In a communications sales and use tax audit, did the cable/video provider succeed in overturning the erroneous-remittance charge, the cable right-of-way fee assessment, the related interest, and the bad-debt credit denial?

Plain-English summary

A Virginia video and cable service provider was audited for communications sales and use tax covering September 2013 through June 2016. The audit assessed tax on untaxed video service sales, plus cable right-of-way ("ROW") fees the Taxpayer had not properly charged customers, and the Taxpayer appealed on four separate grounds. The Tax Commissioner's ruling addressed each ground on its own and reached a mixed outcome.

On erroneous remittance, the Taxpayer argued that part of the communications sales tax the audit treated as "collected but not remitted" had actually been remitted by a related company, so the assessment overstated what the Taxpayer itself owed. The Taxpayer never gave the auditor the supporting reports (for the sample months of September 2013 and April 2014) before the audit closed. The Commissioner noted Virginia law requires taxpayers to keep and produce records for three years (Va. Code §§ 58.1-102, 58.1-103, 58.1-633 A (1); 23 VAC 10-210-470), but rather than deny the claim outright, gave the Taxpayer a fresh 60-day window (from the date audit staff makes contact) to produce the documentation, with the audit to be revised if the records support the claim.

On cable ROW fees, the Taxpayer said it relied on the Virginia Department of Transportation's (VDOT) website to decide which customers to charge and had remitted the fees it did collect to VDOT rather than the Department of Taxation. The Commissioner rejected this: Va. Code § 58.1-654 and § 56-468.1 I, along with the Department's Guidelines (P.D. 06-138) and the Form CT-75 filing instructions, all require these fees to be collected and remitted monthly to the Tax Commissioner (the Department), not VDOT. Because a prior audit had already put the Taxpayer on notice of the correct procedure (even though that audit closed about a year before this audit period began), the ROW fee assessment was not waived, and the Commissioner also declined to issue a credit for the ROW fees the Taxpayer had mistakenly sent to VDOT instead of the Department.

On interest, the Taxpayer asked to have interest excluded from the ROW fee portion of the assessment if the fees themselves could not be waived. Under Va. Code § 58.1-1812 A, interest is mandatory on any correct assessment, and because the Commissioner found the ROW fee assessment itself was correct, there was no basis to waive any of the interest.

On bad debts, the Taxpayer wanted various bad debts it incurred during the audit period credited against the sales tax assessed. The Commissioner explained that Va. Code § 58.1-655 and P.D. 06-138 require bad debts to be reported as a credit on the return for the period in which the debt is determined worthless (with any later recoveries reported on the next return, not by amending the original one). Because the Taxpayer never reported or addressed these bad debts during the audit itself, the Commissioner denied bad-debt credits in the audit, directing the Taxpayer instead to report them going forward under the normal procedure.

Overall, the case was sent back to the audit staff to reconsider only the erroneous-remittance issue if the Taxpayer supplies records within 60 days; the ROW fee assessment, the related interest, and the bad-debt credit denial were all left standing. A revised bill would follow the review, with no further interest accruing if paid within 60 days of that bill.

What this means for you

If you collect and remit Virginia communications sales tax or cable ROW fees

Cable ROW fees collected from customers must be remitted monthly to the Virginia Department of Taxation (the Tax Commissioner), not to VDOT, even if VDOT's own website suggests otherwise — the controlling authorities are Va. Code §§ 58.1-654 and 56-468.1 I, the Department's published Guidelines (P.D. 06-138), and the CT-75 return instructions. Relying on informal guidance from a different state agency will not excuse a misdirected remittance, especially once a prior audit has already flagged the correct procedure.

If you plan to dispute an assessment based on documentation you didn't provide during the audit

Keep and produce your records. Virginia law (Va. Code §§ 58.1-102, 58.1-103, 58.1-633 A (1); 23 VAC 10-210-470) requires taxpayers to retain sales/use tax records for three years and make them available to the Department. If you didn't give the auditor supporting documentation before the audit closed, an appeal may only get you a limited additional window (here, 60 days from contact) to produce it — not automatic relief.

If you want to claim bad-debt credits

Report worthless accounts as a credit on the return for the period the debt became worthless, per Va. Code § 58.1-655 and P.D. 06-138. Raising bad debts for the first time on appeal, after the audit is closed, is likely too late — credits will be denied and you'll be told to follow the standard reporting procedure prospectively.

Common questions

Q: Can I get a Virginia sales tax assessment reduced because a related company already paid part of it?
A: Possibly, but you must document it. Here, the Taxpayer's erroneous-remittance claim wasn't rejected outright — the Commissioner allowed 60 additional days to submit supporting records to the auditor, after which the audit would be revised only if the documentation supports the claim.

Q: If I relied on VDOT's website for cable right-of-way fee guidance, can that excuse an underpayment or wrong remittance?
A: No. The ruling held that the controlling authorities (Va. Code § 58.1-654, § 56-468.1 I, P.D. 06-138, and the CT-75 instructions) require ROW fees to be remitted to the Department of Taxation, not VDOT, and that a prior audit had already given the Taxpayer notice of the correct procedure.

Q: Can I get a credit for right-of-way fees I mistakenly sent to VDOT instead of the Department of Taxation?
A: In this case, no — the Commissioner declined to issue such a credit in the audit.

Q: If my sales tax assessment is upheld, can I still get the interest on it waived?
A: Generally no. Va. Code § 58.1-1812 A makes interest mandatory once an assessment is correct; there is no basis to waive interest simply because the assessment is disputed and ultimately sustained.

Q: I never told the auditor about my bad debts during the audit — can I raise them now on appeal?
A: Not as a credit in that audit. Bad debts must be reported as a credit on the return for the period the debt became worthless (Va. Code § 58.1-655; P.D. 06-138). Since these bad debts weren't addressed during the audit, the Commissioner denied credits and instructed the Taxpayer to report them going forward using the normal procedure.

Citations and references

• Va. Code § 58.1-1821 (application for correction of erroneous assessment)
• Va. Code § 58.1-102 (duty to retain records substantiating returns)
• Va. Code § 58.1-103 (records must be available for Department inspection)
• Va. Code § 58.1-633 A (1) (dealers must keep suitable sales/use tax records)
• 23 VAC 10-210-470 (three-year recordkeeping requirement)
• Va. Code § 58.1-654 A and B (monthly communications sales and use tax returns and remittance)
• Va. Code § 56-468.1 I (cable right-of-way use fee must be remitted to the Department by the 20th of the month)
• Va. Code § 58.1-1812 A (mandatory interest on outstanding tax and penalty)
• Va. Code § 58.1-655 (bad-debt credit procedure for communications services providers)
• Va. Code § 58.1-661 (applying dealer provisions §§ 58.1-630 through 58.1-637 to communications services providers)
• P.D. 06-138 (11/1/2006) — Guidelines and Rules for the Virginia Communications Taxes
• P.D. 16-113 (6/8/2016) — cited on amended-return treatment of bad-debt recoveries

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-160

Original ruling text

September 8, 2020

Re: § 58.1-1821 Application: Communications 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 communications sales and use tax assessment issued for the period September 2013 through June 2016. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer provides video and cable services to Virginia customers. The auditor assessed the communications sales tax in the audit on untaxed sales of the Taxpayer’s video services. The auditor also assessed cable right-of-way fees (ROW) in the audit in instances where the fee was not charged properly to the Taxpayer’s customers. The ROW fees assessment is based on the report of media customers by locality provided by the Taxpayer.

The Taxpayer contests the communications sales tax and requests 90 days to provide additional documentation for review by the audit staff. The Taxpayer contests the ROW fees assessment and requests abatement of the same. If it is determined that the assessment cannot be waived in full, the Taxpayer requests a credit in the audit to offset the amount of cable ROW fees that were collected and remitted to the Virginia Department of Transportation (“VDOT”). If neither option is granted, the Taxpayer requests that these amounts be excluded from the interest computation. The Taxpayer contends that while remitted to the incorrect agency, the ROW fees were remitted timely. The Taxpayer further contends that certain bad debts need to be factored into the final assessment.

DETERMINATION

Erroneous Remittance

The Taxpayer maintains that a portion of the communications sales tax collected on its video services during the audit period was mistakenly remitted by a related company. As such, the Taxpayer contends that the amount of tax collected by the Taxpayer and not remitted to the Department is overstated. During the performance of the audit, the Taxpayer informed the auditor of the erroneous remittance issue. The auditor requested reports from the sample months (September 2013 and April 2014) demonstrating the erroneous remittance. Such documentation was not provided to the auditor prior to the closure of the audit.

The General Provisions in Chapter 1 of Virginia Code 58.1 govern all taxes administered by the Department of Taxation and provides the following in Virginia Code § 58.1-102:

It shall be the duty of every taxpayer to retain suitable records and documents substantiating all information contained on any return required by this subtitle and any such other pertinent records or documents as the Tax Commissioner may require by regulation. The records and documents shall be preserved for a period of three years from the required date for filing a return to which such records or documents pertain.

Virginia Code § 58.1-103 further provides that “All records and documents required by this subtitle or by rule or regulation shall be available during regular business hours for inspection by the Tax Commissioner or his duly authorized agents.”

Chapter 6 of Virginia Code 58.1 specifically addresses the Virginia Retail Sales and Use Tax and requires in Virginia Code § 58.1-633 A (1) that dealers “keep and preserve suitable records of the sales, leases, or purchases, as the case may be, taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.” Title 23 of the Virginia Administrative Code 10-210-470 also provides that the taxpayer is “required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability.”

In this instance, the Taxpayer did not provide documentation as requested by the auditor to support its contention that some of the communication sales tax collected during the audit period was erroneously remitted by a related company. In accordance with the cited authorities, the Taxpayer is required to maintain records related to the communications sales tax and to make such records available for inspection by the Department. Notwithstanding the foregoing, I will allow the Taxpayer additional time to provide the documentation related to these transactions. The audit staff will contact the Taxpayer to discuss the records and documentation the Taxpayer will be required to provide. The Taxpayer must provide all requested records and documentation to the audit staff within 60 days from the date of contact with the auditor. Once the review is completed by the auditor, revisions to the audit and the audit assessment will be made if warranted.

Further, the Taxpayer will have 90 days from the date the review is finalized to file an appeal with the Department for any remaining contested issues. Should the Taxpayer fail to provide the records and documentation to the auditor within the allotted timeframe, the assessments will become immediately due and payable at that time, and the Taxpayer will have no further opportunity to submit an appeal in accordance with Virginia Code § 58.1-1821.

Cable ROW Fees

The Taxpayer contests the cable ROW fee assessment. The Taxpayer maintains that it relied on information on the VDOT website regarding ROW liabilities for communications companies. As such, the Taxpayer states that it remitted the ROW fees that it collected during the audit period to VDOT. The Taxpayer also contends that it did not collect ROW fees from some customers based on the information provided on the VDOT website. It is my understanding that the cable ROW fee was an issue in the prior audit. In both the current and prior audits, the Taxpayer relied upon information on the VDOT website in determining which customers should be charged ROW fees and in determining that that the fees collected should be remitted to VDOT.

Virginia Code § 58.1-654 A requires communications service providers to file communications sales and use tax returns with the Department each month. Virginia Code § 58.1-654 B states:

At the time of transmitting the return required under subsection A, the communications services provider shall remit to the Tax Commissioner the amount of tax due after making appropriate adjustments for accounts uncollectible and charged off as provided in § 58.1-655. The tax imposed by this chapter shall, for each period, become delinquent on the twenty-first day of the succeeding month if not paid.

Further, the Department issued the Guidelines and Rules for the Virginia Communications Taxes, Public Document (P.D.) 06-138 (11/1/2006), which provide guidance regarding the cable ROW fees at issue in this appeal. The Guidelines state that cable ROW fees will be collected and remitted monthly by communications service providers to the Department of Taxation. Virginia Code § 56-468.1 I governs the cable ROW fees and provides that “The Public Rights-of-Way Use Fee billed by a cable operator shall be remitted to the Virginia Department of Taxation for deposit into the Communications Sales and Use Tax Trust Fund by the twentieth of the month.”

Virginia Code § 58.1-654 specifically states that the taxes and fees charged and collected by communications services providers are to be remitted to the Tax Commissioner. Further the instructions for the Communications Sales and Use Tax Return, Form CT-75 state, “Service providers are required to collect the taxes and fees from their customers as line items on their bills and remit amounts collected to the Department of Taxation on a monthly basis .” [Emphasis added].

It is my understanding that the prior audit closed approximately a year prior to the start of the current audit. As such, the Taxpayer was unable to apply the guidance given by the Department’s auditor regarding the proper manner to charge and remit the cable ROW fees during the audit period at issue. Notwithstanding the foregoing, the cited authorities and the applicable return filing instructions offered the Taxpayer the guidance necessary to charge, collect and remit the cable ROW fees properly during the audit period. Accordingly, the ROW fees assessed in the audit will not be waived. I am further unable to issue a credit in the audit for the ROW fees that the Taxpayer may have remitted to VDOT.

Interest

Virginia Code § 58.1-1812 A applies to the Taxpayer’s request for a waiver of the interest assessed in the audit related to the ROW fees assessment. The statute provides, in pertinent part that “If the Tax Commissioner ascertains that any person has failed to make a proper return or to pay in full any proper tax he shall assess the taxes prescribed by law….In addition thereto, interest on the outstanding tax and penalty shall be charged at the rate established under § 58.1-15 for the period between the due date and the date of full payment.” The statute mandates the application of interest to any assessment. In this instance, there is no basis to waive all or any portion of the assessed interest because the assessment is correct. Accordingly, the Taxpayer’s request for a waiver of interest cannot be granted.

Bad Debts

The Taxpayer states that it had various bad debts throughout the audit period. The Taxpayer requests that the bad debts be credited against the communications sales tax assessed in the audit. It is my understanding that the Taxpayer did not address the bad debt issue during the performance of the audit.

Virginia Code § 58.1-655 provides that:

In any return filed under the provisions of this chapter, the communications services provider may credit, against the tax shown to be due on the return, the amount of sales or use tax previously returned and paid on accounts that are owed to the communications services provider and that have been found to be worthless within the period covered by the return. The credit, however, shall not exceed the amount of the uncollected payment determined by treating prior payments on each debt as consisting of the same proportion of payment, sales tax, and other nontaxable charges as in the total debt originally owed to the communications services provider. The amount of accounts for which a credit has been taken that are thereafter in whole or in part paid to the communications services provider shall be included in the first return filed after such collection.

P.D. 06-138 provides further guidance regarding how bad debts are to be reported by taxpayers and states that:

Every provider will be allowed a credit against the tax shown to be due on the return for the amount of tax previously paid on accounts that are owed to the provider and that have been found to be worthless within the period covered by the return. The credit, however, cannot exceed the amount of the uncollected payment determined by treating prior payments on each debt as consisting of the same proportion of payment, communications sales tax, and other nontaxable charges as in the total debt originally owed to the provider. The amount of accounts for which a credit has been taken that are thereafter in whole or in part paid to the provider must be included in the first return filed after collection.

The statute and public document cited above clearly set forth the proper procedures for reporting bad debts, and require that the bad debts be reported by the Taxpayer on the return in the period in which the account is determined to be worthless. The statute further requires that any payments collected on these accounts be reported on the first return filed with the Department after the payment has been collected. The statute does not require the Taxpayer to amend the return on which the bad debt was reported when payments on the worthless account are received (2). Accordingly, the Taxpayer will not be allowed credits in the audit for bad debts that occurred during the audit period. Rather, the Taxpayer should report the bad debts at issue in the audit period in accordance with the aforementioned authorities.

CONCLUSION

Based on this determination, the audit will be returned to the audit staff for review of the erroneous remittance. Following the review, revisions will be made to the audit as warranted. A revised bill, with interest accrued to date, will be mailed the Taxpayer once the review is complete. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of the bill. The Taxpayer should remit payment to: Virginia Department of Taxation, 600 E. Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessments, you may contact at **.

The Code of Virginia sections, regulation and public documents 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, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

(1) Virginia Code § 58.1-661 provides, in pertinent part, that “The provisions in §§ 58.1-630 through 58.1-637 of this title shall apply to this chapter, mutatis mutandis, except as herein provided and except that whenever the term "dealer" is used in these sections, the term "communications services provider" shall be substituted."

(2) See, Public Document 16-113 (6/8/2016)

AR/1991P

Related Documents

06-138

16-113