Could a truss seller remove delivery and design charges from its Virginia audit and receive credit for tax paid to vendors?

Subject

Truss design stayed taxable, while documented delivery and vendor-tax credits could adjust the audit

Plain-English summary

Virginia upheld the audit but allowed two limited adjustment paths. The roof-truss seller billed materials in a lump sum that allegedly included a $45 shipping charge. Although exempt transportation normally had to be separately stated, Virginia allowed the seller 45 days to document a reasonable delivery amount for this audit only.

The seller could not remove design services from the taxable price. Virginia treated the design work as part of the sale of the trusses and said it would remain taxable even if separately stated.

Virginia also allowed audit credit for qualifying sales or use tax erroneously paid to vendors on or after February 1, 2004. North Carolina tax had to be recovered from the vendors that charged it. Interest remained due because it compensated Virginia for use of the money, and the audit delay resulted from the taxpayer's designated accountant failing to respond.

What this means for you

• Delivery charges generally must be separately stated to qualify for exemption.
• Design work integral to a tangible product sale can remain taxable even on a separate line.
• A consumer seeking direct credit or refund must identify the vendor and explain why the vendor will not make the claim.
• Audit interest was mandatory and not treated as a discretionary penalty.

Common questions

Was the claimed $45 delivery charge automatically accepted?

No. The seller had to provide documentation supporting $45 or another reasonable portion within 45 days.

Were separately stated truss-design fees exempt?

No. Virginia said the design services were part of the truss sale and taxable either way.

How far back did the vendor-tax credit reach?

The ruling applied the three-year limitation to qualifying tax paid on or after February 1, 2004.

Citations and references

• Va. Code §§ 58.1-602, 58.1-609.5(3), 58.1-1812, 58.1-1820, and 58.1-1823.
• 23 VAC 10-210-6000 and 23 VAC 10-20-165(D)(3)(2), as cited.
• P.D. 88-15, 90-107, and 95-92.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-113

Original ruling text

July 16, 2009

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

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer"), for the period of February 2000 through January 2006. I apologize for the delay an responding to your appeal.

FACTS

The Taxpayer provides roof truss, floor truss and I-beam systems to the building industry. An audit of the Taxpayer for the aforementioned period resulted in an assessment for its failure to charge sales tax on the sale of trusses and design services.

The Taxpayer claims that the assessment on sales of trusses includes exempt delivery charges. The Taxpayer also protests the tax assessed on design services. Furthermore, the Taxpayer seeks a credit for sales tax paid to various vendors. The Taxpayer also protests the additional interest that accrued during the period in which the auditor was working with the Taxpayer's designated accountant.

DETERMINATION

Delivery Charges

The Taxpayer claims that a $45 shipping charge is included in the lump sum charge for materials on the customer invoice. The Taxpayer requests that it be allowed to segregate the exempt shipping charges from the lump sum materials charge.

Virginia Code § 58.1-609.5 3 provides that the retail sales and use tax shall not apply to transportation charges separately stated. Title 23 of the Virginia Administrative Code (VAC) 10-210-6000 interprets Va. Code § 58.1-609.5 3 and provides that the tax does not apply to transportation or delivery charges added to a taxable sale, provided such transportation charges are separately stated on the invoice to the customer. These charges, commonly known as "transportation-out," are charges for delivery from the seller to the purchaser.

For purposes of this audit only, I will allow a reasonable portion of the lump sum charges to be considered as representing nontaxable delivery charges. This is consistent with the policy set out in Public Documents (P.D.) 90-107 (7/9/90) and 95-92 (4/28/95). In this instance, the Taxpayer has provided no documentation that $45 represents the average delivery charge. The Taxpayer must provide the audit staff documentation supporting the $45 delivery charge or a reasonable portion of the lump sum charges as representing nontaxable delivery charges. I would note that delivery charges in the future must be separately stated from material charges in order to enjoy the exemption.

Design Services

In this instance, the tax was assessed on the total charge for the design and materials used for the construction of the trusses. The Taxpayer asserts, however, that the design services should not be subject to the retail sales and use tax. The Taxpayer requests that it be allowed to segregate an appropriate design service fee from materials.

The sales tax is imposed on the gross sales price of tangible personal property when sold at retail. Virginia Code § 58.1-602 defines "sales price" to mean "the total amount for which tangible personal property or services are sold, including any services that are a part of the sales . . . without deduction therefore on account of the cost of the property, sold, the cost of materials used, labor or service costs , losses or any other expenses whatsoever." [Emphasis added.]

In this case, the design services are a related part of the sale of the trusses and therefore taxable. Furthermore, had the design services been separately stated, the total charge for such would be taxable as set forth in P.D. 88-15 (1/4/88).

Taxes Erroneously Paid To Vendors

Virginia Code § 58.1-1820 permits the Department to issue direct refunds of sales and use taxes to consumers that have paid the tax to dealers. The Taxpayer requests that the Department issue direct refunds of sales and use taxes paid on supplies that are exempt, rather than requiring the Taxpayer to seek the refunds from its vendors.

Title 23 VAC10-20-165 D 3 2 states:

When a consumer is applying for a refund of sales or use tax assessed against a dealer or contractor, the consumer shall identify the dealer or contractor, explain the circumstances surrounding the payment by the consumer and explain why the claim for refund could not, or would not, be made by the dealer or contractor.

Based on the circumstances in this case, I will allow credit in the audit for the tax paid to vendors within the statute of limitations established by the filing of this appeal. In this instance, the three-year statute of limitations prescribed in Va. Code § 58.1-1823 applies to tax erroneously paid to vendors on or after February 1, 2004. The auditor explained that the Taxpayer would have to seek refunds from vendors in North Carolina that charged the North Carolina sales tax.

Interest Calculation

The Taxpayer maintains that interest should be calculated through July 31, 2006 and not November 1, 2006.

In late August 2006, the Department's auditor sent an audit report to the Taxpayer. At approximately this same time, the Taxpayer hired a certified public accountant and requested that all communication regarding the audit be made through the accountant. The accountant was authorized by a Power of Attorney to represent the Taxpayer regarding the contested audit issues. Over the course of the next several months, the Department's auditor made numerous attempts to contact the accountant to determine if additional changes needed to be made to the audit report. The accountant failed to return the auditor's calls and subsequently the audit was closed on November 1, 2006. The delay in finalizing the audit report was a result of the failure to communicate by the Taxpayer's designated contact.

Virginia Code § 58.1-1812 mandates the application of interest to any tax assessment. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it simply represents a fee for the use of money over a period of time. In this case, the Taxpayer had use of the money that was properly due the Commonwealth. Therefore, I find no basis to waive the interest assessed as a result of the Department's audit.

CONCLUSION

Based on the foregoing, the assessment is correct. The Taxpayer has 45 days from the date of this letter to provide to the Department documentation regarding the delivery charge issue. A member of the audit staff will contact the Taxpayer to make arrangements to review any additional documentation. In addition, a credit will be applied to the audit for taxes erroneously paid to vendors as set out above.

The audit will be adjusted as warranted based on the Department's review of the additional documentation provided to support the delivery charges. Upon completion of the auditor's review, an updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding balance of the bill is paid within 30 days from the bill date. The payment should be remitted to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P. O. Box 27203, Richmond, Virginia 23261-7203, Attn: *.

The Code of Virginia and regulation sections and public documents 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 * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1265404356.i