Could a satellite-equipment retailer buy equipment tax-free for resale and sell it tax-free to a satellite-programming provider?

Plain-English summary

Virginia allowed the retailer to buy satellite equipment tax-free for resale, excused its audited sales under good-faith certificates, and required tax collection on future sales to the programming provider. The taxpayer bought televisions, receiving equipment, antennas, and satellite equipment from a vendor, then sold equipment to a satellite-programming provider for use with customer service.

Virginia first reversed the audit tax on the retailer's purchases. The equipment was bought for subsequent sale to the programming provider, so it qualified as a resale purchase. The ruling said this changed policy for the specific fact pattern and superseded the contrary portion of P.D. 11-71.

The downstream sale had a different result going forward. A satellite-programming provider is treated as the user or consumer of dishes, converter boxes, remote controls, installation supplies, and other equipment it supplies with its nontaxable programming service. The retailer therefore must charge tax when selling that equipment to the provider.

The audited sales were nevertheless abated because the retailer had accepted the provider's resale certificates in good faith, believing the provider accrued the tax. The entire assessment was abated, but the ruling put the retailer on notice to collect tax in future transactions.

What this means for you

• A retailer may buy inventory exempt for resale even when its customer will ultimately consume the property.
• The satellite-programming provider, not its subscriber, was treated as the taxable user of equipment supplied with the service.
• A good-faith certificate protected the seller for the audited past sales, but not after the ruling provided contrary notice.
• Read the prospective instruction separately from the historical audit relief.

Common questions

Q: Could the retailer continue buying the equipment tax-free?
A: Yes, because it bought the equipment for resale to the programming provider.

Q: Could it continue selling the equipment tax-free to that provider?
A: No. Going forward, it had to charge and collect tax because the provider consumed the equipment in furnishing programming service.

Q: Why were the past sales removed from the audit?
A: The retailer accepted resale certificates in good faith based on its belief that the provider accrued tax.

Q: Did the ruling change earlier policy?
A: Yes. It superseded the portion of P.D. 11-71 addressing this fact pattern.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-623.
• 23 VAC 10-210-280 and 23 VAC 10-210-4040.
• Virginia Public Documents 97-392 and 11-71.

Subject

Equipment sold to satellite programming provider exempt of the tax resale exemption certificates.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-130

Original ruling text

July 5, 2013

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 February 2008 through January 2011. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates as a retailer of televisions, television receiving equipment, antennas and satellite equipment. The Taxpayer states that it purchases such equipment exempt of the tax for resale. The Taxpayer entered into a contract with * (the "satellite programming provider") to provide services throughout its coverage area for the satellite programming provider's customers. During the audit period, the Taxpayer states that it purchased the equipment from *** (the "vendor"), exempt of the tax for resale. The Taxpayer further states that the equipment was sold to the satellite programming provider in accordance with the contract. The Taxpayer states that the equipment was sold to the satellite programming provider exempt of the tax pursuant to resale exemption certificates.

DETERMINATION

Contested Purchases

The Taxpayer contests the assessment of tax on its purchases of satellite equipment from the vendor. The Taxpayer maintains that these purchases were properly made exempt of the tax pursuant to a resale exemption certificate.

Virginia Code § 58.1-602 defines retail sale, in pertinent part, as "a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter...."

Virginia Code § 58.1-623 A states:

All sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.

The tax was assessed in the audit based upon the determination in Public Document (P.D.) 11-71 (5/11/11). Based upon the facts presented and in accordance with the aforementioned authorities, the Taxpayer correctly purchased the equipment, that it subsequently sold to the satellite programming provider exempt of the retail sales and use tax pursuant to a resale exemption certificate. Going forward, the Taxpayer should continue to make the purchases exempt of the tax. Accordingly, the tax assessed in the audit is abated in full. As this decision represents a change in policy regarding this specific fact pattern and related issues, the portion of P.D. 11-71 that deals with transactions of this type is superseded by this determination.

Contested Sales

The Taxpayer contests the assessment of tax in the audit on its sales of equipment to the satellite programming provider. The Taxpayer maintains that it properly sold the equipment exempt of the tax pursuant to valid resale exemption certificates provided by the satellite programming provider.

In P.D. 97-392 (9/29/97), the taxpayer was a satellite programming provider. The taxpayer was assessed in the audit on purchases of satellite equipment that it subsequently sold to its subscribers. Based upon Title 23 of the Virginia Administrative Code (VAC) 10-210-4040, it was determined that the true object of the transaction between the programming provider and its subscribers was to obtain the television programming services rather than the tangible property accompanying the service. Accordingly, the taxpayer was deemed a service provider when it leased, rented or sold equipment in connection with satellite television programming. As the provider of a nontaxable service, it was determined that the taxpayer was subject to the tax on tangible personal property used or consumed in providing its service. This applied to the satellite dishes, converter boxes, and remote control units provided to Virginia customers, and to any other tangible personal property (including installation supplies) used or consumed in Virginia by the Taxpayer.

Virginia Code § 58.1-623 and Title 23 VAC 10-210-280 require the Taxpayer to charge and collect the tax on sales of the equipment at issue unless the Taxpayer takes in good faith from the satellite programming provider a certificate that the sales are exempt under the law. During the audit period, the Taxpayer made sales of equipment exempt of the tax after taking from the satellite programming provider resale exemption certificates. Because the Taxpayer accepted the certificates in good faith based upon its belief that the satellite programming provider accrued the tax on the equipment purchases, the assessment related to these sales is abated in full. In accordance with P.D. 97-392 and P.D. 11-71, the satellite programming provider is deemed the taxable user and consumer of the equipment leased to its customers to provide the programming services. Therefore, going forward the Taxpayer is required to charge and collect the tax from the satellite programming provider on sales of equipment used by the satellite programming provider in the provision of programming to its customers.

CONCLUSION

Based upon this determination, the assessment at issue is abated in full. The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4833052963.P