Could an HVAC contractor avoid use tax by saying its vendors included sales tax inside sheet-metal invoice prices?

Plain-English summary

Virginia upheld use tax on fabricated sheet metal because the invoices did not separately show sales tax and the contractor did not supply all required proof of vendor remittance. The contractor said tax was embedded in the invoice prices and submitted a notarized statement from one dealer. The other dealer supplied no documentation.

Virginia requires a dealer to add tax to the sales price and show it as a separate item on the transaction record. The purchaser is ultimately responsible for tax on taxable property and does not escape use tax merely because a vendor failed to collect or separately state sales tax.

The Department had offered an opportunity to prove that the dealers actually remitted the tax, but the contractor did not present all documentation required for an audit adjustment. The assessment therefore remained due.

Common questions

Q: Is saying “tax included” in a price enough under this ruling?
A: No. The tax had to appear as a separate item on the transaction record.

Q: Can a purchaser still owe use tax when the vendor should have collected sales tax?
A: Yes. Virginia treated the tax as the purchaser's legal debt unless payment could be established.

Citations and references

• Va. Code § 58.1-625.
• 23 VAC 10-210-340(A) and 23 VAC 10-210-6030.
• United States v. Forst, 442 F. Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978); Lee Brothers v. State Tax Commissioner (Henry County Cir. Ct. Sept. 13, 1973).
• Virginia Public Documents 94-44 and 99-194.

Subject

Untaxed purchases of fabricated sheet metal from Virginia dealers.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-57

Original ruling text

April 27, 2012

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

Dear *:

This will reply to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the audit period February 2008 through January, 2011. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a heating, ventilation and air conditioning (HVAC) contractor. The Department's audit disclosed a deficiency that resulted from untaxed purchases of fabricated sheet metal from Virginia dealers. The Taxpayer disagrees with the audit results and contends the purchase invoices at issue include the sales tax in the invoice prices. The Taxpayer has submitted a copy of a notarized statement from one dealer that states its invoices included the sales tax, which was collected and paid to the Department. The remaining dealer has not submitted any documentation. The Taxpayer seeks abatement of the Department's assessment.

DETERMINATION

Virginia Code § 58.1-625 requires a dealer to separately state the amount of the tax and add the tax to the sales price or charge. Title 23 of the Virginia Administrative Code (VAC) 10-210-340 A provides additional guidance on the statutory requirement, explaining that the "[i]dentification of the tax by a separate writing or symbol is not required provided that the amount of the tax is shown as a separate item on the record of the transaction." The statute and the regulation clearly set forth the requirement that the tax must be separately stated and added to the price of goods sold at retail. When the dealers in this instance included the tax in the sales price of fabricated sheet metal sold to the Taxpayer, but did not list the tax separately on the record of the transaction (the sales invoice), the dealers failed to meet this requirement.

In United States v. Forst , 442 F. Supp. 920 (W.D. Va. 1977), aff’d, 569 F.2d 811 (4 th Cir. 1978), the Court ruled that the legal incidence of the Virginia retail sales and use tax is on the ultimate purchaser. Although a registered seller is legally obligated to collect the tax from the purchaser on retail transactions, Va. Code § 58.1-625 makes the sales or use tax the legal debt of the purchaser. In Lee Brothers v. State Tax Commissioner , Circuit Court of Henry County (9/13/73), the Court ruled that "a person who uses property in Virginia and cannot establish that a sales tax has been added to the purchase price at the time of its purchase is properly assessable with the use tax... even though the vendor fails to collect the sales tax from the consumer . . . ."

Title 23 VAC 10-210-6030 addresses the Department's policy with respect to Virginia use tax and states the use tax is due from the purchaser when a sales or use tax is not paid on the property at the time of purchase. While the dealers in this instance may be required to charge and collect the sales tax, the Taxpayer is ultimately responsible for ensuring the payment of the sales or use tax on all taxable purchases. The Taxpayer does not escape this responsibility because a dealer fails to charge and collect the sales or use tax. See Public Document (P.D.) 99-194 (7/21/99), which also addresses the Taxpayer's situation.

I note that in an attempt to assist the Taxpayer, the Department's auditor advised the Taxpayer of P.D. 94-44 (3/9/94), in which the Tax Commissioner allowed the taxpayer an opportunity to present specific documentation indicating that the tax had been remitted to the Department by the dealers. I also note that the Taxpayer, in this instance, did not present all of the required documentation necessary to allow for an adjustment of the audit assessment.

CONCLUSION

Based on the foregoing cited authorities, I do not find sufficient cause for an adjustment of the Department's assessment. The balance of the assessment is correct and remains due and payable. An updated bill, with interest accrued to date, will be sent to the Taxpayer shortly. The outstanding balance must be paid within 30 days from the date of the bill to avoid the accrual of additional interest and an additional 20% penalty on the tax due under the terms of Virginia's Amnesty Program.

The Code of Virginia section, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department's website located at www.tax.virginia.gov. If you have any questions regarding this matter, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4851178133.Q