Did an electrical contractor owe Virginia use tax on materials delivered in Virginia after its vendor charged another state's 7% sales tax?

Subject

Tax assessed on purchases of materials from a out-of-state vendor; Electrical contractor.

Plain-English summary

An out-of-state electrical contractor owed Virginia's 5% use tax on construction materials delivered to it in Virginia, even though the vendor had already charged another state's 7% sales tax. The contractor used the materials in Virginia real-property contracts and agreed that the purchases were subject to Virginia tax.

The contractor argued that Virginia had also audited the vendor and taxed the same invoices, which would violate the rule against taxing one transaction twice. The Department reviewed the vendor's audit exceptions and found otherwise. The vendor had not been assessed the same 5% Virginia use tax. It had been assessed only for tax collected above Virginia's rate, because a dealer that overcollects tax must remit the excess to Virginia.

The contractor therefore remained liable for the Virginia use tax and had to seek a refund of the erroneous 7% charge from its vendor. No penalty had been assessed in the contractor's audit. Interest could not be waived because Virginia law required it on the unpaid tax.

What this means for you

• Paying another state's sales tax does not satisfy Virginia use tax when goods are delivered for use in Virginia.
• A purchaser may need to pay Virginia and separately pursue the vendor for a refund of tax charged to the wrong state.
• A vendor's audit and a purchaser's audit are not necessarily duplicate taxation; the assessed amounts may address different liabilities.
• Statutory interest is compensation for the use of money and is not treated as a discretionary penalty.

Common questions

Why did Virginia tax the materials?

The contractor took delivery in Virginia and used the materials in Virginia real-property contracts.

Was the same 5% tax assessed to both the vendor and contractor?

No. The vendor's exceptions concerned the amount it collected above Virginia's rate, while the contractor was assessed the 5% Virginia use tax.

Did the Department waive interest?

No. Va. Code § 58.1-1812 made interest mandatory.

Was a penalty upheld?

No penalty had been assessed, so there was no penalty issue to decide.

Citations and references

• Va. Code § 58.1-604(3).
• Va. Code § 58.1-1812.
• 23 VAC 10-210-340(D).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-215

Original ruling text

September 15, 2010

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

Dear *:

This is in reply 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 January 2005 through March 2008. I apologize for the delay in the Department's response.

FACTS

The Taxpayer is an out-of-state electrical contractor. The Taxpayer takes exception to the use tax assessed on purchases of materials from a * vendor. The materials were delivered by the vendor to the Taxpayer in Virginia for use in real property contracts. The vendor charged a 7% sales tax on sales made to the Taxpayer and remitted the tax to **. The Taxpayer agrees that the contested purchases in this instance are subject to the Virginia use tax. The Taxpayer, however, asserts that the Department has audited the vendor and assessed the Virginia tax on the transactions assessed in the Taxpayer's audit. The Taxpayer contends the Department cannot assess the tax on the same transactions more than once pursuant to Va. Code § 58.1-604 3. As such, the Taxpayer seeks abatement of the tax assessed in its audit. In addition, the Taxpayer requests abatement of the assessed penalty and interest.

DETERMINATION

Pursuant to Va. Code § 58.1-604 3 "[a] transaction taxed under § 58.1-603 shall not also be taxed under this section, nor shall the same transaction be taxed more than once under either section."

In this instance, the vendor collected the 7% * sales tax on sales transactions it made to the Taxpayer that were subject to the 5% Virginia use tax. It is clear that these transactions are subject to Virginia use tax because the Taxpayer took delivery of the materials in Virginia. It is also clear that the tax collected on such purchases was not remitted to Virginia. Therefore, the auditor properly assessed the Taxpayer the 5% Virginia use tax on the purchases delivered to Virginia. The auditor instructed the Taxpayer to obtain a refund from its vendor for the 7% *** sales tax erroneously collected on the Virginia transactions.

The vendor informed the Taxpayer that it had undergone an audit by the Department and provided the Taxpayer a copy of the audit exceptions. Based on this information, the Taxpayer claims that the auditor assessed the vendor the Virginia tax on the same invoices assessed in the Taxpayer's audit.

Pursuant to Title 23 of the Virginia Administrative Code 10-210-340 D, "[a]ny dealer who collects tax in excess of a 4% rate [currently 5%] or who otherwise overcollects the tax . . . must remit any amount overcollected to the state on a timely basis." [Insert added.]

The Department's review of the information provided does not support the Taxpayer's claim of double taxation on the transactions in question. The audit exceptions list from the vendor's audit indicates that the vendor was not assessed the 5% Virginia use tax on the transactions in question. Instead, the exceptions list indicates the auditor assessed the vendor the tax collected in excess of the 5% Virginia use tax assessed the Taxpayer on such transactions, based on the cited regulation. As such, the Taxpayer's claim of double taxation has no merit. Therefore, I find no basis to adjust the Taxpayer's audit.

Penalty

Penalty was not assessed in this audit and therefore is not an issue.

Interest

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. An updated bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the updated bill is paid within 30 days from the date indicated on the bill statement.

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

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-3145291183.T