Could a technology company remove audited use-tax purchases using representative invoices and unclear service agreements?

Plain-English summary

Virginia granted only the adjustments supported by transaction-specific records. The taxpayer could not replace missing invoices with other invoices said to be representative.

Va. Code § 58.1-205 presumed the assessment correct. Va. Code §§ 58.1-633 and 58.1-618 required complete records and permitted estimated use-tax assessments from the best available information. Section 58.1-634 also permitted examination and assessment within six years when the Department had reasonable cause to believe a required return was not filed.

Video, photography, and advertising purchases

A conference video furnished on DVD was taxable on the total charge. Although Va. Code § 58.1-609.6(5) exempted qualifying media advertising, the video targeted a limited conference audience rather than the general public and was treated as taxable non-media advertising.

An online PDF flyer could have been nontaxable if no tangible property was transferred. Video or photography delivered on DVD or CD was taxable. But the missing line-item invoices prevented Virginia from determining what was delivered, so representative invoices did not carry the taxpayer's burden.

The same documentation problem kept several video, website-design, computer-hardware, and other vendor items in the audit. An email identifying a video program did not establish whether delivery was electronic or on taxable tangible media.

Items removed or conditionally removed

• One $35 item was removed after the taxpayer proved the auditor used $1,668.43.
• Two invoiced purchases—one fully taxed invoice and 100 saddle-stitched booklets with tax charged—would be removed if the auditor verified full payment.
• Other items remained because the exact invoices were missing.

Internet and colocation agreements

The taxpayer provided a master service agreement and customer service agreement for dedicated Internet access, other services, and vendor-owned equipment. Virginia could not decide the true object because the copies were blurred and key product names, terms, website conditions, and a colocation rider were undefined or missing.

The taxpayer had 30 days to provide legible agreements, descriptions, incorporated terms, and other requested records. The auditor would remove those line items if the clarified transaction proved to be exempt services.

What this means for you

• Preserve the exact invoice for each sampled or contested audit item.
• Document whether digital content was delivered electronically or on physical media.
• A limited-audience promotional video may not qualify as exempt media advertising.
• Keep every incorporated online term, rider, product description, and equipment-ownership provision with the signed agreement.
• Proof that a vendor sometimes collected tax does not prove tax was paid on another purchase.

Common questions

Q: Were representative invoices enough?
A: No. Virginia required the invoice or contract for the specific audited transaction.

Q: Was an electronically delivered PDF taxable?
A: The ruling said no tax would apply if no tangible personal property was transferred, but the taxpayer still had to prove the actual delivery.

Q: Why was the conference video taxable?
A: It was delivered on DVD and directed to a limited audience rather than the public generally.

Q: Did Virginia decide the Internet-service items?
A: Not yet. It required clearer agreements and terms for the auditor's true-object review.

Citations and references

• Va. Code §§ 58.1-205, 58.1-602, 58.1-618, 58.1-633, 58.1-634, and 58.1-609.6(5).
• 23 VAC 10-210-470 and 10-210-2050.

Subject

Assessment of consumer use tax on various purchases of tangible personal property

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-95

Original ruling text

June 24, 2014

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

Dear *:

This is in response to your letter in which you request correction of the retail sales and use tax assessment issued to * (the "Taxpayer") as a result of an audit for the period October 2007 through June 2013.

FACTS

The Taxpayer is a technology company providing hosted software and other business intelligence solutions. The audit resulted in the assessment of consumer use tax on various purchases of tangible personal property used in the Taxpayer's business.

The Taxpayer contests the use tax assessed on several purchases and maintains that such purchases should be removed from the audit based on the documentation furnished.

DETERMINATION

Virginia Code § 58.1-205 deems assessments issued by the Department to be prima facie correct. This means that the burden of proving that the assessment is incorrect is upon the Taxpayer.

Pursuant to Virginia Code § 58.1-633 and Title 23 of the Virginia Administrative Code (VAC) 10-210-470, every person who is liable for the remittance of use tax is required to keep and preserve adequate and complete records necessary to determine the amount of tax liability.

When a person fails to make a return as provided in the Virginia Retail Sales and Use Tax Act, the Tax Commissioner is under a duty to make an estimate for the taxable periods of the cost price of all tangible personal property used or consumed in Virginia and assess the tax based on the best information available. Such estimated assessment is deemed prima facie correct. See Va. Code § 58.1-618.

Pursuant to Va. Code § 58.1-634, the Tax Commissioner may examine a person's records beyond the three-year period of limitations when he has reasonable cause to believe that such person was required by law to file a return and failed to do so. In such instances, the taxes may be assessed at any time within six years from the date that such taxes became due and payable.

Keeping the above cited authorities in mind, I will now address the issues presented in the appeal.

* (Vendor 1)

In the audit, line items 1, 3, 5-7 and 9-12 are purchases from Vendor 1. The Taxpayer was unable to locate all of the specific invoices related to this vendor. Despite this, it claims to have located and provided representative invoices for the 2010 sample period to show that the vendor collected sales tax.

Line Item 1. Invoice 796555 is provided and shows charges for a video shoot that was converted to a DVD. It also shows charges for several DVD copies. Although sales tax was collected on the DVD copies, no sales tax was applied to the charge for the video shoot, which appears to have been furnished to the Taxpayer on DVD.

Pursuant to Title 23 VAC 10-210-2050, tax is applicable to the total charge for a photograph, slide, etc., including, but not limited to, charges for labor, photocomposition, setting design, photography time, and any other components of the charge, regardless of whether such components are separately stated. The regulation also states that the tax applies to the total charge for audio-visual films.

Notwithstanding, consideration is given to whether the transaction qualifies for the media advertising exemption set out in Va. Code § 58.1-609.6 5. The term "advertising" is defined in Va. Code § 58.1-602 as "the planning, creating, or placing of advertising in newspapers, magazines, billboards, broadcasting and other media, including, without limitation, the providing of concept, writing, graphic design, mechanical art, photography and production supervision."

In order for advertising to qualify as media advertising, it has been the long-standing policy of the Department that it must be directed toward and available to the general public. Based on the information provided, the video at issue was not intended to convey promotional information to the public generally but rather to a limited audience attending a conference. As such, the video constitutes non-media advertising, which is not exempt from the tax.

Based on the above cited policy and the invoice presented, the total charge for line item 1 is taxable. I would note that the auditor did not assess the charge for the DVD copies since tax was already charged and collected on those items.

Line Item 3. The Taxpayer furnished a copy of Invoice 796754, which indicates that sales tax was charged on the entire amount billed. Provided the Taxpayer paid the entire amount billed, this item will be removed from the audit.

Line Item 5. In regard to invoice 796624, it is for an online PDF flyer. No sales tax was charged. If no tangible personal property was transferred, then no tax would apply. In regard to invoice 796640, it is for (i) a video production service in which the output is a DVD and (ii) photography services in which the output is a CD. Based on the fact that the output of the service was transferred via tangible personal property, the video production service and the photography service are taxable in accordance with Title 23 VAC 10-210-2050. You assert that the invoices submitted are representative of the line item 5 transaction. However, without the actual invoice for line item 5, we do not know the specific type of work product purchased. It is not acceptable to provide invoices of other transactions to claim they are representative when there is no way to confirm such a claim. In the absence of the invoice for line item 5 to show that no sales tax applies or that tax was correctly charged, the Taxpayer has not met its burden of proof. Accordingly, line item 5 will remain in the audit.

Line Item 6. The Taxpayer contends that invoice 796690 is representative of this transaction. While the Taxpayer indicates that such invoice was furnished, it was not found with the documentation provided for the appeal. Moreover, such invoice cannot be considered representative of the invoice for line item 6 as there would be no way to confirm such a contention. Rather, the only invoice applicable for review in this instance is the invoice for line item 6. Because the Taxpayer has not presented such invoice, it has not met its burden of proof. Accordingly, this item will remain in the audit.

Line Item 7. The Taxpayer contends that this transaction is for website design and no tangible personal property was transferred. The Taxpayer furnishes invoice 796598 as representative of the invoice for line item 7. Despite these claims, we cannot confirm them since no invoice, purchase order or contract for line item 7 has been furnished. Because the Taxpayer has not met its burden of proof, this item will remain in the audit.

Line Item 9. The Taxpayer indicates that the invoice for this line item has not been located. The Taxpayer claims that it presented representative invoices to show that this vendor collected sales tax when applicable. While the vendor did collect sales tax on some of the invoices presented, it did not always charge sales tax when it was required as noted above for line items 1 and 5. Because the Taxpayer has not met its burden of proof, this item will remain in the audit.

Line Item 10. The Taxpayer provides the same information as was provided for line item 9. Accordingly, because the Taxpayer has not met its burden of proof, this item will remain in the audit.

Line Item 11. The Taxpayer indicates that invoice 796783 is applicable to this line item. However, such invoice was not included with the appeal documentation. Because the Taxpayer has not met its burden of proof, this item will remain in the audit.

Line Item 12. While the audit does not specify the name of the vendor, the Taxpayer claims that invoice 796615 is the invoice for line item 12. The charge on this invoice is the same amount included in the audit. A review of the invoice indicates that 100 saddle-stitched booklets were purchased from the vendor. A 5% sales tax was charged on the total amount of the invoice. Provided the Taxpayer paid the entire amount billed, line item 12 will be removed from the audit.

* (Vendor 2)

Line Item 4. The Taxpayer has not located the invoice for the video program but provides an email request for payment that references the purpose of the payment. That email does not establish how the delivery of the video program was made. Pursuant to Title 23 VAC 10-210-2050, video programming delivered via a tangible medium, such as via tape, disk, etc., is taxable on the total amount charged. The Taxpayer has not furnished the invoice for line item 4 and, therefore, we cannot confirm that sales tax was correctly charged by Vendor 2 or that no sales tax applied because the video was transferred electronically to the Taxpayer. Because the Taxpayer has not met its burden of proof, this item will remain in the audit.

* (Vendor 3)

Line Items 22 and 62. According to the Taxpayer, this vendor is a retail establishment located in Virginia. The Taxpayer claims that such vendor properly charges the sales tax. For this reason, the Taxpayer requests the removal of this item (computer hardware) from the audit.

The Taxpayer has not furnished a copy of the invoices in question to establish that the tax was collected or an exemption applies. Because the Taxpayer has not met its burden of proof, this item will remain in the audit.

* (Vendor 4)

Line Items 24-26, 33, 46-50, 52 and 65. According to the Taxpayer, this vendor provides services. Copies of the Master Service Agreement (MSA) and the Customer Service Agreement (CSA) are provided. While I recognize that the MSA is intended for Vendor 4 to provide dedicated Internet access and other services to the Taxpayer as well as equipment for which the title remains with Vendor 4, there are provisions in the MSA that are not clearly defined and may be problematic for deciding the true object of the transaction. As such, I cannot conclude that the agreement is for exempt services without some clarifications. Accordingly, please furnish to the auditor the following information and documentation:

1. The printing on both agreements is blurred and difficult to read. For this reason, and the fact that the MSA and the CSA were not previously provided to the auditor, the Taxpayer should present a legible copy of such documents to the Department's auditor.

2. The purpose of the CSA is not clear. The product is listed as "1C-FastE." No description is provided about such product. Also, no explanation is given to the terms "cross-connect," "DLR," or "LOA." To clarify the CSA, the full description of such terms and the product item should be presented to the auditor.

3. Clause 1 d of the MSA references "additional terms and conditions" that are to be found on a website. The website address given in the MSA for the additional terms and conditions is not legible. Further, a copy of such additional terms and conditions were not presented with the appeal documentation. Accordingly, because such additional terms and conditions are incorporated into the MSA, it is important that we review them as such additional terms and conditions may affect the true object of the transaction. Please furnish a copy of such additional terms and conditions to the auditor. If you are unable to furnish such copy, please furnish a description of all of the additional terms and conditions.

4. The MSA has a "colocation rider" that is not clearly defined or fully described in the MSA. The website address that is set out in the MSA for this rider is not legible. If access to this website is not possible, please describe this rider and all that it entails.

The auditor will review the required information and documentation and decide if the transaction is for exempt services or constitutes a taxable sale of tangible personal property. If the transaction is for exempt services, these line items will be removed from the audit.

Line 51

The Taxpayer contends that the auditor made an error with respect to this item. The Taxpayer maintains that the amount included in the audit should be $35.00, not $1,668.43. The Taxpayer provides documentation to support its contention. Based on this documentation, I find sufficient basis to remove line item 51 from the audit.

CONCLUSION

The Taxpayer should furnish the additional documentation and information requested as well as any invoices for the specific contested items not already submitted to the auditor within 30 days of the date of this determination. The auditor will also need to verify payment of the invoiced amounts for line items 3 and 12. Once this verification is done and the requested documentation and information is received within the time allotted, the audit will be revised in accordance with this determination. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 23 rd Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

Please note that failure to remit full payment within the 30-day period may result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's Amnesty Program. See the enclosure entitled "Important Payment Information."

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5610115828.R