritten software delivered purely by electronic download with no tangible medium (a long-standing Department policy, most recently detailed in P.D. 05-44 and expanded in P.D. 16-124) -- but again, no documentation (a vendor certification, an invoice specifying delivery method) was provided to prove the software at issue was actually delivered that way.

On the audit period itself, the business argued the standard three-year statute of limitations (Va. Code § 58.1-634) should have capped the audit, not the six years actually used. But that three-year cap extends to six years when the Department has reasonable cause to believe a person was legally required to file a return and didn't -- and here, the business had never registered for the consumer use tax and had never filed any use tax returns at all. Because the initial three-year review turned up actual use tax liability, the Department was entitled to extend the audit an additional three years, exactly as the statute contemplates.

Despite upholding the assessment on every point, the Department extended the business one final courtesy: 60 days to submit documentation on any of the disputed items before the assessment became immediately due and payable.

What this means for you

Real property contractors, landscapers, and similar service businesses installing materials

You're the taxable end-user of the materials you install (plants, sod, mulch, fencing, and similar items) -- you owe sales tax when you buy them, or use tax if a vendor doesn't collect it. Register for the consumer use tax if you're not already, since failing to register and never filing use tax returns is exactly the kind of circumstance that can extend an audit's lookback period from three years to six.

Anyone claiming tax was already paid, or that a transaction qualifies for an exemption

Bring actual documentation for each SPECIFIC transaction you're disputing -- invoices, vendor certifications, sales agreements. A general claim that a vendor "usually" charges tax, or that software "was probably" delivered electronically, isn't evidence; the Department reviews and requires proof transaction by transaction.

Businesses that reimburse employees for business purchases

Keep the same kind of documentation for reimbursed employee purchases that you'd keep for your own direct purchases -- proof that sales tax was paid, or that the item was purchased and used entirely outside Virginia. Without it, those reimbursed purchases can be taxed in an audit just like any other undocumented purchase.

Anyone leasing equipment and hoping it's treated as an exempt service

The "true object" test looks at whether the real point of the transaction is a service or the property itself -- and the burden is on you to document that a lease was really structured as, and functions as, an exempt service arrangement. Absent that proof, equipment leases are taxed as ordinary rentals of tangible personal property.

Common questions

Q: The Department extended my audit from three years to six -- is that allowed?
A: Yes, if you weren't registered for the applicable tax (here, consumer use tax) and never filed returns, and the initial three-year review found actual tax liability. Virginia law specifically permits extending the lookback to six years under those circumstances.

Q: Can I remove items from an audit just by saying tax was already paid on them?
A: No -- you need actual documentation (invoices, vendor records) for each specific transaction. A general pattern of a vendor usually collecting tax isn't sufficient evidence that tax was paid on the particular items in dispute.

Q: Are purchases my employees made and got reimbursed for treated differently than my own direct purchases?
A: No -- they're treated the same way. If you can't document that tax was paid (or that the purchase and use happened entirely outside Virginia), reimbursed employee purchases stay in the audit just like any other undocumented purchase.

Q: How do I prove my software purchase was tax-exempt because it was delivered electronically?
A: You need documentation that expressly certifies electronic delivery and confirms no tangible medium (like a disc or USB drive) was furnished -- a sales invoice, contract, or vendor statement referencing the specific transaction. Without that, the Department assumes the software was delivered in taxable tangible form.

Citations and references

• Va. Code § 58.1-610 A (real property contractors are deemed to have purchased installed tangible personal property for their own use or consumption)
• 23 VAC 10-210-610 (florists, nurserymen, landscapers, and contractors; tax applies to their purchases of plants, sod, and similar materials)
• P.D. 07-171 (11/7/2007) (real property service businesses are the taxable users/consumers of installed materials)
• Va. Code § 58.1-633 A; 23 VAC 10-210-470 (dealer recordkeeping and three-year record retention requirements)
• Va. Code § 58.1-603 (imposes sales tax on the lease or rental of tangible personal property)
• Va. Code § 58.1-609.5 1; 23 VAC 10-210-4040 (service exemption and the "true object" test for mixed property/service transactions)
• P.D. 05-44 (4/4/2005) (minimum documentation requirements to prove electronic software delivery)
• P.D. 16-124 (6/22/2016) (expanded acceptable documentation, e.g., a vendor email referencing the specific transaction)
• Va. Code § 58.1-634 (three-year statute of limitations on audits, extendable to six years for fraud or where a required return was never filed)

Subject

Documentation : Statute of Limitations

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-47

Original ruling text

March 22, 2022

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 assessments issued to * (the “Taxpayer”) for the period March 2011 through April 2017. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates a landscaping business with multiple locations in Virginia. As a result of the Department’s audit, the Taxpayer was assessed tax and interest on fixed assets, untaxed purchases, employee expense reimbursements, leases of tangible personal property, and purchases of software. The Taxpayer appeals, contending sales tax was paid at the time of purchase where applicable and as such, they should be removed from the audit. The Taxpayer also contends that the expansion of the audit period to six years was unreasonable and should be limited to three years.

DETERMINATION

Virginia Code § 58.1-610 A provides, in pertinent part, that:

Any person who contracts orally, in writing, or by purchase order, to perform construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures thereon, and in connection therewith to furnish tangible personal property, shall be deemed to have purchased such tangible personal property for use or consumption.

Title 23 of the Virginia Administrative Code (VAC) 10-210-610 provides guidance for florists, nurserymen, landscapers and contractors. Title 23 VAC 10-210-610 states, “the tax applies to retail sales or flowers, potted plants, shrubbery, nursery stock, sod, wreaths, bouquets, and similar items”.

Pursuant to Public Document (P.D.) 07-171 (11/7/2007), the Tax Commissioner determined that businesses that perform real property services would be the taxable users and consumers of the trees, plant materials, sod, silt fence and other similar items and must pay the application sales tax when purchasing these items from vendors. If a vendor does not charge the sales tax, the business will be responsible for remitting the use tax on the untaxed purchases to the Department.

Virginia Code § 58.1-633 A states that every dealer required to file a retail sales and use tax return and pay or collect such tax must keep and preserve suitable records of the sales, leases, or purchases, as the case may be, subject to the retail sales and use tax. The dealer must also maintain such other books of account as may be necessary to determine the amount of tax due, and “such other pertinent information as may be required by the Tax Commissioner”. This record keeping requirement is further explained in Title 23 VAC 10-210-470:

Every person who is liable for collection of sales tax or remittance of use tax or both is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Such records must include… a daily record of all cash and credit sales, including sales under any type of financing or installment plan in use… A record of the amount of all merchandise purchased, including a bill or lading, invoice, purchase order or other evidence to substantiate each purchase… A record of all tangible property used or consumed in the conduct of the business… Records must be open for inspection and examination… by the Department of Taxation…

Sales Tax Paid or Accrued

The Taxpayer claims that sales tax was assessed on various transactions in the audit on which the sales tax was paid. While the Taxpayer cannot provide invoices for the transactions in question, the taxpayer states that it is attempting to locate documentation demonstrating that sales tax has been paid on these transactions.

The Taxpayer’s arguments that vendors consistently collect sales tax in similar transactions are not sufficient evidence that the tax was paid on contested items. Taxpayers are clearly required to provide documentation to show that the tax was paid.

Employee Expense Reimbursements

The auditor assessed the tax on purchase made by employees that were reimbursed by the Taxpayer. The employees purchased tangible personal property and were reimbursed by the Taxpayer for the expense. The Taxpayer could not provide documentation to show that the tax was paid on these purchases. Unless the Taxpayer provides documentation that the tax was paid on the contested items or that the items were purchased outside Virginia and no use of the property was made in this state, there is no basis to remove the items from the audit.

Lease of Tangible Personal Property

Virginia Code § 58.1-603 imposes the sales tax on the lease or rental of tangible personal property in the Commonwealth. The tax is computed on the gross proceeds derived from such lease or rental.

Virginia Code § 58.1-609.5 1 provides an exemption from the sales and use tax for "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made...." Title 23 VAC 10-210-4040 addresses the application of the tax to service transactions and states, "Charges for services generally are exempt from the sales and use tax. However, services provided in connection with sales of tangible personal property are taxable." The regulation describes the "true object" test used in determining whether a transaction involving both the rendition of services and the provision of tangible personal property constitutes an exempt service or a taxable retail sale. The “true object” test states:

If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable. In this case, the Taxpayer has not provided documentations sufficient to show that the true object of transaction for leased equipment was in procurement of a service.

Electronic Delivery of Software

The Taxpayer also disputes the inclusion of several software purchases in the audit and argues that because there was no tangible personal property received it was not taxable. It is the Department’s long-standing policy that the sale or prewritten software delivered electronically to customers does not constitute the sale of tangible personal property and is generally not subject to sales and use taxation.

Virginia Code § 58.1-609.5 1 provides an exemption from the tax, in part, for “services not involving an exchange of tangible personal property which provide access to or use of the Internet and any other related electronic communication service, including software, data, content and other information services delivered electronically via the Internet.” In P.D. 05-44 (4/4/2005), the Department set forth minimum documentation requirements for confirming the electronic delivery of software products. At a minimum a sales invoice, contract or other sales agreement must expressly certify the electronic delivery of the software and that no tangible medium for that software has been furnished to the customer. The Department expanded the documentation requirements in P.D. 16-124 (6/22/2016) when it opined that an email or statement from a vendor referencing the specific transaction at issue, or similar documentation could be sufficient evidence of the software delivery method. Again, the Taxpayer has provided no documentation to support its claim that the software was delivered by electronic download and there was no provision of the software in tangible form.

Statute of Limitations

The Taxpayer argues that because the three-year statute of limitation had expired prior to the extension, the audit period could not be extended an additional three years. Virginia Code § 58.1-634 provides, in part that, “the Tax Commissioner shall not examine any person's records beyond the three-year period of limitations unless he has reasonable evidence of fraud, or reasonable cause to believe that such person was required by law to file a return and failed to do so.”

It is my understanding that the Taxpayer was not registered for the consumer use tax and no returns had been filed. Because use tax liability was found in the initial three-year period reviewed, the audit period was extended to include an additional three years. .

CONCLUSION

In accordance with Virginia Code § 58.1-634, an audit period of six years is proper in this instance. Further, based upon the information presented and the above referenced authorities, the assessments were properly issued.

Notwithstanding the foregoing, I am willing to grant the Taxpayer one final opportunity to provide documentation to the Department for review with respect to the audit period at issue. The Taxpayer must provide the records and documentation to the Department within 60 days of the date of this letter. Once received, the information will be reviewed by audit staff and revisions will be made, if warranted. Should the taxpayer fail to provide the documentation within the allotted timeframe, the assessment will become immediately due and payable.

The Code of Virginia sections, regulations and public documents are available online at www.virginia.tax.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions concerning this determination, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1905.A

Related Documents

07-171

05-44

16-124