Rulings of the Tax Commissioner
Retail Sales and Use Tax
Assessed use tax on untaxed Virginia sales and rental transactions; Nexus
Accounting Periods and Methods; Collection of Tax; Nexus; Records/Returns/Payments
October 5, 2012
Re: § 58.1-1821 Application: Retail Sales and Use Tax
This will reply to your letter in which you seek the correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period August 2005 through June 2011. I apologize for the delay in responding to your letter.
The Taxpayer is a ***** company that sells heavy equipment and repair and replacement parts for the equipment. The Taxpayer also rents equipment and performs some repair services. The Taxpayer does not own facilities in Virginia and does not employ salespersons that solicit sales in Virginia.
The Taxpayer was audited by the Department and assessed use tax on untaxed Virginia sales and rental transactions. At the time of the audit, the Taxpayer was not registered to collect Virginia sales and use tax on its Virginia sales and rentals. The auditor determined that the Taxpayer had nexus with Virginia during the audit period and should have been registered for and collected Virginia use tax on the Virginia sale and rental transactions held taxable in the audit. The Taxpayer disputes the entire assessment on the basis that it did not have sufficient nexus with the state of Virginia to require registration for the collection of sales and use taxes.
The auditor identified Virginia sales and rental transactions during the audit period in which the Taxpayer had erroneously charged and collected North Carolina sales tax. Based on this finding, the Taxpayer was determined to have sufficient nexus with Virginia to require the collection of Virginia use tax and the audit was conducted accordingly. The Taxpayer disagrees with the auditor's nexus determination and states that its only connection with the state during the entire audit period was eleven deliveries of its products by means other than common carrier. The Taxpayer maintains that the erroneous collection of another state's sales and use taxes is not one of the statutory nexus criteria enumerated in
§ 58.1-612 C, and it does not meet any of the criteria listed. Thus, the Taxpayer asserts that the Department's audit assessment is erroneous due to the lack of sufficient sales and use tax nexus with the state of Virginia.
§ 58.1-612 A provides that the sales or use tax is collectible from all persons who are dealers and have sufficient contact with the Commonwealth. As provided in
58.1-612 B 3, a dealer is defined to include every person who "[s]ells at retail, or who offers for sale at retail, or who has in his possession for sale at retail, or for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth, tangible personal property ...."
§ 58.1-612 B 5 also defines the term dealer to include a person that "[I]eases or rents tangible personal property for a consideration, permitting the use or possession of such property without transferring title thereto ...."
The Taxpayer's business activities include the sale and rental of tangible personal property in Virginia. These activities clearly make the Taxpayer a dealer pursuant to
§§ 58.1-612 B 3 and 58.1-612 B 5. While the Taxpayer is a dealer as defined by Virginia law, the Taxpayer must have sufficient contact, or nexus, with the state to require registration for the collection of Virginia use tax. The Department's auditor determined that the Taxpayer had Virginia nexus because it erroneously billed North Carolina sales tax on some Virginia sales and rental transactions.
§ 58.1-612 C lists the statutory criteria that establish nexus and require a business to register for collection of Virginia sales and use taxes. The erroneous collection of another state's sales and use tax is not one of the statutory nexus criteria listed. I agree with the Taxpayer's contention that the billing errors identified in the audit do not establish nexus for Virginia sales and use tax purposes.
However, the nexus criterion in
§ 58.1-612 C 9 applies to a dealer that “[o]wns tangible personal property that is rented or leased to a consumer in this Commonwealth, or offers tangible personal property, on approval, to consumers in this Commonwealth." The Department's longstanding policy imposes sales or use tax collection duties upon any in-state or out-of-state person who leases or rents tangible personal property in Virginia. Title 23 of the Virginia Administrative Code (VAC) 10-210840 A provides the following:
Any person engaged in the business of leasing or renting tangible personal property to others is required to register as a dealer and collect and pay the tax on gross proceeds. A lessor of tangible personal property whose place of business is outside this state and who leases or rents tangible personal property to Virginia customers is required to register as a dealer and to collect and pay the tax on the gross proceeds.
Based on the auditor's review of the Taxpayer's activities, the Taxpayer leased or rented tangible personal property in Virginia during the audit period. Thus, the Taxpayer was a dealer that met the nexus criterion in
§ 58.1-612 C 9 during the audit period at issue. In addition to the presence in Virginia of rental property owned by the Taxpayer, the Taxpayer engaged in other business activities in this state for its benefit, including occasional deliveries of goods into Virginia using its own vehicles and the provision of repair services for equipment located in Virginia. Further, the Taxpayer consistently made sales of tangible personal property in Virginia. There were almost 800 sales exceptions listed in the audit report. All of these factors support a determination that the Taxpayer had sufficient nexus in Virginia to require registration for the collection of Virginia use tax on taxable sales and rental transactions in Virginia.
Adjustment of Audit Period
The Taxpayer's audit period was extended from 36 months to 71 months in accordance with
§ 58.1-634, which states:
The taxes imposed by this chapter shall be assessed within three years from the date on which such taxes became due and payable. In the case of ... a failure to file a return, the taxes may be assessed ... at any time within six years from such date. The Tax Commissioner shall not examine any person's records beyond the three-year period of limitations unless he has reasonable evidence of fraud, or reasonable cause to believe that such person was required by law to file a return and failed to do so.
The Taxpayer was not registered for the collection of Virginia use tax during the audit period and did not file Virginia tax returns. Based on the provisions of
§ 58.1-634, the auditor correctly extended the audit period to include the additional filing periods in which no returns were filed. However, a review of the audit's rental exceptions reveals that the earliest Virginia rental transaction in the audit period occurred in December 2009. As such, the presence of sufficient nexus to require the Taxpayer's registration for Virginia use tax collection prior to the December 2009 rental transaction has not been established. Therefore, the sales transactions assessed for the period August 2005 through November 2009 will be removed from the audit and the liability will be recalculated. The audit will be returned to the appropriate field audit staff for revision and adjustment of the assessment.
Use Tax Collection
The Taxpayer requests that its Virginia use tax registration be rescinded based on the position that it has no Virginia nexus and did not voluntarily register for collection of the tax. The Taxpayer was registered by the Department's audit staff to facilitate the assessment of the audit liability. Based on this determination, the provisions of
§ 58.1-613 apply to the Taxpayer and there is no basis to rescind the Taxpayer's use tax registration. The Taxpayer should begin collecting Virginia use tax on its Virginia sales and rentals and should file monthly tax returns to report and pay the tax to the Department.
The audit will be adjusted based on this determination. After the audit is revised and the assessment is adjusted by the Department's audit staff, an updated bill with accrued interest will be issued to the Taxpayer. The bill should be paid within 30 days to avoid the accrual of additional interest.
Code of Virginia
sections cited, along with other reference documents, 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 concerning this determination, please Contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Craig M. Burns