VA Field Audit Guidelines

Advertising
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Sales and Use Tax Audit Procedure

Advertising
Objective: Discuss the application of sales and use tax as it applies to advertising.
I. History
Prior to 1977. Advertising where the final product was tangible personal
property was taxable.
1977. Virginia Supreme Court case (WTAR Radio-TV Corporation v.

Commonwealth) allowed all advertising where the final product was
tangible personal property to be taxed even if the property was used in
radio or television broadcasting.
7/1/86. Major change. Code of Virginia 58.1-602 and 58.1-608(6)(e)

[Presently recodified as 58.1-609.6(5)] (1) exempted media advertising from
sales and use tax; (2) taxed all tangible personal property purchased by
an advertising business to be used in media advertising. This new
legislation supersedes the WTAR case.
7/1/94. Code of Virginia 58.1-609.6(4) amended to allow out-of-state

advertising businesses to purchase printing from a Virginia printer
exempt of the tax when the printing will be stored in Virginia for 12
months or less and shipped outside of Virginia. Virginia advertising
businesses were still required to pay tax on all printing used in media
advertising.
7/1/95. For period July 1, 1995 through June 30, 1997, Code of
Virginia 58.1-609.6(4) amended to allow any advertising business
to purchase printing from a Virginia printer exempt of the tax when
the printing will be stored in Virginia for 12 months or less and shipped
outside of Virginia.
II. References
A. Code of Virginia Section - 58.1-602, 58.1-609.6

B. Virginia Administrative Code (VAC) citations - 630-10-3, 23 VAC 10-
210-41, 42,43
C. Ruling Letters - see attached
P.D. 88-15 1/4/88 - lists examples of media and nonmedia advertising
P.D. 88-90 5/10/88 - lists examples of media and nonmedia
P.D. 88-245 8/26/88 - sales of audio/video tapes and dubs
P.D. 88-304 10/31/88 - examples of media and nonmedia
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P.D. 88-309 11/7/88 - additional examples of media and nonmedia

P.D. 87-72 2/27/87 charges by professional photographer
P.D. 89-168 5/22/89 - direct mail advertising
Ruling Letter 6/28/91 - photography; stock photographs
Technical Memo 5/24/91 - photographs used in advertising (stock
photos
P.D. 92-19 4/14/92 - graphic design business
P.D. 93-134 6/2/83 - mailing and printing service company
P.D. 94-198 6/29/94 - advertising reprints
P.D. 94-316 10/19/94 - sales of tpp and media advertising
P.D. 94-356 11/23/94 - sign fabrication not creation of media advertising
P.D. 95-88 4/28/95 - Nonprofit clients of advertising businesses
P.D. 95-317 12/15/95 - Fees for reproduction of photos (stock photos)
Legislative Change 7/1/95 Audio Visual Production
D. Virginia Tax Bulletin 86-12, 93-7, 94-7

E. Applicable exemption certificate - ST-10A, ST-10
F. Definitions: These definitions were developed by Tax Policy in
conjunction with industry representatives. These definitions are a to be
considered work in process. Therefore the audit procedure will also have
to be flexible and subject to change as the revised regulation is finalized.
Advertisement means a communication that is intended to promote or

convey a desire to buy, use, sell, or patronize a product, service, business
or idea. Communications which are not considered advertisements
include polling and public surveys, employee relations and in-house
communications, training programs, press releases and similar forms of
business communications.
Advertising means the planning, creating, and placing of advertisements

in media such as newspapers, magazines, billboards, broadcasting and
other similar media. Advertising includes the providing of concept, writing,
graphic and internet and other electronic media design, mechanical art,
photography and production supervision, and audiovisual production.
Advertising differs from other forms of mass communications such as
publishing, polling, training programs, press releases and other similar
forms of business communications, in that it is intended to promote a
desire to buy, use, or patronize a specific product, service, or business.
Advertising business means any person or group of persons providing

advertising as defined in this regulation.
Advertising campaign means the plan or activities conducted by an

advertising business to place advertising in the media in order to
accomplish the specific advertising objective of the client.
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Direct mail means mail consisting of advertising materials, appeals for

donations, etc., sent simultaneously to the general public.
De minimus usage rule means a sale of nonadvertising materials in

conjunction with an advertising campaign where the tax on the
nonadvertising materials is no more than $ 5.00.
General public means a broad segment of people, businesses, or other

activities to which advertisements are communicated or distributed
through the media, such a television or radio broadcasting audience,
newspaper or magazine subscribers, electronic media subscribers,
company or organization accounts receivable mailing list, political
constituency mailing lists, or charitable organization contributor mailing
lists.
In-house advertising means advertising produced by an entity to

advertise, promote, or display its own product or service.
Media means any instrument or medium of mass communication directed

toward and available to the general public as a whole. Media includes, but
is not limited to newspapers, magazines, billboards, catalogs, direct mail,
radio, television, cable television, trade shows, sales conferences and
seminars, door-to-door sales programs, internet or other electronic
interfaces, and other similar forms of mass communication. Media does
not include promotional communications directed other than toward a wide
audience, i.e., the general public.
III. General
Whether the company under audit has purchased advertising or created

advertising, it is necessary to determine what the advertising says and
who the intended audience is in order to know how to tax it.
If the advertising is both promotional in nature and widely disseminated to

the general public, then it is media advertising, the sale of which is
exempt as a nontaxable service. If it does not meet both of those
criteria, it is considered non-media and taxable as the sale of tangible
personal property.
Important Note: Advertising agencies are generally audited in

accordance with the regulations and these guidelines, even during a first
audit. As agencies are often inconsistent in how they apply and pay tax,
it is best to audit them in this manner. Audits are an excellent compliance
tool in the area of advertising because there is such confusion about
sales tax within this business.
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IV. Procedures
A. SALES
When auditing an advertising agency, it's best to begin with sales in order
to obtain a knowledge of who and where the clients are and what the jobs
are. (Agencies usually refer to sales invoices as "client billings".)
Advertising agencies divide their work into "jobs". What makes a

transaction taxable or exempt is the job in which that transaction occurs.
Exempt sales by an advertising business
According to the sales tax regulations:
The tax does not apply to charges by an advertising business for

professional services in the planning, creating or placing of
Advertising in newspapers, magazines, billboards, direct mail, radio,
television, or other media regardless of how such charges are
computed by the advertising business and whether or not such
business actually places the advertising in the media.
The "advertising" referred to here is media advertising. Some examples

of exempt sales of media advertising by advertising businesses are
• Ads that will be placed in newspapers and magazines

• Brochures, letters, return envelopes, etc. for use in direct mail
advertising (that is promotional in nature and widely disseminated)
• Advertising inserts or supplements distributed in nontaxable
publications or through the mail
• Point-of-sale advertising devices, including display racks, animated
and action pieces, posters, banners, table tents
• Promotional literature, leaflets or brochures for direct door-to door
advertising or marketing campaigns
• Promotional materials (brochures, posters, etc.) to the public
promoting trade shows, conferences and seminars
• Political advertising
• Corporate annual reports and prospectuses
• Commercials that appear on television or radio
• Production of art work, photography, music, scripts, recordings, and
audio or video tapes for use in an advertising campaign
• Development of logos and other corporate identity programs
If a job falls into any of these categories, the charge is not taxable.
(However, purchases for these jobs will, for the most part, be taxable.)
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Taxable sales by an advertising business
If you identify a job that does not seem to be both promotional and widely
disseminated to the public generally, and it involves the sale of tangible
personal property, then it is taxable. In ad agency billings, there is often
a breakdown between creative (time) charges and production expenses
(printing, etc.) The taxable sales price should include all creative
services in connection with the sale. However, if an advertising business
receives from its client in good faith a properly completed exemption
certificate, the tax should not be charged.
Some examples of taxable nonmedia sales are:
• Administrative supplies (stationery, envelopes, business cards, etc.)

• Training films and materials
• Product manuals
• In-house communications such as employee newsletters or customer
newsletters
• Price lists, order forms, restaurant menus, etc.
• Shareholders meeting notices and materials
• Photography, art work, computer graphics, logos, etc. for use other
than in media advertising campaigns
• Reprints, without major changes, of previously created advertising
brochures, catalogues, etc.
• Duplicate copies of advertising videos where the duplicates are made
sometime after the creation of the original production
Nonmedia items developed in connection with a media campaign
If, in conjunction with a media advertising campaign, an agency includes

what normally would be considered nonmedia items, the exemption will
apply. For instance, the client has ordered a large direct mail campaign
to promote their new product and will mail brochures to a large number of
residents in the state. The agency designs the brochure, a personalized
letter to accompany it on special letterhead, a matching envelope, and
special business cards of salespeople the prospective customers can
contact. If developed alone, the business cards and stationary would be
considered taxable, but because they were developed for a media
campaign, the sale of all these items would be exempt.
Additional notes on sales
• Who are "advertising businesses"?
"Advertising business" means any person or group of people providing

the planning, creating, or placing of advertising in newspapers,
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magazines, billboards, broadcasting or other media, including without

limitation, the providing of concept, writing, graphic design, mechanical
art, photography and production supervision. Therefore, an illustrator
may be considered an advertising business; a photographer may; a
person in business alone who supervises a number of freelance writers
and artists who create advertising may also be considered an advertising
business.
There are companies called "specialty advertisers" whose business it is

to imprint logos, messages, etc. on novelty items such as pens, cups,
bags, water bottles, etc. These specialty advertisers are usually treated
as sellers of tangible personal property and not advertising businesses.
Their charges for the sale of imprinted items are taxable.
Also, some printers will do layouts for flyers and simple brochures that
customers use to advertise things for sale( to be put in windshields at
supermarket parking lots, etc.) These "quick printer" business are
generally not considered advertising business, but rather sellers of
tangible personal property.
Audio/video production companies are businesses that produce radio

and television commercials. Their charges for creation of advertising
would be exempt. There was a major law change in 1995 regarding the
application of sales tax to these companies. See attached legislative
change.
• What is "promotional in nature?"
When reviewing sales or purchases of advertising items such as

brochures, usually it's a good idea to look at the piece in question. Look
at the layout and read the copy. Does it use selling words like "new and
improved", "the best of its kind on the market", "your life will be
changed"? Is it trying to induce the reader to buy the product or service
being described? Or is it just conveying information ("We have moved.
Our new address is...").
Bear in mind, though, that a promotional piece targeted to nuclear

scientists may be worded a whole lot differently than one marketing soft
drinks to teenagers.
Sometimes it just comes down to the auditor's best judgment.
• What is "the public generally"?
Just how wide an audience does the marketing campaign have to cover
for it to be considered media advertising? A general rule of thumb is that
if the ad is placed in a newspaper or magazine or is shown on television
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or played on the radio, it has reached the general public. This is the case
regardless of what the magazine is or how small the radio listening
audience is.
However, a narrower audience may be considered "the general public" if

it is the general public that will use the product advertised. For instance,
manufacturers of industrial size heating and air conditioning systems will
not be targeting their ad campaign to those shopping at Lowes. Their
audience is probably large commercial building contractors, and a
campaign targeted to those contractors would be considered
disseminated to their general public. (This is called "Business-to-
Business advertising".)
Finally, a campaign targeted to a list of current customers (members,

etc.) is not usually considered to be disseminated to the public generally,
but rather to a restricted audience, and would most likely be nonmedia.
(However, if the client is VA Power, their customers really are the general
public.)
• Look at job folders; key in job numbers.
Advertising agencies usually give each job a special designation, often a

number/letter combination. It's important when keying sales exceptions
(as well as purchases exceptions) to list the job number in the account
number field. This will help match up purchases to sales, and assist the
agency in collecting information about the job.
Also, many agencies maintain separate folders for each job which contain
copies of client billings, purchases invoices and cost breakdowns. When
beginning a review of sales, ask if the agency keeps such job folders; it is
helpful to see all the information about a job in one place.
• Remember, gray is a prominent color when dealing with advertising
B. PURCHASES
Taxable purchases for use in advertising
Because advertising businesses are considered to be providing

professional services, they are the users and consumers of all tangible
personnal property purchased for use in providing that service.
Therefore, with certain exceptions, tax applies to all purchases by an
advertising business including, without limitation, the following items:
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• Administrative items: paper, ink, pencils, layout boards, blank

audio and video tapes, equipment, office furniture and office supplies
whether or not intended for distribution outside of Virginia
• Promotional items: pens, pencils, ash trays, calendars, balloons,

t-shirts, and similar items which are part of an advertising campaign,
whether or not such items are intended for distribution outside of
Virginia
• Printing: before 7/1/95, all printing for use in an advertising

campaign was taxable whether or not it was intended for distribution
outside of Virginia (the exception was if printed outside of Virginia
and never brought into the state). This is what the regulation states.
However, the law has been changed and after 7/1/95, printing of
advertising materials that will be stored for 12 months or less in
Virginia is exempt. The same rules apply to printing done by direct
mailing services, where if the printing is taxable, all services in
connection with that printing (except postage) are also taxable
• Stock Photographs: when an advertiser purchases the right to use

photographs maintained in an inventory kept by a photographer,
stock photo business, advertising business, or other business, this
does not represent the purchase of exempt photographic services
and is taxable, regardless of whether the photo is to be used in a
specific advertising campaign (distinguished from the exempt
purchase of photographs created for a specific campaign)
• Audio/visual production: duplicates (dubs) of previously created

audio/visual tapes purchased for the advertising agency's personal
use constitute the purchase of tangible personal property and are
taxable
• Mailing lists: advertising businesses often purchase mailing lists,

usually on computer disks. These lists are taxable, unless they are
customized in some way. If they are customized mailing lists, they
are exempt. For instance, the agency purchases a taxable mailing
list of all people in a certain ZIP code. However, if they want that list
narrowed down to all people in a certain ZIP code making over
$70,000, that would be an exempt customized list.
Exempt purchases for use in advertising
Purchases by an advertising business of concepts, writing, graphic

design, mechanical art, audio/visual productions, photography and
production supervision created for a specific advertising campaign
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are exempt from the tax when purchased from an entity deemed as an
advertising business pursuant to this regulation. (However, in order to
purchase tangible personal property without tax, a properly completed
exemption certificate, Form ST-10A, must be furnished to the vendor.)
For example, an advertising agency goes to an audio/visual production

company to produce a commercial which will be shown on television
promoting the client's product for sale. The charges by the production
company are exempt of the tax, because they are in the business of
creating advertising for a specific campaign. The same is true if a
photographer were hired to take slides for use in a magazine ad, or a
graphic artist created an illustration for use on a billboard.
Lettershop services: services provided by a mailing service business

such as printing names and addresses on preprinted letters, addressing
envelopes, folding, inserting and mailing are nontaxable services (these
are called "lettershop" services). However, as stated earlier, if the mailing
service prints the letter in its entirety, it is treated like a printer and all
services in connection with that printing job--sorting, formatting, printing,
folding, and inserting--are taxable. Charges for postage are exempt.
These businesses may also do disk conversion and printing of labels for
sale to the advertising business. Both of these are taxable.
Purchases for resale
Tangible personal property purchased for sale to clients in connection

with a nonadvertising campaign is not subject to the tax. This includes
items that are actually conveyed to the client in the sale. For instance, an
agency's purchase of printing of nonmedia brochures can be made
without tax. (However, the purchase of photographs that will be used in
the brochure, because they are not actually conveyed with the items, are
taxable.) The agency should present a properly completed exemption
certificate Form ST-10, indicating the purchase is for resale.
Auditing note
When auditing an advertising business and sampling is used, purchases

and sales should both be audited for the same year. Job numbers should
always be listed, if possible.
In-house advertising
A nonadvertising business such as a manufacturer or a large retailer may

have an advertising division within their corporation. This internal division
operates to market their own products for sale. Purchases of materials,
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supplies and other tangible personal property by these divisions are

taxable in the same manner as any other taxpayer.
If the division were to go to an advertising business such as a

photographer or audio/visual production company for work to be created
for a media advertising campaign, such purchases would be exempt (tax
does not apply to charges by an advertising business for creation of
advertising).
Catalog exemption: if the division completes a catalog, brochure or

some other item which will be used in advertising and takes these to a
printer, tax does not apply to these items--and any envelopes, containers
and labels used for packaging and mailing them-- if they are to be stored
for 12 months or less in Virginia and then distributed outside of the state.
This exemption also applies if a company has an advertising agency
design the advertising materials, but has the printing done themselves.
The company is responsible for sales tax on printing of materials
distributed in Virginia only.
External clients: when an in-house advertising staff provides

advertising to external clients, including affiliated companies, it would be
deemed an advertising business.
Aircraft Sales and Use Tax
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AIRCRAFT SALES AND USE TAX
Objective: Discuss the application of aircraft sales and use tax.
I. History
Prior to January 1, 1994, scheduled air service was defined as "consisting of

regularly scheduled flights to one or more Virginia airports at least five days
per week."
1995 legislation retroactive to January 1, 1994, redefined scheduled air

service. The requirement for scheduled flights to one or more Virginia airports
at least five days per week was reduced to one day per week.
II. References
A. Code of Virginia Sections 58.1-609.3(6) and 58.1-1500 through 58.1-1510
B. Virginia Regulations 630-11-1500 through 630-11-1510 (VAC 10-220-5

through 90); 630-10-6 (VAC 10-210-70); 630-10-6.2 (VAC 10-210-90);
630-10-7 (VAC 10-210-100).
C. Ruling Letters: Public Document 92-251
D. Virginia Tax Bulletin 91-4
E. Court Case: Charles E. Smith Management vs. Department of Taxation of

the Commonwealth of Virginia, et al (Virginia Supreme Court)
F. Sample Letter to Taxpayer
G. Virginia Aircraft Tax Worksheet
H. Form AC-48, Audit Report
I. Aircraft Tax Audit Manual "700-1 through 700-7" and attachments
J. Applicable Exemption Certificates: ST-20

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III. Definitions
Aircraft - Any contrivance used or designed for untethered navigation or flight

in the air by one or more persons at an altitude greater than 24 inches above
the ground. Does not include parachutes or hang gliders.
Dealer - Any person owning five or more aircraft at any time during a
calendar year which are held for resale or used for compensation.
Scheduled Air Service - Any scheduled service provided by a domestic or

foreign air carrier operating pursuant to authority issued by the U.S.
Department of Transportation and under federal aviation regulations. Such
airlines must provide service on a continuing basis to one or more Virginia
airports at least one day per week.
IV. General
The Virginia aircraft sales and use tax is imposed at the rate of two percent
upon the retail sale of every aircraft sold in this state, upon the nonexempt
use in Virginia of any aircraft, and upon the lease, rental, or charter by a
dealer as defined above who has properly applied for the dealer exclusion
with the Tax Commissioner (see Aircraft Tax Reg. Sec. 630-11-1507). If a
dealer elects to pay the two percent tax at the time of the purchase of the
aircraft, the gross receipts from the lease, rental, or charter would not be
taxable.
Form AST-1 is the form used for application for the dealer exclusion. The
AST-2 is the Dealer's Aircraft Sales and use Tax Return. The AST-3 is the
Virginia Aircraft Sales and use Tax Return filed by the aircraft purchaser.
All aircraft owned by Virginia residents must be licensed by the Department of

Aviation and must pay the tax prior to licensure unless they have already paid
aircraft tax or they meet some specific exemption. The basis for this
statement is derived from Code of Virginia sections 58.1 (taxation) and 5.1
(aviation):
Section 5.1-5(a) - Every resident of this Commonwealth owning a civil aircraft,

every non-resident owning a civil aircraft based in the Commonwealth...shall
before the same is operated in this Commonwealth, obtain from the Department
an aircraft license for such aircraft.
Section 58.1-1502 - There is hereby levied and imposed, in addition to all other
taxes and fees of every kind now imposed by law, a tax upon the retail sale of
every aircraft sold in the Commonwealth and upon the use in the Commonwealth
of any aircraft required to be licensed by the Department of Aviation pursuant to
5.1-5.
Section 58.1-1506(A) - Except as provided in paragraph B, the tax on the sale or

use of an aircraft required to be licensed by this Commonwealth shall be paid by
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the purchaser or user of such aircraft and collected by the Commissioner prior to
the time the owner applies to the Department of Aviation for, and obtains, a
license therefor.
V. Procedures
The 2% aircraft tax is computed on the gross purchase price of the aircraft
without deduction for trade-in. As cited in the new Virginia Administrative
Code 10-220-40, the Virginia aircraft sales and use tax does not apply to any
aircraft sold or used by:
1) The United States government or any of its governmental agencies;

2) The Commonwealth of Virginia or any of its political subdivisions;
3) Any airline operating in intrastate, interstate, or foreign commerce as
a common carrier providing regularly scheduled service to one or
more Virginia airports at least one day a week on a continuing basis.
It should be noted that the new regulation does not reflect the 1995 legislative
change effective January 1, 1994, that redefined scheduled air service.
Aircraft sales and use tax audit leads and information on those leads come
from various sources:
• The "Annual Airport Survey" (required to be filed with the Department of

Aviation) lists the aircraft based at each airport and the aircraft owners and
is given to the Department of Taxation by the Department of Aviation.
• Aircraft tax audit referrals from the Miscellaneous Taxes Section of the
Office of Customer Services.
• Auditor referrals.
• Leads forwarded by the Department of Aviation through their licensing
information.
• The Federal Aviation Administration provides sales transaction information
and serial and tail number information. The Department of Aviation will
assist us with getting information from the FAA. Additionally, some
ownership information can be found on the FAA's website under
"www.landings.com".
• The airport's Fixed Base Operator (FBO) that manages the hangar spaces
and provides maintenance and fuel to non-commercial aircraft.
As auditors conduct sales and use tax audits they should note and investigate
any evidence that the business may own an aircraft. The review of assets
may disclose ownership of an aircraft. Expenses incurred for hangar space,
tie-down services, aircraft repairs and maintenance, and payments to a
company for aircraft management may indicate ownership of an aircraft by
the business.
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The initial step in conducting an aircraft tax audit is to contact the taxpayer
through a letter accompanied by a worksheet. The completed worksheet
includes information such as purchase price of the aircraft; aircraft tax paid to
another state, and length of time that the aircraft has been located in Virginia.
When the worksheet is returned, all pertinent information should be verified
by the auditor. Descriptions of aircraft can be obtained from the FAA in
Oklahoma at (405) 954-3116. Valuation of the aircraft can be verified through
Janice Cole with the Department of Taxation (financing documents or bill of
sale also state the value). Tax paid can be checked on the STARS screen 8-
03. Typically when tax is paid, the taxpayer receives a certificate of tax
payment and notes are made on screen 8-03 indicating payment along with
the tail number and serial number. In addition, the Department of Aviation can
provide the auditor with payment information. Since the 8-03 screen is
regularly purged, it is sometimes necessary to contact Aviation to verify
payment and licensing of the aircraft.
Serial numbers for aircraft do not change but tail numbers, similar to auto
license plates, can change. It is important to use both numbers as references.
Serial numbers on the worksheet should be checked with those on the
STARS screen 8-03 and on the Landings Internet website at
www.landings.com, or with the Federal Aviation Administration.
Each district office should keep a current list of planes based in their region.
This list should include the tail number, serial number, and the most recent
owner's name and address. This list can be compared annually to the airport
survey and Landings to identify aircraft sales to new owners and new aircraft
located in the region.
The owner may claim that the aircraft was never located in Virginia. For
verification, the auditor should review the aircraft's flight logs which can be
obtained from the owner/operator. The flight log contains the flight history of
the aircraft. If the aircraft regularly used a Virginia airport as a hub (e.g., flying
from Virginia and back again), it would be taxable. Aircraft based in Virginia
more than 60 days (need not be consecutive) in any 12-month period would
also be taxable.
An aircraft may not be required to be licensed in Virginia; nevertheless, the

aircraft tax must be paid if the aircraft was purchased in Virginia. Aircraft tax is
due on aircraft used within the state, and not based upon residency of its
owner.
Although both Dulles and National airports have Washington, D.C., mailing
addresses, they are located in Virginia. Aircraft at these airports would be
subject to the aircraft tax absent any statutory exemption.
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In the case of leases, if total lease payments equal or exceed 80% of the
aircraft's fair market value, the lessee is subject to the tax. Should lease
payments be less than 80% of the aircraft's market value, the lessor is liable
for the tax even if the lease is to a government agency.
Subsequent to the purchase of the aircraft, any purchases of supplies (e.g.,

repair parts, pilot charts) and taxable services (e.g., food service) would be
subject to 4 1/2% retail sales and use tax (VAC 10-210-70). Charges for
refurbishing or refitting an aircraft are also subject to the retail sales and use
tax if the remodeling is a transaction separate and distinct from the original
purchase.
The Office of Tax Policy has taken the position that the statute of limitations is
three years for taxpayers who have filed returns and six years for those who
have not filed, as is the case with the four and one-half percent retail sales
and use tax.
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Sales and Use Tax Training

Aircraft Sales & Use Tax
Exercise Problems
1. A Delaware corporation has acquired an aircraft located at National Airport. Is

the airplane subject to Virginia aircraft tax?
2. The following has been issued for the sale of an aircraft:
Sales price $1,000,000.00

Trade-in credit (100,000.00)
Balance Due $ 900,000.00
What is the taxable amount? Explain.

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Exercise Answers
1. Yes, this is supported by the Charles E. Smith court case
2. $1,000,000; based on the definition of sales price, the tax is on the gross
amount before trade-in.
Objective: Discuss the application of sales and use tax as it applies to agriculture.
I. History
With the 1966 Rules and Regulations, as with many sections of the Rules and
Regulations booklet, the agriculture section was limited and generalized. Since that
time the code of Virginia has changed only slightly, while the Rules and Regulations
has grown tremendously. In the beginning, “agricultural products” was not defined,
but today we have farmer-horse breeder, commerical tree farming, commerical fish
farming, commerical worm farming. Also the Code of Virginia states that
“Agricultural commodity,” for the purposes of this subdivision, means horticultural,
poultry, and farm products, livestock and livestock products, and products derived
from bees and bee keeping.
A substantial change in the regulation occurred effective July 1, 1979 with the
introduction of the term “structural construction materials” and those items that were
excluded from that definition. The term “structural construction materials” includes
but is not limited to the following: silos; barns and sheds; storage bins (not portable);
greenhouses, including plastic covered houses; permanent fencing; fuel oil storage
tanks; electrical wiring, except for wiring running from special purpose equipment to
an on-off switch; plumbing, except as part of special purpose equipment (e.g., water
feeding system in poultry house); cattleguards; farrowing houses; and bulk tobacco
curing barns. These items are therefore subject to tax.
The term “structural construction materials” specifically excludes the following

but may also exclude other items: milking systems; feeding systems; heating
systems; artificial insemination equipment, lighting fixtures in poultry houses used for
the purpose of extending the daily feeding period of chickens; power outage and
water pressure alarm systems; egg cooling equipment, including wall mounted egg
coolers; ventilating equipment, to include air inlets, curtains and curtain cables,
cords and related fixtures, pull-ups, winches, fans and fan belts, louvers, shutters,
motors, static pressure gauges, thermostats and replacement parts; shade cloth;
and irrigation lines and sprinkler heads. These items are therefore exempt from tax.
As amended in 1993, Va. Code 3.1-796.66 of the Comprehensive Animal

Laws defines “livestock” to include:
Domestic or domesticated: bovine animals; equine animals; ovine animals; porcine

animals; cervidae animals; capradae animals; animals of the genus Lama; ratites;
Page - 2
enclosed domesticated rabbits or hares raised for human food or fiber; or any other
individual animal specifically raised for food or fiber, except companion animals.
Definitions: Bovine animals-belonging to the ox or cow family.

Equine animals-belonging to the horse family.
Ovine animals-characteristic of sheep.
Porcine animals-resembling swine or a pig.
Cervidae animals-resembling a deer.
Capradae animals-belonging to the goat family.
Genus Lama-llama, alpaca.
Ratites-flightless birds
II. References
A. Code of Virginia Section 58.1-609.2 & 3.1-796.66 of the Comprehensive

Animal Laws
B. Virginia Admininsrative Code 23 VAC 10-210-50
C. Ruling Letters
PD 00-126, Occasional sale 7/6/00
PD 99-85, Exempt tractor used in vineyard, prorated portion 4/22/99
PD 99-27, Feeding systems, bins and tanks 3/16/99
PD 98-197, Fencing materials 11/30/98
PD 98-8, Trailer and customized poults transport system 1/19/98
PD 97-454, Structural construction materials-hog parlor 11/14/97
PD 97-280, Two-way radios 6/24/97
PD 97-139, Veterinarian, prescription medicines and drugs 3/21/97
PD 97-27, Golf carts-agricultural uses 1/30/97
PD 97-17, Storage bins vs feeding systems 1/22/97
PD 96-349, Vaccination machines 11/27/96
PD 96-291, Agricultural cooperative association is not a farmer 10/17/96
PD 96-120, Rental of farm machinery 6/5/96
PD 96-69, Livestock wholesaler may be a farmer 4/26/96
PD 96-34, Farm vehicles 4/3/96
PD 95-33, Gravel and crushed stone 3/1/95
PD 94-324, Miniature horses 10/24/94
PD 94-311, Methyl bromide gas for weed control 10/5/94
PD 94-301, Farm service truck, lube truck, boom truck 9/29/94
PD 94-152, Ostrich farming, define “livestock” 5/16/94
PD 94-68, Operating grain buying station, equip to spread fertilizer
3/17/94
PD 93-100, Thoroughbred breeding and racing operation 4/12/93
PD 93-93, Computer operated irrigation controllers 4/2/93
PD 93-74, Show horses 3/18/93
PD 93-5, Amusement park and breeding facility 1/8/93
Page - 3
PD 92-104, Cab covers 6/23/92

PD 91-294. Thoroughbred horse breeding farm 11/19/91
PD 91-174, Multi-state thoroughbred horse business 8/23/91
PD 91-129, Breeder and trainer of race horses 7/22/91
PD 91-116, Purchase of trees 7/9/91
PD 90-113, Lessor of TPP-Agricultural 7/23/90
PD 89-288, Storage tanks, parts and tobacco barns 89-288
PD 89-223, Fish farming 8/24/89
PD 89-125, Sale of prescription and nonprescription medicines 4/24/89
PD 88-231, Supplies for horse breeding 7/29/88
PD 87-156, Milking and feeding stalls 6/2/87
PD 86-58, Silos 3/25/86
PD 86-29, Delivery of horse outside the state 2/86
D. Applicable exemption certificate
ST 15-Discontinued 9/81, old ST 15s are valid still (Should be replaced with
ST 18)
ST 18
III. General
A. Generally we are not auditing the farmer himself, rather we are auditing
the farm supply dealers, farm implement & equipment dealers and farm
bureaus. The agricultural exemption can be defined as broad. What is
necessary for agricultural production is exempt. Many rules of agricultural
auditing relate to other types of auditing, ie real property is taxable
(except specific “structural construction materials”), tools used to repair
farm equipment are taxable and so forth. As with other regulations the
same item can be used in a taxable and also an exempt manner, ie light
bulbs, temporary vs permanent fencing, tractor blade, parts for licensed
and unlicensed vehicles used on the farm etc. Purchases may be
taxable, exempt or proratable. A “custom farmer” does not enjoy the
agricultural exemption. Custom farmers generally do not raise an
agriculture product for sale. Instead they provide a “service” for farmers
where the custom farmer has equipment to harvest crops for the farmer.
These typically may be corn pickers, combines and hay balers.
B. Only on a rare occasion would we audit an individual farmer. More

compliance can be achieved by auditing the dealer as opposed to one
individual.
Page - 4
IV. Procedures
Audits of Farmer
A. Due to the nature of the farm business, it is recommended you

perform a detail audit. Using the CCH amended agricultural exemption
list as a guide, farm purchases may be totally exempt, totally taxable or
may be prorated based upon the use. The statue may be opened to 6
years as the farmer may not be registered or may not have reported any
tax in the last 3 years. It needs to be determined if the farmer is making
any sales of products which may require a registration. The occasional
sale provision applies to farmers as to any other business. There are
programs in which members pay for a share of produce in advance of the
growing season as an investment in the farm and receive produce
deliveries through out the season. These membership fees, initiation
dues, or annual fees which entitle the members of the group to tangible
personal property are subject to the tax at the time the fees are paid. 23
VAC 10-210-6030 states “The use tax does not apply to livestock and
livestock products, poultry and poultry products or farm and agricultural
products, if produced by a farmer and used or consumed by him and the
members of his family.”
Audits of Supplier
A. Upon contacting the taxpayer to be audited and doing a sample month,

keep in mind the seasonal cycles of the farmer. There are the planting,
growing and harvesting months to be considered when selecting the
sample months. Obviously a selection by the STAUDN program would
not take the seasons into consideration.
B. Great care should be exercised on the examination of exemption

certificates. Exemption certificates must be completely and correctly filled
out. The ST-18, on the face of the exemption certificate, list the items
which can be purchased exempt. Remember an exemption certificate that
is accepted in good faith may not be scrutinized as closely as one
received after the fact. Form ST-11A is for use by construction
contractors to purchase tangible personal property necessary for
agricultural production, to be affixed to real property(feeding, milking
systems, lighting fixtures in poultry houses, etc.). The contractor must
obtain the ST-11A from Richmond. The Form ST-18 is the proper
certificate for use by both in state and out of state farmers. Structural
construction materials for silos, barns, sheds and permanent fencing are
subject to tax. Contrary to the belief of both farmers and dealers, the ST-
18 Exemption Certificate is not a blanket exemption certificate. Generally
Page - 5
the auditor or the farmer may prorate items based on use. Normally the
dealer would not prorate.
C. Generally sampling is acceptable for parts and repair orders, while

detailing is necessary for farm equipment due to invoice amounts
(commonly referred to as whole goods). Any exempt whole good sales
should be considered for a future letter campaign. The following
information should be obtained for this purpose: name; address; invoice
date; invoice amount; invoice number; description of property purchased.
In a letter compaign we are attempting to find taxpayers who have signed
an ST-18, but do not file a Farm Schedule F for federal income tax
purposes. Thus they are not entitled to the exemption. We have found
that a true farmer files a Farm Schedule F whereas, many weekend
farmers and persons with 10-20 acre estates think they are farmers but,
raise no agricultural product for sale. Also, in rare cases, large farms are
incorporated and file a Schedule C. This is also acceptable in
determining a true farmer. Sample letters are attached. Unofficial
guidelines for tractor/implement dealer audits are attached.
D. Special attention should be paid to audits of farmer-horse breeder in that

they enjoy some exemptions that other farmers do not. Also, sales of
horses require a thorough study.
The following excerpt is taken from Commerce Clearing House, Virginia Tax Reports, Sales
and Use Section, either hard back edition or cd-rom. COPYRIGHT 2000, CCH Incorporated.
Additions to or changes from the original printing by CCH are identified by bold, italicized
and underlined print.
CCH-ANNO, VA-TAXRPTR ¶60-250.13, Agricultural exemptions listed.--

Agricultural exemptions listed.--
I. Tangible personal property listed in Items A through H below is exempt from the
Virginia retail sales and use tax when purchased by a farmer for his use in agricultural
production for market--(These exemptions do not apply to purchases for personal or family
use or consumption as distinguished from purchases for use or consumption in agricultural
production for market. A farmer who is not engaged in the business of producing agricultural
products for market cannot claim any agricultural exemption.)
A. Commercial feeds and seeds purchased by a farmer for his use in agricultural
production for market.
Feed for breeding and other livestock
Feed for poultry
Seeds
Page - 6
B. Fertilizers and liming materials purchased by a farmer for his use in agricultural
C. Poultry purchased by a farmer for his use in agricultural production for market.
Baby chicks
Ducklings
Geese
Guineas
Hatching eggs
Turkey poults
D. Agricultural chemicals such as herbicides, pesticides, insecticides, fungicides,

defoliants, disinfectants, and cleaning materials purchased by a farmer for his use in
agricultural production for market.
E. Fuel for drying or curing crops purchased by a farmer for his use in agricultural
F. Twine and containers, including bags and wrapping materials, purchased by a farmer
for his use in agricultural production for market.
G. Farm machinery and equipment, and parts therefor, purchased by a farmer for his use in
agricultural production for market.
Automatic feeding and watering equipment for poultry and livestock including electrical
wiring to on/off switch
Bush hog or like equipment used on a farm to cut over existing pasture land
Cab covers for farm equipment and machinery when attached at factory or added later
Dusting and spraying equipment
Farm water systems for poultry and livestock
Feed grinders and mixers
Front-end loader attached to a farm tractor when attached at factory or added later
Page - 7
Grading and packaging equipment for agricultural products
Grain and hay drying machinery
Grain and seed cleaning machinery
Hand operated pruning equipment, power pruning equipment and power saws for use
exclusively in pruning fruit and nut trees.
Milking machines including electrical wiring to on/off switch
Bulk milk tanks and pipeline milking systems
Compressors for milking machines
Generator (including portable) to operate milk machines or other exempt agricultural

machinery
Milk cans
Milk coolers
Strainers and milk buckets
Parts for unlicensed vehicles used exclusively on the farm Parts for unlicensed farm
vehicles as well as farm vehicles licensed as such Restrictions such as the transportation
of agricultural products to market and personal non-farm use would be subject to
proration by the farmer
Peanut pickers and peanut drying machinery
Portable bins or tanks for use in feeding poultry and livestock (Bins and tanks for storage
of agricultural products for market are taxable)
Portable elevator machinery used to load harvested crops into storage facilities on the farm
Portable irrigation equipment
Scales portable only
Power steering for agricultural equipment and machinery
Pruning equipment and chainsaws when used by orchardmen, christmas tree farmer,
vineyard
Silo unloading and conveyor machinery

Page - 8
H. Other agricultural items purchased by a farmer for his use in agricultural production for
market.
Baler twine
Bobcat type machinery used to clean dairy barn, poultry, etc
Brooms and other commodities for use in cleaning dairy barns, hog parlors, poultry
houses and other buildings used to produce an agricultural product for market
Clippers, shears, and grooming tools used on livestock that will become an agricultural
product for market
Covering materials, such as canvas or plastic, or the like, for farm crops and farm supplies.
Ear tags, neck chains, ID tags or adhesive stickers
Fluorescent lamps and bulbs and light fixtures used in feeding poultry
Freezers when used to hold dead animals
Fuel, oil, grease, and antifreeze for farm machinery or unlicensed vehicles used on the
farm as well as farm vehicles licensed as such
Grain shovels, hay forks, hoes, scoops for use in cleaning dairy barns, hog parlors,
poultry houses and other buildings used to produce an agricultural product for market
Hot water heater for use in dairy barn
Leaf blowers to clean chicken houses
Litter and/or bedding material for poultry and livestock
Obstetrical gloves and chains used in removing a calf at birth
Paint for farm machinery (Paint for any building or structure that is a part of real estate is
taxable)
Portable heater for use in a milking barn
Posthole digger for planting fruit and nut trees
Poultry and hog equipment such as heaters, light bulbs, and brooders
Page - 9
Posts and wire for grape arbors
Power washers for cleaning the dairy barn, farrowing houses or poultry house
Machinery used to clear land for future farming(machinery used to construct ponds,
roads or make other real property improvements would be taxable)
Rental of farm equipment such as tobacco heaters
Repair items for storage and production facilities (Repair items for any building or
structure that is a part of real estate or for bins and tanks used for storage of agricultural
products for market, are taxable)
Seeders
Seed stocks and plants
Self feeders and waterers for poultry and livestock
Space heaters for dairy barns for benefit of milking
Signs and safety reflectors attached to farm machinery when passing over public roads
Supplies used in brooder construction and repair (but not applicable to building itself)
or sanitation control
Supplies used in incubator repairs or sanitation
Temporary portable fencing material such as metal posts or stakes, strand-wire, and
electric fence controllers that will not become a part of real estate
Tillers used in the poultry house to mix litter
Tires, batteries and tubes for tractors and farm machinery
Tires, batteries, tubes and truck covers for unlicensed vehicles used on the farm as well as
farm vehicles licensed as such
Tobacco bed covers
Veterinary supplies for poultry or livestock
Welding rods which become a part of farm machinery and equipment.
2, 3, 4, and 6 wheelers, golf carts and similar equipment used to herd livestock, gather
eggs in a poultry operation, transportation of feed or hay around the farm would be
Page - 10
exempt. However, the use of this equipment to go from one field to another to check on
crops, general farm transportation, performing maintenance or permanent fence repairs
would be taxable. In the case of both exempt and taxable uses of this equipment, the tax
may be prorated based on the use
II. No farmer may claim any agricultural exemption with respect to the purchase of any of
the items of tangible personal property listed below:
Air tanks
Antifreeze testers, battery charges
Backhoe attachments for tractors
Bins and tanks for storage of agricultural products for market
Building materials, including lumber, bricks, cement, paint, and nails, for use in building
or repairing any building or structure (barn, chicken house, shed, silo, etc.) that is a part of
real estate.
Cement mixer operated off a power take-off on farm tractor
Compressors for use in maintenance of equipment
Dog and cat food
Electrical and plumbing supplies and fixtures for the home or any farm tenant building
Fertilizer and liming material for lawn or family garden use
Freezer bags or containers for home use
Fuel oil for heating the home or a farm tenant house changed to fuel oil for farm tenant
house(unless paid for by tenant) Fuel oil is exempt for residential heating except for the
1% in some localities
Guns and ammo
Hand tools such as hammers, wrenches, screw drivers, pliers
Home garden, lawn, or farm shop tools
Lawn mowers, hand or powered are taxable (Riding lawn mowers with blade
attachments to clean litter from chicken houses, etc, are exempt if that is the exclusive use,
otherwise prorate taxable portion)
Page - 11
Lightweight mowers (finishing mowers)
Luxury items which are not agricultural supplies such as radios, tape decks, air
conditioning, and other items when bought separately or added to the tractor solely for the
benefit or comfort of the farmer are taxable. If, however, these items were part of the
tractor when bought new, the items would be exempt (power steering would be exempt if
added at at later date)
Oils, lubricants, tires, batteries, tubes, antifreeze, repair parts, or any other items of
tangible personal property for use in or on any licensed vehicle(excluding vehicles with farm
use tags)
Oxygen, acetylene, and welding equipment used to repair farm machinery and equipment
Permanent fencing material that will become a part of real estate
Post hole digger/auger to erect fence
Power washers for cleaning farm equipment
Protective euipment (example: goggles)
Plants and shrubbery for garden or lawn
Ramps
Rotary tiller for family garden use
Snowblower, blades or other equipment used to clear or maintain roads
Soaps, fly sprays, rat killers and other insecticides or pesticides used on or around the
home or farm tenant house
Space heater for shop, etc.
Tire filling units
Twine or rope for home or farm tenant house use
Water pumps and systems for home or a farm tenant house
Weed eaters
Wood saws(see pruning equipment in exempt section)

Page - 12
Work gloves, work clothes and plastic aprons used in a dairy barn or pen to keep clothes
clean, also plastic shoe covering for prevention of disease transmission from one poultry
house to another
Any other item not used by a farmer in agricultural production for market.
Memorandum of Sales and Use Tax Division, October 20, 1966 (as revised October 1, 1967,
and February, 1971).
Page - 13
Unofficial Guidelines For Tractor/Implement Dealers
Bale Spears and forks-exempt

Balers-exempt
Billy Goat Vacuum-taxable
Blades/Box Scrapers-exempt if used exclusively to clean dairy barn or poultry
house, of if used to clean land for future production, otherwise prorate. Taxable
for any other use on real property. (roads etc)
Bobcats-Basically same rules as tractors and backhoes.
Bushogs/rotary cutters/finishing mowers/grooming mowers-depends on use.
Exempt uses are clearing land and to cut over existing pasture. Also exempt if
used exclusively on land on which agricultural production takes place. However,
finishing mowers are almost always taxable. Mowing around farm building and
poultry houses is taxable.
Cab Covers-exempt
Chain Saw-See pruning equipment listed below.
Dusting and Spraying Equipment-exempt
Filing fees/Processing Fees-If item is taxable then fee is taxable.
Front End Loaders, Backhoes, Bulldozers, Motor Graders-Uses such as clearing
land(rocks and stumps) cleaning out barns and lots for manure would be
exempt. The same equipment for any building of roads or ponds would be
taxable. Proration may be necessary.
Generators-If used to run poultry or dairy equipment exempt (These would be
large generators). Small ones (portable) generally costing $1,000.00 or less
would be generally taxable.
Harrows-exempt(Normally used to cultivate the soil)
Hay Unroller-exempt
Lawnmowers/Brush Cutters(Gravely-Goat etc)-taxable except if a riding mower
with a blade to clean litter in poultry house. Exemption is exclusive use,
otherwise prorate.
Leaf Blowers and other Blowers(Back Pack)-only exempt if used in poultry
house.
MoCo’s-(Mower Conditioner)-exempt(Normally used to condition hay).
Parking Stand-exempt if equipment is exempt (Normally used to hold up
equipment ie a stand to hold up a travel trailer).
Portable Elevators-exempt (Normally used to move grain or hay).
Post Hole Diggers-exempt for vineyard for planting trellis post and orchard for
planting fruit trees. All others taxable as used for real property construction. Ie
fencepost.
Power Steering, A/C, 2 Way Radio, Tape Decks and AM/FM Radios for tractors-
power steering is aways exempt, other itens listed are exempt only if purchased
with the tractor but taxable if added later.
Power Washers-exempts for dairy barn, barrowing house and poultry house. All
others taxable.
Pruning Equipment/Chain Saws-exempt to orchard, vineyard and tree farmers..
Exempt if used to clear land for future farming. Taxable to all others.
Page - 14
Reflective Safety Sign-exempt

Space Heaters-exempt if used in dairy barn or chicken house to heat livestock
and poultry. Another exempt use would be to keep pipes from freezing in the
dairy barn or poultry house. Taxable if used for comfort.
Snow Blowers-always taxable.
Spreaders/Befco Rear Discharge-for agricultural use exempt. Otherwise prorate
or tax.
Tillers-exempt if used exclusively in poultry house, otherwise prorate. All others
taxable.
Utility Carts/Trailers-exempt if used to haul agricultural products.
Weedeaters-taxable(Mowing around poultry houses and other farm buildings is
a taxable use).
Welders-taxable as used in maintenance.
2, 3, 4, and 6 Wheelers, Golf Carts, Gators-See attached letter.
Those items listed as exempt is assuming that the purchaser can file a Federal
Schedule F. (Some farms are corporations and would be exempt filing a
Schedule C). Filing of these schedules is prima-facie evidence that these
taxpayers are entitled to the exemption.
The above listing is based on written and verbal opinions issued by the
department as of this date. Changes may be made by legislation and/or
opinions from the Tax Cfommissioner. Persons wishing rulings relative to
agriculture not covered above are encouraged to write the Tax Commissioner
stating all facts.
Updated 8/28/2000
Auctioneers, Agents, Factors
Page-1

Objective: Discuss the application of sales and use tax as it applies to Auctioneers,
Agents, and Factors selling tangible personal property.
I. References
A. Code of Virginia Sections 58.1-603 & 58.1-602
B. Virginia Regulation section 630-10-9 (VAC 10-210-140) Auctioneers

630-10-75(VAC 10-210-1080) Occasional sale
C. Ruling Letters PD 88-335 Auctioneers--Auction Conducted by Non-Profit

PD 95-294 Public School Fund Raising Auction
II. General
A. Sales of tangible personal property at auctions are taxable. Auctioneers,

agents, or factors must collect sales tax on the gross sales price of each
taxable sale, even if title to the property being sold rests with another
person. "Gross sales price" is the price for which property is sold, without
any deduction for commissions, service charges or expenses.
B. Exceptions
1. An auctioneer, agent, or factor who sells substantially all the assets
of a liquidating or reorganizing business which qualifies as an "occasional
sale" is not liable for collection or payment of the tax provided the sale
occurs in 3 days or less.
2. PD 88-335 An auctioneer would not be deemed in the business of
selling at retail if he gratuitously bid calls an auction which is actually
conducted by a nonprofit organization, i.e. the auctioneer has no direct
association with the money being collected, registration, clerking, etc..
3. PD 95-294 The Dept of Taxation has also determined that under
very limited circumstances an auctioneer may make sales without
collecting the tax such as a public school fund raising auction provided
the auctioneer has no direct association with the money being collected,
registration, clerking, etc..
Page-2
III. Procedures
When auditing auctioneers the main concerns would be if all sales have been
accounted for, and were any exempt i.e. occasional sales, certificate of exemptions.
Normally there will be acceptable accounting and the audit trail will discover any
problems.
In the case of little or no records, you use the normal checkbook and bank
statement audit search. Deposits can lead you to trace real estate sales,
commissions, other rentals, and other income. Payments can lead you to newspaper
advertising where the auctioneer advertised for auctions. If this doesn't lock in on
auction sales then the auditor can go to the newspapers and get copies of auction
advertising which would provide an adequate audit trail.
The main problem auditors find with auctioneers is the reverse, that is you're
auditing a business, such as a contractor, and a sales invoice from an auction has
no sales tax. Usually someone at the audit can clarify if the sale was an
"occasional" type or other. If this doesn't satisfy the auditor then the question should
be presented to the auctioneer. Typically the correct answer can be determined, but
it's still a judgment call by the auditor. In all cases the proper documentation should
be made for the auctioneer to become an audit candidate.
The same scenario exists for an auction that takes place outside Virginia and
the property purchased is brought or shipped to Virginia. If it was "occasional"
based on VA law then it would be exempt. One extra lead in this situation is how the
item purchased was delivered. The transaction may have been exempted because
of the interstate commerce rule, thus making it taxable in VA.
Page-3

Exercise Problems
1. You're auditing a Realtor/auctioneer business and you discover only two

auctions were conducted in one year. The two auctions were personal property
estate sales in VA. and the auctioneer did not collect or remit sales tax based on
the "occasional sale" rule.
Do you agree or disagree?
Explanation:
2. You're auditing an auctioneer and you find the following scenario:
A consignment auction was held in VA of miscellaneous equipment from

dealers in VA. Two of the five dealers were going out of business and this was a
total liquidation sale for them. The other three dealers were selling old inventory
items. The sale took place for two days, on March 10 and on April 13.
Should the auctioneer have collected VA sales tax ?
Explanation:
3. You're auditing a highway construction contractor located in VA and you find the
following:
Two purchase invoices from ABC Auction Co, Charlottesville, VA. dated May 12
and June 30 of the same year. Both were for excavating equipment and both
showed no sales tax.
What should you do?
(1) hold the contractor for the sales tax

(2) do not hold the contractor and submit the auctioneer as a audit candidate
(3) both 1 & 2
(4) other and explain
Page-4

Exercise Answers
1. Disagree.
The "occasional sale" exemption does not apply because (1) there was no
liquidation of a business and (2) sales on three or fewer separate occasions
within one calendar year does not apply to auctioneers.
The auctioneer should be assessed sales tax on gross receipts on both sales.
2. Yes
It was not a liquidation sale of a single business.
3. (4)
The contractor may furnish you information on whether the sale was a liquidation
sale or not. Contact the auction company and get their explanation.
Then it is a judgment call by the auditor!
Always document and refer for audit candidate.
Audit Selection
Page - 1

Audit Selection
Objective: Discuss the application of sales and use tax as it applies to audit
selection.
I. General
The auditor is to conduct field audits of the taxes administered by the

Department in order to determine taxpayer compliance. The ultimate goal
is to have total compliance with the tax laws. Taxpayers targeted for
audit are those deemed to be in non-compliance. It is the auditor's job to
identify those taxpayers most in need of audit.
II. Procedures
A. There are two steps prior to the selection of audit candidates:
1. Identification
2. Research
B. Identification - There are several sources used to identify audit

candidates.
1. Audit recommendations - These taxpayers have been identified by

other auditors or other employees who have evidence of activity in
Virginia or some of type of taxpayer error.
2. Recurring audits - Based upon the results of the previous audit, these
taxpayers were selected as potential candidates.
3. Taxpayers with a large volume of exempt sales.
4. New businesses.
Audit Selection
Page - 2
5. Business types - These traditionally have proven to be good audit

candidates.
a. manufacturers
b. contractors
c. professionals/service providers
6. Auditor experience and expertise - with time and experience auditors

develop a sixth sense and are able to identify viable candidates.
7. AUDAP, and other Departmental reports and databases of registered

taxpayers. The records in the databases can be queried and/or
sorted by selected criteria in order to provide a useful listing for the
identification of audit candidates.
8. Complaints from the public
9. Income tax returns
10. Information gathered from other agencies and states -
a. DMV
b. Commissioner of Revenue
c. IRS
d. VEC
e. ABC Board
f. SEATA Nexus Questionnaires
11. Other outside sources include the following:
a. Media - This includes newspapers, radio, television and

billboards. Look for advertisements, advertising inserts, news
articles or segments on businesses.
b. Dodge reports - These list contractors doing business or bidding

to perform construction contracts in Virginia.
c. Business journals and other publications.

Audit Selection
Page - 3
C. Research - Once taxpayers have been identified as potential audit

candidates, the auditor must use the resources available to him to
determine if a taxpayer is actually a viable candidate for audit. This
requires thorough research. This is the most important step in the
selection process. Sources include:
1. STARS - The department's primary source of information is STARS

and the related reports generated from STARS.
a. Most research begins with the registration screens. Through

review of these screens you may identify other candidates, and
other tax types audits.
(i) 2-02 Identify all registrations for a particular name.
(ii) 2-03 Once you have all the account numbers, identify the tax
types associated with each account number, the address,
and social security numbers of the owners. You may also
discover a different trade name or legal name. Look for other
accounts under these names.
(iii) 2-04 - Provides a list of registration numbers associated with

a consolidated filer.
(iv) 2-01 - Check BLD's, ELD's.
(v) 2-16, 2-17 Check for related entities of the business and it's
owners.
b. Payment/billing
(i) 3-01, 3-02 - These screens will provide payment records,

including a detail of the local tax allocation.
(ii) 3-27 - VA-6 Inquiry - The amount of withholding paid to

Virginia and the number of W2's sent to Virginia is an
indicator of the size of business and/or its activity in Virginia.
(iii) 4-01 - The account status may identify trouble/delinquent

accounts.
c. Tax returns
Audit Selection
Page - 4
(i) 5-01, 5-02 - provide return detail for withholding and

corporate taxes which will indicate activity in Virginia.
Corporate return detail shows if the business is showing a
profit or loss and how much income is being apportioned to
Virginia.
(ii) 5-03 - The detail of the sales tax returns indicates the volume
of gross sales, exempt sales and personal use reported.
Fluctuations in sales can be identified by reviewing the
returns. Filing errors may be more obvious. Reporting errors
can be identified when return totals for a particular time span
are compared to other sources such as the income tax return.
d. Collection tracking - 8-03 - Collection history may provide

additional information.
e. Audit
(i) 9-06 - Audit cross-reference - Provides a listing of prior audit

activity for a particular account number.
(ii) 9-07 - Results of previous audit - This will identify the areas of
deficiency on the prior audit -sales, purchases and/or assets.
Were issues contested, and subsequently revised?
2. Compare information provided - results of last audit to current filings;

amount of WH to amount of CU or volume of sales; gross receipts per
income tax returns to sales tax returns; tax reported to tax reported
by similar businesses.
3. Inquiries - ask other auditors, employees, and local officials about

their knowledge of the particular business in order to get a general
feel for the business. Contact the business and ask questions.
D. Make selection
Weigh all the information you have reviewed in order to determine the
feasibility of the candidate - revenue potential vs. time and other
costs.
Keep in mind that an audit candidate does not have to have a large
revenue potential to be a good candidate. Small audits that can be done
in a short amount of time are good candidates, too.
Audit Selection
Page - 5

Exercise Problems
1. Name three STARS screens an auditor should utilize in researching potential

sales tax audit candidates?
2. Refer to Question 1. Explain why the auditor should utilize these screens.
Audit Selection
Page - 6

Exercise Answers
1 and 2.
2-02 Identify all registrations for a particular name.
2-03 Once you have all the account numbers, identify the tax types
associated with each account number, the address, and social security
numbers of the owners. You may also discover a different trade name or
legal name. Look for other accounts under these names.
2-04 Provides a list of registration numbers associated with a consolidated

filer.
2-01 - check BLD's, ELD's.
2-16, 2-17 Check for related entities of the business and it's owners.
3-01, 3-02 - These screens will provide payment records, including a detail of
the local tax allocation.
3-27 - VA-6 inquiry - the amount of withholding paid to Virginia and the
number of W2's sent to Virginia is an indicator of the size of business
and/or its activity in Virginia.
4-01 - The account status may identify trouble/delinquent accounts.
5-01, 502 - provide return detail for withholding and corporate taxes which will
indicate activity in Virginia. Corporate return detail shows if the business
is showing a profit or loss and how much income is being apportioned to
Virginia
5-03 - The detail of the sales tax returns indicates the volume of gross sales,
exempt sales and personal use reported. Fluctuations in sales can be
identified by reviewing the returns. Filing errors may be more obvious.
Reporting errors can be identified when return totals for a particular time
span are compared to other sources such as the income tax return.
8-03 - Collection history may provide additional information.
9-06 - Audit cross-reference - Provides a listing of prior audit activity for a

particular account number.
Audit Selection
Page - 7
9-07 - Results of previous audit - This will identify the areas of deficiency on the prior
audit -sales, purchases and/or assets. Were issues contested, and
subsequently revised?
AUDIT TECHNIQUES
Page - 1

AUDIT TECHNIQUES
Objective: Discuss the application of sales and use tax as it applies to audit
techniques.
I. References
A. Ruling Letter PD 91-276, Commissioner's Ruling dated October 29, 1991.
II. General
A. This section is a discussion of questions to ask, records to examine, and

issues to think about. There are different appoaches that can be used to
accomplish our work. Use this outline to consider how you can improve
your skills at gathering the information needed in an efficient manner.
III. Procedures
A. Auditor should thoroughly research an audit candidate to determine the

feasibility of the audit. The following information should be reviewed:
1. Prior audit history - Check STARS screen 9-06. Locate prior audit file.
Read prior audit file. Read audit comments and any letters written to
the taxpayer.
2. Stars Research
(a) Screen 2-01/2-03 - Make sure all registration information is

accurate. If not, be sure to correct it before the audit is
completed.
(b) Screen 5-03 - Return statistics for the audit period. Patterns of
gross sales, exempt sales, and use tax accruals can provide
clues to non-compliance.
(c) Screen 4-01 - Outstanding bills and nonfilers should be discussed

with the taxpayer. Nonfiler periods should be included in the
audit, and penalized. Statutory Assessment periods (code 131
bills) should also be included, and penalized. If the Statutory
AUDIT TECHNIQUES
Page - 2
Assessments have been paid, give the taxpayer credit on the

audit for the amounts paid in the month paid. Any unpaid
balances on the assessments should be abated just prior to the
audit assessment.
3. Audit recommendation information - Where did this audit candidate

come from? What are the areas of compliance associated with this
type of taxpayer? Review the rules & regs, and ruling letters.
B. Contact taxpayer and find out about the business.
1. If the taxpayer has been previously audited, inquire about changes

that have occurred since the prior audit.
Has there been any turnover/reassignment of personnel?

What procedures have been implemented to improve compliance?
Has there been any change in the flow of transactions due to
technological enhancements or automation?
2. What is the record environment?
How are the source documents filed?

Sales invoices filed by invoice number.
Sales invoices filed by customer, by year.
Purchase invoices filed by voucher number.
Purchase invoices filed by vendor, by year.
How many invoices in an average month?
How many drawers of purchase invoices in a year?
Are fixed assets filed separately? Are they all in one place? Are the
construction in process projects in a separate file?
3. Request records to be available at the beginning of the audit.
(a) Fixed Assets - Typically, the auditor will request these records to
review first. Capital project folders - both closed and open
projects, depreciation schedule, or other fixed asset listing,
federal forms 4562 and 4797.
(b) Sales - Sales invoices, sales journals, exemption certificates,

sales tax report(computerized), sales tax returns and worksheets.
AUDIT TECHNIQUES
Page - 3
(c) Purchases - Purchase invoices, accounts payable registers, chart

of accounts (voucher system), sales tax returns with detail of
purchases reported, cash disbursements, check ledgers.
(d) Contractors - There are two basic ways contractors typically

organize purchases:
(1) job cost files - all purchases charged to a particular project are
filed together. This is the best situation.
(2) purchases filed by vendor- This requires asking for the job
cost ledgers that list the vendors for a particular job. Most job
cost ledgers include the invoice number. This speeds cross
referencing to the vendor purchase files.
(e) Important Considerations:
Taxable customers far outweigh exempt.

Dollar amount of average invoice.
Number of invoices per month.
Are computer printouts of monthly sales journals available?
Are there "by state" sales reports available?
Are there contract files or sales territory reports to isolate Virginia
sales?
Are there reports of charges to expense accounts? Is a vendor
name included? Is a cross reference present?
C. Understand the flow of transactions from the source document to the

sales tax return. Think of a sales tax return as a river with many
tributaries. Be sure all the tributaries are accounted for. Be sure that the
transaction in each tributary is completely understood.
1. Sales - Invoices to sales journal to sales tax worksheet.
(a) What intermediate reports are available?
(b) Are sales journals available that include the data needed to
conduct the audit?
- tax charged on invoice
- separate freight and/or non taxable labor charges
-where taxpayer is multi-state, can the Virginia sales be readily
identified?
-invoice number and date included
AUDIT TECHNIQUES
Page - 4
If this information is available, the sales journal can be used

instead of invoices to begin your examination.
2. Purchases and fixed assets - Identify the list that use tax accrual
comes from. Are there any percentages or amounts taken straight
from general ledger expense accounts included in the use tax
accrual? If so, you must find out why this is being done. There might
be a valid reason based on a previous audit. Are fixed assets
accounted for as a separate amount? Are there separate files for
fixed assets?
Does an accounts payable register or monthly expense ledger exist

that has purchase invoice information? These intermediate reports
may enable the auditor to eliminate certain vendors from further
examination.
3. Filing Procedures - Identify all personnel involved in filing the return.

Have each person explain their part in the return filing process. It is
very important to take your time and listen to these explanations. Do
all the tributaries flow to the river every month?
Questions to consider:
Who makes the taxability decision concerning purchases -

purchasing or accounts payable?
Who decides if a sale is exempt - sales/marketing, the accounting or
credit department?
Identify each stop in the process of accumulating the final amounts
reported (sales and purchases) Where do these amounts come
from?
What is added to these amounts at each step?
What is the next step?
It is helpful to think of this procedure in terms of the names of the
people involved in the process.
Are there formal or informal policies concerning sales or purchase
taxability?
D. Scope of the audit. The scope of the audit is the amount of time, the
number of records, and the areas of non-compliance.
Many small tasks have been mentioned in sections A-C above. Many
questions have been asked and answered. The process of going through
this checklist need not consume a great deal of time. Some of the
answers are self-evident, others require careful questioning of the
taxpayer. In order to make a good decision on the scope of the audit all
these questions (and more) must be answered.
AUDIT TECHNIQUES
Page - 5
The taxpayer has been interviewed, the nature of the business is

understood, the records have been inventoried, and the transactions flow
has been explained. Now it is time to determine the scope of the audit.
1. Multi-generational audits- Research on a multi-generational audit can

very well determine the scope of the audit. Some large audits, where
no change in business or personnel has taken place, demand a
certain sampling period, or have other peculiarities that must be
accommodated. All the questions and considerations outlined in B
and C should be used for every audit.
2. Sales - Sampling is the preferred method here. There may be cases

where a first time audit with few invoices (300 a month) and large
average sales price may command a full audit. Reasoning being:
large liability potential may be skewed, record base is not too large,
and taxpayer may be better served with a complete audit.
A more typical sales audit involves a large number of transactions,

relatively small dollar amounts (under $200) and minimal compliance
opportunity. This situation, of course, should be sampled.
3. Purchases - The number of transactions is the important factor here.

One year sample period is common, owning to the manner of filing
purchase invoices.
Two types of liability - There are two actions that cause tax liability:
1) The taxability decision - the decision to charge or pay tax is wrong.

This is the decision most easily sampled.
2) The remittance problem - This occurs when tax amounts are

incorrectly accumulated, transferred, or otherwise not brought
forward to the sales tax return. These types of transactions are
not easily sampled.
The agenda - the scope of the audit becomes the minimum work to
be performed
E. The Test of Time - When should an audit be terminated? The first answer
to this question is: the audit should be terminated at a minimum, when the
original "scope of the audit" work is completed. In order to maintain
integrity in the result, the work set out must be completed. There may
very well be circumstances that demand expanding the sample period or
examining more detailed records because of a larger remittance problem.
AUDIT TECHNIQUES
Page - 6
Questions to ask when considering termination
Have a representative number of transactions been reviewed based

on the total number of transactions, number of exempt sales,
number of exceptions?
Has the taxpayer provided all the documents requested?
What is the cost benefit of the time expended?
Where is the next logical termination juncture?
Are the compliance problems complicated issues or merely simple
mistakes?
Can the exceptions compiled at this point be used to bring the
taxpayer into compliance?
F. Post Audit Conference - The taxpayer is your customer. The post audit
conference is your opportunity to serve your customer. It is your
obligation to fully disclose to the taxpayer several items:
the exceptions discovered in the examination

the audit computations including interest and/or penalty
the areas of non-compliance based on the rules & regulations
explanation of the correct rules and procedures
respond to questions concerning changes in taxpayer
procedures
After the post audit conference there are other important tasks:
Be sure to summarize conference in the audit comments
If necessary, write the taxpayer a letter explaining changes to be
made for future compliance. Why is this needed? Taxpayer may
have indicated that remediation of taxpayer procedures is not
likely. This letter puts the taxpayer on notice and provides a file
document for future audit.
BAD DEBTS
Page - 1

BAD DEBTS
Objective: Discuss the application of sales and use tax as it applies to bad debts.
I. References
A. Code of Virginia Section 58.1-621

B. Virginia Regulation 630-10-11 (23 VAC 10-210-160)
C. Ruling Letters PD 94-153, 94-358, 94-372
II. General
A. Section 58.1-621 of the Code of Virginia provides that a dealer may claim
a credit for "the amount of sales or use tax previously returned and paid
on accounts which are owed to the dealer and which have been found to
be worthless ...." This section further indicates that amounts "for which a
credit has been taken that are thereafter in whole or in part paid to the
dealer shall be included in the first return filed after such collection."
B. No credit may exceed the amount of sales price which is actually

uncollectible. Prior payments made to the dealer on a debt which is
subsequently determined to be uncollectible must be allocated to the
sales price, sales tax and other nontaxable charges based on the
percentage that those charges represent to the total debt originally owed.
C. If the dealer receives reimbursement for bad debts from a guarantor for a
sale made to a customer, then no bad debt deduction is allowed. A
taxable sale does not depend on the source of the reimbursement.
D. All amounts recovered through collection efforts must be reported back

without any deduction for collection costs incurred.
III. Procedures
A. Verify all deductions for bad debts reported on the sales tax returns. For
prior years, the bad debts will be included in deductions on the dealer's
federal income tax returns. For current periods, the dealer will have
documentation such as a bankruptcy notice supporting amounts deemed
worthless.
BAD DEBTS
Page - 2
B. Once it has been determined that the bad debts are legitimate, the auditor
must analyze the amounts deducted to determine if any portion is not
attributable to taxable sales. In order to take the deduction on the sales
tax returns, the deduction must be computed on each bad debt, not
based on a percentage of sales.
A review of the original document, and payments made, if any, is

necessary in order to determine the actual amount of the deduction
allowed. For example:
Dealer makes the following sale:
Parts $100.00
Labor 35.00
Freight 15.00
Subtotal $150.00
Tax 4.50
Total $154.50
The customer's current account balance is $114.50, which reflects a

payment at the time of purchase of $50.00 and finance charges
added of $10.00. The debt is now determined to be uncollectible.
The amount that may be deducted on the sales tax is $67.64.
An allocation of the amount previously collected must be computed.
Parts $100.00 100/154.50 x $50.00 = $32.36

Labor 35.00 35/154.50 x $50.00 = 11.33
Freight 15.00 15/154.50 x $50.00 = 4.85
Subtotal $150.00
Tax 4.50 4.5/154.50 x $50.00 = 1.46
Total $154.50 $50.00
Amount of sales price for computing the credit is $100.00

- 32.36
$67.64
C. Analyze any collections of bad debts. These should be reported on the

dealer's sales tax returns when recovered. No reduction for costs of
collection is allowed.
BAD DEBTS
Page - 3
In the previous example, suppose a collection agency remits a

$50.00 payment to the dealer after the account has been written off
and bad debt deduction has been taken on the sales tax return. The
agency actually collected $55.00 and retained 10% as a collection
fee.
The dealer would need to report additional sales of $32.49.
Outstanding debt prior to write-off:
Parts $67.64 67.64/114.50 x $55.00 = $32.49

Labor 23.67 23.67/114.50 x $55.00 = 11.37
Freight 10.15 10.15/114.50 x $55.00 = 4.88
Finance 10.00 10.00/114.50 x $55.00 = 4.80
Tax 3.04 3.04/114.50 x $55.00 = 1.46
Total $114.50 $55.00
D. Penalty applies to taxes collected, not remitted. Failure to report

subsequent collections of bad debts and to deduct bad debts at the
proper amounts, are subject to penalty.
Banks
Objective: Discuss the application of sales and use tax as it applies to Banks.
I. History
P.D. 95-159 - June 16, 1995.

In certain situations allows a third party to collect and remit sales tax on
behalf of dealers selling their product.
II. References
A. Code of Virginia Section - 58.1-203, 58.1-612
B. Virginia Administratrive Code - 23 VAC 10-210-170

23 VAC 10-210-840
23 VAC 10-210-460
23 VAC 10-210-4040
23 VAC 10-210-6010
C. Ruling Letters AGO 55--85, P.D. 86-103, P.D. 88-243, P.D. 91-12, P.D.
91-142, P.D. 91-166, P.D. 94-207, P.D. 94-230, P.D. 94-
271, P.D. 95-72, P.D. 95-159, P.D. 95-207, P.D. 96-184
E. Applicable exemption certificate ST-10 for companies engaged in the

lease or rental of tangible personal property.
III. General
A. The tax applies to purchases of tangible personal property by all national

and state banks for their use and consumption.
When any bank engages in selling, leasing or renting tangible personal
property to consumers, it must register as a dealer and collect and pay
the tax to the Department of Taxation.
Taxable sales by banks include, but are not limited to, sales of checks
and checkbooks; silverware; savings or piggy banks; repossessed
merchandise; gold and silver coins or bars for investment purposes; and
charges for the lease or rental of tangible personal property.
The rental of safe deposit boxes is not subject to the tax.
Page - 2
IV. Procedures
A. Pre Audit
When auditing a bank the initial concern should be to gain a complete

understanding of the corporate structure. Banks typically have many
separate subsidiaries and divisions. A request should be made of the
Taxpayer to supply the auditor with a list of all subsidiaries and business
operations for the audit period. The Corporate Income Tax returns should
be reviewed for corporate structure. Many banks will have divisions or
separate entities to perform a portion of the banks operations such as:
Construction, Property Management, Credit Card, Leasing, etc. The
auditor must make certain that all applicable records are reviewed for
each operation. The review of the corporate structure will usually raise
questions such as:
1. Are all of the purchases done through a single division or are some
divisions responsible for their own purchases? Commonly, property or
construction divisions will do some of their own purchasing. These
records may be kept separately. Some Banks have divisions that
purchase all office supplies and invoice the other divisions and branches
and charge sales tax. This procedure has been approved for some Banks
(see Department letter dated June 16, 1986).
2. Banks often foreclose on businesses (for example, golf courses)
and continue the operations. If the bank continues the operation it is
responsible for reporting any sales and use taxes.
3. Does the Bank sell more than three assets per year? It's a good
bet that they do. Sales to employees of old furniture and the like is
common.
4. Does the Bank transfer, sell, or lease assets between related
entities and are they properly taxed? (see P.D. 9-271).
5. Has the Bank sold any branches or divisions? The occasional sale
exemption may apply in some circumstances (see P.D. 91-12,91-142),
However if the bank is in the business of selling assets (more than three
per year) they are required to collect tax on the selling price of the
tangible personal property. Conversely the purchase of branches or
divisions should be reviewed for any possible liability.
6. If the Bank has a leasing division or subsidiary it should be
collecting tax on leases of tangible personal property.
7. Tangible personal property sales from the Resolution Trust
Corporation are subject to sales tax; however, states cannot
constitutionally impose a direct tax on the United States government or its
instrumentalities. This does not exempt the purchaser of tangible
personal property from the use tax however (see internal memo dated
March 18, 1992).
Page - 3
B. SALES
All sales of tangible personal property by banks are subject to sales and
use tax. Types of sales to be cognizant of are as follows:
1. Check sales: The reporting of tax of check sales has been simplified by
allowing the check printers to collect and remit the tax on behalf of the
bank (see P.D. 95-159). Check printers who sign a sales tax collection
agreement with the Department of Taxation would be allowed to collect
the tax on behalf of the institution.
2. Sales of fixed assets. Many banks make a sufficient number of sales
of fixed assets to be required to register and collect sales tax. In addition
to reviewing individual asset sales, sales of divisions or groups of assets,
reorganizations and spin off type sales should be carefully reviewed. The
occasional sale exemption may apply in some cases but each incident
should be reviewed to determine the proper application of tax. Tax-free
reorganizations governed by IRC Sec 368(a)(1)(D) are exempt from sales
tax. Each of these types of sales should be carefully reviewed. There are
several Public Documents that deal with these type of transactions but
each is individual and should be examined on its own merits.
3. Leases. Banks often have lease departments or subsidiaries. 23 VAC
10-210-80 applies to these transactions.
4. Microfilm. In providing checking account services banks may supply
their customers with account information on microfilm. The "true object"
test must be applied in these sales. Generally sales of multiple copies of
microfilm will be subject to the tax (see P.D. 94-230).
C. PURCHASES
Banks are subject to use tax on all purchases of tangible personal

property. There is no exemption specifically except for purchases for
resale. Banks purchase a wide array of property and services some of
which are specifically tailored to financial institutions. Some types of
purchases banks typically make are as follows:
1. Financial services. Companies that provide banks with financial

services such as loan processing, checking account statements, credit
authorization services,etc. sometime include in their invoicing charges for
monthly equipment rental. Taxability is determined by the "true object
test" and is enumerated in several Public Documents (P.D. 88-243, 96-
184, 94-230). There is a wide variety of this type of transaction and each
must be reviewed on its individual merit.
2. Software. The auditor needs to obtain a copy of the software
agreement to make a determination on taxability. Many specialized
Page - 4
software packages are sold to banks and the only efficient way to
understand what is being purchased is to read the agreements. In some
cases you may request that the Bank contact the vendor and provide a
description of the invoices in writing to assist in the decision making
process.
3. Bank Equipment. The decision here is to determine if bank
equipment is tangible or real property. P. D. 94-207 lists various types of
equipment and the treatment by the Tax Department. P.D. 91-166 also
addresses several different types of equipment and states the
Departments position. In this P.D. it is apparent that the treatment of
ATM's is dependent on the type of installation. There are several large
vendors of bank equipment who properly charge tax on sales of tangible
personal property; however there are also many smaller, independent
suppliers who are not as well versed in the treatment of sales of bank
equipment. Security systems should be looked at to see if they are
monitored or non monitored systems.
Catalogs and Other Printed Material
Page - 1

Objective: Discuss the application of sales and use tax as it applies to catalogs and
other printed material.
I. History
7/1/76 to 7/1/77. The catalog exemption was enacted to provide relief to

direct mail operations which contracted with Virginia printers to produce
catalogs and similar items. The statute wording was very broad and included
advertising and promotional materials, catalogs, envelopes, etc.
7/1/77 and after. The catalog statute was amended to narrow the scope of
the exemption to catalogs and other printed materials thereby making printed
advertising materials such as pencils, pens, grocery store displays,
matchbooks, calendars, etc. taxable.
7/1/79 and after. The catalog statute was amended to provide exemption for
the purchase of raw paper by a non-printer when the paper will be furnished
to a printer for fabrication into catalogs or other printed materials that
advertise the sale of tangible personal property which will be stored in Virginia
for 12 months or less and be distributed for use outside Virginia.
7/1/86 and after. Letters, brochures, reports, and similar printed materials,
etc. were added to the statute and the wording "used in the advertising of
tangible personal property for sale" was dropped. The exemption for these
additional items was set to expire 6/30/90 but became a permanent part of
the statute in 1989.
7/1/94 and after. The catalog exemption was expanded to include (without
an expiration date) any advertising business located outside Virginia which
purchases printing from a printer within the state when such purchases are
stored for twelve months or less in Virginia and distributed for use outside the
state.
7/1/95 and after. The catalog exemption was expanded to include (with an
expiration date of 6/30/97 extended in 1997 to 6/30/02) any advertising
business which purchases printing from a printer within Virginia when such
purchases would have been exempt under Code of Virginia § 58.1-609.6(3)
(newspaper/magazine exemption) or § 58.1-609.6(4) (catalog exemption).
Page - 2
II. References
A. Code of Virginia Sections
58.1-602 Definition of "Advertising"

58.1-609.6(3) Newspaper/Magazine Exemption
58.1-609.6(4) Catalog Exemption
58.1-609.6(5) Advertising Exemption
58.1-609.10(4) Interstate Commerce Exemption
B. Virginia Administrative Code

23 VAC 10-210-41 Advertising businesses.
23 VAC 10-210-43 In-house advertising.
23 VAC 10-210-260 Catalogs and other printed materials.
23 VAC 10-210-780 Interstate & foreign commerce
23 VAC 10-210-3010 Printing.
C. Ruling Letters
P.D. 97-248 Virginia Mailing House

P.D. 97-61 Exercise of Right or Power in Direct Mailings
P.D. 96-148 Advertising -Regulations Are Not Retroactive
P.D. 96-63 Interstate Commerce, Constructive Possession
P.D. 95-216 Service in Connection With a Sale Is Taxable
P.D. 95-185 Distribution of Catalogs In & Out of Virginia
P.D. 95-112 Form ST10A & Estimated Percentages
P.D. 94-294 Interstate Commerce
P.D. 94-266 "Use" in Virginia
P.D. 94-248 CD-ROM Exempt
P.D. 94-239 Swatch Cards Not Printed Material
P.D. 93-217 Constructive Possession
P.D. 93-162 Administrative Supplies
P.D. 92-112 Labels
P.D. 91-30 Videotape Not Printed Material
P.D. 91-26 Advertising Rules - Old
P.D. 90-220 Postage Exempt When Separately Stated
P.D. 90-218 Labels Taxable
P.D. 89-99 Transactions In & Out of Virginia
P.D. 88-62 Old Advertising Rules
P.D. 87-243 Estimating Taxable Percentages
P.D. 86-9 Service in Connection With a Sale Is Taxable
¶201-194 Photographs Meet Definition
¶201-088 "Use" in Virginia
Page - 3
D. Virginia Tax Bulletin 93-7 - Printing Purchased by Advertising Agencies

(Old Rules)
E. Applicable exemption certificate - ST-10A
III. Definitions
The following words or terms are useful in understanding the catalog statute.
While all businesses are now more equally treated under this statute, prior to
1994 and 1995 there were substantial differences for advertising businesses.
"Administrative supplies" as defined in Code of Virginia § 58.1-609.6(4)

"includes, but is not limited to, letterhead, envelopes, and other stationery;
and invoices, billing forms, payroll forms, price lists, time cards, computer
cards, and similar supplies. This definition is expanded in the catalogs and
other printed materials regulation to include, but not be limited to ". . .
certificates, business cards, diplomas, and awards. The term also includes
supplies for internal use by the purchaser, such as menus, calendars,
datebooks, desk reminders, appointment books, and employee newsletters."
The printing regulation also includes "other house organs." But even
administrative supplies may be exempt when they become an integral part of
exempt printed materials. The printing regulation in paragraph H states that ".
. . letterhead upon which fundraising or promotional letters are printed, return
envelopes enclosed with fundraising letters, and price lists enclosed within
catalogs advertising tangible personal property for sale or resale are not
taxable." (P.D. 93-162)
"Advertising" as defined in Code of Virginia § 58.1-602 ". . . means 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. Any person providing advertising as defined
herein shall be deemed to be the user or consumer of all tangible personal
property purchased for use is such advertising."
"Advertising business" as defined in the advertising regulation ". . . means

any person or group of persons providing 'advertising'. . . ."
"Other printed materials" as defined in the catalog regulation ". . . means

items which are similar to catalogs and which are used in advertising tangible
personal property for sale. Brochures, leaflets, and similar items are
examples of other printed materials, but price lists, merchandising displays,
floor racks and similar items are not." It is important to remember that prior to
1986, § 58.1-609.6(4) read "[c]atalogs and other printed materials. . . ."
Since 1986 it reads "[c]atalogs, letters, brochures, reports, and similar printed
Page - 4
materials. . . ." Similar printed materials can include items that would be
taxable under the definition of other printed materials.
"Similar printed materials" as defined in the catalog regulation ". . . means

printed materials used for promotional purposes, except administrative
supplies." Paragraph H of the printing regulation gives examples of printed
materials that are exempt from the tax.
• Fund raising and promotional letters, circulars, folders,

brochures, and pamphlets, including those for charitable,
political, and religious purposes;
• Corporate stockholder meeting notices;
• Proxy materials and enclosed proxy cards;
• Meeting and convention promotional materials;
• A business prospectus;
• Corporate monthly, quarterly, and annual stockholder

reports:
• Announcements, invitations, and informational pieces for

external promotional purposes;
• Greeting cards, brochures, menus, calendars, datebooks,

desk reminders, appointment books, art prints, and posters
for external promotional purposes; and
• Printed point-of-purchase sales devices, including display

racks, animated and action pieces, posters and banners.
"A sale in interstate commerce" as explained in the interstate and foreign

commerce regulation means "a sale. . . when title or possession to the
property being sold passes to the purchaser outside of Virginia and no use of
the property is made within Virginia." Regulation 23 VAC 10-210-780 gives
four examples to which the tax does not apply. Further clarification can be
found in P.D. 86-103, P.D. 87-200, P.D. 93-217, P.D. 94-266, P.D. 94-294,
P.D. 96-63, and ¶201-088.
IV. General
A. Code of Virginia § 58.1-609.6(4)
Because the catalog regulation 23 VAC 10-210-260 was last amended in

Page - 5
1987 and does not take into account subsequent statute changes, the
statute, itself, provides the best overall summary of the extent of the
exemption.
Catalogs, letters, brochures, reports, and similar printed

materials, except administrative supplies, the envelopes,
containers and labels used for packaging and mailing same,
and paper furnished to a printer for fabrication into such
printed materials, when stored for twelve months or less in
the Commonwealth and distributed for use without the
Commonwealth.
At this point the statute defines "administrative supplies" which is

described in Section III. The statute is actually straightforward and
relatively easy to interpret except that the advertising statute and
regulations specifically tax advertising businesses on these types of
purchases. This will be discussed in Section V. Effective 7/1/94, the
statute was expanded so that Virginia printing and direct mail houses
would not be put at a competitive disadvantage when dealing with out-of-
state advertising businesses. The statute continues:
Notwithstanding the provisions of subdivision 5 [the

advertising exemption] of this section or the definition of
"advertising" contained in § 58.1-602, (i) any advertising
business located outside the Commonwealth which
purchases printing from a printer within the Commonwealth
shall not be deemed the user or consumer of the printed
materials when such purchases would have been exempt
under this subdivision. . . .
There was another legislative change the following year (effective 7/1/95)
which put Virginia advertising businesses on parity with all other
companies when making purchases from a Virginia printer. This, in
effect, has given a competitive advantage to Virginia printers since the
exemption is limited to purchases from an instate printer. Any printing
purchased from an out-of-state printer is 100% taxable when constructive
delivery takes place in Virginia (i.e., a Virginia mailing house) or if delivery
is made to the purchaser's Virginia location, regardless of its eventual
distribution.
. . . and (ii) from July 1, 1995 through June 30, 2002, any
advertising business which purchases printing from a printer
within the Commonwealth shall not be deemed the user or
consumer of the printed materials when such purchases
would have been exempt under subdivision 3
[newspaper/magazine exemption] or this subdivision,
provided that the advertising agency shall certify to the Tax
Page - 6
Commissioner, upon request, that such printed material was

distributed outside the Commonwealth and such certification
shall be retained as a part of the transaction record and shall
be subject to further review by the Tax Commissioner.
Note the unusual wording of this section that states the Commissioner
can request certification that the printed material was actually distributed
outside Virginia. This section of the exemption has a "sunset provision"
that has already been extended once to 6/30/02.
V. Procedures
For purposes of this training, transactions are discussed from the viewpoint of
the purchaser. It is also assumed that all examples meet the limitations set
out in § 58.1-609.6(4) for catalogs and similar printed materials and occur
under current law unless otherwise stated. The examples deal strictly with
the application of the Virginia sales tax law to catalogs and similar printed
materials. Furthermore, the terms "taxable" and "exempt" are also limited to
Virginia sales tax - another state's tax may well apply. Except for the
procedures discussed in section D, all transactions should be considered
purchased by other than an advertising business. Finally, delivery, whether
actual or constructive, is often the crucial criteria that will determine the
taxability of catalogs and similar printed materials. (Location! Location!
Location!)
The treatment of sales by the seller can readily be inferred from the purchase
scenarios, but will not be specifically addressed. If catalogs and similar
printed materials are sold for resale (to other than advertising businesses),
the purchaser can provide a Form ST-10 to purchase such resale materials
exempt, whether they meet the § 58.1-609.6(4) limitations or not.
A. Purchases
When auditing a business which has purchased catalogs, etc., it is

important for the auditor to answer five questions - who, what, where,
when, and how. Each question is important and can turn an otherwise
exempt transaction into a taxable situation. Strict construction is the rule.
• Who is purchasing the materials in question? (Is it an

advertiser or non-advertiser?)
• What is being purchased? (Does it qualify for exemption

under the definitions?)
• Where is it being distributed from and where is it going?

(Location is important as you will see below.)
Page - 7
• When is it leaving the state? (Remember storage in Virginia

has to be twelve months or less.)
• How is the distribution made? (Is it interstate commerce or

not?)
1. Printing, Mailing Services and Catalogs, Etc.
a. When separately stated, postage is exempt from the sales tax.

(P.D. 90-220)
b. Mailing services (i.e., folding, stapling, stuffing, delivery to the

post office) are ordinarily nontaxable. However, when the
services include the provision of tangible personal property, the
entire charge becomes taxable. This is further explained in 23
VAC 10-210-4000 "Sales price". The printing of non-customized
mailing labels by a mailing service which are then placed on the
materials provided by the customer would make all service
charges taxable except separately stated postage or delivery.
Printing the materials that the customer wants mailed or
distributed will also make such services taxable. The next
section explains the exemption for catalogs, etc. (P.D. 86-9,
P.D. 90-218, P.D. 92-112, P.D. 95-216)
c. The Code provides an exemption from the sales tax for catalogs,
letters, brochures, reports, and similar printed materials (except
administrative supplies), the envelopes, containers and labels
used for packaging and mailing the same and paper furnished to
a printer for fabrication into such printed materials, when stored
for twelve months or less in Virginia and distributed for use
outside Virginia. (Review the Section III definitions for "similar
printed materials", "other printed materials" and "administrative
supplies".) If these conditions are met there is no sales tax
liability as long as Form ST-10A is provided to the mailing
service or printer.
d. "Printed material" can advertise tangible personal property for

sale or be promotional or instructional in nature.
2. Use of Form ST-10A
By providing Form ST-10A to the vendor, the customer may

purchase all catalogs exempt that are stored for twelve months or
less in the state and distributed outside of Virginia . If the customer
knows what items are taxable at the time of purchase, sales tax may
be paid to the printer/mailing service or consumer use tax may be
Page - 8
accrued and remitted directly to the state. If it is unknown how the

catalogs will be distributed, the customer may submit an Form ST-
10A to the vendor, purchase all catalogs exempt and remit consumer
use tax on those delivered in the state or stored in the state for more
than 12 months. If it is impractical to determine exact numbers, an
estimated percentage of Virginia delivered catalogs may be used.
Printing for the customer's own use or consumption within Virginia
and storage in the state for longer than twelve months should be
taken into consideration when determining percentages. (P.D. 87-
243, P.D. 95-112)
3. CD-ROMs, Videotapes, Swatch Cards & Pictures - Printed Material?
Catalogs on CD-ROM are treated as printed material while

instructional videotapes are not. Swatch cards (material swatches
attached to cards with descriptive print) are not printed material but a
furniture company's finished pictures of furniture lines with
specifications are. Go figure! (P.D. 94-248, P.D. 91-30, P.D. 94-239,
CCH ¶201-194)
4. Catalogs and Other Printed Materials - The Regulation
23 VAC 10-210-260, the catalog regulation provides for the

exemption of certain printed materials when the following three
conditions are met:
• The materials will be stored in Virginia for less than 12 months.

(§ 58-1-609.6(4) wording is "twelve months or less.")
• The materials will be distributed for use outside Virginia; and
• The materials will be used for advertising the sale of tangible

personal property.
Note: The scope of the last condition has been broadened since 1986
with the removal from the statute of the wording "used in the
advertising of tangible personal property for sale." The public
documents have consistently ruled, however, that the printed
materials still must be promotional or informational in nature to
qualify.
5. In-house Advertising Department
An in-house advertising department is only an advertising business

when performing out-of-house jobs, therefore the general exemption
is available for in-house work as long as it meets the definition of
Page - 9
catalogs, etc., is stored in Virginia 12 months or less, and is

distributed for use outside of Virginia.
B. Transactions that Occur Within Virginia (Except Advertising Businesses)
There are several types of transactions concerning the distribution of

materials defined in the catalog section and meeting the time limitation
that can occur within Virginia. These refer to the taxability of the purchase
or production of catalogs, etc.
1. Virginia business distributing from their Virginia location:
• Delivered through interstate commerce out of state: EXEMPT

Including delivery out of state by the Virginia business' own truck
• Delivered in Virginia: TAXABLE
2. Virginia business using Virginia printer and/or Virginia mailing

company:
3. Virginia business using out-of-state printer and a Virginia mailing

company:
4. Out-of-state business using Virginia printer and/or Virginia mailing

company:
5. Out-of-state business using an out-of-state printer and a Virginia

mailing company:
(P.D. 89-99, P.D. 95-185, P.D. 97-248)

Page - 10
C. Transactions that Occur Outside Virginia (Except Advertising Businesses)
There are several types of transactions concerning the distribution of

materials defined in the catalog section and meeting the time limitation
which occur outside Virginia. These refer to the taxability of the purchase
of the catalogs. . . and delivered to other than the purchaser's
business.
1. Virginia business using out-of-state printer and/or mailing company:
• Remaining out of state: EXEMPT
• Delivered in Virginia: EXEMPT *
2. Virginia business using a Virginia printer and an out-of-state mailing

company:
3. Out-of-state business using out-of-state printer and/or mailing

company:
4. Out-of-state business using a Virginia printer and an out-of-state

mailing company:
* Note: Even though the catalogs are being delivered into Virginia, the
purchaser has exercised no right or power over them in Virginia. (P.D.
95-185, P.D. 97-61)
D. Advertising Businesses
Under the statutory definition of advertising, an advertising business is a

service provider and is considered "to be the user or consumer of all
tangible personal property purchased for use in such advertising."
Because of this specific language, prior to the 1994 and 1995 statute
amendments all advertising businesses were precluded from taking
Page - 11
advantage of the catalog exemption. Consequently, all purchases of

printing by an advertising business were taxable. First, effective 7/1/94
the statute was expanded to allow any advertising business located
outside Virginia to purchase printing exempt from a Virginia printer as
long as the printing meets the definition and limitations for catalogs, etc.
Then, effective 7/1/95 another amendment was passed that extended the
catalog exemption as well as printed materials exempt under § 58.1-
609.6(3) (the newspaper exemption) to Virginia advertising businesses
when the printed material is purchased from a Virginia printer. These
printed materials, likewise, have to be stored in Virginia for 12 months or
less and distributed for use outside the state. Neither amendment was
retroactive and the 1995 amendment currently has an expiration date of
6/30/02. Purchases by a Virginia advertising business from an out-of-
state printer remain 100% taxable when the printing is delivered to the
advertising business in Virginia or to a Virginia mailing house, regardless
of its eventual distribution. (P.D. 96-148) When auditing for periods
before 7/1/95, review and follow Tax Bulletin 93-7 and the regulations on
advertising businesses. (The catalog exemption has always been
available for nonmedia advertising jobs by advertising businesses.) The
following examples reflect current law.
1. Out-of-state advertising business using Virginia printer:
2. Virginia advertising business using Virginia printer:
3. Out-of-state advertising business using out-of-state printer:
• Delivered in Virginia: EXEMPT
4. Virginia advertising business using out-of-state printer:

EXEMPTION CERTIFICATES
Page - 1

Objectives: Discuss the types of exemption certificates currently available, general

and specific procedures for dealing with exemption certificates in audits, and
comment on the most commonly used certificates.
I. References

B. Virginia Administrative Code 23 VAC 10-210-280
C. Tax Bulletin 99-9 (PD-99-164)
D. Legislative Summary 2003 (PD 03-54)
E. Legislative Summary 2004 (PD 04-40)
F. Ruling Letters PD 98-29, PD 04-3, PD 04-205
II. Types of Certificates
ST-10 Resale Certificate typically used by dealers for the exempt purchase
of items for resale or lease.
ST-10A Multipurpose certificate used by purchasers of catalogs and similar

printed materials for temporary storage in Virginia, by purchasers delivering
goods to a factor or export agent, by purchasers of advertising supplements,
and by purchasers of advertising.
ST-10B Used by handicapped persons for the purchase of special equipment

for installation on a motor vehicle.
ST-11 Multipurpose certificate used by manufacturers, miners, printers and

other industrial processors. Certified pollution control equipment as well as
property qualifying for the research and development exemption may also be
purchased exempt using this certificate.
ST-11A Used by contractors and non-manufacturers for the specific purpose

noted on this certificate.
ST-12 Used by Virginia, political subdivisions of Virginia, and the United

States government. This certificate is not valid for use by states other than
Virginia, political subdivisions of those states, or national governments other
than the United States.
ST-13 Used for seven specific medical related exemptions.

Page - 2
ST-13A Used by non-profit churches. Non profit churches also have the
option of applying for a numbered exemption certificate with a broader
exemption.
ST-14 Exclusively used by Out-of-State-Dealers who purchase property in

Virginia for immediate transportation out of Virginia for resale outside this
state. This is not a “blanket” certificate in the way that an ST-10 is a blanket
certificate. A separate ST-14 is required for each sale.
ST-14A Used by Out-of-State dealers or brokers who purchase livestock in

Virginia for immediate transportation out of Virginia for resale. Unlike the ST-
14, this is a “blanket” certificate and the selling livestock dealer need have
only one properly executed certificate on file for the out-of-state dealer or
broker.
ST-15 Used by Individuals to purchase heating oil, propane, firewood, or

coal for domestic consumption exempt of the State sales tax. The local tax
may continue to be charged, depending on whether the specific locality in
which fuel dealer is located has adopted an ordinance specifically exempting
fuels purchased by individuals for domestic consumption.
ST-16 Used by watermen who extract fish, bivalves, or crustaceans from

waters for commercial purposes.
ST-17 Used by harvesters of forest products.
ST-18 Used by farmers for the purchase of property used in producing

agricultural products for market.
ST-19 Multipurpose certificate used by shipping (as in boat) lines engaged

in interstate or foreign commerce, ship builders, companies engaged in
building, converting, or repairing ships or vessels used or to be used in
interstate or foreign commerce.
ST-20 Used by certain public service corporations, commercial radio and

television companies, motion picture theatres, cable television systems,
certain airlines, and taxicab operators.
ST-20A Used by production companies, program producers, radio, television

and cable TV companies, and other entities engaged in the production and
creation of exempt audiovisual works and the licensing, distribution, and
broadcast of the same.
Numbered Certificates issued by the Department – On July 1, 2000 the

Department began to issue numbered exemption certificates to those
nonprofit organizations, excepting churches, who had previously been
Page - 3
granted exemption and had met certain informational filing requirements.

Effective July 1, 2004, all Internal Revenue Code (IRC) § 501(c)(3) and
charitable § 501(c)(4) organizations can qualify for a sales and use tax
exemption if they meet certain eligibility criteria. Nonprofit organizations that
held a valid exemption certificate issued by the Department of Taxation prior
to July 1, 2004 will remain exempt until their exemption expires, at which time
they will be required to reapply for exemption under the new process.
Nonprofit churches have the option of continuing to use the ST-13A or
applying for a numbered certificate of exemption and enjoying a broader
exemption
III. Generally
A. A dealer is to collect sales tax on otherwise taxable transactions, unless

he accepts a valid exemption certificate from the purchaser.
B. The dealer must act in good faith and exercise reasonable care and
judgment to prevent the receiving of a false, fraudulent or bad faith
exemption certificate.
C. A certificate that is incomplete, invalid, infirm or inconsistent on its face is

never acceptable.
III. Audit Procedures
A. If the taxpayer's exemption certificates are not in order, allow sufficient

time (thirty days maximum is suggested) to obtain the certificates from his
customers.
B. The absence of an exemption certificate at the moment of the transaction

indicates that such a certificate was never accepted “in good faith.” Such
a certificate must be confirmed by the Department as valid and proper for
the specific transaction under review.
C. Incomplete certificates, i.e., certificates lacking any of the following are

invalid:
1. Date
2. Signature
3. Indication of use (box checked)
4. Registration number where required
5. Names and addresses of the supplier and the customer

Page - 4
D. The purchase made and the manner in which it is made must be

consistent with the language of the exemption certificate. For example,
1. An ST-10 prohibits its use by a contractor.
2. An ST-12 indicates that an official purchase order is required.
E. First generation audits are considered an opportunity to educate the

taxpayer. Where a properly executed exemption certificate is on file, it
should be honored. Properly executed certificates that subsequent
events (Repeal of Exemption) have made invalid should be revoked. The
taxpayer should be instructed as to what items are not included in the
exemption or what laws have recently changed. The audit comments
should contain a summary of the items discussed in this area. Comments
will be available to future auditors, through research of the M drive audit
archive, for subsequent audits and the taxpayer will be held responsible
for a greater understanding of the matters discussed.
IV. Comments on Commonly Used Certificates of Exemption:
A. ST-10 The fundamental question a dealer must ask is: Do I reasonably

believe that the purchaser is going to resell or lease the item for which
this ST-10 is being offered? If the answer is no, the sales tax should be
charged.
B. ST-11 Manufacturers purchase many items that can be used in both

taxable and/or exempt ways. It is often difficult to determine taxability
from the dealer’s perspective. One should accept a properly executed ST-
11 in these cases. Where the auditor suspects that the purchaser is not
truly a manufacturer or the exemption has been misused, an audit
recommendation should be made to the appropriate district office.
C. ST-12 The language of the ST-12 indicates that a government purchase

order is required in order to use it. Cash sales exempted under an ST-12
are always suspect. Credit card sales to the United States may be
exempt if the credit of the Federal Government is bound rather than that
of its employee.
D. ST-13A Smaller churches will probably use this certificate rather than
apply for a numbered exemption certificate. The church exemption under
this certificate is more limited than that available under a numbered
exemption certificate. Structural construction materials are not exempt to
churches under this certificate. (for information on numbered exemption
certificates see the section on Non-Profit Organizations)
Page - 5
E. ST-18 The agricultural exemption is broad but it has its limits. For
example, the farmer must be producing products for the market, not for
his/her personal use, and not custom farming for someone else.
Furthermore, the property purchased must be used in agricultural
production. Lawn mowers for the farmer’s personal use do not qualify for
the exemption. Structural construction materials are specifically identified
on the ST-18 as not qualifying for the exemption.
F. ST-20 This certificate was recently revised to reflect the loss of the
exemption by certain public service corporations and certain airlines.
Effective 9-1-04, House Bill 5018 (Chapter 3, 2004 Special Session I)
eliminates the sales tax exemptions for certain public service corporations
including electric suppliers, gas utilities, water and sewer utilities,
telecommunications companies, telephone companies and common
carriers of property or passengers by motor vehicle. Also, the
manufacturing exemption will not apply to machinery, tools and
equipment used by a public service corporation in the generation of
electric power, except for raw materials, including fuel.
G. Numbered exemption certificates. Upon application, review, and approval,

Nonprofit organizations are issued numbered exemption certificates. The
exemption varies by the type of organization and the details of the
organization’s exemption are detailed on its numbered certificate.
Nonprofit 501(c)(3) and 501(c)(4) organizations that wish to apply for or
renew their exemption can find the instructions on the department’s web
site at http://www.tax.virginia.gov/web_pdfs/npinst.pdf and the application
at http://www.tax.virginia.gov/web_pdfs/npappl.pdf .
VI Useful Ruling Letters
PD 00-91 Multipurpose or multi-jurisdictional exemption certificates

PD 97-19 Use of the ST-10/foreign certificate by Out-of-State dealers
PD 96-324 Valid registration numbers vs. FEIN
PD 95-316 Generic exemption certificates
Certificate of Registration
Objective: Discuss the application of sales and use tax as it applies to the
certificate of registration.
I. History
There have been no significant changes in the sales and use tax law
pertaining to the certificate of registration.
II. References
A. Code of Virginia Section 58.1-613 & 58.1-203

B. Virginia Regulation 23 VAC 10-210-290
23 VAC 10-210-460
23 VAC 10-210-1090
23 VAC 10-210-3090
23 VAC 10-210-6010
23 VAC 10-210-6040 through 23 VAC 10-210-6043
C. Ruling Letters -PD 98-24, February 13, 1998
PD 89-328, November 20, 1989
D. Virginia Tax Bulletin - Adm Rul 55-85
E. Applicable forms - Form R-1 and instructions R-4.
F. Additional references - User's Guide for Registration Procedures &
Business Registration Guide
III. General
A. The Virginia Retail Sales and Use Tax Act requires every individual,
partnership, corporation, etc. desiring to engage in or conduct business
as a dealer to apply for a certificate of registration. (See 23 VAC 10-
210-460 for the definition of a dealer.) An out of state dealer who did
not have the obligation to obtain a registration could voluntarily do so for the
benefit of his customers.
IV. Procedures
(1) First, determine what the business entity type is. (Sole proprietorship,
general partnership, limited partnership, corporation, etc.) See Business
Registration Guide for definitions of entities.
Page - 2
(2) Complete and submit Form R-1. This form can be used to apply for all
Virginia taxes; however, for the sales and use tax, a separate application
is required for each location. The certificate of registration must be
displayed at at the location of the business.
(3) A new certificate of registration is required if a business changes the

entity type. The following are examples of changes that require
an application for a new certificate of registration:
(a) Sole proprietorship becomes a corporation or a partnership
(b) Corporation becomes a sole proprietorship or a partnership
(c) Partnership becomes a sole proprietorship or a corporation
(d) Partnership no longer has any of the original partners that were on
the original certificate of registration application.
By making these requirements, the department is able to identify those
persons responsible for the payment of the taxes.
(4) Any dealer who has two or more business locations for which he is
required to hold a certificate of registration within the same locality may
elect to file a single combined return for all locations within that locality.
(5) Any dealer who has five or more business locations for which he is
required to hold a certificate of registration within the state may request
permission to file a consolidated return to report and remit sales and use
tax for all locations; however, he agrees to separately account for and
report sales and use tax for each locality.
A change in address would only require a revised certificate of

registration. Should the business cease to exist, the certificate of
registration expires and should be returned to the Department of
Taxation.
Churches
Page 1

CHURCHES
Objective: Discuss the application of sales and use tax as it applies to nonprofit
Churches.
I. History
Effective 7/1/84, the nonprofit Church exemption was extended to

tangible personal property used in libraries, offices, meeting or
counseling rooms and other rooms of public church buildings to carry
out the work of the church and its related ministries, including
kindergartens, elementary and secondary schools. (Virginia Tax
Bulletin 83-12)
Effective 7/1/86, the exemption was expanded to select items for use
outside the public buildings. Specifically, baptisteries affixed to realty,
gifts for use outside the public buildings, and purchases of bulletins,
programs, newspapers, and newsletters for distribution outside the
public church building were exempted. (1986 Legislative Summary)
Effective 7/1/87, House Bill 1256 expanded the existing exemptions for
nonprofit churches to provide an exemption for food, disposable
serving items, cleaning supplies, and teaching materials used by a
nonprofit church, or organization composed of several nonprofit
churches, such as a diocese, synod or conference, in the operation of
camps or conference centers, provided such items are used in carrying
out the work of the church(es). However, the exemption does not apply
to purchases of food, disposable serving items, etc., used or
consumed while the church camp or conference center is being utilized
by non-church related functions, such as business groups,
governmental organizations, civic groups and other groups not
affiliated with the church. (Virginia Tax Bulletin 87-4)
Effective 7/1/95, legislation clarified that purchases of food by nonprofit

churches for distribution as gifts outside the public church building are
exempt from sales and use tax. (1995 Legislative Summary)
Effective 7/1/97, the definition of tax exempt organization in Title 58.1-1

was changed by HB 1562 of the 1997 General Assembly to “Tax
exempt organization" or "an organization exempt from taxation under
§ 501 (c) of the Internal Revenue Code" means any corporation,
partnership, organization or trust which has received written notice of
its exempt status from the Internal Revenue Service, if such notice is
Churches
Page 2
required by the Internal Revenue Service to obtain exempt status.” (Va

Code 58.1-1) In PO 97-107 the Commissioner dealt with the effect of
this on church exemption.
Effective 7-1-99, churches were specifically exempted from the new

reporting requirements established by the General Assembly for
nonprofit organizations exempt from the sales and use tax. (1999
Legislative Summary and Tax Bulletin 99-9).
Effective 7-1-04, an administrative process was created by the 2003

General Assembly establishing standard criteria for the granting of sales
and use tax exemptions to nonprofit organizations. (2003 Legislative
Summary)
Effective 7-1-04, the 2004 General Assembly clarified the impact on
churches of the administrative process created by 2003 General
Assembly. Churches are given the option of continuing to issue the ST-
13a or satisfying more stringent reporting criteria for nonprofit entities
and being issued a numbered exemption certificate that was not limited
by the language of the ST -13a. Churches that elect to use the ST-13a
will be entitled to the traditional exemption specified for churches under
58.1-609.10(16). (2004 Legislative Summary)
Effective 7-01-04, the exemption from collecting sales tax on fundraising

sales currently enjoyed by organizations is grandfathered. This
exemption is now available to any other organization that is within the
same class of an entity that was exempt from collecting sales tax as of
June 30, 2003. (2004 Legislative Summary)
Effective July 1, 2004 - Any entity that was exempt from paying sales
and use tax for the purchase of services, as of June 30, 2003, shall
continue to be exempt from such payment, provided that it follows the
exemption criteria set forth in 58.1-609.11. (House Bill 2100, SB 1105)
(2005 Legislative Summary)
II. References
A. Code of Virginia Section 58.1-609.10(16) for the traditional church

exemption or 58.1-609.11 for the expanded exemption that is
available under the new process. The media related exemption is
found at 58.1-609.6 (6). Current code supplements should be
reviewed for changes to these sections.
B. 23 VAC 10-210-310 for the traditional exemption available under the

ST13a. If the church has been issued a numbered exemption
certificate the details of the exemption will be outlined in the
certificate.
Churches
Page 3
C. Legislative Summaries: 2005, 2004, 2003, 1999, 1995, and 1986
D. Virginia Tax Bulletins: 99-9,87-4,86-8, 83-12, and 05-4.
E. Ruling Letters:
-PD 05-9 Worship Service and Church Building
-PD 97-107 Effect of HB 1562 of 1997 General Assembly
-PD 96-196 Sales of food by churches
-PD 95-115 Denominational Governing Body
-PD 95-54 Automotive Parts
-PD 94-237 Christian Ministry Camp
-PD 94-11 Church Affiliated Day Care Center
-PD 93-204 Church Operated Swimming Pool
-PD 93-177 Campground Facilities
-PD 91-157 Roman Catholic Church: Education Programs-Marriage
-PD 92-55 Property Purchased By Churches-Conference Center
-PD 90-164 Administrative Governing Body (see also PD 95-115)
-PD 90-66 Mobile Food Bank-Church Parking Lots
-PD 90-36 Building Materials
-PD 89-331 Food for Distribution
-PD 89-176 Camp Meeting
-PD 89-174 Rentals: Church Christmas Play
-PD 88-216 Items Used in Public Church Buildings
-PD 88-85 Church Provided Prison Ministry
-PD 88-14 Conference Center
-PD 87-65 Meals Sold at Cost By Church
-PD 86-109 Non Profit Religious Shelter
-Ruling of Commissioner: Administrative & Clerical Assistance to
Churches.
F. Applicable exemption certificates-ST13-A or numbered exemption

certificate issued by the Department
III. General
A. Under the traditional church exemption, a church enjoys a limited

exemption from the tax on purchases of tangible personal property
used in carrying out the work of the church or churches. Code of
Virginia 58.1609.10(16) states that a church is exempt from tax on
the purchases of tangible personal property if the church is
conducted not for profit and exempt under IRC 501 (c) (3), or exempt
from local taxation on real property pursuant to Code of Virginia 58.1-
3606. The code section then goes on to discuss the limitations of
what may be purchased exempt under the section. These limitations
are discussed below in section IV.
Churches
Page 4
B. If a church applies for and receives a numbered exemption certificate

as a nonprofit entity under Code section 58.1-609.11, it receives a
broader exemption than the traditional church exemption. The
limitations of the church exemption contained in section 58.1-
609.10(16) do not apply. As a qualifying nonprofit entity, there is no
restriction on the types of tangible personal property that may be
purchased exempt. Taxable services are still taxable, however.
C. Neither exemption applies to churches operating for profit.
IV. Traditional Church Exemption. (ST-13a)
Purchases by Churches
Under 58-1-609.10(16) the exemption extends only to

purchases by a nonprofit church of tangible personal property
for:
1. Use in religious worship services by a congregation or church

membership while meeting together in a single location. A religious
service includes regularly scheduled church services as well as
weddings, bar mitzvahs, bat mitzvahs, baptisms, christenings,
funerals, and special services
2. Use in libraries, offices, meeting or counseling rooms or other rooms

in the public church buildings used in carrying out the work of the
church and its related ministries, including kindergarten, elementary
and secondary schools. (PD 94-11 exempts church day-care,
preschool activities)
3. Gifts, including food, for distribution outside the public church

building.
4. Food, disposable-serving items, cleaning supplies and teaching

materials used in the operation of camps or conference centers by
the church or organization composed of churches exempt under
58.1-609.10(16) used in carrying out the work of the church or
churches.
Churches
Page 5
Examples of exempt purchases (ST-13a)
Acolyte robes
Administrative supplies (letterheads, envelopes, office supplies, etc.)
Altar cushions and cloths
Baptism, marriage, and membership certificates
Baptismal font and Baptisteries
Bibles and bible stands
Bulletins, programs, newspapers, and newsletters, which do not contain
paid advertising (including paper and ink used to print these)
Candles and candelabra used at the location of the worship service
Carpeting used at the location of the worship service (except glued-down
carpeting)
Choir robes
Cleaning equipment and supplies
Communion supplies and tables Curtains
Flags used at the location of the worship service
Flowers, plants, live or artificial, and-accessories thereto used at the
location of the worship service
Fuel oil
Funeral pall
Gifts, including food baskets, for distribution outside the public church
building
Hymnals and hymnal racks
Light bulbs used at the location of the worship service
Kitchen equipment that is not incorporated into realty
Microphones and public address system used in the worship service
except when incorporated into realty
Musical instruments (e.g., organ, piano, hand bells)
Nametags for ushers and guests, and attendance records
Offering envelopes
Office machinery and equipment
Pews, cushions, chairs, or other seating systems
Portable heaters and fans and window air conditioners used at the
location of the worship service
Prayer books
Pulpit, lectern, pulpit lamp Rosaries, crosses, crucifixes Sheet music
Systems to assist persons who are hearing impaired, except when used
in the recording or reproduction of church services
Tallithim
Torahs
Vestments for ecclesiastical celebrants
Wafers, bread, wine, grape juice used in communion services
Yarmulkes
Churches
Page 6
Taxable purchases for Church under 58.1-609.10(16)
Generally, purchases of tangible personal property not used in the

sanctuary, libraries, offices, meeting or counseling rooms, or other
rooms in the public church buildings used in carrying out the work of the
church are taxable. There have been some recent exceptions to this. In
PD 05-9 a church was exempted for purchases used in a religious
service at a single location that was not a public church building.
Generally, purchases that are affixed or become a part of the real

estate are taxable. Baptisteries are the exception. Baptisteries, which
will be incorporated into real estate at the public church building and
used in the religious services of a non-profit church, are exempt.
Construction and building materials purchased for use in real estate
construction, reconstruction, installation, or repair to a church are
taxable. If the materials are furnished by the church to the contractor for
incorporation into realty, and the church did not pay tax on the materials,
the contractor, as a consumer of the materials, must pay the use tax
directly to the department, irrespective of whether or not any right, title,
or interest in the materials become vested by the contractor. (Code of
Virginia 58.1-610(b)) (PD 90-36)
Recording devices such as equipment, tools, supplies, or other tangible
personal property used in any form of recording or reproducing of
church services are taxable. If a single item is used for recording church
services and providing hearing assistance in church service, the entire
sales price is taxable.
Examples of recording and reproduction items may include, but not

limited to:
Amplifiers, microphones, speakers, and wires

Cassette tapes and tape players, except when used for religious
education
Tools and testing equipment
Tape or disk duplicating devices
Audio/visual cameras
Television broadcasting cameras
Radio and television transmitting devices
Photographic cameras, film, developing supplies
Other taxable purchases made by a church are:

Any property used in the church parsonage
Any property used on church trips, picnics, or similar outings outside
a public church building
Churches
Page 7
Any property used in maintenance of church grounds, including

without limitation, lawn mowers, trees, shrubs, grass seed, and
fertilizer
Tool sheds and picnic shelters
Stained glass windows, lighting fixtures, and other property which,
when installed, becomes a part of realty
Bulletins, programs, newspapers that contain paid advertising
(including paper and ink used in printing)
Heating and air conditioning equipment, which is a part of realty
Kitchen equipment that is a part of realty
Repair parts, accessories, oil, and similar items for use in motor
vehicles including church buses and vans (PO 95-54)
Taxable services such as meals, lodging, etc.
Purchases made by the minister from his own funds, purchases by

affiliated religious associations, and purchases by church members or
others for donation to the church are subject to the tax.
SALES BY CHURCHES
Generally, churches that make retails sales of tangible personal property

must register as dealers, collect and remit the tax to the department.
Such sales may include cassette tapes, audio/visual tapes, books, photo
directories, jewelry, and items sold at yard sales and bazaars.
If there are fewer than three such sales per calendar year, the sale may
be exempt as an occasional sale. Check VAC 10-210-1080 to determine
if the sales could qualify as an occasional sale.
If a church sells food for which a profit is realized, and it is not an

occasional sale. the church should collect and remit the tax. In this
instance, the church may purchase the food exempt using a ST-10. (i.e.
Fund raising dinners, spaghetti dinner, youth group, etc.)
For food only, if the sales price charged for food is completely offset by
the cost of the food, and the church does not realize a profit, the church
is not required to register, collect, and remit the tax to the department.
The church must pay the tax to its vendors on the cost price of the food
purchased.
(PD 87-65)
CAMPS AND CONFERENCE CENTERS
Purchases. The tax does not apply to purchases for church related
activities of food (including beverages), disposable serving items (such
as paper plates, cups, napkins, plastic eating utensils), cleaning
Churches
Page 8
supplies, and teaching materials used or consumed in operating camps

or conference centers by a church or a organization composed of
churches that are exempt from sales and use tax and which are used in
carrying out the work of the church or churches. All other tangible
personal property purchased for the operation of camps and conference
centers are taxable. (PD 96-196, PD 94-237, PD 93-177, PD 92-55, PD
89-176, PD 88-14) (Virginia Tax Bulletin 87-4)
Sales
Lodging. Charges by the church camp or conference center for rooms,

lodging, and accommodations are taxable, as provided in 23 VAC 10-
210-730. The church must register as a dealer, collect the tax on the
amount of the charge, and remit the tax to the department. Tangible
personal property used and consumed in providing rooms, lodging, and
accommodations are taxable at the time of purchase.
Meals. The sales price of the meals sold to participants is taxable. The
church must register, collect, and remit the tax to the department. Food
provided in the meals, as well as, paper place mats, plastic ware, and
similar items furnished with the meals and disposed after the use by only
one person, may be purchased exempt of the tax using a ST-10.
Camp fees. Camp fees, which cover expenses, incurred to provide

meals, lodging, and camp activities are exempt from the tax. The camp
may purchase these items using a ST-13A.
Non-church related activities. Food, disposable service items,

teaching materials, or cleaning supplies purchased by a church or
organization of churches for use in operating camp and conference
centers in non-church related activities are generally taxable. Some
examples of non-related church activities may be the renting of the
facility for conferences, retreats, business groups, governmental
organizations, and civic groups. (Virginia Tax Bulletin 87-4) The camp
must accrue and pay tax on items consumed in these non-church related
activities.
V Nonprofit Entity - Numbered Exemption Certificate
Under Code Section 58.1-609.11, a church that files an application with

the Department and meets the applicable criteria will be issued a
numbered exemption certificate. This certificate confirms that the church
qualifies for the nonprofit exemption and has both an issued date and an
expiration date. Under this exemption the church may purchase all
tangible personal property exempt. The exemption does not extend to
the purchase of taxable services, such as meals or lodging.
Churches
Page 9
Sales by this type of nonprofit entity, sufficient in number to exceed

those allowed for an occasional sale, are taxable. The church must
register as dealer and then collect and remit the tax to the Department
as any other dealer would. There is no preferential treatment.
OVERCOLLECTION AND ERRONEOUS COLLECTION
Page - 1

OVER COLLECTION AND ERRONEOUS COLLECTION
Objective: Discuss the application of sales and use tax as it applies to over
collection and erroneous collection of tax by dealers.
I. References
A. Code off Virginia Section 58.1-625. 58.1-16

C. Ruling Letters PD 94-80, Commissioner's Ruling dated March 4, 1985,
PD 94-195, Commissioner's Ruling dated June 23, 1994, PD 85-55,
Commissioner's Ruling dated March 4, 1985.
II. General
A. All sales and use tax collected by the dealer must be remitted to the
Department of Taxation. This includes over collected taxes, tax collected
on nontaxable transactions, and collection of the wrong state's tax on
Virginia transactions. Over collected taxes do not include taxes collected
in accordance with the bracket system for sales transactions of $5.00 or
less.
III. Procedures
A. Any dealer collecting the sales and use tax on nontaxable transactions
must remit the sales tax to the Department of Taxation unless it can show
that the tax has been refunded to the customer. Such nontaxable
transactions include exempt sales and out-of-state sales.
B. Any dealer who over collects the tax must remit any amount over
collected to the state. This includes wrong state's tax collected on
Virginia transactions.
(a.) The "Gross Up" method must be used in order to calculate the
taxable measure amount to enter in the exceptions list. The sales price
on an invoice is increased to a taxable amount that, when multiplied by
the Virginia tax rate, results in the amount of tax charged on the invoice.
Generally, this taxable measure is computed by dividing the tax collected
by the Virginia rate.
OVERCOLLECTION AND ERRONEOUS COLLECTION
Page - 2
C. Compare tax collected to tax reported. Sometimes the taxpayer will

utilities a method of reporting sales which inaccurately reports sales tax
actually collected.
Contractor
Page - 1

Contractor
Objective: To provide information on the application of Virginia sales and use tax to
real estate contractors, dual role contractors, and contractors deemed to
be retailers.
I. References
A. Code of Virginia Section 58.1-610, 58.1-609.1(4), 58.1-609.2(1), 58.1-

609.3(1-4), 58.1-609.6(2), and 58.1-609.8(2)
B. Virginia Administrative Code VAC 10-210-410
C. Ruling Letters PD 93-23, PD 93-91, PD 94-104, PD 94-195, PD 94-207,
PD 94-334, PD 95-32, PD 95-62, PD 95-154, PD 95-204, PD 95-260, PD
95-295, PD 96-4, and PD 96-24
E. Applicable exemption certificate ST-11A - Limited to certain classifications
of jobs. Contractor must make application to the Office Services Division,
furnishing the name, address, location or premises where the property is
to be installed, and the projected completion date of the project, along with
a complete description of the property to be installed. Once the
information has been reviewed and approved, the contractor will be
provided with the appropriate restricted exemption certificate to use in
making the purchases for the project tax exempt. The contractor is
expected to code the invoices for the materials, so that they may be
readily identified by an auditor as relating to the exempt project.
II. General
A. Unless otherwise noted, the law treats every contractor as the user or
consumer of all tangible personal property furnished to him or by him in
connection with real property construction, reconstruction, installation,
repair, and similar contracts. A contractor, whether a prime contractor or a
subcontractor, does not pass the sales or use tax on to anyone else as a
tax. He takes the amount of tax paid in consideration when submitting
bids.
B. Contractors may use form ST-11A to purchase tax exempt materials used
in the performance of the following contracts:
Contractor
Page - 2
1. Personal property purchased by a contractor which is used solely in

another state or in a foreign country, which could be purchased by such
contractor for such use free from sales tax in such other state or foreign
country, and which is stored temporarily in Virginia pending shipment to
such state or country (Va. Code 58.1-609.3(1).
2. Machinery or component parts that are to be used directly in

manufacturing products for sale or resale, when the contractor contracts to
purchase and install such machinery for a manufacturer (Va. Code 58.1-
609.3(2).
3. Tangible personal property for a farmer, necessary for agricultural

production, to be affixed to real property owned or leased by the farmer
engaged in agricultural production for market. Structural construction
materials are not exempt from the tax (Va. Code 58.1-609.2(1).
4. State certified pollution control equipment and/or facilities used primarily

for abating or preventing pollution of the atmosphere, or waters of the
Commonwealth of Virginia (Va. Code 58.1-609.3(9).
5. Baptisteries purchased by churches organized not for profit and which

are exempt from taxation under § 501 (c) (3) of the Internal Revenue
Code, or whose real property is exempt from local taxation pursuant to the
provisions of § 58.1-3606 (Va. Code 58.1-609.8(2).
III. Procedures
A. In order to classify a taxpayer as a using or consuming contractor, we

must begin by defining real property. Real property typically means land
along with its natural resources, such as timber, coal, ore, and precious
stone, and structures permanently affixed to the land, such as houses and
other buildings, but does not include temporary buildings or structures. To
determine whether tangible personal property becomes real property after
being affixed to realty, three general tests are applied: See
Transcontinental Gas Pipe Line Corp. v. Prince William County, 210 Va.
550 (1970)
1. Annexation of the property to realty

2. Adaptation to the use or purpose to which that part of the realty with
which the property is connected is appropriated, and
3. The intention of the parties involved, with the intention of the party
making the annexation being the chief test to be considered in whether
tangible personal property becomes realty.
Some examples of using and consuming contractors are:

Contractor
Page - 3
1. A dealer/installer of swimming pools, both above and in-ground,

and decking. Sales without installation would remain sales of tangible
personal property. (Ruling Letter dated 4/12/90, Taxpayer-Kayah
Manufacturing)
2. A dealer/installer of monitored security systems is providing an

exempt service and is responsible for paying sales tax on all
equipment and materials used in providing this service. Conversely,
the sale of non-monitored security systems represents a taxable sale
of tangible personal property. If the dealer/installer should contract
with a contractor to install security systems in new homes being built
by the contractor, and at a later time, contract with the homeowner to
provide the monitoring services, then two separate transactions have
taken place. The sale to the contractor of a security system, which is
not monitored at the present time and is subject to Virginia sales tax,
and the providing of monitoring services, which is non-taxable, to the
homeowner. (P.D. 96-4)
Likewise, a contractor who contracts to build a jail, and, as a
part of that contract, to install electronic cell bar walls, electronic doors,
and a non-monitored security system which includes numerous video
cameras, t v monitors, and other electronic components, would still be
deemed the user or consumer of all materials and equipment used in
the performance of the contract. The contractor is not a
dealer/installer but rather a user/consumer of the electronic
components.
3. Retailers are deemed to be using and consuming contractors with

respect to their purchase of installation supplies, i.e. sand, gravel,
concrete, steel pipe, etc. used to install satellite systems. (Ruling letter
dated 7/7/88, Taxpayer-Lawhorn, Inc.) Conversely, sales of satellite
dishes, descramblers, control boxes, remote controls, receivers and
like components, are sales of tangible personal property.
B. A person who is a using or consuming contractor may also be

engaged in the business of selling tangible personal property to
customers, including contractors, for use or consumption by them. If
so, the person is a dealer with respect to such sales, and is required to
obtain a Certificate of Registration.
After obtaining a Certificate of Registration as a dealer, a contractor
may purchase the tangible personal property to be resold under a
resale exemption certificate. He may not purchase under a resale
exemption certificate any tangible personal property which he knows at
the time of purchase will be furnished by him in connection with any
specific contract.. If such a person, as a using or consuming
contractor, removes from his sales inventory for use in the
performance of any contract any tangible personal property purchased
Contractor
Page - 4
under a resale certificate, he must include the cost to him of such

tangible personal property on his dealer's return and pay the tax.
C. A dual role contractor is a manufacturer, processor or miner who

operates in a dual capacity of fabricating tangible personal property for
sale or resale and fabricating for his own use and consumption in the
performance of real property construction contracts. Such dual role
contractors shall follow a primary purpose rule based on gross receipts
in determining sales and use tax application. If 50% or more of the
contractor's gross receipts are derived from sales of tangible personal
property, the contractor shall apply the tax according to paragraph (1)
below. If 50% or more of the contractor's gross receipts are derived
from real property construction contracts, the contractor shall apply the
tax according to paragraph (2) below.
The primary purpose test is computed annually either on a fiscal or

calendar year basis provided that the same basis is used consistently
from year to year by the Taxpayer. The primary purpose rule is
computed separately for each facility of a company located in or doing
business in Virginia. For such facilities, the primary purpose rule will
apply to gross receipts regardless of whether they are from Virginia or
non-Virginia sources. (P.D. 93-91)
1. Any person who is principally fabricating tangible personal property

for sale or resale should collect and remit the tax based upon the total
amount for which tangible personal property and services are sold,
except that charges for labor and services rendered in installing,
applying, remodeling or repairing property sold may be excluded from
the tax when separately stated or charged. In addition, any person
who withdraws tangible personal property from inventory for use and
consumption in the performance of real property construction contracts
is liable for the tax based on the fabricated cost price of the tangible
personal property withdrawn. Fabricated cost price is computed by
totaling the cost of materials, labor, and overhead charged to work in
process.
2. Any person who is principally fabricating tangible personal property for

his own use and consumption in real property construction contracts is
classified as a using or consuming contractor and must pay the tax on the
cost price of the raw materials which make up such fabricated property.
The tax must be paid at the time of purchase to all suppliers who are
authorized to collect the tax. In instances where the supplier is not
authorized to collect the tax or fails to collect the tax, the tax must be
remitted directly to the Department of Taxation on Form ST-7, Consumer's
Use Tax Return. In addition, persons who sell tangible personal property
to consumers must register, collect, and pay the tax on the retail selling
Contractor
Page - 5
price of the tangible personal property. Such person is entitled to

purchase exempt from the tax only that tangible personal property which
can be identified at the time of purchase as purchases for resale.
D. A person selling and installing tangible personal property that

becomes real property after installation is generally considered a
contractor, except that a retailer selling and installing fences, venetian
blinds, window shades, awnings, storm windows and doors, floor
coverings (as distinguished from floors themselves), cabinets, kitchen
equipment, window air conditioning units or other like or comparable
items is not classified as a using or consuming contractor with respect
to them.
For purposes of this subsection only, a "retailer" shall be deemed

to be any person who maintains a retail or wholesale place of
business, an inventory of the aforementioned items and/or materials
which enter into or become a component part of the aforementioned
items, and who performs installation as a part of or incidental to the
sale of the aforementioned items. As so defined, a retailer is not
classified as a using or consuming contractor with respect to
installations of the aforementioned items. A retailer must treat such
transactions as taxable sales except that installation charges when
separately stated on an invoice are exempt from tax. Note: No
distinction is made between in-state and out-of-state retailers.
Persons who are not classified as retailers within the definition

set forth above and who sell and install fences, venetian blinds, etc.,
are deemed to be contractors and must pay the sales tax on such
items at the time of purchase.
Both retailers and contractors are deemed to be the users or

consumers of supplies used in installing tangible personal property
that becomes real property after installation. Therefore, retailers and
contractors are subject to the tax on their purchases of tacks, stripping,
glue, cement, and other supplies purchased.
During the pre-audit conference with the contractor or his

representative, the auditor should determine the contractor's business
activities. The contractor may be a general contractor, subcontractor,
retailer, dual role contractor, dealer-installer, or any combination of the
above. This determination will dictate how the audit should proceed
and the audit techniques to be employed by the auditor.
A contractor's books of original entry may be similar to those of a

retailer or manufacturer. The purchase journal and/or cash
disbursements journal may show material purchases charged to
Contractor
Page - 6
inventory or directly to specific job numbers. The sales journal may

reflect progress billings on various jobs and sales of tangible personal
property.
The general ledger may include several accounts peculiar to a

contractor who wishes to set-up as a liability the contracts he is
obligated to perform, and the discharge of that liability, as the job
progresses and the progress billings are made.
Subsidiary records may include:
1. Contract register with columns for contract numbers, owner's name,

job location, brief description of the job, type of contract, total amount
of the contract, and date completed.
2. Contract job cost journal showing in columns such items as material

cost, labor, overhead, subcontracts, etc., for various jobs in process
and a total for all jobs in process to date for a particular accounting
period. Job cost ledger cards may also be kept.
3. Requisition journal recording materials and fixtures withdrawn from

inventory through requisitions.
4. Job cost folders containing plans and specifications, estimates of

cost, copy of the contract, copies of purchase invoices charged directly
to the job, copies of requisitions for materials withdrawn from
inventory, and time cards for both in-plant and job-site labor.
5. Files of purchase invoices.
6. State and federal tax returns.
Auditors should always verify that tax charged to contractors is

Virginia sales tax when delivery is taken in Virginia. This is especially
important when auditing an out-of-state contractor who is working in
the state. Often, out-of-state contractors will purchase from out-of-
state suppliers who may or may not be registered to collect Virginia
sales tax. Also some suppliers, both in state and out-of-state,
collect tax based on the contractor's address instead of point of
delivery. (P.D. 94-195)
The fixed assets of contractors should be audited in detail. Again,

this is very important when auditing an out-of-state contractor. Some
states may not tax certain fixed assets of contractors, nevertheless,
they would be subject to Virginia consumer's use tax when brought
into Virginia.
SALES TAX CHARGED AND PAID IN ERROR
Page - 1
Objective: Discuss the application of sales and use tax as it applies to taxes paid in
error.
I. References
A. Code of Virginia Section 58.1-611, 58.1-609.10(4).

B. Virginia Regulation 630-10-29, 630-10-51 (VAC 10-210-450 , VAC 10-
210-780)
C. Ruling Letters PD 87-227, Commissioner's Ruling dated October 14,
1987, PD 94-195, Commissioner's Ruling dated June 23, 1994.
II. General
A. Section 58-1-611 of the Code of Virginia provides for a credit against the
taxes imposed by the Commonwealth with respect to a person's use of
tangible personal property in the Commonwealth for taxes paid in the
state of purchase.
B. Section 58.1-609.10(4) exempts from sales and use tax the delivery of
tangible personal property outside the Commonwealth for use or
consumption outside the state.
C. Virginia Regulations 630-10-51 provides examples of transactions in

interstate and foreign commerce to which the tax does not apply.
III. Procedures
A. The interstate commerce exemption cannot be used to exempt

transactions in which delivery of items purchased by the taxpayer occurs
within Virginia. No credit is allowed for taxes erroneously charged or
incorrectly paid to another state. The taxpayer must apply to the out-of-
state seller for a refund.
B. In some instances where the taxpayer has either been charged the wrong
state's tax or no tax at all, the taxpayer will remit Virginia tax to the vendor
with his payment. These transactions should be included in the audit
exceptions and the taxpayer must apply to the vendor, whether in-state or
not, or registered or not, for a refund of the tax paid.
Taxpayer has made a purchase, and is now a dealer, by definition. 630-
10-29.1 d. states,"the term 'dealer' includes every person who:
Page - 2
has...used, consumed or distributed, or stored for use or consumption in
this state, tangible personal property and who cannot prove that the tax
has been paid on the sale at retail...".
The taxpayer was not charged the correct Virginia Sales Tax and "cannot
prove that the tax has been paid". Voluntarily including the correct
Virginia Sales Tax with the payment to the vendor does not assure that
the tax was remitted to the Department.
See PD 94-165.
DEALER
Page - 1

DEALER
Objective: Discuss the application of sales and use tax as it applies to definition of
dealer and nexus.
I. References

Code of Virginia Section 2.2-4321.1
C. Ruling Letters PD 93-240

PD 94-10
PD 94-62
PD 95-250
PD 97-81
PD 00-53
PD 04-4
II. General
A. Sales tax is collectible from all persons who meet the definition of a
dealer and who have sufficient activity within the Commonwealth.
III. Procedures
A. Determine if the person meets the definition of a dealer through inquiry

and examination of the business activity. The Code and the Rules and
Regulations provide a list of all persons who meet the definition a dealer.
1. Persons who manufacture or produce tangible personal property for
sale at retail, for use, consumption or distribution, or for storage to be
used or consumed in this state.
2. Persons who import or cause to be imported into this state tangible
personal property for sale at retail, for use, consumption or
distribution, or for storage to be used or consumed in this state.
3. Persons who sell at retail, or who offer for sale at retail, or who have in
their possession for sale at retail, or for use, consumption or
distribution or for storage to be used or consumed in this state,
DEALER
Page - 2
4. Persons who have sold at retail, used, consumed, distributed, or

stored for use or consumption in this state, tangible personal property
and who cannot prove that the tax has been paid on the sale at retail,
the use, consumption, distribution or storage of the tangible personal
property.
5. Persons who lease or rent, or who are lessees or rentees of, tangible
personal property for a consideration, without transfer of title thereto.
6. Persons who, as representatives or agents, solicit, receive, and
accept orders for delivery into Virginia for an out-of-state principal who
refuses to register as a dealer.
7. Persons who become liable to and owe Virginia any amount of tax
imposed by Virginia, whether they hold, or are required to hold, a
certificate of registration.
B. Determine if the dealer has sufficient activity in Virginia to require

registration and collection of the tax.
1. Maintains or has within this state, directly or through an agent or
subsidiary, an office, warehouse or place of business of any nature.
Two factors are necessary for an agency relationship to exist.
2. Solicits business in this state by employees, independent contractors,
agents or other representatives.
3. Advertises in this state by any of the following methods:
(a) In newspapers or other periodicals printed and published in this
state.
(b) On billboards or posters located in this state.
(c) Through continuous, regular, seasonal, or systematic solicitations
broadcast or relayed from a transmitter within Virginia or
distributed from a location in Virginia.
(d) Through materials distributed in this state by means other than
the United States mail, except for continuous, regular, seasonal,
or systematic solicitations in which the dealer benefits from any
banking, financing, debt collection, or marketing activities
occurring in Virginia or benefits from the location in Virginia of
authorized installation, servicing, or repair facilities.
4. Makes regular deliveries within this state. There are two conditions
that must be present.
(a) Deliveries must be by other than a common carrier. e.g., dealer
truck or contract carrier.
(b) There must be more than 12 deliveries in a calendar year.
5. Is owned or controlled by the same interests which own or control a
business located within Virginia.
DEALER
Page - 3
6. Has a franchisee or licensee operating under the same trade name in

this Commonwealth if the franchisee or licensee is required to obtain
a certificate of registration.
7. Owns 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.
C. Two factors are necessary for an agency relationship to exist.

(a) First, the agent must be subject to the principal's control, with
regard to the work to be done and the manner of performing it.
Actual control is not the test; it is the right to control that is
determinative.
(b) Second, the work has to be done on the business of the principal
or for his benefit.
D. The dealer must perform one of the listed activities to require registration
and collection of the tax.
E. Nexus does not exist for an out-of-state seller whose only presence in
Virginia is the use of a computer server to create or maintain a site on the
Internet.
F. Out-of-state persons who contract with a commercial printer in Virginia

are not required to register solely because of their contractual relationship
with the printer if their activities are limited to the following:
(a) Owning or leasing tangible or intangible property at the printer’s
premises which is used solely in connection with the printing
contract with that person.
(b) Selling property printed at and shipped or distributed from the
printer’s premises.
(c) Activities in connection with the printing contract with the person
performed by or on behalf of that person at the printer’s premises.
(d) Activities in connection with the printing contract with the person
performed by the printer within Virginia for or on behalf of that
person.
G. State agencies are prohibited from purchasing goods or services from

vendors who are required to collect use tax on goods delivered into
Virginia but refuse to do so. They are also prohibited from purchasing
goods or services from vendors who are affiliated with such businesses.
CASH VS. ACCRUAL
Page - 1

CASH VS. ACCRUAL
Objective: Discuss the application of sales and use tax as it applies to cash basis
taxpayers.
I. References
A. Code of Virginia Sections 58.1-603.5, 58.1-615, 58.1-616.

C. Ruling Letters Ruling of Commissioner dated June 6, 1983; Memorandum
dated September 25, 1974.
II. General
A. Section 58.1-603.5 of the Code requires that the sales tax paid by
retailers be computed on gross sales. Gross sales are defined as the
sum total of retail sales. A sale for the purpose of determining gross
sales is defined as "any transfer of title or possession, or both, exchange,
barter, lease or rental, conditional or otherwise, in any manner or by any
means whatsoever, of tangible personal property and any rendition of a
taxable service for a consideration."
B. Sections 58.1-615 and 58.1-616 require that dealers file a return and pay
the sales or use tax on or before the twentieth day of the month for the
gross sales of the previous month. Sales tax must be paid on every sale,
whether the sale is an installment sale, charge sale, or cash sale. For
purposes of the sales tax laws, the sale is complete in any case.
III. Procedures
A. Determine that the taxpayer is reporting on a cash basis. There are

different methods to determine the liability based upon the volume of the
records, the dollar amount of the invoices, and the detail of records
available.
B. There are two areas of liability:

CASH VS. ACCRUAL
Page - 2
(1) The current accounts receivables represent sales that have not been
reported on any sales tax return. These should be entered in the
unremitted sales exceptions list during the month of the actual sale.
(2) No additional tax is due on charge sales made during the audit period
that have already been paid and reported. A debit entry is made in
the sales exceptions list in the month of the actual sale, and a credit
entry is made in the month reported. A review of detailed accounts
receivable for the audit period can be used to identify sale and
payment dates. Also, a detail list including sales dates may
accompany the sales tax return worksheets each month.
Penalty, as applied below, and interest, are to be assessed from the

time the tax on the sales was due to the time the tax was actually
remitted.
C. On first audits, no penalty should be imposed on any sales tax previously

remitted on the cash basis. Penalty will apply to unreported sales tax,
i.e., tax on the current accounts receivables. The taxpayer should be
instructed to remit on an accrual basis in the future.
On subsequent audits, penalty should be applied to all payments that

were not reported or remitted on the return covering the month in which
the sale was made. A debit entry should be made in the unremitted sales
exceptions list in the month of the sale, and a credit entry should be made
in the miscellaneous sales exceptions list in the month of the remittance.
This method will correctly compute the interest due. Penalty will also be
computed correctly for the unreported sales, and for sales that were
reported six months or more after the original sale (30% penalty is due).
A manual calculation of penalty is required for all other sales that were
remitted late.
Direct Payment Permit
Objective: Discuss the application of sales and use tax as it applies to the dealer’s
discount for holders of the direct payment permit.
I. History
The court ruled in Reynolds Metals Company v. Commonwealth of Virginia,

Department of Taxation, that holders of a direct payment permit who were also
registered dealers were entitled to the dealer’s discount.
II. References
A. Code of Virginia Section: 58.1-622 – Dealer’s Discount, 58.1-624 – Direct

Payment Permit
B. Virginia Administrative Code: 23 VAC 10-210-485–Dealer’s compensation
or discount, 23 VAC 10- 210-510-Direct Payment Permits
C. Ruling Letters 01-11 – Direct Pay Permit; Dealer discount
D. Applicable exemption certificate – ST-21
III. General – The Tax Commisioner, upon application, may issue a direct
payment permit to manufacturers, mine operators and public service corporations.
This permit allows a person subject to the tax to pay that tax directly to the
Department instead of to its vendor. This permit is used in situations in which the
applicant finds it impossible to determine at the time of purchase how the company
will use the property and, therefore, whether a tax will be due on that purchase. The
holder of the direct payment permit is entitled to the dealer’s discount if it is a
registered dealer, that is, has a certificate of registration in addition to the direct
payment permit and provided the Direct Payment Permit Sales and Use Tax Return,
Form ST-6, is timely filed and paid.
Fabrication
Objective: Discuss the application of sales and use tax as it applies to fabrication
and fabrication services.
I. History
The concept of fabrication and fabrication labor has been integral to Virginia
sales and use tax since the beginning. Fabrication labor is specifically
mentioned in the Instructions to Dealers published by the Department on July
1, 1966.
II. References
A. Code of Virginia Section 58.1-203 & 58.1-602 B.

B. Virginia Administrative Code 23 VAC 10-210-560 Fabrication
23 VAC 10-210-410 Contractors respecting real estate
23 VAC 10-210-920 Manufacturing and processing
C. Ruling Letters
PD 98-75 Primary Purpose Test-Fabricated Products

PD 97-137 Services-Separately Stated Charges
PD 96-222 CD Fabrication- Data Conversion
PD 94-264 Manufacturing-Fabricated Steel
PD 91-301 Fabrication by Subcontractor
PD 87-137 Fabrication by a Third Party
PD 86-242 Fabrication-Lumber
PD 86-22 Fabricators-Conversion of Word Processing Diskettes
III. General
A. Fabrication is not defined in that portion of the Virginia Code devoted to

Sales and Use tax. Some general definitions of the word given by
Webster are "to construct, manufacture, invent, or create." The word
describes a broad range of human activities. Clearly a definition peculiar
to sales tax is needed.
Fabrication
Page –2
For a tax definition of fabrication we look to the regulation 23 VAC 10-

210-560 where the Commissioner, under the authority granted by Virginia
Code 58.1-203, has provided us with one. For tax purposes, fabrication
is "An operation which changes the form or state of tangible personal
property….” It is key to note in this definition that a change in the form or
the state of the tangible personal property occurs. This distinguishes
fabrication (the creation of something new) from repair (the restoration of
something old). This definition is still quite broad and can be used to
describe activities ranging in scale from portrait painting to industrial
production.
A fabricator who is regularly engaged in the fabrication of tangible

personal property for sale at retail must collect and pay the tax on the
sales price of the of the property.
The fabrication of tangible personal property for consumers who furnish

the materials used is specifically included in the definition of "Sale" in
Virginia Code Section 58.1-602. The effect of this section is to make
taxable separately stated labor charges for the creation of something new
while separately stated labor charges for the restoration of something old
(repair labor) would be exempted as a service under Virginia Code
Section 58.1-609.5 (2).
This distinction, that something new has been created, is key for
differentiating between potentially taxable fabrication labor and other
forms of labor qualifying for the service exemptions granted by 58.1609.5
(2). The sawing of a board, for example, creates two new shorter boards.
A change in the form or state of the original board has occurred. The
labor charge for sawing the board is taxable.
B. A fabricator may fabricate product for resale or they may fabricate

product for their own use. Fabricators who are also industrial
manufacturers may qualify for the production exemptions set out on 23
VAC 10-210-920 as well as the resale exemption on raw materials and
component parts if they are fabricating product for resale. Fabricators who
fabricate product for their own use do not enjoy either the production or
resale exemptions.
Fabricators sometimes operate in a dual-capacity and fabricate both for

sale and for their own use. The tax application to this situation varies
significantly depending on the primary purpose of the fabricator's activities
as well as the nature of the fabricator's business. The primary purpose of
the fabricator's activities is based on an analysis of the gross receipts of
the fabricator. If more than 50 % of the gross receipts of the fabricator are
the result of sales of product then the fabricator may
Fabrication
Page –3
purchase raw materials, component parts, and other materials that go into
the product under a resale exemption. In addition, if the fabricator is also
qualifies as an industrial processor, then the production exemption would
also be available for purchases of equipment used directly in the
production process in same manner as any other industrial processor.
When withdrawals from such a fabricator's inventory take place, normally

for use or consumption by the fabricator, a use tax liability is created. That
use tax liability is computed on the fabricated cost price of the materials
withdrawn. The fabricated cost price is computed by totaling the cost of
materials, freight in, labor, and overhead charged to work in process
attributable to the product withdrawn.
On the other hand, if a fabricator primarily produces product for their own
use or consumption, they would lose all production exemptions. In
addition they would only be able to claim a resale exemption on those raw
materials and component parts that could be identified at the time of
purchase as being purchased for resale. If such identification was
impossible, the fabricator would pay the tax at the time of purchase as
well as charge the tax at the time of sale.
The application of the tax to fabricators, particularly manufacturers,

processors, and miners, is discussed in detail in 23 VAC 10-210-410 C,
D, E & F as well as in the Contractor portion of this training manual
IV. Procedures
A. Initially, when reviewing the overall operation ask if there is a change of

form or state in tangible personal property occurring? If so, then some
form of fabricating activity is taking place.
B. Next, since so many fabricating activities have their own separate

regulation that describes the particular activity in much more specific
terms, determine if such a regulation exists. For example, manufacturers
would be audited under the provisions of 23 VAC 10-210-920, while real
estate contractors would be done under the provisions of 23 VAC 210-
410. They are both fabricators since they are both changing the form or
state of tangible personal property, but their tax treatments are quite
different.
C. Finally, If no specific regulation exists for the particular fabricating activity

encountered, apply the provisions of 23 VAC 10-210-560. Be alert to the
numerous personal service exemptions contained in Virginia Code
Fabrication
Page –4
Section 58.1-609.5 as well as other industry specific exemptions. A

search of public documents for the specific activity is sometimes
warranted since some apparent fabricating activities have been "deemed"
by the Commissioner to be service in nature.
Sales and Use Tax Audit Procedures
Floor Coverings / Flooring
Objective: To provide information on the application of Virginia sales and use tax on
floor coverings.
I. References:
A. Code of Virginia Section 58.1-610 D

B. Virginia Administration Code 23 VAC 10-210-410 G
C. Ruling Letter P.D. 98-139
D. Ruling Letter P.D. 89-252
E. Tax Bulletin 92-7
II. General:
The application of the tax on floor coverings is set forth in the Code of Virginia Section
58.1-610 D and the Virginia Administrative Code 23VAC 10-210-410 G. Both discuss
the application of tax to materials used by contractors in the performance of their
contract jobs. The regulations and bulletin provide that “floor coverings” are
distinguished from “floors” themselves and are defined to include rugs, mats, padding,
wall-to-wall carpets when installed by the tack strip or stretch-in methods, and other
floor coverings which are not glued, cemented, or otherwise permanently attached to
the floor below. Floor coverings, which are glued, cemented, or otherwise permanently
attached to the floor below, are deemed to be floors.
Persons who sell and install floor coverings are considered either a retailer or
contractor. A person is considered a retailer of floor coverings if such person maintains
a retail or wholesale place of business, an inventory of floor coverings or their
component parts, and if that person performs installation as part of the sale of the floor
coverings. The sale of "floor coverings," as described above, by a retailer constitutes
retail sales and the retailer must collect the tax on the sales price of the floor coverings.
A retailer selling and installing "floors" is deemed a using and consuming contractor with
respect to the floors and must pay the use tax on the cost price of the floor covering. In
both instances, the retailer must pay the use tax on materials used in the installation of
floor coverings.
A person selling and installing floor coverings, who is not a retailer, is considered a
using and consuming contractor with respect to such items, regardless of the method in
which the floor covering is installed. The contractor is subject to the tax on the costs of
all materials used in the performance of the contract work and the tax is not collected
from the purchaser.
The tax does not apply to installation charges when separately stated on the invoice
under Code of Virginia § 58.1-609.5(2), copy enclosed. If the installation charge is not
separately stated, the tax must be computed on the total invoice charge.
III. Procedures:
Contractor (No retail or wholesale place of business with no inventory)
This type of business is considered a using and consuming contractor with respect to
floor coverings, regardless of the method in which the floor covering is installed. The
contractor is subject to the tax on the costs of all materials used in the performance of
the contract work and the tax is not collected from the purchaser.
Retailer (Has a retail or wholesale place of business and inventory)
A retailer shall be deemed to be any person who maintains a retail or wholesale place of
business, an inventory of floor coverings and/or materials which enter into or become a
component part of the aforementioned items, and who perform installation as part of the
sale of such items.
Permanent "Double-Stick" Carpet, Tile and Laminate Installation: Due to the fact that
both the cushion and the carpet are permanently glued down, this would be classified
as contract work.
Releasable "Double-Stick" Carpet, and Laminate Installation: Due to the fact that the
carpet is attached to the cushion using a releasable adhesive, this would be considered
a floor covering and classified as a retail sale.
Permanent Modular Carpet Installation: Due to the fact that the carpet tiles are
permanently glued down and the entire substrate is covered with permanent adhesive,
this would be considered contract work.
Releasable Full Spread Modular Carpet and Laminate Installation: If the carpet can be
removed without material injury to the carpet/Laminate or to the real estate, this would
be considered a floor covering and considered as a retail sale.
Releasable Grid System Modular Carpet Installation: The carpet can be removed with
no damage to the substrate. If this were the case, this would be classified as a floor
covering and considered as a retail sale.
Releasable Perimeter Glue Carpet Installation: The fact that this is a loose lay
installation with only releasable adhesive used on the perimeter of the carpet, this would
be classified as a floor covering and considered as a retail sale.
Floating Floors: This consists of tongue and groove planks that are glued together to
create a sheet of laminate flooring. The flooring is laid on top of the layer of foam and
secured by moldings around the perimeter. This type of flooring is distinguished from
the floor themselves and is considered a retail sale.
P.D. 98-139
October 6, 1998
Re: Request for Ruling: Retail Sales and Use Tax
Dear
This is in reply to your letter of September 11, 1998, in which you seek
information on the application of the retail sales and use tax to (the
"Taxpayer").
FACTS
The Taxpayer is a retailer who sells and installs floor coverings. One type of
flooring it sells, laminate flooring materials or "floating floors," consists of tongue and
groove planks that are glued together to create a sheet of laminate flooring. The
flooring is laid on top of a layer of foam and secured by moldings around the perimeter.
The flooring is not secured to the sub floor or the floor below. You question the
application of the tax to the laminate flooring.
RULING
The application of the tax to floor coverings is set forth in Code of Virginia §
58.1-610 and Title 23 of the Virginia Administrative Code (VAC) 10-210-410. Tax
Bulletin 92-7, issued September 15, 1992 (copy enclosed), also addresses the
application of the sales tax to floor coverings.
"Floor coverings" are distinguished from "floors" themselves and are defined to
include rugs, mats, padding, and wall-to-wall carpets when installed by the tack strip or
stretch-in methods, and other floor coverings that are not glued, cemented, or otherwise
permanently attached to the floor below. Floor coverings that are glued, cemented, or
otherwise permanently attached to the floor below are deemed to be floors.
P.D. 98-139
October 6, 1998
Page 2
The laminate flooring described in this case is not glued down, cemented, or
otherwise permanently attached to the floor below. Consequently, the laminate flooring
is considered a floor covering and not a floor. The sale of a floor covering is considered
a retail sale, and the seller must collect the tax from its customers on the sales price.
Accordingly, the Taxpayer must collect sales tax from its customers on its sales of
laminate flooring or “floating floors."
The tax does not apply to the installation charges when separately stated on the
invoice. See Code of Virginia § 58.1-609.5(2). If the installation charge is not
separately stated, the tax must be computed on the total invoice charge. Please note
that the Taxpayer must pay tax on materials used in the installation of its floor
coverings.
I hope this has responded to your inquiry. If you have additional questions,
please contact in the Office of Tax Policy at .
Sincerely,
Danny M. Payne
Tax Commissioner
Enclosure
OTP/17527J
September 21, 1989 P.D. 89-252
Re: Ruling Request/Sales and Use Tax
Dear
This will reply to your letter of April 27, 1989 requesting a ruling on the sales tax application to various
methods of carpet installation.
The application of the tax to floor covering dealers is set forth in Virginia Retail Sales and Use
Regulation 630-10-27(G) (copy enclosed). Persons selling and installing floor covering which
becomes permanently affixed to the floors below are considered to be the using or consuming
contractor with respect to such items.
A person who installs floor coverings may be either a contractor or a retailer. Floor coverings, as
distinguished from the floors themselves, include rugs, mats, padding, wall-to-wall carpet and any other
floor covering not permanently affixed to the floor below. A retailer shall be deemed to be any person
who maintains a retail or wholesale place of business, an inventory of the aforementioned and/or
materials which enter into or become a component part of the aforementioned items, and who perform
installation as part of the sale of such items. I will now address the specific situations as outlined in
your letter.
Permanent "Double-Stick" Broadloom Carpet Installation: Due to the fact that both the cushion and the
carpet are permanently glued down, this would be classified as contract work.
Releasable "Double-Stick" Broadloom Carpet Installation: Due to the fact that the carpet is attached to
the cushion using a releasable adhesive, this would be considered a floor covering.
PD 89-252
Page 2
September 21, 1989
Permanent Modular Carpet Installation: Due to the fact that the carpet tiles are
permanently glued down and the entire substrate is covered with permanent adhesive,
this would be considered contract work.
Releasable Full Spread Modular Carpet Installation: If the carpet can be removed
without material injury to the carpet or to the real estate, this would be considered a floor
covering.
Releasable Grid System Modular Carpet Installation: From the information
provided, it appears that the carpet can be removed with no damage to the
substrate. If this were the case, this would be classified as a floor covering.
Releasable Perimeter Glue Broadloom Carpet Installation: The fact that this is a
loose lay installation with only releasable adhesive used on the perimeter of the
carpet, this would be classified as a floor covering.In answer to your question
concerning the invoicing to your customers, no sales tax would be shown on the
invoice for contract work. Instead your corporation would be responsible for the
sales or use tax on all material used to perform contract work. This tax may be
taken into account when bidding on contract jobs. When making retail sales, the
tax does not apply to installation charges when separately stated on the invoice.
If the installation charge is not separately stated, the tax must be computed on
the total charge.
I hope this has answered all of your questions. If you should have any further
questions, please feel free to contact this department.
Sincerely,
W. H. Forst
Tax Commissioner
Landscapers & Nurserymen (Rev. 10/97)
Page - 1

Landscapers and Nurserymen
Objective: Discuss the application of sales and use tax as it applies to landscapers
and nurserymen.
I. History
Prior to 1996. The department has consistently treated landscapers who sell
and transplant trees, shrubs, plants and like items as dealer/installers making
retail sales.
1996 and after. Due to a large number of contested audits and taxpayer
inquiries, a short moratorium on audits of landscaping companies was in
effect while the interpretation of the regulation was reevaluated. After
exploring the possibility of allowing landscapers to operate solely as
contractors under 23 VAC 10-210-410, it was decided, because of industry
opposition and the new problems which would be created, to retain the
established interpretation. The moratorium was lifted and audits may be
performed on landscaping companies and nurserymen.
II. References
58.1-609.2(1) Agriculture exemption.

58.1-609.5(9) Maintenance contracts.
B. Virginia Administrative Code
23 VAC 10-210-50 Agriculture.

23 VAC 10-210-610 Florists and nurserymen.
23 VAC 10-210-910 Maintenance contracts and Warranty plans.
C. Ruling Letters:
P.D. 97-320 Tax must be separately stated on invoice.

P.D. 96-181 Contractor held taxable on sod when sold/installed by sub.
P.D. 96-71 Plant replacement maintenance contract is taxable at 50%.
" " " Landscaper is retailer for trees, shrubs, etc. - not contractor.
P.D. 96-68 Tax must be charged on the total of a lump sum billing.
P.D. 96-19 Plant replacement maintenance contract is taxable at 50%.
P.D. 94-73 Tax must be charged on the total of a lump sum billing.
P.D. 93-158 Plant replacement maintenance contract is taxable.
P.D. 88-78 Gen. Contractor owes tax on trees sold & installed by a sub.
P.D. 87-172 Landscaper may show one lump sum total for all plants.
Page - 2
" " " Landscaper is retailer for trees, shrubs, etc. - not contractor.
P.D. 86-214 Maintenance contract w/o plant replacement gtd. is service.
P.D. 86-58 Immovable silos are taxable.
P.D. 84-126 Tests to determine if tpp becomes real property after install.
P.D. 82-153 Exempt items for greenhouse facilities.
¶200-694 (CCH) Plastic covered greenhouse is taxed as is the plastic.
D. Virginia Tax Bulletin 95-8 - Parts and Labor Maintenance Contracts
E. Applicable exemption certificates: ST-10 Resale Certificate

ST-18 Farmer's Certificate
III. General
A. 23 VAC 10-210-610) - Florists and Nurserymen.
The first three paragraphs of this regulation describe the general tax
treatment of landscapers and nursery men as follows:
1. Paragraph (A) - Retail Sales
"The tax applies to retail sales of flowers, potted plants, shrubbery,

nursery stock, sod, wreaths, bouquets, and similar items."
2. Paragraph (B) - Transplanting
"When a nurseryman, florist or other person makes retail sales of

shrubbery and similar items, and as a part of the transaction agrees to
transplant them on the land of the purchaser for a lump sum, the tax
applies to the total charge. The tax does not apply to the charge for
transplanting if the charge is separately stated on the invoice."
3. Paragraph (C) - Landscape Contractors
"Any landscaper, nurseryman, or contractor who goes beyond the sale

and planting of shrubbery, sod, etc. and contracts to grade, seed and
fertilize lawns or to provide periodic fertilizing or weed killing treatments is
deemed to be a consumer of all tangible personal property used in
performing such service and must pay the tax on such property at the
time of purchase. The charge to the customer for providing the service is
not subject to the tax."
B. Working Definitions
"Landscaper" is used generically to indicate a landscape contractor,

nurseryman or other person who performs landscaping.
Page - 3
"Landscape contractor" refers to any landscaper, nurseryman, or other

person as described in paragraph (C) of the regulation. A true landscape
contractor does not have a retail business such as a garden center. The
primary business usually involves grading, seeding, fertilizing and
maintaining existing lawns as well as establishing lawns and landscaping
for new construction. In addition, a landscape contractor often sells many
of the items specifically designated as retail sales under paragraph (A) of
the regulation. A landscape contractor seldom grows any of his nursery
stock.
"Listed items" references the items in paragraph (A) of the regulation

which are specifically designated as retail sales.
"Nurseryman" designates any landscaper or other person who grows

some or all of the listed items which are sold to customers; or someone
who operates a retail or wholesale business which carries a stock of such
items. A nurseryman who grows nursery stock for market enjoys the
agriculture exemption set out in 23 VAC 10-210-50. A nurseryman also
acts as a landscape contractor anytime he goes beyond the sale and
planting of shrubbery, sod, etc. and enters into landscape contracts as
described in paragraph (C) of the regulation.
C. General Taxability of Landscapers
Landscapers, whether landscape contractors or nurserymen, are treated

equally under 23 VAC 10-210-610 and long-standing department policy.
They must register and charge sales tax whenever they make sales of the
listed items. When landscapers go beyond the sale of these items and
act as landscape contractors to grade, seed and/or fertilize lawns, they
are treated as consuming contractors with respect to their purchases of
seed, fertilizer, mulch, straw and for all of their tools supplies and
equipment. Being treated as a landscape contractor in no way negates
the requirement that landscapers charge tax to their customers on the
retail sales of listed items.
IV. Procedures
A. First Audit
The sales tax registration status of the landscaper during the period under
audit determines how the audit will be conducted.
1. Landscaper not Registered to Collect Sales Tax - First Audit
A landscaper who is not registered to collect sales tax or is only

registered to remit consumer use tax will be audited as the business was
Page - 4
operated during the audit period and then "turned around." Normally this
will result in auditing the unregistered landscaper as a contractor. Most
often these audits will be on those companies commonly thought of as
landscape contractors. Tax will be assessed on purchases on which no
tax was paid to the vendor and on which no consumer use tax was
remitted by the landscaper. Of course, a landscaper should be held liable
for any over the counter retail sales, which would include the sale of
mulch, topsoil, etc. that was delivered with no contractor services
involved. These transactions should be shown as sales exceptions. The
taxpayer should be instructed on the proper procedure for requesting a
refund of sales tax paid to their supplier on these resale items. The audit
comments should note how the business was operated and confirm that
the landscaper was informed of the correct operating procedures. Lack of
such comments can jeopardize the application of penalty in future audits.
These special instructions should also be noted in the letter to the
taxpayer at the conclusion on the audit.
2. Landscaper Registered to Collect Sales Tax - First Audit
A landscaper who is registered to collect sales tax should be held

accountable for the proper business operation as described in 23 VAC
10-210-610. As a registered dealer, the landscaper should have been
aware of the correct method of operation.
3. Penalty - First Audit
For the first audit, penalty is waived unless fraud is involved.
B. Issues Regarding the Taxability of Landscape Contractors
1. Retailer and Contractor
A landscape contractor often operates in a dual capacity - as a retailer

and as a contractor. Even if the listed items are included as part of a
landscape contract, a landscape contractor is always a retailer for sale of
such items. A landscape contractor cannot be a using or consuming
contractor of the listed items.
2. Exemption Certificates - Landscape Contractors
A landscape contractor may use Form ST-10 to purchase listed items

exempt from the tax. Tax must be charged to customers on all sales of
listed items unless a valid certificate of exemption is received. Valid
exemption certificates can be provided by federal, state and local
governments, and other customers which are statutorily exempt for the
purchase of tpp. The department will issue nonprofit organizations a
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certificate of exemption on Department of Taxation letterhead. The

certificate contains an exemption number and nonprofits are instructed to
provide vendors with a copy of the certificate. A resale certificate (ST-10)
can never be accepted in good faith for sales of listed items which the
landscaper transplants. It is also imperative that landscapers realize the
difference between making an exempt retail sale and fulfilling the service
portion of a landscape contract. While acting as a consuming landscape
contractor, the landscaper is responsible for the tax on seed, fertilizer,
etc. The sales tax exemption status of the customer is not relevant to
purchases of items used and consumed by landscape contractors.
3. Purchases by Landscape Contractors
A landscape contractor's resale exemption is valid only for direct resale

purchases. Any purchases of installation supplies (i.e., top soil, peat
moss, fertilizer, mulch, stakes and wire) and equipment (i.e., shovel, rake,
auger, backhoe) are taxable to the landscape contractor at the time of
purchase or upon withdrawal from an exempt resale inventory.
4. Lump Sum Contracts and Invoices
A landscape contractor who bills a lump sum amount which includes

charges for any listed items (even if the listed items are not the majority of
the charge) is required to charge tax on the total bill. If transplanting
charges are separately stated, they are excluded from the taxable sale.
P.D. 87-172 explains that "if the taxpayer prefers not to list the exact
amount charged for each plant or shrub being sold to its customers in
connection with its landscape contracts, it may list in a lump sum the total
amount charged for all such items sold and thereby avoid disclosing the
exact amount being charged for any particular item." Although a
landscape contractor's invoice should show the proper breakdown
between tpp and transplanting or installation labor, the auditor can accept
categorized figures from a quote sheet or contract (if the customer was
provided a copy).
5. Similar Items
23 VAC 10-210-610(A) requires that a landscaper be treated as a retailer

of listed items including any similar items. Most likely the regulation’s
intent was to include in the term "similar items" only those items which are
live or were grown. Although many of these items appear to become real
property when transplanted, the definition of "retail sale" found in Code of
Virginia §58.1-602 states that all sales for resale must be made in strict
compliance with the regulations. The regulation is very clear on the
taxability of the listed items. This approach also ensures that a landscape
contractor and a nurseryman enjoy the same treatment under the
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regulation. (Imagine how difficult it would be to audit a nurseryman if a

"produced cost" had to be determined for the products, which he grows.)
6. What TPP becomes Real Property when Installed by a Landscape

Contractor?
The auditor also has to determine the tax status of tpp installed by a
landscape contractor which are not similar items. P.D. 84-126 explains
the tests set forth by the Virginia Supreme Court in Transcontinental Gas
Pipe Line Corporation v. Prince William County, 210 Va. 550 (1970).
(Note: P.D.84-126 erroneously shows the year of the court case as 1969.)
The classification of property as real estate or as tangible

personal property is to be determined by the law of fixtures . . .
three general tests are applied in order to determine whether
an item of personal property placed upon realty becomes itself
realty. They are:
(1) annexation of the property to the realty
(2) [adaptation] to the use or purpose to which that part of the

realty with which the property is connected is appropriated, and
(3) the intention of the parties . . .
The intention of the party making the annexation is the chief

test to be considered . . .
With these tests in mind, most tpp (other than listed items) installed by a
landscape contractor becomes real property. A landscape contractor
must pay tax at the time of purchase or the withdrawal from an exempt
resale inventory when installing items such as landscape timbers, edging,
walkways (gravel, rock, slate, etc.), decks, decorative boulders and other
similar items. If the intent is for permanent installation, the landscape
contractor is considered a consuming contractor with respect to real
property. The classification of other items such as a decorative pond or a
fountain is more open for interpretation. For example, if hard wired or
plumbed in, it would most likely be considered realty after installation. If
each winter it must be brought indoors to protect from freezing, then it
would retain its status as tpp.
C. Issues Regarding the Taxability of Nurserymen
1. Nurserymen vs. Landscape Contractors
A nurseryman is usually more familiar with making retail sales than a

landscape contractor and is probably already registered to collect sales
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tax before being chosen as an audit candidate. Nurserymen become

landscape contractors whenever they enter into landscape contracts or
perform grading, seeding, fertilizing, etc., therefore all of the issues
already discussed apply equally to them. The nurseryman, however,
enjoys the agricultural exemption if he grows nursery stock for market.
2. 23 VAC 10-210-50 - Agriculture Exemption
The agriculture exemption is available to the nurseryman who is

considered a farmer when growing his plants or nursery stock. The
agriculture regulation states in paragraph (A) that
[t]he tax does not apply to . . . seed, plants, fertilizers, liming

materials, . . . agricultural chemicals, . . . farm machinery, and
agricultural supplies sold to farmers for use in agricultural
production for market. Also, effective July 1, 1979, the tax
does not apply to tangible personal property, except structural
construction materials, necessary for use in agricultural
production for market when sold to or purchased by a farmer
or contractor or furnished to a contractor by a farmer to be
affixed to real property owned or leased by a farmer . . .
The term "structural construction materials" includes but is not

limited to the following: silos; barns and sheds; storage bins
(not portable); greenhouses, including plastic covered houses;
permanent fencing; fuel oil storage tanks; electrical wiring,
except wiring running from special purpose equipment to an
on-off switch, plumbing, except as part of special purpose
equipment. . . . These items are therefore subject to tax.
The term "structural construction materials" specifically

excludes the following but may also exclude other items: . . .
heating systems; . . . power outage and water pressure alarm
systems; . . . ventilating equipment, to include air inlets,
curtains and curtain cables, cords and related fixtures, pull-
ups, winches, fans and fan belts, louvers, shutters, motors,
static pressure gauges, thermostats and replacement parts;
shade cloth; and irrigation lines and sprinkler heads. These
items are therefore exempt from tax.
3. Exemption Certificates - Nurserymen
A nurseryman uses the ST-10 resale exemption to buy products for

resale. In addition, a nurseryman should use the ST-18 exemption
certificate to make purchases which fall under the agriculture exemption.
Exempt purchases would include such things as seedlings, potting soil,
black plastic ground cover, mulch, vermiculite, pots, weed killer, pruning
Page - 8
shears, irrigation or misting systems, heating and ventilation systems if

they are for the survival of the plants, tillers and other farm equipment
directly used in growing the nurseryman's products. (It is important to
limit the definition of excluded structural construction materials to those
items within or attached to an agricultural building.) If a contractor installs
exempt attachments to realty, he must contact the department to obtain
an ST-11A. Also because of the agriculture exemption, a nurseryman is
more likely than a landscape contractor to have made improper exempt
purchases.
4. Greenhouses and Shade Cloth
Please note that greenhouses, including plastic covered houses, are

specifically designated as taxable structural construction materials. This
includes the plastic covering itself. However, plastic shade cloth hanging
inside a greenhouse is specifically excluded from the term structural
construction materials and is exempt. Shade cloth used in the fields
would also be exempt.
5. Withdrawals from Exempt Resale Inventories
Nurserymen are more likely than landscape contractors to have exempt

resale inventories of consumable supplies such as mulch, topsoil,
fertilizer etc. If the nurseryman has a retail business, these items are
often sold over the counter. It is important for the auditor to determine
whether consumer use tax is being accrued and remitted on withdrawals
from such inventories.
D. Mulch, Top Soil, Stone and other TPP Delivered in Bulk
A landscape contractor is only a consuming contractor when "installing"

items delivered to customers. Therefore, all sales of mulch, topsoil, stone
and other tpp delivered in bulk are taxable retail sales if they are delivered
without being spread. When a landscaper dumps a load of mulch in the
driveway and drives away leaving the customer responsible for its
distribution, the landscaper must charge his customer the tax.
Conversely, if the landscaper spreads the mulch, he is acting as a
consuming contractor and must pay the tax at the time of purchase or
upon the withdrawal from an exempt resale inventory. When acting as a
consuming contractor, the customer is not charged tax.
E. Plant Maintenance Contracts
Plant maintenance contracts, which only provide for the regular watering,
fertilizing, mulching, pruning, etc., are service contracts not subject to the
tax. Plant maintenance contracts, which include any of the above
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services and in addition contain a plant replacement guarantee, are "parts

and labor maintenance contracts" covered under 23 VAC 10-210-910 and
Virginia Tax Bulletin 95-8. Prior to January 1, 1996, such contracts were
taxable at 100% of the total cost of the contract. After January 1, 1996,
these contracts are taxed at one-half (50%) of the total charge. The
auditor will have to take this statute change into account when
extrapolating a purchase sample including taxable maintenance
contracts. This can be accomplished by using the “Multisam” program. A
landscaper may purchase or withdraw replacement plants from an
exempt resale inventory without incurring a consumer use tax liability.
Consumable items and installation or transplanting supplies and
equipment are subject to the tax at the time of purchase or withdrawal
from an exempt resale inventory.
F. Sale of Equipment and Occasional Purchases
A registered landscaper cannot make an occasional sale of equipment if it

was used in the activity for which he is required to hold a certificate of
registration unless the business is sold, reorganized or liquidated. A
landscaper not required to be registered can probably make an
occasional sale of equipment as long as no more than three sales are
made in any one year period. Any landscaper, however, would be able to
make an exempt occasional purchase if the occasional sale was made by
a person not required to be registered to collect sales tax (i.e., a
contractor or a farmer).
G. Records
Most nurserymen keep adequate records. Landscape contractors are

somewhat less consistent. They often use only a small number of
suppliers, therefore, duplicate purchase invoices may be available from
vendors. It is not unusual to find that sales invoices are lacking in detail.
Landscapers must be instructed on the importance of providing their
customers and retaining for themselves detailed invoices and contracts.
Without proper documentation it is sometimes impossible for the auditor
to determine whether a landscaper has made a retail sale or acted as a
landscape contractor. If only a lump sum invoice exists, the tax applies to
the total charge. However, if the customer has been provided with a
contract or quote which shows the breakdown of the lump sum, the
auditor should make use of this categorization to determine any tax
liability.
Food Tax Reduction Program
Objective: Discuss the application of sales and use tax as it applies to the Food
Tax Reduction Program.
I. References
A. Code of Virginia Section 58.1-611.1

B. Virginia Tax Bulletin 99-11
C. Ruling Letter – P.D. 01-20. 01-10
D. Video Conference Questions & Answers
II. General
A. For purposes of the Virginia sales and use tax reduction for food
purchased for human consumption as enacted by the 1999 Virginia
General Assembly, the definition of “food purchased for human
consumption” includes most staple grocery food items and cold
prepared foods packaged for home consumption. Specifically
excluded from the definition are alcoholic beverages, tobacco, and
prepared hot foods sold for immediate consumption.
B. “Food purchased for home consumption” means food for home

consumption by humans, as defined under the Food Stamp Act of
1977, 7 U.S.C 2012..
C. The first rate reduction was effective January 1, 2000. The following
table illustrates the implementation of the state sales and use tax rate
reduction.
Effective Date State Tax Rate Local Tax Rate Total Tax Rate
Jan 1, 2000 3.0% 1.0% 4.0%

April 1, 2001 2.5% 1.0% 3.5%
April 1, 2002 2.0% 1.0% 3.0%
April 1, 2003 1.5% 1.0% 2.5%
Note: The rate reductions scheduled for April 1, 2001, 2002, 2003
are conditional upon prescribed revenue growth requirements set out in
the legislation. The Dept of Taxation will know no later than December of
each year whether a rate reduction scheduled for the following April will
take effect and issue the proper notification to dealers and the public. The
second rate reduction did not take effect on April 1, 2001.
III. Procedures
A. First audit of taxpayer(seller) under the Food Tax Reduction

Program
Determine which items have been identified as “food purchased for

human consumption”. Start with testing register tapes to identify
items that may not qualify for the reduction. Note such items and
discuss with T/P. Since this is a new occurrence and the item
should have been coded as taxable, please advise T/P to
immediately change the item(s) to taxable and do not hold T/P for
the error in the audit. Advise that in any subsequent audit the same
type errors will be held taxable and the appropriate tax assessed.
When testing the register tapes, verify the “total” tax from the tapes
as posted to the daily closing sheets, then to the monthly closing
sheets and to the sales tax return.
As always, when auditing a retail food store, verify the handling of

food stamps and WIC coupons. With the food tax reduction, new
problems may arise.
If no register tapes or no registers used at all, then good luck and

use the best information obtainable.
B. Second and further generation audits under the Food Tax

Reduction Program
Same procedures as (A) above, but if items are identified as not

qualifying under the Program the T/P is to be held liable for the
error(s) and assessed the appropriate tax.
C. Miscellaneous items to note
1- Retailer classifications. VA Tax Bulletin 99-11 list the type of

retailers who should charge the reduced sales tax rate, such as
bakeries, cafes, cafeterias etc..
2. Exceptions. Some vendors are presumed sellers of food for

immediate consumption and may not impose the reduced sales
tax rate on sales of eligible foods. All sales are fully taxable at
the 4.5% rate. P.D. 99-11 lists those sellers to include caterers,
concession vendors, etc.
3. Fast food/restaurants. Only those foods deemed eligible under

the federal food stamp program may be sold at the reduced
sales tax rate.
4. Samples and giveaways. Samples, free distributions, and

giveaways of eligible food products by food wholesalers and
retailers are subject to the reduced sales and use tax rate
unless otherwise exempt from the tax.
5. Gift transactions. These are the three party transactions and

are eligible for the reduced tax rate.
D. Consumer Use Tax Audits
Business establishments are required to pay the consumers use

tax on untaxed purchases of tangible personal property for use in
Virginia, which are not otherwise exempt of the tax. Under the
Food Tax Reduction Program, businesses should pay the reduced
sales tax rate on untaxed purchases of eligible food products.
The same applies to individuals on purchases of more than $100 in

a calendar year.
Government Contractors
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GOVERNMENT CONTRACTORS
Objective: Discuss the application of sales and use tax to government contractors.
I. History
In January 1986, an emergency regulation was issued to provide an

exemption for innovative high technology industries. Government contractors
involved in research and development in innovative technology may qualify
for this exemption.
II. References
A. Code of Virginia Section 58.1-609.1
B. Virginia Administrative Code: VAC 10-210-410J and VAC 10-210-693;

VAC 10-210-3070 through 3074; VAC 10-210-690 through 692; VAC 10-
210-760 through 766; VAC 10-210-920.
C. Ruling Letters: Public Documents 88-159, 88-249, 89-154, 89-206, 91-

247, 92-4, 92-179, 93-20, 93-170, 93-181, 93-186 93-191, 93-203 93-
238, 93-241, 94-115, 94-140, 94-155, 94-201, 94-218, 94-231, 94-238,
94-267 94-270, 94-334, 94-335, 95-16, 95-28 95-42 95-77 95-80, 95-82,
95-91, 95-97, 95-99, 95-124, 95-139, 95-293, 95-313, 95-314, 95-323,
95-329, 95-333, 96-23, 96-48, 01-6.
D. Virginia Tax Bulletins 86-5 and 95-8
E. Court Cases: U.S. vs. New Mexico, et al (U.S. Supreme Court); U.S. and
Hercules vs. W.H. Forst, State Tax Commissioner, et al (U.S. District
Court for the Western District of VA).
F. Handout on Contract Types, "Chapter 6, 6-000 Contract Types"
G. Applicable Exemption Certificates: ST-10, ST-11, ST-12

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III. Significant Terms
DCAA - Defense Contract Audit Agency. Audits government contractors for

compliance with Federal Acquisition Regulations.
FAR - Federal Acquisition Regulations. FAR are used by all federal executive
agencies for acquisition of supplies and services with appropriated funds.
FAR, together with agency supplemental regulations (such as the Department
of Defense FAR Supplement that applies to all Defense agencies), should be
the primary guideline for the contractor's conduct in administering the
contract.
Statement of Work (SOW) - A general statement of the overall objective of

the government contract. The statement should be a primary source for
determining the "true object" (service vs. sale of tangible personal property) of
the contract.
RFP - Request for Proposal. A document developed by the government to

apprise the prospective bidder of the type of contract the government
requires, such as the general specifications of the items or services to be
provided. Usually, the RFP is not a classified document.
Contracting Officer - A government employee who oversees the progress of

a government contract and works with the contractor to facilitate progress and
completion of a contract.
TWR - Technical Work Request. Task orders within a contract.
Reference information-There is a wealth of federal government contractor

information available online. For example, the FAR can be found at
www.arnet.gov/far.
ID/IQ – Indefinite Delivery / Indefinite Quantity
IV. General
A government contractor may operate as a retailer or service provider based

upon the "true object" of the contract. When the "true object" of the contract
involves a sale of tangible personal property, the contractor may purchase the
resale inventory with an ST-10 certificate of exemption.
A government contractor who performs a service and in conjunction therewith

furnishes some tangible personal property is deemed to be the consumer of
all such property and is not entitled to exemption on the grounds that a
governmental entity is a party to the contract. This is true even though title to
Page - 3
the property provided may pass to the government and/or the contractor may
be fully and directly reimbursed by the government.
Contractors providing services are the consumers of all equipment and

supplies absent any statutory exemptions such as research and development.
V. Procedures
During the pre-audit conference and tour, the auditor should determine if the
contractor makes sales of tangible personal property. If such sales are to
customers other than the government, the sales transactions should be
reviewed to ensure proper application of tax. For example, sales by the
contractor to other government contractors are not entitled to the exemption
afforded the U.S. government. Such sales are taxable in the absence of an
exemption certificate. The contractor can purchase resale inventory exempt
from tax using the ST-10 form.
In those cases when the contractor provides services to the government, the
relevant contracts must be reviewed to verify consumer use tax compliance.
The "true object" test must be applied when examining contracts by reviewing
the "statement of work (SOW)." The SOW will explain the scope of the
contract and the product or service to be provided by the contractor. An
analysis of the SOW is essential in determining the "true object" of the
transaction.
When reviewing the SOW, the auditor should be aware of potential

manufacturing, resale, or research and development exemptions. An example
of a resale contract would involve the sale of a computer system to the
government; a service contract, however, may include furnishing, operating,
and maintaining the computer system. The auditor must determine if the
government entered into the contract for the purpose of securing tangible
personal property or to obtain services from the contractor.
The amount of funding for labor as opposed to equipment is not the

controlling factor in determining the "true object" of the contract. For example:
Equipment $10,000,000.00
Direct Labor 1,000,000.00
Indirect Labor 1,000,000.00
TOTAL $12,000,000.00
In this particular contract, the resale exemption does not apply

solely on the basis of the percentage of funds allocated to
equipment. This contract states deliverables of $10 million and
labor costs of $2 million. Without further clarification from the
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SOW, the auditor cannot make a determination as to the "true

object" of the contract and the tax implications
In reviewing the SOW, the auditor should focus on key terms such as
"operate," "maintain," or "manage." Such terminology would indicate a service
contract and purchases charged to that contract may be fully taxable to the
contractor absent another exemption such as R&D.
If it has been determined that the contractor is providing services to the

government, emphasis is placed on reviewing expense purchases as well as
asset acquisitions. Expense purchases examination includes both direct
charges to the contract and indirect charges.
Sample periods should be chosen to include a fair representation of contract

activity during the audit period. One of two methods may be utilized to
conduct an examination of direct charges. A criterion for selecting a method is
for the auditor to determine the number of contracts as opposed to the
volume of purchase invoices. If the number of contracts to be reviewed is
minimal, one method would be to examine the SOW for each contract prior to
reviewing purchase invoices. Should the auditor determine that a particular
contract is for the provision of a service, any purchases of tangible personal
property directly charged to that contract would be taxable to the contractor
absent an R&D exemption. If a specific contract is for the procurement of
tangible personal property, the inventory items can be purchased tax-exempt
with an ST-10 form.
An alternate method is to first examine purchase invoices prior to reviewing

the contracts. This approach would be appropriate should the number of
contracts be voluminous, or in those cases when the auditor has been denied
access to the contracts for reasons such as lack of security clearance. This
method would involve listing any direct charges as taxable to the contractor
until the appropriate contracts are reviewed to determine the "true object."
When listing the purchase exceptions it is important to include the contract

number and as much information as possible, such as the following (non-
inclusive):
- account number
- purchase order number
- cost center number
- department number
- invoice number
Additionally, a complete description of the item being purchased will expedite

completion of the audit.
Page - 5
As mentioned previously, in the absence of a security clearance, classified

contracts may not be available for review by the auditor. In this situation, the
auditor should consult the audit supervisor for guidance. The "burden of
proof" ruling provides that the "burden of proof" is on the business to show
that a particular transaction is exempt from tax. In the absence of proper
records/documentation, the Department can hold the transaction as fully
taxable. The audit supervisor may, therefore, decide to include all purchases
of tangible personal property charged to the classified contract as taxable to
the contractor. The other option is for the audit supervisor to assign a
Department employee with appropriate security clearance to review the
classified contracts and determine the tax implications.
A careful analysis of contracts is essential. In many cases, contractors

erroneously believe that they are exempt from Virginia sales and use tax due
to their contractual relationship with government agencies. In addition, some
contractors have operations in multiple jurisdictions with differing tax
implications which contributes to the contractor's misunderstandings. Also,
government contractors are sometimes authorized to access government
funds through a procedure known as "advanced funding." The U.S. Supreme
Court has ruled in United States v. New Mexico, et al, that "immunity does not
result merely because the tax is paid with government funds through such a
procedure as 'advanced funding'." In these situations, the auditor should
carefully scrutinize the contract between the United States and the contractor.
Should the contractor exercise control over the funds, the exemption afforded
to the government does not extend to the contractor (see P.D. 91-247). The
auditor must have knowledge of the government contractor's total operations
in order to ensure proper application of the tax.
It is important to note that in determining the “true object” of a contract, the

Department has consistently ruled that the determination is made at the
overall contract level and not at the “task” level. Tasks under a contract can
and do have their own statements of work, and the contractor may supply the
auditor with the statement of work for the task that the property is purchased
under rather than the overall contract.
There is, however, a January 4, 2001 ruling (PD 01-6) that identifies a
government contracting situation where the auditor would apply the “true
object” test at the task level rather than the contract level. The following is a
description of this contracting arrangement.
ID/IQ (Indefinite Delivery / Indefinite Quantity Contracts)

A brief description of ID/IQ contracts and how the auditor should recognize
and handle sales tax issues is included here. It is recommended that the
auditor review PD 01-6 to gain a more complete understanding of the subject.
Page - 6
The basic contracting arrangement involves the government contractor,

General Services Administration (GSA), and GSA’s client agencies
(government agencies). GSA will execute a very broadly written contract with
a government contractor – the ID/IQ contract. This contact can include hourly
rates for labor categories along with other general provisions for supplies and
services and will specify that all supplies and services will be ordered by
individual delivery orders (tasks). After this broad contract between the
contractor and GSA is executed, the contractor can solicit GSA’s client
agencies for business or the client agencies can approach the contractor to
arrange for supplies or services addressed in the overall contract. If a client
agency and the contractor agree to do business, the work (which may be for
the provision of property, services, or both) will be provided to the client
agency under authority of individual delivery orders or tasks.
It should be noted that there can be many tasks or delivery orders under a
single overall contract between GSA and the contractor. Additionally, there
can be multiple client agencies doing business and letting out tasks under the
contract.
Based on PD 01-6, the Department has ruled that in the contracting

arrangement described above, the application of the “true object” test will be
based on individual delivery orders or tasks and not on the underlying
contract between GSA and the contractor. If the “true object” of the delivery
order issued pursuant to the GSA contract is for the provision of services, the
Taxpayer will be deemed the user of consumer of all tangible personal
property used in performing the services. If, however, the “true object” of the
delivery order is for the sale of property to the government, the Taxpayer may
purchase that property exempt of tax for resale.
Again, the auditor is encouraged to review PD 01-6 for additional information

regarding this area of government contacting.
Forest Products Tax
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Forest Products Tax
Objective: Discuss the application of Forest Products Tax.
I. References
A. Code of Virginia Section: 58.1-1600 thru 58.1-1622
B. Virginia Regulation: § 630-19-100 thru § 630-19-1622

23 VAC 10-350-10 thru 10-350-190 (as of January 1,
1997)
C. Ruling Letters: PD 95-51 Purchaser of chips is not subject to tax
D. Returns: Form 1034 Forest Products Tax Return

Form 1035 Forest Products Tax Return (Small
Manufacturers and certain Small Severers)
II. General
A. The Forest Products Tax is a miscellaneous tax that is imposed on the

manufacturer in Virginia who will change the state of the forest product
(tree) that was harvested in Virginia into a usable product or the shipper
of the forest product that was harvested in Virginia that is shipped out of
Virginia.
B. A manufacturer for forest products purpose is the person who operates a

sawmill for the sawing of logs into rough lumber and its various sizes and
forms, or who operates a cooperage mill, veneer mill, excelsior mill, paper
mill, chip mill, chemical plant or other means for the processing of forest
products into products other than lumber. For the purpose of this tax,
manufacturer also includes the person who purchases from the person
who severs cross ties, switch ties, mine ties, mine props and other forest
products used in the connection with mining and piles and poles (except
fish net poles). Furthermore, a manufacturer includes the severer of post,
fuel wood, fish net poles and similar products. A manufacturer for
Forest Products Tax might not be the same as a manufacturer for
sales tax!
Forest Products Tax
Page - 2
C. If the manufacturer, as listed above, is not in Virginia then the tax is

payable by the shipper. A shipper is any person in this state who sells or
ships outside the state by railroad, truck, barge, boat or by any other
means of transportation any forest product or products in an
unmanufactured condition, whether as an owner, lessee, woodyard
operator concessionaire, agent or contractor.
D. Forest products include logs, timber, puplwood, excelsior wood, chemical

wood, wood chips, bolts, billets, crossties, switch ties, mine ties, poles,
piles, fuel wood, post, all cooperage products, tan bark and any and all
other types of forest products, except dead chestnut wood.
E. The Forest Products Tax is not applicable to any forest products

harvested outside of Virginia nor on forest products manufactured in
Virginia from timber harvested from outside of Virginia.
F. There are two exemptions for Forest Products Tax:
1) Forest products that are cut by an individual owner from their own
property for their own use. Own use means in the construction or repair of
their structures, buildings or improvements; or for their home consumption
(i.e. firewood); or for use by them in processing their farm products.
2) Forest products that are severed and used by the State educational
institutions for the experimentation in teaching about forestry if the
product is severed from land owned by the state.
G. Every taxpayer that is subject to Forest Products Tax is required to keep

their records for three (3) years following the date the tax is reported. The
records must separate the forest products into the various categories on
which the tax applies. It is a class 4 misdemeanor for any person who
fails to file a return, keep the required records or refuse to permit
examination of their records.
The following are the tax rates for forest products:
products tax rates

lumber pine-$1.15 per 1000 feet board measure
hardwood-22.5¢ per 1000 feet board
measure
logs pine-$1.15 per 1000 feet log scale

other species-22.5¢ per 1000 feet log scale
veneer logs pine-$1.15 per 1000 feet log scale

other species-22.5¢ per 1000 feet log scale
Forest Products Tax
Page - 3
pulpwood, excelsior wood, pine-47.5¢ per standard cord of 128 cubic ft

chemical wood, bolts and other species-11.25¢ per standard cord of
billets, fuel wood and other 128 cubic ft
products customarily sold by
the cord
chips manufactured from pine-.986¢ per 100 lbs.

round wood and customarily other species-.234¢ per 100 lbs.
sold by the pound
railroad crossties pine-3.8¢ per piece

other species-1¢ per piece
post, mine ties, mine props, pine-4' or less, 38¢ per 100 pieces
round mine collars and other other species-4' length or less, 9¢ per 100
types of timber used in pieces
connection with mining and pine-over 4' but not over 8', 61.75¢ per 100
ordinarily sold by the piece pieces
other species-over 4' but not over 8',
14.25¢ per 100 pieces
pine-over 8', 76¢ per 100 pieces
other species-over 8', 18¢ per 100 pieces
t/p may elect to pay taxes on

products in this item as follows:
pine-$1.045 per 1000 lineal ft.
other species-24.75¢ per 1000 lineal ft.
pilings and poles of all types 2.31% invoice value f.o.b. loading point
keg staves pine-3.8¢ per standard 400" bundle

other species-1.5¢ per standard 400"
bundle
keg heads pine-11.5¢ per 100 heads

other species-4.5¢ per 100 heads
tight cooperage 4.5¢ per 100 staves
tight cooperage 9¢ per 100 heads
any other type of forest the Tax Commissioner shall determine a

product not enumerated fair unit tax rate, based on the cubic foot
above wood volume relationship between the
product and the cubic foot volume of
Forest Products Tax
Page - 4
1000 ft board measure of pine when the

product is pine or on the unit rate of
hardwood lumber when the product is a
species other than pine
annual tax for small 300,000 to 500,000 board feet-$460.00

manufacturers of rough less than 300,000 board feet-$230.00
lumber
There is a provision for alternative rates in the regulations booklet. This

provision is for use if the General Assembly fails to appropriate from the
general fund an amount at least equal to the revenue estimated to be
collected from the pine reforestation program. Please see the regulation
booklet for these rates.
III. Procedures
When doing a sales & use tax audit on a business that sells or buys any of
the items listed above then the forest products tax may apply.
Some of the businesses that will be subject to the forest products tax:
Loggers: If they sell chips to anyone whether the chips will be used as fuel,
landscaping or any other type of use. If they ship whole logs to
anyone outside of Virginia. If they sell firewood directly to a
consumer.
Sawmills: If they buy whole logs from a logger or woodyard.
Woodyards: If they ship any of the whole logs to a concern outside of

Virginia. If they sell chips from a whole tree.
Papermills: If they buy the whole logs from the logger or woodyard.
A manufacturer that uses logs as their raw material will be prime candidates
for paying the forest products tax. The tax is computed on board feet or on
weight, depending on the product, being manufactured or shipped. Most logs
are bought by a weight measure. This will need to be converted into a board
feet measurement for some of the tax rates. There is currently no standard
conversion rate. The manufacturer that you are auditing will need to give you
the board feet or measurements for each product being taxed.
Forest products tax is a Quarterly tax. The quarters end on March 31, June
30, September 30 and December 31. The tax is due within 30 days of the end
of the quarter. Some small manufacturers can pay an annual tax. The tax
for these dealers is due within 30 days of the last day of December.
Forest Products Tax
Page - 5
You will need to account for which locality the forest product was
manufactured in or shipped out of. At least 50% of the tax collected is to
returned to the locality from which the tax was collected.
Currently there is no audit report for forest products. When doing an audit
use the forest products tax return, Form 1034 or 1035, depending on the size
of the business. The interest can be computed manually or thru STARS.
Penalty may apply but the regulations do allow for the penalty to be waived
at the Department of Taxation's discretion.
MEDICAL FACILITIES / PROVIDERS
Page - 1

Medical Facilities/Health Care Providers
Revised 8/2006
Objective: Discuss the application of sales and use tax as it applies to hospitals,
hospital cooperatives and hospital corporations, nursing homes, clinics, homes for
adults and physician offices.
I. References
A. Code of Virginia Section 58.1-609.7 (1) (4) (12)

58.1-609.8 (10)
.
B. Virginia Administrative Code (VAC 10-210-710)

(VAC 10-210-720)
(VAC 10-210-2060)
.
C. Applicable Case law
Northern Virginia Doctors Hospital v. Department of Taxation -

Exemption for drugs sold to a for-profit hospital by a pharmacy upon
written order of a physician.
Bluefield Sanitarium, Inc. v. Department of Taxation - Taxability of

drugs purchased by a for-profit hospital's pharmacy for distribution by
work order of physician to patients.
Chesapeake Hospital Authority v. Department of Taxation - The

nonprofit hospital exemption applies to a nonprofit hospital’s purchases
of raw food products for preparation by its dietary department for
consumption at the hospital facility by medical staff, hospital meeting
participants and volunteers. (P.D. 03-42)
Effective 7/1/2004 – expansion of the nonprofit exemption to include all

nonprofit organizations (including medical facilities & organizations) which
quality will be issued an exemption letter which exempts all their
purchases of TPP.
D. Ruling Letters
Memorandum (12/10/80) - Definition of clinic
P.D. 86-112 - Meal sales to taxable facilities for consumption by their

residents
Page - 2
P.D. 86-116- Determination of whether clinic is an integral part

92-220 of a nonprofit hospital
95-131
P.D. 87-204 - Taxability of nonprofit hospital cooperative and

87-291 corporations
94-74
94-150
P.D. 88-151 - Taxability of "Group Medical Practice" as a clinic
P.D. 88-166 - Purchases of oxygen by a nonprofit nursing home are

not deemed to be exempt D.M.E.
P.D. 89-254 - Sales of controlled drugs to various medical facilities
P.D. 91-43 - Sales by nursing homes of supplies to its residents
P.D. 92-97 - Drug purchases by clinic through affiliated pharmacy
P.D. 92-172 - Taxability of purchases by home health care operation
P.D. 93-46 - Taxability of a "life care facility's" non-licensed portion of

operations
P.D. 93-82 - Intermediate care facility licensed by the Virginia

Department of Mental Health and Mental Retardation
P.D. 95-70 - Food and meal purchases by nonprofit hospital

consumed by individuals other than its patients
P.D. 95-309 - Purchases by taxable nursing home of vaccines to

vaccinate employees
P.D. 96-64 - Taxability of dietary/nutritional supplements

P.D. 00-89 - Taxability of profit home care cooperative formed by
Nonprofit hospitals
D. Exemption Certificate –
The ST-13 has been revised as of July 2001 and should be used by the
specific purchasers listed and for the specific items and products listed on
the exemption certificate form. The ST-13 should not be used by nonprofit
hospitals, nonprofit hospital cooperatives and nonprofit hospital
corporations, nonprofit nursing homes, nonprofit adult homes, and other
nonprofit medical facilities that are entitled to exemptions. These entities
Page - 3
are provided an exemption letter and registration number by the

department, which should be provided to their vendors to make tax-
exempt purchases.
Effective 7/1/2004 – all nonprofit organizations that qualify for the

expanded Non Profit exemption must apply and obtain the Non Profit
Exemption Letter from TAX. This letter should be provided to their
vendors to make tax-exempt purchases.
II. Generally
A. Hospitals/Nursing homes (profit and not for profit) - Nonprofit hospitals

and nonprofit licensed nursing homes are exempt on purchases for their
own use and consumption, while profit hospitals and nursing homes are
taxable on all purchases of T.P.P. used or consumed in connection with
their operation (except items which specifically qualify for exemption such
as DME, medicines & drugs) Any divisions making sales must register as
a dealer and collect and pay the tax. Effective 7/1/98, all purchases of
nonprescription and proprietary medicines are exempt regardless of the
purchaser. Effective 7/1/00, the medicines and drugs exemption was
expanded to include medicines and drugs purchased by any licensed
hospital. Effective 7/1/06, the medicines and drug exemption was again
expanded to include for-profit nursing homes, clinics and similar
corporations (see Controlled Drugs/Medicine Procedures)
B. Hospital Cooperative and Hospital Corporations - Only nonprofit

cooperative and hospital corporations who provide services exclusively to
nonprofit hospitals are exempt from the tax. All others are taxable.
C. Clinics - Only clinics which are an integral part of a nonprofit hospital or

itself licensed as a hospital and conducted not for profit are exempt. All
other clinics are subject to tax except for items exempted under other
code sections.
D. Home for Adults (profit and not for profit) - Only nonprofit homes for adults
as defined by Virginia Code Section 63.1-172A are exempt. All other
homes for the care and maintenance of children, adults and other
persons are taxable.
E. Physicians Offices - Physicians are considered the consumer of all

purchases used in providing their medical services. There are three main
exceptions to this - purchases of controlled drugs and dialysis equipment/
supplies used in their practice, purchases of nonprescription and
proprietary medicines and purchases of exempt durable medical
equipment when purchased on behalf of a specific patient. Any physician
Page - 4
who regularly makes sales of T.P.P. must register as a dealer and collect
and pay the tax on retail sales.
NOTE: All facilities, regardless of the taxability on all other items, may
purchase hemodialysis and peritoneal dialysis equipment and supplies
exempt of the tax. This does not include general supplies but supplies
specifically for dialysis equipment and treatment.
NOTE: There are also exemptions for other specific nonprofit medical
facilities, refer to 58.1-609.7.
NOTE: Effective 7/1/98 all nonprescription and proprietary medicines will
be exempt from sales and use tax. “Nonprescription drugs” include any
substance or mixtures of substances containing medicines or drugs for
which no prescription is required and which are generally sold for internal
or topical use in the cure, mitigation, treatment, or prevention of disease
in human beings. “Proprietary medicines” are any nonprescription drug
sold to the general public under the brand name or trade name of the
manufacturer and does not contain any controlled substance or
marijuana. The exemption does not apply to cosmetics.
NOTE: The auditor needs to keep in mind that although a medical facility
may be deemed taxable – other exemptions such as those under
Controlled Drugs or DME may apply.
Ill. Procedures
OVERVIEW: In examining various medical facilities, it is important to

understand the changes, which have occurred in the last decade in the health
care industry. In the past, it was common to perform an audit on an
independent medical facility. With the trend in recent years changing towards
the concept of "Managed Health Care", there are many more multi-level
health care corporations involving many types of health care facilities. The
following is an organization chart typical of such an organization:
[-----------Hospital [-----Outpatient Clinic

[ [------------------------ [-----Exercise Facility
[ [-----Diagnostic Laboratory
Parent------- [
[-----------Physicians Offices
[-----------Nursing Homes
[-----------Medical Services
[
[ [-----Retail D.M.E. Store
Page - 5
[ [-----Urgent Care Centers

[------------------------ [-----Home Health Care
[-----Physicians Billing Company
[-----Doctors Paging Service
It is imperative to ascertain whether the entities are profit or nonprofit as

this will determine the taxability of the entity. The auditor should examine
the state licenses (i.e. Department of Health, Department of Social
Services) held by any of the facilities. The auditor must examine the
relationship between the various entities to determine the taxability of
each facility and possible taxable transactions between them. In addition,
the organizational chart, federal tax returns, chart of accounts and
general ledgers can assist the auditor in the determination of taxable
areas. Also, an examination of all the tax registrations, both sales tax and
withholding, will assist in this analysis.
A. Hospitals and Nursing Homes - (Profit and Not for Profit)
Profit - Profit hospitals and profit nursing homes are taxable on all
purchases of tangible personal property used in the provision of their
medical services. Effective 7/98 purchases of nonprescription and
proprietary medicines are exempt regardless of the purchaser. Also,
effective 7/00, the exemption for medicines and drugs have been
expanded to include purchases by any licensed hospital. The exemptions
for durable medical equipment and prosthetic devices would still apply for
purchases made on behalf of individuals. The purchases of prescription
medicine and drugs by profit hospitals prior to 7/00 are taxable. The
purchases of drugs by profit nursing homes prior to 7/06 are also
taxable. When any of the divisions or departments are selling T.P.P., it
must register and collect the tax.
One clarification needs to be made regarding the acquisition of blood

products from the American Red Cross. This transaction is to be treated
as a nontaxable service. The Red Cross obtains the blood from donors,
screens the blood and then separates it for distribution to various medical
facilities. In addition to blood, the charges in connection with tissue,
bones and organs are nontaxable services.
Nonprofit - A non-profit hospital or nursing home is exempt on all

purchases of tangible personal property for use in providing their medical
services. Any purchases of controlled drugs are exempt and purchases
of D.M.E. and prosthetic devices are also exempt whether purchased for
a specific patient or in bulk. As with for-profit, when any divisions or
departments are selling T.P.P., it must register and collect the tax. Also,
the department's policy of performing three year audits on any nonprofit
Page - 6
organizations must be followed. There are still areas in which a nonprofit

hospital or nursing home could have liability.
A 2001 court ruling in Chesapeake Hospital Authority v. Department of

Taxation applies the nonprofit hospital exemption to a nonprofit hospital’s
purchases of raw food products for preparation by its dietary department
for consumption at the hospital facility by medical staff, hospital meeting
participants and volunteers. The exemption does not apply to catered
meals purchased by a nonprofit hospital from an outside vendor.
Therefore, the auditor should sample such catered transactions from
outside suppliers to determine if liability exists in this area.
The auditor should note that external transfers or sales from the hospital
or nursing homes to other entities (related and non-related) could be
taxable as well. If the transfers are to inter-related companies, the
transfers are usually handled internally with the transactions posted in the
general ledger
The sale of fixed assets is also an area of possible liability for nonprofit
hospitals and nonprofit licensed nursing homes. The sale would be exempt
if they met the "occasional sale rule" of three or less sales per year. With
constant changes in technology, many medical facilities are continually
updating their equipment. Sometimes, these are sales to related
companies, both exempt and taxable.
Another area for these nonprofit facilities to incur possible liability is in the
sale of T.P.P. Some departments may go beyond their services to the
hospital and make sales to other entities. In addition to services, they
could also have sales of printing or audio-visual slides. If this is the case,
then the hospital's department or division must be registered and
instructed in the proper method for charging and reporting sales tax.
Most likely, the purchases would have been bought exempt under the
hospital exemption, so only the sales would have to be examined. This
does not negate the exemption for the operating expenses of this
department or division of the nonprofit facility.
With regards to nonprofit nursing homes, it is important to compare their

licenses with the total operation of the facility. As related to P.D. 93-46,
only licensed nursing homes and homes for adults licensed with the
Virginia Department of Social Services are allowed the exemption. In this
case, part of the nonprofit care facility, the cottages, were not licensed as
either. Therefore, a portion of their purchases was assessed as
consumable to the taxable cottages. Pro-ration, based on the number of
cottage residents to total residents was used when the taxpayer could not
substantiate who had consumed certain purchases. In some nursing
Page - 7
homes, only a portion of their available beds is licensed and this same
auditing procedure would be applicable.
B. Hospital Cooperatives and Hospital Corporations
In order to qualify for the exemption, the taxpayer must be organized as a

nonprofit hospital cooperative or a nonprofit hospital corporation and
structure its operations to provided services exclusively to nonprofit
hospitals. The exemption shall not apply when services of any kind or to
any extent are provided to other than nonprofit hospitals. There have
been many cases where a taxpayer met one of the two qualifications but
was denied the exemption because they did not meet both.
While determining the first qualification, the structure of the organization,

is relatively easy; the second stipulation may require more investigation.
The auditor must look at the taxpayer's A/R ledgers and billing records to
determine who the corporation is actually servicing. There have been
several cases where exemption was denied due to the nonprofit hospital
cooperative or corporation providing what may have seemed
inconsequential services to other entities.
There have been several documented cases involving nonprofit hospitals

grouping together to procure and operate M.R.I. equipment. In one case,
the nonprofit hospitals formed a general partnership and therefore, it was
not entitled to the exemption (P.D. 87-204). In addition to this point, the
partnership planned on providing services on an outpatient basis for
which patients were billed directly. As such, the second qualification, of
providing services exclusively to the nonprofit hospitals that created it, did
not apply as well. In P.D. 87-291, the taxpayer was comprised of four
nonprofit health care systems. It was a nonprofit organization and was
organized as a corporation, therefore the first test for exemption was met.
This letter further clarifies the second portion of the exemption in that the
taxpayer should make all billings for M.R.I. services directly to nonprofit
hospitals rather than the individual patients served by the hospitals. The
ruling also notes that the exemption does not apply if services are
provided to nonprofit health care organizations other than hospitals.
In other situations, a nonprofit corporation was organized as the

controlling affiliate (parent corporation) for several nonprofit hospitals and
also the sole member of various other nonprofit health care related
organizations. The exemption was denied because its activities go
beyond the ownership and support of nonprofit hospitals (P.D. 94-74). In
P.D. 94-150, a nonprofit corporation which provided billing services for
four nonprofit hospitals was denied the exemption because the
corporation also contracted with physicians of the hospitals to provide
services. Therefore, both tests for qualification had not been met.
Page - 8
C. Clinics
There are only two instances in which a clinic will qualify for the sales tax
exemption. If a clinic is conducted not for profit and is licensed as a
hospital by the Department of Health, it will qualify for this exemption. All
profit clinics are subject to the tax. The only other situation in which a
clinic will be eligible for the exemption is when the clinic is an integral part
of a nonprofit hospital. The relationship between the clinic and hospital
must be examined to make this determination. Several areas which must
be analyzed are the corporate structure, billing practices and the question
of whose credit is bound. The physical location of a clinic in relation to its
affiliated hospital may be part of the analysis but is not a determining
factor (P.D. 93-82).
In P.D. 92-220, a pediatric outpatient clinic, exempt from federal income

taxation under 501(c)(3), was deemed to be an integral part of a nonprofit
hospital and therefore extended the exemption. The clinic was not
separately incorporated but rather was a part of a nonprofit hospital.
This ruling further denied exemptions to some separately incorporated
nonprofit affiliates which supported the clinic and its operations. Another
ruling, P.D. 86-116, emphasizes that though a nonprofit clinic and
nonprofit hospital have a close working relationship, this alone does not
render the taxpayer an integral part of the hospital. Although the clinic
had both financial and contractual ties to the nonprofit hospital, it was a
separate corporation and therefore, was not an integral part of the
hospital.
In some audits, determining whether a medical facility is a clinic or a

group physician's practice will have a significant impact on the taxability
of bulk purchases of controlled drugs. If the facility is a clinic, not
qualified for the exemption, then all bulk purchases of controlled drugs
are taxable (prior to 7/06) In contrast, a group medical practice can
purchase drugs for use in the professional practice exempt from taxation.
Basically, the physician's exemption for controlled drugs applies
regardless of how the practice is organized as long as the shareholders
and operators are all licensed physicians engaged in the practice of
medicine.
Some taxable clinics actually have "mini-pharmacies" in their locations as

a convenience to their patients. When their physicians write a
prescription, the patients can elect to have it filled by this internal
pharmacy. In order for the "retail" drug exemption to apply, the seller
must hold a special certificate from the Board of Pharmacy which allows
them to "sell" drugs. Normally, a clinic's pharmacy is not licensed as
noted above and only provide this service to their own patients. This is
Page - 9
considered an extension of their medical services and the clinic would be

taxable on all bulk drug purchases (prior to 7/06)
D. Home for Adults (Profit and Not For Profit)
This exemption applies only to homes licensed as a home for adults by

the Virginia Department of Social Services and conducted not for profit.
Any home, profit or nonprofit, which is not licensed as noted, and
provides the care and maintenance of children or other persons, are
taxable on all purchases of tangible personal property. Some retirement
communities operate several types of facilities within their organization. A
close examination of their licenses will assist the auditor in determining
which portions, if any, are subject to the tax (P.D. 93-46).
E. Physicians Offices
Generally, physicians offices are considered the consumer of all tangible

personal property used in providing their services. There are three main
exceptions to this - purchases of controlled drugs and dialysis equipment/
supplies used in their practice, purchases of nonprescription and
proprietary medicines and purchases of exempt durable medical
equipment when purchased on behalf of a specific patient. The
physician's exemption for controlled drugs applies regardless of whether
the practice is organized as a sole proprietorship, partnership of
professional corporation, or any type of corporation in which the
shareholders and operators are all licensed physicians engaged in the
practice of medicine. Physicians may also purchase durable medical
equipment or prosthetic devices on behalf of a specific patient. Bulk
purchases of D.M.E. or similar devices are subject to the tax even if they
are later dispense to or modified for specific patients.
Physicians who regularly engage in the sale of T.P.P. must register for
sales tax and collect and remit the tax based on those sales. Some
physicians, because of their rural location, will obtain a license from the
Board of Pharmacy, in effect acting as pharmacists. In cases such as
this, the physician may purchase items for resale but must report any use
tax on items (except controlled drugs) for use in his professional practice.
Also, some dermatologists offer skin care and cosmetic products to their
patients. These products are not deemed to be drugs or medicines and
the sales are not considered part of their medical services. Therefore, the
dermatologist is operating as a retailer and must register to collect the
tax. Another example of taxable sales is the selling of vitamins, minerals
or nutritional food supplements in conjunction with a physician's weight
loss program. (P.D. 96-64).
Page - 10
(NOTE: Additional information on medicines, controlled drugs, and

D.M.E. purchases on behalf of a specific patient are addressed in that
section of the training manual.)
V. Use of ST-13 Exemption Certificates
The ST-13 has been revised as of August 2001 and should be used by
the specific purchasers listed and for the specific items and products
listed on the exemption certificate form.
The ST-13 should not be used by nonprofit hospitals, nonprofit hospital

cooperatives and nonprofit hospital corporations, nonprofit nursing
homes, nonprofit adult homes, and other nonprofit medical facilities that
are entitled to exemptions. These entities are provided an exemption
letter and registration number by the department which should be
provided to their vendors to make tax exempt purchases.

Page - 1
Sales and Use Audit Procedures

HOTELS, MOTELS, TOURIST CAMPS, ETC.
Objective: Discuss the application of sales and use tax as it applies to

Hotels, motels, tourist camps, etc.
I. References
A. Code of Virginia Section- 58.1-203. Regulations and rulings. and 58.1-
609.5(8) Service exemptions. (8) " the sale or charges for any room or
rooms....for more than ninety continuous days..." of the Code of Virginia
B. Virginia Administrative Code 23 VAC 10-210-730. Hotels, motels, tourist

camps, etc.
C. Ruling Letters
-P.D. 96-306, 96-295, 95-172, & 88-72, Charges for long-distance phone
calls taxable
-P.D. 97-229, 97-150 90-225, Lodging Federal Employees, taxable
-P.D. 91-143, Temporary Lodgings of Shipbuilders, taxable
-P.D. 98-206 & 92-120, Comprehensive List of Transactions Related to
Hotels w/references
-P.D. 97-229, 97-150 & 93-133, Use of Credit Card by Government
Employee - taxable
-P.D. 96-55 & 93-167, Hotel Contract with Government Agency, taxable (less
than 90 days)
-P.D. 96-23 & 94-60, Meals furnished to non-restaurant employees
-P.D. 94-107, Purchases with I.M.P.A.C. Credit Card, exempt, 4/12/94
-P.D. 96-379, 96-295, 95-322 & 95-17, Green fees in connection with hotel
services
-P.D. 96-3, Reservation services, taxable
-P.D. 98-148, 97-229, & 96-23, Meals and lodging sold to state and local
employees
-P.D. 98-206 Rental of Property
-P.D. 99-221 Ice sculptures
-P.D. 99-31 Internet, Special event services
-P.D. 98-117 Amenities, Complimentary breakfast
-P.D. 99-254, 98-31, 95-237, 90-32, 88-41, 84-262 & 82-205 Conference
room rentals
-P.D. 95-307 & 86-156 Veterans Organization, Lodgings and
Accomodations
-P.D. 96-3, 91-219 & 87-268, Transient Accommodations--Food Purchases
of Bed and Breakfast Inns
-P.D. 92-120 & 88-41, Transient Accommodations--Setup Charges,
-P.D. 98-148, 96-135, 90-208, 89-291, 88-277 & 88-121, Virginia and its
Page - 2
Political Subdivisions – Meals and Lodging

-P.D. 97-274, 93-177, 90-195, 90-186 & 90-23, Girl Scouts and Boy Scouts-
Purchases of restaurant or banquet meals, or hotel, motel, or
campground accommodations
-P.D. 96-297, 96-3, 95-158 & 91-219, Transient Accommodations--Bed and
Breakfast Operation
- ST-10- Resale Exemption Certificate- may be use by registered dealers to

purchase items that are for resale
- ST-12- and "supported by the required official purchase order"
** Diplomats may be exempt in certain instances. See Diplomatic Exemption

Program form (rev. 4/98)
* * Exempt Federal Government Credit Cards. Information to follow.
E. Additional Reference Source--Northern VA Office, Michael H. Mitchell,

CPA , Senior Auditor and other audit staff members, extensive
guidelines on hotels & motels, they have most exposure to both
diplomats and various governmental employees
II. General
A. The tax applies to the sale or charge for any room or rooms, lodgings or
accommodations furnished to transients by any hotel, motel, inn, tourist
camp, tourist cabin, camping grounds, club, extended stay hotels, or
other similar place. The tax applies to all sales of tpp by such
businesses.
“Corporate housing” refers to apartment units in residential apartment

buildings that have been furnished and offer a wide range of a la carte
furnishings and service options. Guests have the comforts of home in a
private residential setting, typically with a 30-day stay.
“Serviced apartments” operate more like a hotel, with onsite hospitality

staff, a 24-hour front desk, daily maid service, and accommodations for
both daily and longer stays.
B. Accommodations furnished for 90 continuous days. The tax does not

apply, however, to rooms, lodgings or accommodations supplied to a
guest for a period of 90 continuous days or more. The 90-day continuous
stay is not restricted to the same room. After a transient has occupied a
room or received other accommodations for 90 continuous days or more,
Page - 3
the dealer furnishing the room or other accommodation may refund any
sales tax actually collected from the person. In filing a subsequent return
with the Department of Taxation, the dealer may deduct from gross sales
in the place provided the amount of the charges for which the tax was
refunded.
Agreements for the availability of a certain number of accommodations of

90 days continuous days or more are exempt at the time of the
agreement.
C. Charges in connection with accommodations. Any additional charges

made in connection with the rental of a room or other lodging or
accommodations are deemed to be a part of the charge for the room and
are subject to the tax. For example, additional charges for movies, local
telephone calls and similar services are subject to the tax. Charges for
television programming by satellite or cable made to hotel customers are
exempt provided that the charges are separately stated and title to the
receipts vest with the provider (and not the hotel) at all times. In such
event, the receipts are not a part of the overall compensation the hotel
receives from the rental of the rooms; rather, the hotel is merely the
collection agent of the provider. (PD 86-117)
D. Purchases. Purchases of furniture, fixtures, linens, towels, carpeting,

drapes, and amenities for use in guestrooms (i.e. toiletries such as soap,
shampoo, etc.) are taxable at the time of purchase. This would also
include flowers used for decoration, which are later kept by the guest.
Purchases of audio visual equipment, or rental for subsequent rental to

guest (without operator), are for resale, provided that the price charged by
the hotel for the accommodations will not depend on any A/V equipment
provided to the guest. The hotel must make a separate charge to the
guest for providing A/V equipment and collect the tax on that charge. (PD
95-287)
Newspapers and magazines distributed for free, and purchased by

subscription directly from the publishers, are not subject to the tax. (PD
91-188)
E. Computerized reservation systems. The charge to a hotel, motel or

similar business for a computerized reservation system which includes,
within a single contract, the provision of a printer or similar hardware and
a charge for the use of the system based upon frequency of usage or
number of rooms, is deemed to be a service transaction. There is no tax
is applicable to charges for such service. The entity providing the service
must pay tax on any tpp used in the provision of the service.
Page - 4
III. Procedures
The auditor should look for any exempt sales that a hotel or motel makes
to confirm whether they should have been exempted. In particular sales
to governmental employees or agencies or Nonprofit Organizations
should be examined. State and local governmental agencies or
employees are not exempt on their purchases of hotel or motel meals or
lodging, P.D. 88-72 "No exemption is provided for state and local
government employee purchases of meals or lodging whether purchases
are pursuant to required official purchase orders or not." This differs from
the law on Federal Employees.
Federal Employees are exempt from tax on meals and lodging only under
certain circumstances. An exemption is provided for federal government
purchases of meals and lodging when they are made pursuant to official
purchase orders or with an official government credit card that bills the
government directly.
Look for an St-12 with a required official purchase order attached for sales
to federal agencies. The purchase must be made by the federal
governmental agency itself, where the government is directly billed or the
proper government credit card is used. What is an acceptable
governmental credit card? Acceptable cards are an American Express
Card with the Exempt prefix numbers 3783 9...which indicates a card that
is directly billed to the government, although it will still have the name of
the employee on the card at the bottom left. Also, an I.M.P.A.C. Visa
card issued in the name of the United States is acceptable. It is not
required that a TP maintain a copy of the card in their Certificate of
Exemption file.
Many governmental employees are issued governmental credit cards, but

this does not mean they are exempt from meals and lodging. This card
will look just like an exempt card except for the number (the first 5 prefix
differs) for example may read 3783 7(taxable card) versus 3783 9
(exempt card--with the 3783 9 prefix) both cards will have the individuals
name and the agency they represent. The taxable cards (3783 7) are
used by the employees and they are subsequently reimbursed by their
agency, but the government is not directly billed.
Foreign Diplomats may also be exempt to various extents on their

purchases and the auditor should look for the Office of Foreign Missions
US Department of State cards. Each card is color coded with a stripe that
distinguishes various level of exemption. Each TAX District Office has a
copy of the Department of State form that has examples of the cards.
The tp should obtain the exemption card number from diplomats,
annotate it on the record of the sale, and a photocopy of the diplomat's
Page - 5
exemption card is desirable, but not required provided that the number
has been annotated. Foreign diplomats who qualify for the exemption on
taxable services are exempt when hosting a group of non-diplomats.
(P.D. 95-17)
Most Nonprofit Organizations are taxable on purchases of meals and

lodging. Exemption certificates should be examined closely to see if the
wording for the particular organization includes services or meals and
lodging. The Red Cross is treated as a federal governmental agency,
subject to the same rules as federal agencies and use of the ST-12.
Scouting organizations are not exempt from the tax on restaurant or

banquet meals and hotel, motel or campground accommodations. There
is no general exemption from the Virginia retail sales and use tax for
nonprofit organizations. A hotel that sold meals and lodging to nonprofit
organizations was subject to sales tax even though the organization held
an exemption certificate since meals and lodging are not considered
tangible personal property, but rather, taxable services. However, if a
organization qualified for an exemption from tax for services, and the
certificate contained language to that effect an exempt sale would be
valid. Churches are taxable on purchases that do not meet the wording
of their exemption certificate. Therefore, based on strict construction, tpp,
meals, and services used outside of the public church buildings are
taxable.
Schools enjoy several exemptions, which are detailed in another section

of this manual. Generally, they are taxable on meals and lodging. An
exception to this would be an organization such as "Close Up". This is a
"Education institute" that teaches civics and meets all the criteria of
"certain educational institutions" specified in the regulations under
schools. They are exempt on both tpp and services i.e.. lodging and
meals when the property or services are purchased by the educational
institution. ***Remember, that "Educational institutions" are distinct from
"Schools and colleges". Schools and colleges are taxable on meals and
lodging.
Areas in sales that have been problems in prior audits include: catering,
equipment rentals, telephone charges, and miscellaneous items.
Catering is covered in another area of this manual, but it involves issues
related to taxable services provided in conjunction with the sale of tpp and
the gratuity issue of discretionary (non-taxable) versus non-discretionary
(taxable).
Equipment rented by a restaurant for its own use in preparing and serving
meals, such as kitchen equipment, tablecloths, and similar items are
taxable and may not be purchased under a Certificate of Exemption.
Page - 6
Also, the tp should apply tax to the total charge for an event including the
cost of labor, equipment, supplies or other services provided in
connection with its catering service, whether separately stated or not.
Look for add- on- costs by hotels for various services connected to the
sale of lodging or accommodations. Sales price is defined in VAC 10-21-
4000 as , "the total amount for which tpp or taxable services are sold and
includes any services in connection with such sale." Examples would be:
added charges for movies (other than nontaxable programming),
telephone charges other than long-distance toll charges, whale watching
fees, golf fees etc. if they are sold in connection with the room rental.
Toll charges for long-distance telephone calls (without markup) are not
subject to the tax. However, additional charges for telephone calls are
subject to the tax. The auditor should inquire as to how the hotel or motel
bills for telephone calls. A company may have additional charges added
on to the billing for number of calls made, local charges for long distance
calls, and various other similar charges associated with the phone usage.
Toll charges for long distance calls are charges made by the long
distance carrier and are independent of the local call charges. An
examination of a bill from the phone company will itemize toll charges for
long distance calls. Additional amounts billed by the hotel are taxable.
The auditor should examine billings from the telephone company to the
hotel/motel and compare them to the taxpayer’s charges to their
customers. Look for any telephone charges made to the customer that
are not long distance toll charges. Also, it would be helpful to look at
information brochures etc. that a hotel/motel makes available to their
guest. Usually, they will give information as to the company's policy and
procedures in terms of phone charges and usage that will identify any
charges associated with phone calls.
Many hotels and motels use computerized reservation systems. The

charge for a computerized reservation system which includes, within a
single contract, the provision of hardware and charges for the use of the
system is deemed to be a service transaction.
Exemptions for employee meals pertain only to meals furnished to

restaurant employees as part of wages. Meals provided by employers to
other than restaurant or food service operation employees are subject to
the tax.
Purchases of food and non-alcoholic beverages for the preparation of

complimentary breakfasts are not taxable. These items can be
purchased with a resale exemption certificate, since the costs of the
complimentary services are included in the taxable room rental charges.
Page - 7
Corporate Housing/Serviced Apartments
The new global economy has a highly mobile workforce. More

companies are placing staff and consultants on “short-term assignments,”
a corporate term for a business trip that is more than one month but does
not require relocation. The growth of this form of travel has spurred
demand for a new lodging product – corporate housing/serviced
apartments. Analysts speculate that the potential for this type of lodging
is between 10 to 15 percent of the total hotel demand.
Hospitality companies may operate in one or more of the following:
1. The company may own an entire apartment community.

2. The company may lease a block of apartments in an established
residential apartment community.
3. The company may have an agreement with select residential
apartment communities to lease apartments on a “as needed”
basis.
The department has previously determined that only a person primarily

engaged in the business of “regularly” furnishing accommodations to
transients must collect the tax on such occasional rental of an apartment
for less than 90 days to represent the “regular” furnishing of transient
accommodations.
The department has been consistent in not applying the tax to such
rentals pending the establishment of definitive policy guidelines.
The department is currently reviewing its policy with respect to this issue,
and until any change in this policy is finalized and communicated to the
industry, NO TAX SHOULD BE ASSESSED ON SUCH RENTALS.
Computers
Page - 1

COMPUTERS
Objective: Discuss the application of sales and use tax to computer hardware and
software.
I. History
Prior to July 1, 1986: Computer programs sold as tangible personal property

and related services were taxable.
Effective July 1, 1986: Custom programs are considered to be services and

tax exempt. Prewritten ("canned") computer programs are taxable; however,
the separately stated charges for modification of prewritten programs are
exempt.
Effective January 1, 1996: Maintenance contracts invoiced on or after 1/1/96

which provide for both replacement parts and labor are subject to tax upon
one-half of the total charge. Prior to this date, tax applies to the total charge
for such contracts.
II. References
A. Code of Virginia Sections 58.1-602 and 58.1-609.5(6)(7)(9)
B. Virginia Administrative Code VAC 10-210-760 through 766; VAC 10-210-

840; VAC 10-210-910; VAC 10-210-920; VAC 10-210-3070 through 3074;
and VAC 10-210-4040.
C. Ruling Letters: Public Documents 86-169; 87-88; 87-209; 88-20; 88-211;

88-339; 89-179; 91-20; 91-102; 91-190; 91-256; 92-196; 93-157; 93-230;
93-237; 94-12; 94-70; 94-209; 94-251; 95-30; 95-134; 95-286; 96-14; 96-
66, 96-193.
D. Memorandum from Steven Schwartz dated April 9, 1992.
E. Virginia Tax Bulletins: 86-5 and 95-8
F. Applicable Exemption Certificates: ST-10 and ST-11

Computers
Page - 2
III. Definitions, ref: VAC 10-210-763
A "custom program" is a computer program that is specifically designed and

developed only for one customer.
A "prewritten program" is a computer program that is prepared, held, or

existing for general or repeated sale or lease, including a computer program
developed for in-house use and subsequently sold or leased to unrelated third
parties.
IV. General
The sale, lease, rental, or licensing of prewritten programs sold in tangible

form is taxable. Custom software programs are specifically excluded in the
Code of Virginia from the definition of tangible personal property. As a result,
custom software is treated as a non-taxable service. The definition of a
custom program does not include modifying a prewritten program or
combining two or more prewritten programs.
Tangible personal property used in the development of custom software

qualifies for the research and development exemption if it is used directly and
exclusively in the development of the software. Custom software is not
tangible personal property and cannot qualify for the industrial manufacturing
exemption.
The production of prewritten software for sale or resale qualifies for the
industrial manufacturing exemption. The research and development
exemption applies to the purchase of equipment and supplies used directly
and exclusively in developing a prewritten software program.
Separately stated labor or service charges in connection with the modification

of prewritten computer software are not taxable. The industrial manufacturing
exemption is not available for equipment used to modify prewritten computer
software because the processing performed is not industrial in nature. The
research exemption may be available for tangible personal property used
directly and exclusively to modify prewritten software programs to perform
new tasks as described in VAC 10-210-3070 to 3074.
Maintenance contracts which include repair parts, upgrades, or updates in the

form of tangible personal property are taxable. Contracts invoiced on or after
January 1, 1996, are taxable on 50% of the total amount.
Computers
Page - 3
V. Procedures
A. Computer Hardware
The initial step in conducting an audit of a company that sells and installs
computer hardware is to schedule a pre-audit conference and a tour of
the facility. The auditor should make a determination if the taxpayer is
entitled to the manufacturing exemption.
When a computer reseller goes beyond the configuration and testing of

system components (e.g., CPU, monitors, modems, printers) and actually
integrates the system (e.g., assembling boards in CPU), they may qualify
for the manufacturing exemption as described in VAC 10-210-920. The
auditor should refer to the manufacturing regulation when examining fixed
asset and expense purchases of computer manufacturers.
Computer resellers may purchase equipment for their resale inventory tax
exempt using the ST-10. The auditor should be aware that certain
purchases charged to inventory may not be entitled to the resale
exemption. Items such as tools, cable affixed to real estate, and similar
installation materials are taxable when purchased by the retailer/installer.
Sales and purchases should be reviewed in the same manner as audits

of similar retailers of tangible personal property. Exemption certificates
should be reviewed to support any tax exempt sales.
B. Computer Software
Conducting audits of computer software dealers should begin with an

understanding of the type of software being generated and sold. The
business may provide custom, prewritten, and/or modified prewritten
software programs.
Custom software is designed and developed for only one customer and is
considered a non-taxable service. Sales of additional copies of custom
software are taxable. Custom programs originally developed for in-house
use and then marketed for resale become taxable. The auditor should
review sales invoices and contracts to verify if the taxpayer is selling
additional copies. When conducting audits of custom software
developers, the major focus will be on asset acquisitions and expense
purchases.
The innovative technology regulation (VAC 10-210-760 through 766)

allows for the research and development (R&D) exemption on purchases
made for use directly and exclusively in the development of custom
software; such purchases do not qualify for the manufacturing exemption.
Computers
Page - 4
The auditor must take special care in classifying purchases for the R&D
exemption. Equipment must be used directly and exclusively in R&D
(e.g., software used to write new code) to enjoy the exemption.
Equipment used to encode the diskette with a program that has already
been developed, or hardware used by researchers for use in software
development and also for administrative purposes (e.g., word processing)
is taxable.
The auditor should note that the current R&D regulation allows for
"de minimis" usage. In accordance with VAC 10-210-3071, when
research property is used in a taxable manner, it will continue to be
exempt from the tax if the taxable use is de minimis in nature. Taxable
use of the property is considered de minimis if the taxable usage of the
property (i) does not involve a continuous or ongoing operation; (ii) does
not follow a consistent pattern, i.e., weekly, monthly, quarterly, etc.; (iii) is
occasional in nature, occurring no more than three times; and (iv) in total,
accounts for no more than three days.
Computer hardware with mixed usage (taxable and exempt) is not

exempt under R&D. The software installed on this same equipment and
used directly and exclusively for R&D would meet the requirements for
exemption. To determine the exclusiveness of hardware, the auditor can
request a tour and visually check the software installed on the equipment.
This will assist in determining if the equipment has other uses, such as
administrative. Also, the auditor should ask questions as to who has
access to a system. If a PC is networked to a system used by the entire
staff and not strictly R&D engineers, the system will not qualify for the
exclusive use status. The auditor should analyze software purchases for
exclusiveness by obtaining descriptions of usage from purchase orders,
reviewing account codes charged, and interviewing the contact person.
Prewritten ("canned") software is developed for repeated sale or lease

and considered taxable. The combining of two or more prewritten
programs is not considered custom. The auditor should examine the
sales for tax application; exemption certificates should be reviewed to
support exempt sales.
Development of prewritten software for sale or resale qualifies for the

industrial manufacturing exemption. Tangible personal property used
directly in the production of the software can be purchased exempt.
However, computer software developed for in-house use is not
considered industrial manufacturing. The tax applies to the sale of
prewritten programs. Separately stated charges for the modification or
alteration of the program would be exempt. In addition, separately stated
installation charges would also be exempt.
A prewritten ("canned") program, which is sold and transferred over data

lines rather than in tangible form, is an exempt transaction.
Computers
Page - 5
C. System Sales
Initially, the auditor should determine whether a business that provides

integrated systems is a retailer and/or manufacturer and if custom and/or
prewritten programs are being developed. Sample periods should be
selected with consideration given to types of sales. The auditor may
need to review more sample periods to ensure that all types of sales are
included in the audit.
When a computer reseller purchases a software license and resells

copies, consumer use tax is due on the original license fee as it is not
being resold. The dealer must collect tax on the sale of the copies
delivered on tangible media.
If a dealer installs a system and lap links the installation of the software
along with the customer receiving tangible copies of the program, then
separately stated charges for the program are taxable.
Labor charges (e.g., system configuration), not including installation or

modification fees, are sometimes separately stated. These charges are
considered part of the "sales price" or "gross proceeds" and would be
fully taxable. For example:
WIN 486 equipment $3,000.00 - taxable

System configuration 1,000.00 - taxable
1 pkg Lotus 1-2-3 300.00 - taxable
1 pkg Works for Windows 150.00 - taxable
3 hours modification to prewritten
program 300.00 - exempt
TOTAL $4,750.00
D. Training
Charges for training are generally exempt; however, services in

connection with a sale of tangible personal property are taxable. For
example, a sales agreement for standardized software may include
separate invoicing for on-site training, consulting services, and travel
time. As part of a sale of tangible personal property, each invoice is
taxable. (Ref. PD 96-193)
The auditor should be aware of businesses conducting training seminars

and purchasing training packages. Frequently, they pay royalties for
training books and software for each customer/student. When invoicing
for the seminars, if the materials are not separately stated and invoiced to
the customer as a taxable sale of tangible personal property, then the
business is considered the consumer of the materials and must remit tax
on the purchase price.
Computers
Page - 6
E. Repairs and Maintenance
Computer hardware maintenance and repair is taxable when parts are

included. Software maintenance may include upgrades, updates, and
support. When upgrades and updates are transferred via diskette or
other tangible format, it constitutes the transfer of tangible personal
property and is taxable. When upgrades and updates are transferred via
modem (electronically), they are not taxable. If a programmer updates/
upgrades a program without any transfer of tangible personal property,
the updating/upgrading fee is a non-taxable service.
Computer maintenance, repairs, and support can be invoiced in various

formats as follows (non-inclusive):
Hardware and software maintenance contract exempt

- labor only
Hardware maintenance contract 100% taxable prior to

1/1/96
- parts & labor 50% taxable on or after
1/1/96
Hardware maintenance contract 100% taxable

- parts only
"Time and materials" repair labor exempt, parts

taxable
- labor separately stated
"Time and materials" repair 100% taxable

- labor NOT separately stated
Software support contract 100% taxable prior to

1/1/96
- including updates, upgrades, and 50% taxable on or after
1/1/96
phone support
Software "hotline" phone support exempt

(no transfer of tangible personal property)
It is essential for the auditor to examine both the invoices and the contract
documents to properly apply the tax.
F. Licensing Agreements
Computers
Page - 7
The licensing of prewritten computer software constitutes a taxable sale

or lease when the licensing agreement conveys not only the right to use
computer software but also the software itself in tangible form. A license
agreement that includes a software program and related documentation is
subject to the tax. In addition, license fees and charges for source coding
the software are taxable.
Computers
Page - 8
G. Additional Information
Database on-line services are non-taxable. Firms offering electronic mail

and Internet access are also offering a non-taxable service and are
considered the consumer of all tangible personal property purchased in
performing these services.
Firms performing data conversion from one format to another on tangible

media are making taxable retail sales. The auditor must apply the "true
object" test to determine if the customer wants to obtain tangible property
or the company's services.
Page - 1
Leases or Rentals
Objective: Discuss the application of sales and use tax as it applies to leasing or
rental companies.
I. History
Prior to 01/01/96 . Total gross proceeds from the lease or rental of tangible
personal property were taxable.
01/01/96 and after. Separately stated transportation charges for the picking
up of leased or rented tangible personal property are exempt.
II. References
A. Code of Virginia Section 58.1-203, 58.1-602, 58.1-603,

58.1-603(2), 58.1-603(3),
58.1-609.5(7), 58.1-609.6(6), 58.1-609.10(3)
B. Virginia Administrative Code 23 VAC 10-210-5030,

23 VAC 10-210-840,
23 VAC 10-210-3030,
23 VAC 10-210-4000
C. Ruling Letters P.D. 95-189, P.D. 95-47, P.D. 91-241, P.D. 95-246,
P.D. 95-223, P.D. 87-241, P.D. 89-139, P.D. 94-90,
P.D. 91-266, ADMN RUL 55-85, P.D. 96-66
E. Applicable exemption certificate ST-10-For companies engaged in the

lease or rental of tangible personal property.
III. General
A. A person engaged in the business of leasing or renting tangible personal

property (TTP DEFINED CODE OF VIRGINIA 58.1-602, VR 630-10-
Page - 2
102.1,23 VAC 10-210-5030) to others is required to register as a dealer
and collect and pay the tax on gross proceeds (DEFINED CODE OF
VIRGINIA 58.1-602,VR 630-10-57,23 VAC 10-210-840).
B. Tangible personal property for future use by a person for taxable lease or
rental may be purchased tax exempt under a certificate of exemption
(CODE OF VIRGINIA 58.1-609.10(3),VR 630-10-57,23 VAC 10-210-
840,ST-10 EXEMPTION CERTIFICATE).
C. The term "lease" or "rental" does not include the leasing, renting or
licensing of copyright audio or video tapes and films for public exhibition
at motion picture theatres or by licensed radio and television stations
(CODE OF VIRGINIA 58.1-609.6(6),23 VAC 10-210-3030,VTB 95-5,ST-
20A EXEMPTION CERTIFICATE).
IV. Procedures
A. When auditing look for all untaxed charges on invoicing. Reading the lease
or rental agreement can help determine what charges the lessor has agreed
to pay.
B. Some examples of taxable gross proceeds charges.
1. Finance and interest charges. (CODE OF VIRGINIA 58.1-602,23 VAC 10-

210-840, 23 VAC 10-210-4000, P.D. 95-189).
2. Insurance charges. (CODE OF VIRGINIA 58.1-602, 23 VAC 10-210-840(A)

and (B), P.D. 95-47).
3. Personal property tax charges. (CODE OF VIRGINIA 58.1-602, 58.1-

603(2), 23 VAC 10-210-840(A) and (B), P.D.
91-241).
4. Assembly and disassembly charges. (CODE OF VIRGINIA 58.1-602,

23 VAC 10-210-840, 23 VAC 10-210-
4000,P.D. 95-189).
5. Fees to pick up leased property . Taxable until 1/1/96 after 1/1/96 exempt
if separately stated. Fees to pick up lease payments are taxable
(VIRGINIA TAX BULLETIN 95-7, P.D. 95-246).
Page - 3
6. Combined lease of real and personal property. The portion of the lease
payment attributable to personal property is taxable. A taxpayer who cannot
determine the taxable portion of the lease payment may pay the tax on 28%
of the lease payment for restaurant operation. (CODE OF VIRGINIA 58.1-
602, 23 VAC 10-210-840, P.D. 95-223.
7. Charges for parts used to repair leased equipment when the repair was
performed by the lessor and billed to the lessee. CODE OF VIRGINIA 58.1-
602(17),58.1-603(3), 23 VAC 10-210-840,23 VAC 10-210-4000, P.D. 87-241).
8. Leases or rentals of machinery or equipment without operator is taxable,

with operator exempt. (CODE OF VIRGINIA 58.1-608(2), 23VAC 10-210-840,
P.D. 89-139).
9. Lease purchase agreement typically occurs when taxpayer contracts with

a financing company to purchase equipment and lease the equipment to the
taxpayer. Usually at the end of the lease, taxpayer has an option to purchase
the equipment. (CODE OF VIRGINIA 58.1-602, 23 VAC 10- 210-840,P.D.94-
90).
10. Lease-backs occur when a taxpayer purchases tangible personal

property, sells the tangible personal property to another company, and leases
the property back from the company.
If the taxpayer purchases the property, makes no use of the property, sells
the property to another company, and leases the property back from the
company, the taxpayer may purchase the property exempt of the tax using
form ST-10. The lease payments for the property is taxable.
If the taxpayer purchases and uses the property, he must pay the tax on the
purchase price of the property. If at a later date, he sells the property to
another company and enters into a leaseback arrangement, he must pay
the tax on the lease payments. Because two separate transactions have
occurred, there would be no relief from double taxation. (CODE OF VIRGINIA
58.1-609.10(3), P.D. 91-266, ADMN RUL 55-85).
10 (A). Conditional sales contracts and lease agreements. Under conditional

sales contract, title passes to the buyer automatically in the same manner
as any other sale of tangible personal property. In a lease agreement the
payments are spread over the term of the lease, and title does not pass
to the lessee. For sales and use tax purposes, a conditional sales contract
is treated in the same manner as any other sale of tangible personal
property, while the tax payments on a lease are spread over the term of the
lease. (P. D. 96-263)
Page - 4
11. Computer software licensing fees are taxable. (CODE OF VIRGINIA 58.1-
602, 58.1-609.5(7),58.1-603, P.D. 96-66).
Convenience Stores
Inadequate Records/Purchase & Sales Mark-Up
Objective: Introduce the auditor to areas of consideration, audit techniques and

procedure for convenience stores.
I. History
Convenience store growth is increasing; there was a 5-percent increase in

store count in 1999 for a total of 119,400 nationwide according to a census
performed by Trade Dimensions. Convenience Store News, a trade publication,
reports an increase of 18-percent between the years 1995 and 1999. Convenience
store sales increased by $48 billion to $234 billion in 1999, a 25.8-percent jump. A
convenience store may sell anything from gasoline to live plants to farm supplies to
money orders.
II. References
A. Convenience Store News, “Industry Report 2000”

B. Virginia Administrative Code 23 VAC 10-210-340 Collection of the tax by
dealers.
C. Purchase Markup P.D. 00-46, 99-28, 97-303, 97-298, 95-320, 94-213
D. Sales Markup P.D. 98-72
E. Virginia Tax Bulletin 99-11 Food Tax Reduction Program. Note: The rate
reduction scheduled for April 1, 2001 did not take effect due to revenue
requirements.
F. Rentals: VAC 10-210-840, P.D. 99-22, 84-89
P.D. 91-166 ATM Machines
P.D. 91-98 Tanning bed rentals
G. Virginia Tax Bulletin 98-4 Nonprescription Drugs: Nonprescription Drug
Exemption Teleconference Questions and Answers Summary.
III. General
Because of the wide variety of items sold at a convenience store, these audits
present a challenge. Preaudit activities are important to give a “heads up” on
the operations. The dealer may be on a commission basis for gasoline,
newspaper sales, vending machines. Some departmentalized areas such as
books and magazines or hardware may be on a consignment basis.
Page - 2
It is characteristic of convenience stores to make purchases such as bread,

milk, snacks, etc. from the cash drawer. Some convenience stores are on a
program with a convenience store specialty supplier for their grocery
purchases. Grocery items may be prepriced when they are delivered. A
convenience store may purchase some items from chain grocery stores when
they run specials for resale at their “convenience” pricing.
Most convenience stores sell lottery products. Usually, there is a separate

cash register for lottery and a separate bank account from which drafts are
made in payment of lottery purchases. Lottery sales mayor may not be
included in gross sales on the sales tax return.
Most convenience stores now serve prepared food and prepackaged foods as
well. Be aware of the Food Tax Reduction Program which may affect how
sales are reported. Reference: Tax Bulletin 99-11, Question and Answer
Summary-Food Reduction Program.
Video rentals and tanning bed rentals are also seen occasionally at
convenience stores. There are also a growing number of convenience stores
with ATM’s located in the store.
IV. Procedures
A. Pre-Audit Activities
Schedule returns information from 5-03 screen
Request a copy of the income tax returns for the years being audited from
Central Files
Request ABC reports to use in comparing purchases/sales, if needed
Request lottery sales/purchase information from Department of Lottery, if
needed
Visit the store to observe - store location (is it in a high traffic area?), store
layout, vending machines located outside the premises, number of gas
pumps, etc.
Develop a questionaire containing information about the business, how the
records are kept, etc. (see example)
Develop a unit price list from which mark-up will be figured (see example)
Develop a records request
B. Areas of Consideration
A comparative review of sales reported by year and an analysis of the
income tax returns are very advantageous in determining potential audit
issues. Compare the figures reported on the sales tax returns with the
income tax return and note any differences. Use these differences to
compare lottery and gasoline sales to Department of Lottery records and
Page - 3
records that the taxpayer may have. Does the income tax return show a
loss or profit? If the return shows a loss, how did the taxpayer live?
Determining the Percentage of Markup will give a possible indication that

either cost of goods is overstated or sales are understated. A tendency to
understate sales rather than overstate costs is usually encountered.
Computing the Percentage of Markup is a good way to determine if an
audit will be productive. Using the income tax returns, compute the
Percentage of Markup for each potential audit year in the following
manner:
Gross Sales – Cost of Goods Sold = Percentage of

Cost of Goods Sold Markup
Example: Gross Sales of $19,645.44 with a Cost of Goods Sold of

$15,348.00 equals 28% (.28) markup.
How does each year compare with the other? Care must be taken to
observe whether supplies are included in Cost of Goods Sold or
separately claimed as operating expenses as this may affect the markup
percentage. Our experience has shown that the Percentage of Markup
for convenience stores after allowance for theft is generally above 25%.
Use this percentage as a guideline when figuring the markup on the face of
the income tax return. If the percentages are below this range, chances
are that an audit is warranted.
C. The Initial Interview

The initial interview is important in determining how you proceed with the
audit. Conduct the initial interview with the owner. If the owner does not
work in the store, the manager, or person who is responsible for the day to
day management of the store should also be interviewed. Ensure that
questions are specifically stated and geared directly toward the taxpayer’s
situation. It is a good practice to pre-plan your questions prior to your
meeting with the taxpayer. Allow for expected and unexpected responses.
Ask open-ended questions, requiring a response other than yes or no, to
allow the taxpayer an opportunity to respond to the questions, and allow
you an opportunity for follow-up questions or responses. Document
taxpayer responses accurately in your workpapers. Have the taxpayer
sign a copy of your questionaire that he did respond in the manner that
you recorded. It is important to tie down all known sources of income
during the initial interview.
Ask the taxpayer what his percentage of markup is. Ask what items he
sells the most. Does the taxpayer accept food stamps? What portion of
his sales does he believe are attributable to food stamps? How are
inventories valued? If there is a deli in the store, ask how selling prices
Page - 4
are determined. What does he think the markup is on the deli? Deli
markup can be as much as 200% and is most always 100% and greater.
Agree upon a reasonable percentage of markup for the deli. Ask about
whether deli supplies are taken from the store inventory and how deli
sales are handled (remember there may be a local food tax issue in
addition to the reduction of state sales tax issue).
After the initial interview, complete your unit price schedule. Walk around
the store, recording the selling price of a sampling of items from the
various departments. Convenience stores usually sell more cigarettes,
beer, and soft drinks, so be sure to get unit prices of most brands in these
categories.
D. Reviewing the Records

Many small businesses use a single entry bookkeeping system. This
system may consist of a ledger, journal, and cash book or only a cash
book. If the taxpayer has this sort of books, you will need to examine
purchase invoices, bills, receipts and cash register tapes.
Among the items that should be requested from the taxpayer are purchase
invoices received from his suppliers and cash tickets for purchases paid
for by cash. Prepare a spreadsheet for each year showing vendor by
month. Scheduling a year’s purchases on a spreadsheet will allow you to
spot any “holes” in the purchase pattern. As you schedule the invoices,
notice how often the beer vendor, bread vendor, grocery vendor, etc.
service the store. This will also assist you in determining if you have all
the invoices. If there are missing purchases, contact the vendor to get
their accounts receivable history on the taxpayer. Make a separate
schedule for deli purchases as the markup for deli is much higher than the
rest of the store.
Note that many suppliers who specialize in convenience stores show the
markup on their invoices. As you examine these invoices look for any
equipment purchases or supply purchases which may have been made
from these suppliers. In examining the overall purchase invoices, you
may also find items purchased for the taxpayer’s own use which have
been included in the records of the business.
Use invoices within the past one or two months to complete your unit price
list cost side. This will pair the sales/cost prices. Figure the markup
percentage on each item and and average overall markup. How does this
compare with the analysis of the income tax return and the percentage the
taxpayer gave you?
As a cross check, examine cash register tapes. Look for suspicious

“Voids” and “No Sale” rings. One experience with a taxpayer showed as
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many as fifty “No Sale” rings per day. His explanation of “keeping the
keys in the cash register” didn’t pan out when it was found that his markup
percentage was less than 15%.
A bank deposit analysis may also be helpful. Sales of equipment or other

fixed assets which may be taxable may be uncovered in this analysis.
Compare bank deposits (allow for deposits in transit) plus cash paid outs
with sales reported; and with your marked up sales.
. E. Making the Adjustment

Once you feel you have all the purchases and have determined a
reasonable overall average markup, you can use your purchase
schedules to compute taxable sales. To purchases from your purchase
schedules, add beginning inventory at cost and subtract ending inventory
at cost. The result is cost of goods sold for the year. Inventories are
shown on the income tax return in the cost of goods sold section.
You can use the overall average markup percentage to mark up the
purchases; or mark them up by category. For example, if your purchase
spreadsheet shows the purchases are heavily weighted toward beer and
cigarettes, you may use an average of all the beer markup percentages
for beer purchases; an average of all the cigarette markup percentages for
the cigarette purchases; and the remaining overall average on the balance
of purchases. An example using overall markup percentage to mark up
the purchases is as follows: Purchases totaling $15,348.00 marked up
28% (.28) would equal sales of $19,645.44. Computation would be
$15,348.00 X 1.28 = $19,645.44
Be sure to make an allowance for theft. One to three percent of

purchases is usually adequate depending on store size. If the taxpayer
says he has had break-ins, he should have a copy of a police report as
documentation. Show these adjustments as a reduction of cost of goods
sold on your working papers. Also ask about withdrawals from inventory
for his own use which would be taxable at cost.
Mark up the deli purchases using the markup you agreed upon with the
taxpayer. If deli purchases are withdrawn from inventory, you must
agreee on an amount with the taxpayer and then mark it up.
Enter the difference between your marked up purchase schedules and

taxable sales reported on the return by month. Remember to include
other outright taxable sales such as video rentals.
Penalty would apply for sales tax collected but not remitted.
F. Sales Markup
Page - 6
Occasionally, when comparing income tax returns to sales tax returns, the
sales reported on the income tax return is greater than reported on the
sales tax return. After an analysis to determine if there were commissions
or other income included in the sales which should be separated, a sales
markup may be done.
The difference between the income tax return sales and sales tax return
sales may be spread evenly throughout the twelve months; or allocated by
month based on your analysis.
Penalty would apply for sales tax collected but not remitted.
In an instance where the sales tax return sales are greater than the
income tax return sales, an adjustment to the income tax return would be
warranted if no explanation can be given.
Page - 7
Examples of Interview Questions
1. When did you begin your business?
2. What is your expertise/experience in this field?
3. What is your educational background?
4. Who usually operates the business? Who operates the business when the usual
operator is on vacation or sick?
5. How many locations do you have?
6. Did you acquire or dispose of any business assets during the past three years?
7. Do you own or rent the real estate? How much is the rent?
8. What types of products do you sell? Do you rent videos, tanning beds, or any
other tangible personal property?
9. What are the hours and days of operation?
10. How many employees or independent contractors do you have? Family

members? Duties of each? How do they get paid; by the hour, week, etc.? By
cash or payroll check?
11. Do you keep tabs or accounts for any customers?
12. What are the hours of the deli? What do you sell the most of from the deli?
13. How do you account for sales taxes on a daily basis?
14. What types of reports are prepared for the business? Who prepares them?
15. What type of records are available for purchases?
16. Do suppliers offer kickbacks or rebates? How are they recorded?
17. What type of payment is accepted? (i.e. cash only, credit cards, checks, food
stamps, WIC coupons, trade coupons)
18. How many bank accounts (checking & savings) do you have, both business and
personal?
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19. What are the sources of funds deposited into each account? Were there regular
transfers between accounts?
20. Did you have any income which was not deposited in a bank account?
21. How much money do you keep in the register(s)?
22. Who makes the deposits?
23. What percentage of cash receipts are deposited?
24. Is any cash removed for personal use or expense?
25. Did you borrow any money for business or personal use during the year?
26. Do you have any non-taxable sources of income?
27. What method of accounting do you use? Cash, accrual, other
28. What type of bookkeeping system do you keep?
29. Who maintains the daily accounting records? Is this the same person who does
the banking?
30. What records are used to prepare the sales tax returns?
31. Who prepares the sales tax returns?
32. Are all sales included in the gross sales reported?
33. What is the mark-up percentage for sales? Deli? Other?
34. What inventory valuation method is used? Cost? Lower of cost or market?
35. How often is an inventory taken?
36. Do you have food stamp sales? Do you have records of the dealer’s
reimbursement?
37. Has there been any theft or loss of product or other property?
38. Do you “give away” any products?
39. Do you remove any products for personal consumption?
40. Do you keep track of how many deli items are sold each day?
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41. Who has access to the cash register(s)?
42. Is access to the register tapes restricted? To whom?
43. Are beginning and ending cash register transaction numbers compared?
44. Is the cash reconciled to the register tapes and deposited to the bank intact?
45. How are expenses for the business paid?
46. Are any expenses paid in cash? If so, how are these amounts accounted for?
Example of Unit Price List
Item Shelf Price Cost Price Markup
Pepsi 20 oz 1.09 .69 .579

Pepsi 2 liter .99 .58 .706
Dr. Pepper 16 oz .89 .48 .854
Budweiser 12/6 cans 3.29 2.21 .488
Budweiser 12/24 cans 5.99 3.84 .559
Pet Milk 1/gal 2.39 1.99 .201
Kraft Cheese 10/slice 1.89 1.58 .196
Chef Boyardee Spagetti 1.59 1.31 .213
18.12 12.68 .429

Manufacturing and fabricating
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Manufacturing and Fabricating

manufacturers and fabricators
I. History
Since Sales & Use tax Inception in 1966 hundreds of audits, taxpayers letters,
commissioners rulings, and many court cases, producing millions of dollars in
audit assessments, have been based upon the Virginia code sections
pertaining to manufactures and fabricators, The Virginia Manufactures
Association, along with other interested parties, and the department have
traditionally worked together in producing the laws, rules and regulations
governing these exemptions. In recent years only rules and regulations have
been reinterpreted or clarified based on commissioners rulings. There have
not been any changes to the law regarding these two types of activities during
the current statue of limitations periods available for audit . For purposes of
explanation current rules and regulations categorize manufacturing activities
under three areas: administration, production and distribution.
II. References

B. Virginia Administrative Code 23 VAC 10-210-920 &
23 VAC 10-210-560
C. Ruling Letters (with public document numbers if applicable)
P. D. # or Date: Other type of document: Subject:
• 86-46 Ex prod forms,monitors
• 86-98 Packaging-containers
• 87-167 Production records
• 87-274 Repackaging
• 88-17 Cad/Cam-computers
• 88-127 Inventory withdrawals
• 90-15 Swatch cards
• 91-183 Steel, platforms, etc
• 91-291 Cad/Cam-computers
• 92-65 Maint gen & exempt
• 93-135 Quality control
• 93-238 Cooling tower chem
• 94-276 Truck/pit scales
• 95-43 Steel, platforms, etc
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• 95-140 Storage tanks

• 95-278 HVAC equipment
• 3-28-83 Commissioner's Ruling Boiler chemicals
• 8-03-89 Technical Servs. letter Bar coding
• 9-29-92 Commissioner's Ruling Boilers/air handling
• 3-08-88 Technical Servs. letter Spray booths
• 1-13-88 Technical Servs. letter Plant site
• 9-23-88 Technical Servs. letter Quality control/testing
• 11-08-82 Commissioners Ruling Fire Protection/prevent
• 10-24-85 Commissioners Ruling Production forms
• 1996 CCH 64-352 Pollution control
St-11, St-11a
F. Definitions and explanations of key terminology.
• TPP-Tangible personal property.

• Sic codes-The Standard Industrial Classification Manual. This manual
may be used by the auditor to help determine if a particular business
activity is deemed to be industrial in nature and entitled to the
processing exemptions. The SIC code is listed on the Federal
Corporate Income tax return and also is available on the STARS
system on the 2-03 screen. Generally businesses that fall in codes 10-
14 and 20-29 are deemed to be industrial in nature.
• Manufacturing-for purposes this training document, shall include
processing, converting and fabricating (other than fabricating for ones
own use or consumption).
• Fabrication- The act of changing the physical state of TPP.
• Fabricating for own use or consumption-is not considered an
exempt activity. For example, a welder who fabricates iron railing at
his shop then installs them on the steps of an office building would not
be entitled to the exemption. The Welder acted as a real estate
contractor when he installed his fabricated items at the job site. Under
Virginia regulations a contractor is considered the user or consumer of
the TPP they affix to real property.
• Administration-there are no available processing exemptions in this
area that includes: pre-production activities, marketing, managerial,
record keeping and non operational aspects of manufacturing.
• Production-The production line of the plant starting with the handling
and storage of raw materials at the plant site and continuing through
the last step of production where the product is finished or completed
and conveyed to a warehouse at the production site.
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• Distribution-the storage, distribution and transportation of goods after

the production process. No manufacturing exemptions apply under
this category. For example packaging equipment used to strap
products for shipment that are not utilized at the final stage of
production, but are used to package products after they have been
conveyed to a finished goods warehouse for later shipment are not
exempt.
• Quality control-particular industries may use different terminology
such as QC or Quality assurance to denote this function . Generally
QC is limited to production line testing. This means that to qualify for
exemption the TPP used in QC must act directly on the product during
the integrated manufacturing process. Off site testing or testing of
finished products in the warehouse would not qualify for exemption.
Testing or monitoring of manufacturing equipment is not considered an
exempt activity.
• Research and development-items that are used exclusively (100%)
in developing new or improving existing products. Improving
equipment or machinery efficiency is not considered to be an exempt R
& D function.
• Preponderance- by law the taxability of a particular item that is used
both in a taxable and exempt manner is based upon its preponderance
or percentage of time used in exempt Vs nonexempt activities . For
example a forklift used more than 50% of the time in the handling of
raw materials while being utilized in the warehouse for shipping less
than 50% of its usage would be exempt. Generally preponderance
only applies to identifiable single items of machinery, equipment or
repair parts. Items that are not singular in nature like mass purchases
of safety apparel such as gloves, or fuel used in processing as well as
for heating are not considered for preponderance of use. For these
types of items a percentage of taxable vs exempt usage may be used
to determine the taxable amount of a particular purchase of TPP.
• Plant site- the exemption is limited to the particular singular plant
location in a specific geographic location.
• Stores and/or stores accounts- Generally manufacturers physically
warehouse (store) at the plant site repair parts (spares), small tools,
maintenance and housekeeping supplies. For cost accounting
purposes these items are charged to a suspense or prepaid expense
accounts. When the items are withdrawn from stores the appropriate
account or cost center is charged with the cost of the items withdrawn.
This account must be carefully analyzed to determine if the sales tax or
use tax accrued is accounted for correctly
• Pollution control- Pollution control facilities certified by the state
certifying authority, The Department of Environment Quality (DEQ) are
exempt. Only facilities that abate water or air pollution to the
environment are considered for the exemption. DEQ forwards a copy
of the certification to TAX . Tax then notifies the Taxpayer that they
Page - 4
are entitled to the exemption. To qualify for exemption the Taxpayer

must have this approval letter from the Department.
• Used directly- When used in relation to manufacturing, processing,
refining, or conversion, refers to those activities which are an integral
part of the production of a product, including all steps of an integrated
manufacturing or mining process, but not including ancillary activities
such as general maintenance or administration.
III. General
A. The production exemption for fabricators and industrial manufacturers is

broad and complex. The exemption applies to raw materials, machinery,
manufacturing tools, repair parts, and fuel. Supplies used directly in
manufacturing , safety wearing apparel furnished gratuitously to
production employees, packaging materials, and TPP used directly. The
area that exemptions are applicable begins with the handling and storage
of raw materials at the plant site and ends with the finished product being
placed in the warehouse or plant storage area. Just because items of
TPP are used in these specified areas does not mean that they are
exempt. The exemption applies to only those items used directly in a
integrated manufacturing process. The key to determining what is
taxable or exempt during manufacturing is what is used or not used
directly in the integrated process. For example, plant lighting in
processing areas is not considered to be exempt as it does not act
directly on the product.
IV. Procedures
Fabricators and manufacturers are a diverse group. The Items produced

and the processes involved vary from one manufacturer to another.
There is no set way to audit a manufacturer. The auditor and audit
methods utilized must be flexible. Generally the auditor will look at the
following areas( this list is not all inclusive): sales, expensed purchases,
fixed assets, stores, withdrawals from inventory and intercompany
accounts.
Several things need to be done before the auditor begins to examine

specific records at the audit site. The auditor needs to meet with the
taxpayer's representative in order to ascertain exactly what is
manufactured . A tour of the plant site should be scheduled so that the
auditor has an idea of processes involved.
It should be determined that all the records necessary for the audit are
available at the audit site. Inquiries should be made to determine that all
purchasing functions for the audit site will be reviewed. Be on the lookout
for purchases made by out of state corporate headquarters for a Virginia
Page - 5
plant site. Ask for general ledgers to check for journal entries used to
record purchases and intercompany transfers. Be aware that taxpayers
could be making payments by electronic transfer which does not require
paper invoicing. Also be aware that manual checks may be utilized for
payment of some types of transactions. Purchase orders and the voucher
register( if applicable) should be reviewed to determine if all purchase
records are seen by the auditor.
A chart of accounts or general ledger with a brief explanation should be

used to help determine the taxability of audit exceptions. For fixed
assets, work in process, or capital projects a list of open and closed jobs
for the audit period should be obtained from the taxpayer.
The taxpayer's accrual system for use tax should be reviewed. If the
taxpayer files a sales tax return or a direct pay return, these should be
examined for correctness.
A review of the Federal and State Income Tax returns before starting the
audit will give you details about corporate officers, Social security
numbers, subsidiary companies and various other helpful facts (be sure
to update stars information if necessary) . The review of the income tax
return may disclose a problem resulting in an income tax audit.
Application of law and regulation--Administrative
Administration is the managerial, sales, and nonoperational aspects of

manufacturing and processing operations. TPP used in administrative
activities are subject to the tax. Listed below are various questionable
items found when auditing manufacturers:
1. Production records are taxable to a manufacturer. The recording

charts and recording equipment which are use to generate production
data from production equipment are taxable. Computer hardware and
software in the manufacturing area that records production information is
also taxable. (PD 86-46 & 87-167)
2. TPP withdrawn from a non taxed inventory and given away is taxable
at the fabricated cost of the material. Textile manufacturers are a good
example. They withdraw material to make swatches out of, send various
lengths of material to prospective customers at no charge and also give
completed garments to various charities. (PD 88-127)
3. Catalogs and other printed material used to advertise TPP for sale and
are distributed within Virginia are taxable. Catalogs and other printed
materials distributed outside Virginia within a 12 month period are
exempt. Items in the "other printed material" category such as annual
Page - 6
reports usually will have a higher percentage of distribution in Virginia

than catalogs. Rulers, mugs or other similar items are not considered
printed material and are taxable. (PD 90-15)
Application of law and regulation--Production
Production includes the production line of the plant starting with the
handling and storage of raw materials at the plant site and continuing
through the last step of production where the product is finished or
completed for sale and conveyed to a warehouse at the plant site.
Listed below are various questionable items found when auditing

manufacturers:
1. Boiler and cooling tower chemicals used to prevent pipe and

equipment corrosion and plant growth are taxable as part of general
maintenance. The chemicals are not used directly in manufacturing, but
are used in preventative maintenance of production machinery.
(Commissioners Ruling Letter 3/28/83 & PD 93-238)
2. Structural steel used for platforms and equipment supports is taxable

unless the steel becomes a component part of exempt production
machinery and does not become permanently affixed to realty. When
freestanding steel legs or other supporting structures are attached to
exempt machinery and used solely to support exempt machinery, and the
machinery cannot be operated without such supports, then the steel is
exempt from the sales tax. (PD 91-183 & 95-43)
3. Computer hardware and software used both in taxable and exempt

manners are taxed based on their preponderance of use. (PD 90-15)
4. Swatches and swatch cards are taxable when used as a sales aids
and are not given the same exemption as catalogs. (PD 90-15)
5. Packaging materials and shipping containers are exempt whether

returnable or nonreturnable when used or consumed by an industrial
manufacturer or processor of products for sale or resale. Any packaging
or shipping container that restrains movement of the product in more than
one plane is considered packaging. (PD 86-98)
6. Bar coding equipment when used for administrative or inventory

control purposes is taxable. However, when bar coding equipment is
used directly in the production process it is exempt. (Technical Services
Letter 8/3/89)
Page - 7
7. Storage tanks used to store fuel are taxable. However, storage tanks
used to store raw materials are exempt. (PD 95-140)
8. Boilers, chillers, air handling units and cooling towers used for
employee comfort are taxable when purchased by the manufacturer or a
contractor. The same equipment would be exempt to the manufacturer or
contractor, with the use of a ST 11-A, when the equipment maintains
critical temperature and humidity for the quality of the product being
manufactured. (Commissioners Ruling Letter 9/29/92)
9. Air conditioning equipment used to cool manufacturing machinery is

taxable. (PD 95-278)
10. Cleaning supplies used in general maintenance are taxable.

However, cleaning supplies used to ensure the quality of the product are
exempt. (PD 92-65)
11. CAD/CAM computers used for design or redesign purposes are

taxable. CAD/CAM computers used to produce software which operates
manufacturing machinery is tax exempt. (PD 88-17 & 91-291)
12. Spray booths are not used directly in manufacturing and are taxable.
(Technical Services Letter 3/8/88)
13. Equipment used in a raw material warehouse not located at the

manufacturing plant site is taxable. (Ruling letter 15) (Technical Services
Letter)
1/13/88)
14. TPP used in production line testing and quality control is exempt.
The exemption is restricted to the production line. Testing prior to
manufacturing or subsequent to manufacturing is taxable. (Technical
Services Letter)
15. Hoods used to remove fumes for employee comfort are taxable.
(Commissioners Ruling Letter 12/23/87)
16. Fire prevention equipment attached to manufacturing equipment is

taxable. (Commissioners Ruling Letter 11/8/82)
17. Printed forms used directly in the production process are exempt.
Any form retained for production records is taxable. If the form is a multi-
part form, it may be a percentage taxable item. (Commissioners Ruling
Letter 10/24/85)
Page - 8
18. Computers used to monitor production equipment but don't control

the equipment are taxable. Computers used to record manufacturing
information are taxable. Computers used to monitor the product for
quality purposes are exempt. (Commissioners Ruling Letter 3/14/86)
19. Electrical items, where more than 50% of the electricity passing
through them is going to manufacturing equipment, are exempt. Where
electrical items are purchased and placed into stock, a percentage of the
stock items should be taxed.
20. Steam, air, or other process piping used more than 51% for
processes directly in manufacturing are exempt. These same items are
purchased and placed into stock, a percentage of the stock items should
be taxed.
21. Pit truck scales are deemed to be real property and the tax should be
paid by the contractor installing them. (PD 94-276) Other scales located
in the plant may be taxable or exempt based on their use. A postage
scale would be taxable. Scales used to weigh raw materials being
measured for manufacturing purposes would be exempt.
22. Certified pollution control equipment and facilities are exempt.

However, all such equipment is taxable until it has been certified. In
performing audits, you must hold this equipment taxable until the dealer
has obtained the proper certification. (CCH Reference 64-352)
23. Repackaging is industrial in nature when the packing operation

substantially increases the marketability of the product being packaged.
Any TPP used directly in the repackaging process would be exempt. (P
D 87-274)
Application of law and regulation--Distribution
Distribution is the transport or conveyance of products after the

completion of production and is not part of manufacturing or processing.
After production, if the product goes straight to a truck for shipment then
there is no taxable property used in the handling of the product.
Listed below are various items to be aware of when auditing

manufacturers:
1. Car bracing used to hold cargo in trucks or rail cars is taxable. Where
3/4" steel strapping is typically used for packaging, 1" or larger strapping
is used most of the time for car bracing. Lumber and dunnage bags are
also used as car bracing.
Page - 9
2. Forklifts used to place the manufactured product in the finished goods

warehouse are tax exempt. Forklifts used to take the finished goods out
of the warehouse for shipment are taxable. If the same forklift is used
both in a taxable and an exempt manner, the preponderance of use rule
will apply.
3. Where finished goods and raw material are both stored in the same
warehouse, any equipment used will be taxable on its preponderance of
use.
The following is a list of items that are generally taxable:
Electrical Items:
• cable trays
• F96T12CW-flourescent Lighting
• F72T12CW- fluorescent Lighting
• light bulbs
• machinery lights enabling operator to see
• Lighting Ballast
• contact cleaner
• wire markers
• Greenlee electrical tools
• voltmeters
Equipment type items:

• Hoist, cranes & chains for maintenance of production machinery
• free standing exhaust fans
• pipe cutters
• pipe threading machine
• HVAC for employee comfort
• vacuum systems for housekeeping purposes
• inventory bar code system
• computer equipment to design products
• calibration equipment
• catwalks and ladders
• repair parts and supply storage bins or racks
• Chart recorder, chart paper, and pens
• administrative computer hardware and software
• computers for inventory management
• dust covers
• guards
• wearing apparel for employee comfort
• portable dockboards
Page - 10
• raised or false flooring

• fire prevention equipment
• gas cylinder rental or demurrage charges on gas cylinders
• grinder machine and accessories used to sharpen production parts
• Pipe identification markers
• general maintenance equipment
• rail car leases
• off site packaging equipment
• off site quality control equipment
Supply Items:
• supply storage tanks
• boiler treatment chemicals
• chemical and additives that prolong the life of equipment
• fuel for comfort heating
• oil dry
• heat tape to prevent freezing
• acetylene, oxygen, argon-welding gases
Restaurant / Bars Purchase Mark-Up
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Sales and Use Audit Procedure

Objective: Discuss the application of sales and use tax as it applies to purchase
markup procedures for restaurant and bars.
I. History
The use of purchase markup procedures has always been based upon the lack of
suitable records necessary to determine sale tax due.
II. References
A. Code of Virginia Sections 58.1-633 (Records)

58.1-628 (Bracket System)
58.1-625 (Sums held in trust)
58.1-614(D) (Remit tax based on Gross
Receipts)
B. Virginia Administrative Code 23 VAC 10-210-470 (Dealers Records)

23VAC 10-210-340 (Collection of tax).
C. Ruling letters that are relevant to purchase markup procedures are:

P.D. 95-224
P.D. 95-162
P.D. 95-11
P.D. 95-61
P.D. 94-232
P.D. 94-213
P.D. 91-276
P.D. 87-183
P.D. 99-28
P.D. 97-303
P.D. 97-298
P.D. 96-287
P.D. 97-149
D. Exemption Certificate: ST-10 - For purchase of food and beverages to be

resold.
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III. General
Purchase markup procedures are resorted to when restaurant / bars have failed to
maintain suitable records for the determination of sales tax owed. The procedures
allow the auditor to estimate taxable sales by marking up purchases with ratios
derived from known cost and selling prices or industry standards. The portioned
purchases of liquor and beer, along with limited sources of supply that occur with a
bar make it especially effective. A restaurants menu, though more troublesome, will
provide good results; particularly, one which lends itself to portion control
purchasing. In addition, industry standards provide known benchmarks, which act as
a plausibility check for your results, and, may even be used alone to provide a quick
and generally accurate result.
IV. Procedures
It is already assumed that there are insufficient records maintained by the business.
Therefore, the auditor needs to ascertain what records are available that will assist
in performing a purchase markup. When mixed beverages are being sold the
business is required to file a Mixed Beverage Annual Review report with "ABC".
This is done on an annual basis. If the taxpayer does not have his most recent
reports, copies can be obtained from "ABC". The information in the report is
provided by the business and purports to be an accurate reflection of the business.
The report categorizes sales by mixed beverage, beer & wine, and food for a twelve-
month period. It also provides total purchases for each category. This information is
useful in several regards. First, it provides sales information with which to verify
what has been reported to TAX. Secondly, it provides total purchases, per category,
which is useful to have in summary form. And third, it enables the auditor to
calculate the Cost of Goods Sold for each category as reported by the business;
thereby, providing a quick figure with which to judge the reasonableness of the sales
numbers contained in the report. This in itself is a tremendous aid for the auditor.
For, given that the purchase figures are correct, the auditor may preemptively
conclude either that sales have accurately been reported, albeit with poor records
being retained, or that something is amiss and further effort is required. Thus, the
auditor has a tool that either confirms the need for a complete purchase markup or
allows for the procedure to be aborted before much effort has been expended. After
all, the auditor is most concerned with underreported sales and not just the exercise
of reconstructing sales. Except, of course, for instances where no sales have been
reported at all.
After the "ABC" report has been reviewed, purchase invoices need to be obtained.
There is only one legitimate source for liquor purchases. That is the ABC store
which serves that particular business area. Beer & wine purchases are almost
exclusively made from the few large beer & wine wholesalers that serve the area.
The business owner is required by ABC to keep liquor purchase information on the
premises. However, if it is felt that the records are incomplete or unavailable for
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review, the auditor may obtain copies of all liquor purchases from the ABC store
serving the business. This will be in the form of actual invoices showing the type,
quantity, and price of liquor purchased. In like manner, beer & wine wholesalers
may be contacted for information concerning their products. Instead of actual
invoices, they will provide summary reports showing quantities and sales dollars by
product on a monthly basis. These reports usually cover the current and prior year.
An ABC agent can facilitate gathering the aforementioned information.
Once the purchase information has been obtained, the total purchase amounts
provided on the Mixed Beverage Annual Review report can be verified. The auditor
now knows how much alcohol has come into the business and at what prices.
Therefore, it needs to be determined at what serving sizes and prices the business
sold the alcohol. This is best accomplished by interview with the business owner or
manager on the initial visit to the location. At that time, posted prices and bar setup
may be observed while discussing the following:
What serving size for liquor is used? Is it one ounce, ounce and a quarter, what?
Is a measured type of system in use or is it free pour?
At what price is liquor sold at for well, call, and premium brands?
Is there a happy hour?
Are just well brands used at happy hour?
What prices are used at happy hour?
What size glass is used for draft beer?
What size are the pitchers?
What are the regular prices?
What are the happy hour prices?
What about bottled beer?
How much is domestic?
How much is import and premium?
Are there any reduced prices with bottled beer?
Are happy hour records kept?
Are Z-tapes kept from the cash register?
Are the Z-tapes consecutively numbered?
How many cash registers are there?
How are daily sales recorded?
Are daily sheets used and maintained?
These questions provide the answers you will need to perform your calculations and
also establish the degree of record keeping the business has maintained. In order to
facilitate organizing this information the following questionnaire should be used and
then maintained as a statement of record as to certain facts pertaining to the
taxpayer’s business.
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General Audit Information Questionnaire
Business Name: _________________ Registration # ____________
Trade Name: ____________ Type of establishment: ___________
Street Address: ______________ City/Town, State and Zip __________
Type of location of establishment: _________________________________

(Shopping center, Downtown, etc…)
Days/Hours of Operation: Days ________ Hours __________ .
Food percentage sold: ____________ . Menu provided: yes ___ no ___ .

Does taxpayer have copies of old menus: yes ___ no ___ .
Miscellaneous Sales:
Cover Charges – Are cover charges imposed? yes ___ no ___ .
Records for cover charges kept? Yes ___ no ___ .
How long have cover charges been in effect? __________ .
Days / Hours cover charges are imposed: Days: _______ Hours: ______ .
Cover charge imposed: $_____ per person, $______ per couple. If different
amounts are charged for different times of days, please note: ___________ .
Is anything other than admission included in cover charges? Yes / No.

Please note: ______________ .
Other Miscellaneous Sales:
Pool tables / Video Games / souvenirs – Does the applicant or licensee have pool
tables or video games or sell souvenirs (such as hats or T-shirts)? Yes/No.
If yes, list type(s): _________________________ .
Are records for these sales maintained? Yes / No
If records for miscellaneous sales are not kept, approximately how much money is
taken in per week from these sales: $ _________.
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Alcoholic Beverage Sales
Happy Hours (reduced pricing)
Are there periods when reduced prices are charged? Yes / no
Are Happy Hour records maintained? Yes / no
Days and times of Happy Hours: Days of Week: _____ Hours: ______ .
How long have these Happy Hour times been in effect? __________ .
If Happy Hour records are not maintained, obtain the percentage of total alcohol
sales derived from Happy Hour. _____%.
How is liquor dispensed: Free pour ____ Gun system _____ Measured pour _____ .
Serving Sizes of Alcoholic Beverages:
Summary of Serving Sizes and Prices for Alcoholic Beverages
Item Regular Serving Regular Price Happy Hour Happy Hour

size (in oz.) Serving size (in Price
oz.)
Domestic Bottle
Beer
Imported Bottle
Beer
Other Bottled
Beer (more than
12 oz.)
Other Bottled
Beer (less than
12 oz.)
Draft-Glass
Draft-Pitcher
Wine sold by
bottle.
Wine sold by
glass.
Mixed Amount of Regular price Amount of Happy Hour

Beverages liquor used in liqour used in Price
ounces. ounces.
House Brands
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Call Brands
Premium
Brands
Exotic Drinks
Normally restaurants use the cost of each brand to determine the sale price.
Example: 750ml bottles that cost from $0.00 - $10.00 are considered house brands,
bottles that cost $10.01 - $18.00 are considered call brands, etc. Determine the
price structure for House, Call, Premium and Exotic brands.
Document the price structure in the chart below:
Mixed Beverage Pricing Structure
House Brand
Call Brand
Premium Brand
Exotic Brand
Is sales tax included in the price for a drink: yes / no
Is sales tax separately charged when a drink is bought: yes / no
Are daily sheets used and maintained: yes / no
Are Z-tapes kept from the cash register: yes / no
Are the Z-tapes consecutively numbered: yes / no
Person providing the information for this questionnaire:
Name: ______________ Title: _________ Date: _________
Date of interview: ___________ Auditor’s Signature: _______________
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The auditor is now prepared to begin constructing worksheets which will put the
accumulated information into meaningful form. The goal is to produce a cost of
goods sold ratio per category which, in turn, can be applied to the total purchases
per category which results in a sales figure based on known facts. This entails
arranging the information in such a manner so that the relationship between actual
costs and selling prices produces the COGS ratio necessary to project sales based
on purchases. This is not as complicated as it sounds, though it is somewhat time
consuming. Examples of such worksheets are attached.
There are certain other considerations that have to be taken into account when
constructing the worksheets. First and foremost is the issue of the sales tax itself.
Is sales tax included in the price of alcohol beverages? Can sales tax be included in
the price of alcohol beverages? When constructing the worksheets, the sale prices
used should be net of tax. This allows a true GOGS ratio to be developed based on
the actual cost and selling prices of the product itself. The sales generated by the
worksheets will be taxable sales. To begin with, when purchase markup procedures
need to be utilized, adequate records may not be available to substantiate the
handling of sales tax. And, as a practical matter, many, if not most restaurant/bars
regard the selling price of alcohol beverages to include sales tax. When you order a
drink at the bar you pay $2.25 or whatever. You do not pay $2.25 plus tax. When
they report their monthly sales, they back out the tax from their gross alcohol
beverage sales and report the result as taxable sales. What is our department's
position on this? Code of Virginia Sec. 58.1-625 provides that a dealer is required to
separately state the amount of the tax and add the tax to the sales price or charge.
Title 23 VAC 10-210-340(A) further provides that identification 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 transaction. However, Code of Virginia
Sec. 58.1-614(D) provides that when a dealer is able to demonstrate to the
satisfaction of the Tax Commissioner that is impractical to collect the tax in
accordance with the bracket system it may be authorized to remit an amount based
on a percentage of gross receipts which takes into account the inclusion of the sales
tax. So, it appears that, yes, tax must be accounted for separately, but, it may be
included in the sales price. The caveat is if the Tax Commissioner grants the
taxpayer authorization to do so. However, if the taxpayer includes the tax in the
sales price of the alcohol beverages without first obtaining the Tax Commissioner’s
authorization, the total price received for the drink is not considered to contain sales
tax. Either way, use net taxable prices, as best can be determined to perform your
calculations.
Another factor, which must be considered, is spillage. How much should be allowed
for overpouring, foamy beer, breakage, and theft? The bar owner will claim he's
being robbed blind and that overpouring is rampant. But where's his documentation
and inventory count sheets to show the shortfalls? The fact is some spillage does
occur.
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The following spillage figures, per the ABC, should be utilized in providing an
allowance:
Free-pour liquor and wine --------------------8%
Gun-dispensed liquor --------------------------5%
Beer & Wine by individual container -------5%
Draft Keg beer ------------ No spillage allowed.
Another issue of concern is that of weighting. What percentage of total sales does
each broad category represent. That is, how many sales dollars are attributed to
regular prices and how many to happy hour prices. Ideally there are at least some
register tapes which can provide some guidance. In addition, the auditor has
information provided by the questionnaire previously attained with which to establish
a ratio. Lacking that, an arbitrary number can be tried using the length of time of the
happy hour as compared to the total time the business operates.
So, the auditor strives to construct worksheets that recreate past activity as
accurately as possible.
In regard to food, ABC regulations require that the food and nonalcoholic beverage
sales must account for at least 45% of the gross sales of mixed beverages and food.
The main tool available for use is the menu itself. It presents the product along with
its selling price. What remains to be determined is the cost of the product. Lack of
variety on the menu becomes a plus when attempting to analyze it. There are fewer
main selections and probably fewer vendors involved. In any case, the procedure is
similar to that of alcohol. The auditor determines the cost per portion and relates
that to the selling price. The resulting GOGS percentage for the various entrees are
then weighted to establish an overall COGS. This can be extremely tedious and
time consuming. It is much simpler and just as effective to spot check one or two
main entrees against what the Industry considers standard for that type menu. This
spot checking allows the auditor to confirm where the business stands on the
Industry's scale. An even simpler approach is to allow a somewhat high COGS, say
40 to 45 percent, which covers virtually any restaurant scenario and go with that.
Say a restaurant/bar has food purchases of $100.00. If you divide that $100.00 by
40 percent you arrive at $250.00. If the business has reported food sales of at least
$250.00, you may assume that reported sales are correct. This provides for a built
in waste factor in addition to being simple to apply. Copies of historical restaurant
ratios are attached.
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To summarize, each restaurant/bar strives to be unique. One way they do this is by

the pricing of the product they sell. Some are family oriented with "family" prices.
Others aim at being known as fine dining establishments where price is not the
concern. Yet, for others, low prices and simple surroundings attract their clientele.
Not to be left out, are those places where concerns of food and prices are secondary
to the patrons seeking drink and entertainment. Each type of place has its own price
structure. While they can be categorized and grouped with similar type operations,
each place must be examined in the context of it’s own price structure. This is not to
mean that industry standards cannot be utilized. These standards are a great help.
For, if a business is not meeting certain standards for any length of time, it ceases to
be a viable business.
Purchase markup procedures are a means to recreate the past sales history of a
particular business. As such, actual price information is utilized in conjunction with
known or estimated factors to achieve its outcome. Though complete accuracy is
sought, the reality of the situation often requires negotiation. The auditor's sense of
fairness in evaluating circumstances cannot be overly stressed.
Additional comments:
1. Experience has shown that nightclubs, go-go bars and independently run
restaurant/bars are the most likely to underreport sales.
2. While it is not carved in stone; the following GOGS ratios provide ballpark
numbers to evaluate the Mixed Beverage Annual Review: Liquor - 20%, Beer &
Wine - 25%, Food - 45%. If the evaluation of the Mixed Beverage Annual Review
shows substantially higher numbers, further investigation is required. It may be that
the business only charges low prices or it may indicate that sales have been
underreported.
3. The COGS ratio is the relation of cost to sales ( $40.00 cost divided by $100.00
sales equals 40 percent COGS. The inverse of COGS is the markup factor ( 1
divided by 40 percent equals 2.5) Therefore, purchases may either be divided by
the COGS percentage ( $40.00 cost divided by 40 percent equal $100.00 sales) or
purchases may be multiplied by the markup factor ( $40.00 cost times 2.5 equals
$100.00 sales).
4. A place of business, which sells only beer, is required to have at least $2000.00
worth of food sales per month by the ABC.
5. Happy Hour time frames cannot extend past 9:00 p.m..
6. Separate happy hour records are supposed to be maintained by the business. In

practice, this usually takes the form of designated keys on the cash register which
segregates happy hour sales on the register tape.
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Review of steps involved in purchase markup:
• Check ABC report if Applicable (MBAR)

• Verify if totals reported to ABC contain Sales Tax
• Verify if totals are the same used for reporting Sales Tax
• Make note of the COGS percentage per report
Obtain Beer and Liquor purchases:
• Contact beer distributors

• Contact ABC
Determine selling prices of beverages
Establish COGS for different categories
• Regular price for liquor

• Happy hour price for liquor
• Regular price for beer
• Happy hour price for beer
• Back out tax from price if required
• Allowance for spillage is factored into all calculations
Weight COGS
Determine how much of each category is sold for:
• Liquor (Well, Call, Premium) and beer (bottles, draft)

• Determine percentage of happy hour pricing versus regular pricing
Divide COGS into total purchases for liquor & beer.
Compare resulting figure with what was reported.
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Steps to determine if purchase markup is necessary:
Review records that are available from the department.
Payment record.
Outstanding bills.
Non-filers.
Once an auditor arrives at the taxpayers to perform the audit, a determination

will be made if sufficient records are available. Do they have cash register
tapes, balance sheets, profit and loss statements, general ledgers, sales
journal, purchase invoices and check register?
If they do have sufficient records, you will review these records and determine
if the proper amount of tax has been paid on purchases and collected and
remitted to the Commonwealth.
To ensure that the proper amount has been submitted, you will have to review
the cost of goods sold figure. This can be done by dividing purchases for
resale by gross sales which will give you cost of goods sold percentage. If
this is in line with established guideline figures then the audit is complete.
If the cost of goods sold percentage is high then you must look into the
reasons why.
Establish what the selling price is for the different beverages.
If the selling price is low, then that might explain why the cost of goods sold
percentage is high.
If the selling price is average for the industry, then that should alert you of
possible under reporting of sales.
Even if the taxpayer has all the records necessary to perform the audit there
is no way of knowing if all sales were rung up on the cash register or if the
cash register was totaled prior to closing. This leads the auditor to question
the validity of the records that were given to him.
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CATERERS
Objective: Discuss the application of sales and use tax as it applies to Caterers.
I. References
A. Code of Virginia Section 58.1-203 (Note: Their is no specific Code related

to caterers.
B. Virginia Administrative Code 23 10-210-930
C. Ruling Letters
Letter dated 6/24/96: Gratuity Charges-Caterer
PD 04-223 Item Transferred to Customers - Exempt
PD 96-109 Box Lunches-State & Local Governments
PD 96-10 Meals Purchased & Sold by Local Governments
PD 94-39 Catering Supplies & Equipment
PD 93-58 Catering Supplies
PD 93-33 Labor Charges of Caterer
PD 93-16 Catering Supplies & Equipment
PD 92-156 Leases & Rentals-Catering Supplies
PD 89-167 Labor Charges by Catering Service
PD 88-147 Personnel Supplied by Caterer
PD 87-247 Catered Student Meals-Educational Institution
PD 87-245 Purchase of Catered Food For Use At County Sponsored
Event
Ruling of Commissioner-Dated 11/07/84: Meals & Catering Services
Provided by Non-Profit State University
Ruling of Commissioner-Dated 01/12/82: Meals Purchased by Gov't
E. Applicable exemption certificate: ST-10
II. General
A. Retail sales by caterers are taxable, including charges for cover, labor,
minimum, service, set-up, cleaning, non discretionary tips, etc. Virginia
Code 58.1-602 defines sales price as the total amount for which tpp or
services are sold, including any services that are part of the sale.
The only items excluded from the sale price are any cash discounts
allowed and taken or finance charges, carrying charges, service charges
or interest from credit extended on sales of tpp under conditional sales
contracts. (PD 93-33)
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B. Items purchased or leased by a caterer for its own use in preparing and
serving meals are taxable to the caterer at the time of purchase and are
also subject to tax as part of the sales price to the customer.
III. Procedures
Purchases
Equipment and supplies leased or purchased by a caterer, for its own use
and consumption in preparing and serving meals, are taxable. Examples of
some items subject to the tax are:
Kitchen equipment & supplies

Cloth linens such as table cloths and napkins
Serving trays
Serving utensils
Serving dishes
Plates/China
Glassware
Silverware
Tables
Chairs
The tax is applicable at the time of purchase or rental and must be paid to
the vendor. These items were not sold to customers as part of the meals, but
instead were consumed by the caterer in providing the meals. The caterer
would charge the sales tax on the entire cost of the meals including all
charges associated with the providing of the meals, even if separately stated.
(PD 93-33, PD 92-156, PD 89-167, PD 88-147, Tax Bulletin 92-10)
The application of the tax to a caterer's purchase or rental of tpp for use in
providing food service and the subsequent taxation of the caterer's total
charge to its customer for the provision of such services does not constitute
double taxation in that these are two separate and distinct transactions for
purposes of the application of the sales and use tax. (PD 94-39)
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Purchases of items furnished with meals and disposed of after use by a

customer are considered part of the meal and may be purchased exempt
under a Resale Exemption Certificate (ST-10). These items include:
Disposable paper doilies

Disposable paper placemats
Plastic eating utensils, plates, cups, and lids
Plastic or paper bags
Disposable serving trays
Straws
Paper napkins
Other similar items
Policy change
Effective January 1, 2005, the Department will change its

policy regarding the application of the sales and use tax to
certain purchases by caterers. Effective for purchases made on
and after January 1, 2005, items intended to be transferred to
the customer will no longer be taxable to the caterer, i.e., the
caterer will not be required to pay tax at the time of purchase.
Instead, items intended to be transferred to the customer may
be purchased for resale by presenting a valid and complete
resale certificate of exemption (Form ST-10). Items eligible to
be purchased for resale include: party accessories, including
invitations, favors and decorations, flowers and flower
arrangements, ice sculptures and similar items. In addition, a
caterer may rent for resale tables, chairs, tents, gazebos,
arches, and similar equipment when such items are obtained
on behalf of the customer and the charge for such rented items
is passed on to the customer.
SALES
The tax is to be collected on the total amount billed to a customers,

including labor, personnel, set-up, cleaning, serving, equipment & supplies
used in the provision of the service, flowers, and any other similar items,
even if separately stated on the invoice. All charges for services
provided in conjunction with the provision of food services are subject to the
sales tax. This also includes non discretionary tips added by the caterer,
including a "minimum" amount of gratuity. (Letter dated 6/24/96, PD 89-167,
PD 88-147)
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SALES TO GOVERNMENTS
Code of Virginia 58.1-609.1(4) provides an exemption from the sales tax

for purchases of tpp by the federal, state and local governments of Virginia.
VAC 10-210-690 (VR 630-10-45) provides further guidance on the application
of the exemption. VAC 10-210-690 (B) states that charges for catered
events are subject to the tax when paid for by the state or local government
or public institution of learning, or employees of such, regardless of whether
the purchases are made pursuant to required official purchase orders. VAC
10-210-690(B) also provides that the purchases of meals (catering) by the
federal government are exempt provided they are pursuant to an
official purchase order. (Letter dated 6/24/96, PD 96-109, PD 96-10, PD
87-247, PD 87-245, Letter dated 11/07/84, Letter dated 01/12/82)
The department has consistently held sales of meals to local governments

and state agencies for consumption by individuals as taxable. However,
Public Document 87-245 illustrates one situation in which the sales of
food/catered services would be exempt because the food was served to
inmates housed in a jail facility operated by a local government.
When auditing an entity that provides catering to local and state

governments, taxation has generally been the rule, with only certain
exceptions made. The auditor should check for current rulings or changes in
law concerning meals/catering to local and state governments. As of this
writing, (9/96) there is currently litigation concerning the sales of
meals/catering to a non profit college/university. The issue being litigated is
the sale of meals for faculty meetings, conferences, etc.
Meals/catering sold in a county run cafeteria to interdepartmental divisions

are subject to sales tax since the meals were not consumed by the tax-
exempt county. (PD 96-10)
A school, college, certain educational institution and other institutions of

learning must collect the sales tax on retail sales of meals to students and
others if the price of the meal is not included in room, board or tuition charges
or fees. Also catered meals may be purchased exempt of the sales tax if the
price of the meals were included in room, board and tuition set by an
institution of learning as defined in VAC 10-210-4020. (PD 87-247, Lettered
dated11/07/84)
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Rulings of the Tax Commissioner

Document
04-223
Number:
Tax Type: Retail Sales and Use Tax

Caterer; tangible personal property use in the preparation & serving
Brief Description:
food
Topics: Property Subject to Tax; Taxable Transactions
Date Issued: 12/30/2004
December 30, 2004
Dear *****:
This is in reply to your letter in which you request a ruling regarding the
application of the retail sales and use tax to purchases made by *****
(the "Taxpayer"). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a catering business and questions the application of the
tax to purchases of perishable goods and disposable items made in
connection with the provision of catering services. The purchases in
question are not reusable and transfer to the customer.
RULING
Current policy
Title 23 of the Virginia Administrative Code (VAC) 10-210-930

addresses the application of the tax to purchases by restaurants in
connection with the provision of meals and provides in section F that
"[p]aper doilies, paper placemats, plastic silverware, bags and similar
items furnished with meals and which are disposed of after use by only
one customer are also considered a part of a meal and can be
purchased exempt under a Resale Certificate of Exemption." In addition,
the regulation provides that "[o]ther items purchased by a restaurant for
its own use in preparing and serving meals, such as kitchen equipment,
plates, glasses, silverware, tablecloths, and similar items are taxable
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and may not be purchased under a Certificate of Exemption."
In applying the above regulation to caterers, the Department's

established policy is that a caterer is the taxable consumer of all items
and supplies used in connection with providing a meal, except that the
food itself and related disposable items may be purchased under the
resale exemption. Therefore, the Taxpayer may purchase for resale the
food and disposable items that transfer to the customer and are not
reusable.
The tax must be paid on all other purchases made in connection with the
provision of catered food. The application of the tax to purchases by
caterers is set out in a number of prior rulings of the Tax Commissioner,
including Public Documents 89-187 (5/22/89) and 93-33 (2/24/93). In
addition, Virginia Tax Bulletin 92-10 (11/4/92) discusses the application
of the tax to providers of meals, including caterers.
Policy change
Effective January 1, 2005, the Department will change its policy

regarding the application of the sales and use tax to certain purchases
by caterers. Effective for purchases made on and after January 1, 2005,
items intended to be transferred to the customer will no longer be
taxable to the caterer, i.e., the caterer will not be required to pay tax at
the time of purchase. Instead, items intended to be transferred to the
customer may be purchased for resale by presenting a valid and
complete resale certificate of exemption (Form ST-10). Items eligible to
be purchased for resale include: party accessories, including invitations,
favors and decorations, flowers and flower arrangements, ice sculptures
and similar items. In addition, a caterer may rent for resale tables,
chairs, tents, gazebos, arches, and similar equipment when such items
are obtained on behalf of the customer and the charge for such rented
items is passed on to the customer.
It is important to note that the caterer must document all purchases and
rentals of the aforementioned items for resale purposes. The charges to
the customer for such items must be separately stated on the invoice to
the customer. It must be evident that the charges being incurred by the
caterer for the customer are the same charges that are being passed on
to the customer and on which tax is collected from the customer.
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The caterer will continue to pay the tax on purchases of tangible

personal property for its use in the preparation and serving of food as
under the current policy. In addition, the caterer must pay the tax on
purchases of reusable items.
The regulation, public documents and Tax Bulletin cited are available
on-line in the Department's Tax Policy Library, located at
www.policylibrary.tax.virginia.gov. If you have any questions regarding
this ruling, you may contact ***** in the Office of Policy and
Administration, Appeals and Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
CONTROLLED DRUGS, MEDICINE & D.M.E.
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Controlled Drugs, Medicines, Durable Medical Equipment, Nonprescription
Drugs and Proprietary Medicines
Revised 8/2006
Objective: Discuss the application of the sales and use tax as it applies to
controlled drugs, medicines, durable medical equipment, prosthetic devices,
nonprescription drugs and proprietary medicines.
I. References
A. Code of Virginia Section 58.1-609.7 (1) (2) (3)(15)(20)

B. Virginia Administrative Code VAC 10-210-940 (C)(E)(F)(G)
C. Applicable Caselaw
Northern Virginia Doctors Hospital Corporation v. Department of Taxation -

Exemption for drugs sold to a for-profit hospital by a pharmacy upon written
order of a physician.
Bluefield Sanitarium, Inc v. Department of Taxation - Taxability of drugs

purchased by a for-profit hospital's pharmacy for distribution by work order
of physician to patients.
Bio-Medical Applications of Roanoke Inc. v. Department of Taxation –

Purchase of drugs by a clinic to treat patients. Drugs held taxable.
Sentara Enterprises Inc v. Virginia Department of Taxation – drugs

purchased and sold through clinics to patients of the clinics are taxable
similar to Bluefield Sanitarium.
Effective 7/1/06, the medicines and drugs exemption was expanded to

include medicines and drugs purchased by for-profit nursing homes, clinics
and similar corporations.
Effective 7/1/00, the medicines and drugs exemption was expanded to

include medicines and drugs purchased by licensed hospitals. Drug
purchases are exempt for any licensed profit hospital from 7/00 forward.
Effective 7 /1/98 all nonprescription and proprietary medicines are exempt

from sales and use tax. “Nonprescription drugs” include any substance or
mixtures of substances containing medicines or drugs for which no
prescription is required and which are generally sold for internal or topical
use in the cure, mitigation, treatment, or prevention of disease in human
beings. “Proprietary medicines” are any nonprescription drug sold to the
general public under the brand name or trade name of the manufacturer
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and does not contain any controlled substance or marijuana. The

exemption does not apply to cosmetics.
D. Ruling Letters
P.D. 84-63 - Definition of Controlled Drug
P.D. 91-24 - Supplies used with feeding equipment, ostomy supplies
and liquid nutrients
P.D. 91-43 -Third party billings – medicaid, medicare - Liquid
nutrition sold on prescription for use in enteral and
parenteral feeding equipment. See PD 92-118 and 95-
182.
P.D. 92-67 - Vitamins, minerals and food supplements.
P.D. 92-97 - Drugs sold to clinics by affiliated pharmacy
P.D. 92-118 -Various medical supplies, Third party billing See P.D.
91-43, P.D. 95-182
P.D. 94-109 - Breast and chin implants
Commissioners Ruling (4/25/94) - Clarification on implants for
cosmetic purposes
P.D. 95-182 - Changes in legislation regarding third party billings.
Department of Medical Assistance Service
reimbursement for medical supplies. See PD 91-43, 92-
118.
P.D. 95-266 - Infusion pumps and documentation required for D.M.E.
"bought for an individual"
P.D. 96-47 - Exemption for drugs and fluids used in chemotherapy
treatments
P.D. 96-64 - Taxability of dietary/nutritional supplements
P.D.97-253 - Sales to physicians, drug samples, sales to
Veterinarians
P.D. 97-488 - Taxability of acupuncture supplies
P.D. 98-98 - Exemption for Nonprescription Drugs and Proprietary
Medicines
P.D. 99-32 -Taxability of homeopathic medicines, astringents, natural
foods and supplements
P.D. 00-203 – Taxability of bath additive products
P.D. 92-172 - Home infusion therapy pharmacy’s purchase of
controlled drugs is taxable as part of the rendition of services.
P.D.97-322 - Pharmacy corporation’s provision of controlled drugs to
affiliated hospitals is a service similar to Bluefield
Sanitarium. See also PD 04-118. 04-49
P.D. 00-47 - Pharmacy corporation’s provision of controlled drugs to

hospital is a service similar to Bluefield Sanitarium.
Pharmacy not a retail establishment
P.D. 00-215 – Bulk Purchase of DEM later modified for a specific
patient.
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P.D. 03-1 - Distinction between medical “drug” and medical “device”

P.D. 03-30 - Taxability of spas & hot tubs
P.D. 04-116 – Agency relationship between clinic and a management
Company
P.D.04-136 – DMAS exemptions as it applies to nutritional
supplements
P.D. 05-106 – Taxability of installed wheelchair lift
P.D. 05-135 - Determining whether item meets non prescription drug
exemption - Metamucil
E. Tax Bulletin 98-4 (5/15/98) – Exemption for Nonprescription Drugs &

Proprietary Medicines
F. Nonprescription Drug Exemption Teleconference Question & Answer
Summary
G. Exemption Certificate - ST-13 (Effective July 1, 2001 a letter with a ten

digit number ending with E, will be issued by the Department to qualified
non-profit organizations)
II. Generally
A. Controlled Medicines and Drugs - The sale of controlled medicines or

drugs, including oxygen, pursuant to a written prescription of physicians
and dentists are exempt from tax. Purchases by physicians (for use in
their professional practice), Nonprofit hospitals and nonprofit nursing
homes are also exempt. Licensed retail pharmacies may purchase
controlled drugs under the resale exemption. Effective July 1, 2000, any
licensed hospital may purchase medicines and drugs for its use and
consumption exempt of the tax. Effective July 1, 2006, the tax exemption
for medicines and drugs was again expanded to include purchases by for-
profit nursing homes, clinics, and similar corporations. Effective July 1,
1996 an exemption is provided for samples of pharmaceutical products
and their packaging distributed free of charge in Virginia to authorized
recipients in accordance with the Federal Food, Drug and Cosmetic Act.
The term controlled drugs is further restricted to drugs under Schedules I-
VI of the Virginia Control Act, Sections 54.1-3446 through 54.1-3456.
Generally, controlled drugs and prescription drugs are synonymous in
Virginia.
B. Durable Medical Equipment (D.M.E.) - The exemption for D.M.E. applies

to those general categories listed in the regulations or other specific
items, which meet the definition below. These D.M.E. items must be
purchased by an individual or on their behalf in order to qualify for the
exemption. They also must meet 4 criteria: (1) can withstand repeated
use (2) is primarily and customarily used to serve a medical purpose (3)
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generally is not useful to a person in the absence of illness or injury; and

(4) is appropriate for use in the home. See Code of VA 58.1-609.7 (2).
Bulk purchases by health care providers for later distribution to patients
do not qualify for the exemption.
C. Prosthetic Devices - The exemption for prosthetic devices applies

specifically to those devices purchased by and on behalf of an individual
for use by that individual. Bulk purchases for later use or modification are
taxable if no other exemption applies (such as that of a nonprofit
hospital).
D. Nonprescription drugs and proprietary medicines – Effective July 1, 1998

the sale of nonprescription drugs and proprietary medicines are exempt
from retail sales and use tax. The exemption is applicable regardless of
the nature of the purchaser. These may be purchased tax-exempt by
individuals, physicians, medical facilities, and all other entities. In addition,
effective July 1, 1998, samples of nonprescription drugs and proprietary
medicines distributed free of charge by the manufacturer are exempt from
the sales and use tax. The exemption includes packaging materials and
constituent elements and ingredients. The exemption does not apply to
cosmetics.
III Definitions
A. Controlled Drugs - Shall mean those drugs itemized under Virginia Code
Sections 54.1-3446 through 54.1-3456, but shall include only medicines
and drugs and not devices.
B. Prosthetic Devices - Shall mean devices, which replace a missing part or

function of the body and shall include any supplies physically connected
to such devices (i.e. ostomy supplies but does not include general
supplies such as tape and gauze).
C. Prescription - Shall mean and include an order for drugs and medical
supplies, written, signed or transmitted by word of mouth, telephone,
telegraph, or other means of communication to a pharmacist by a duly
licensed physician...or other practitioner, authorized by law to prescribe
and administer such drugs or medical supplies.
D. Durable Medical Equipment - is that which:
1. Can withstand repeated use

2. Is primarily and customarily used to serve a medical purpose
3. Generally is not useful to a person in the absence of illness or injury
4. Is appropriate for use in the home
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(NOTE: All 4 criteria must be met for an item to be deemed D.M.E.)
E. Prescription Drug – shall mean any drug required by federal law or

regulation to be dispensed only pursuant to a prescription, including
finished dosage forms and active ingredients subject to the federal Food,
Drug, and Cosmetic Act. (Code of Virginia § 54.1 – 3401)
F. Nonprescription Drugs – Shall mean any substance or mixture of

substances containing medicines or drugs for which no prescription is
required and which are generally sold for internal or topical use in the
cure, mitigation, treatment, or prevention of diseases in human beings.
G. Proprietary medicines – Shall mean any nonprescription drug sold to the

general public under the brand name or trade name of the manufacturer
and which does not contain any controlled substance or marijuana.
IV. Procedures
A. Medicines and Drugs - The exemption for medicines and controlled drugs
is "purchaser specific". In order for the exemption to apply, purchases of
controlled drugs and medicines must be made by an exempt entity, a
licensed pharmacy, or purchased pursuant to a physician’s prescription.
First, the auditor will determine the taxability of the purchaser of the drugs
or medicines. The auditor should note that the exemptions for medicines
and drugs has been expanded several times and therefore the timing of
purchases may be a important factor. If the purchaser is an exempted
medical facility or a licensed pharmacy, all purchases of drugs and
medicines will be exempt and no further examination of the drug
purchases is required. The exemptions for various medical facilities are
outlined in P.D. 89-254 and also detailed under medical facilities/health
care providers. If the purchaser is a taxable entity, then the auditor will
decide if the transaction meets one of the other criteria for exemption.
The auditor should also keep in mind the legislative change in 7/1/98
previously noted exempting all sales of nonprescription and proprietary
medicines as well as the legislative changes in 2006.
The tax does not apply when the ultimate consumer or a taxable entity
purchases drugs or medicines on a physician's or dentist's written or oral
prescription provided it is reduced to writing. The issue before the Court
in Northern Virginia Hospital was whether or not the issuance of drugs in
that case constituted a sale of drugs on a “prescription or work order” of a
licensed physician. The drugs were purchased by the hospitals patients
on physician's work orders from a conventional pharmacy operating
separate and apart from the hospital. The sale constituted a sale of drugs
on a prescription or work order and the transactions were deemed tax
exempt.
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This contrasts with Department of Taxation vs Bluefield Sanitarium Inc in

which a taxable entity purchased drugs in bulk for later distribution to its
patients. Although some of the drugs may later be distributed to patients
per a doctor's prescription, the bulk purchase by the taxable hospital was
considered a taxable purchase necessary in the rendition of medical
services to their patients. The distinction between drugs sold pursuant to
a prescription and bulk purchases is also addressed in P.D. 92-97.
Clinics that provide “internal” pharmacy sales to its patients did not satisfy
the definition of a retail pharmacy operation and were taxable on all bulk
drug purchases.
The auditor should be aware that there is a difference in "controlled

drugs" and nonprescription drugs. "Controlled drugs" are those listed in
Schedules I-VI of the Virginia Control Act, Sections 54.1-3446 through
54.1-3456. An easy method for determining if a drug is controlled is to
look at the packaging materials for the drug. "Controlled drugs" all have a
federal warning on them such as "...Federal Law prohibits the dispensing
without prescription". Also, most injectables (sold in "cc" units) are
controlled and therefore exempt. A recent ruling, P.D. 96-47, also
specifically exempted normal saline (when dispensed intravenously),
Zofran, and Decadron used in administering chemotherapy treatment.
Most physicians keep a copy of the Physicians Desk Reference or "PDR"
in their office. This is a helpful tool in identifying prescription/controlled
substances.
The exemption would also include vitamins and minerals dispensed on a

physician’s prescription, but would not extend to vitamins or dietary
supplements used in weight loss programs. (See P.D. 92-97) The
controlled drug exemption does not apply to supplies and medical
products, which are not normally, considered medicines.
In order to purchase drugs under the “resale” exemption, the seller or

physician must hold a special certificate from the Board of Pharmacy,
which allows them to "retail" drugs and fill prescriptions accordingly. In
the case of a physician, use tax should be remitted on any items (other
than controlled drugs) which are withdrawn from the resale inventory for
their own use (PD 84-63). Some clinics actually have "mini-pharmacies"
in their locations as a convenience to their patients. When their
physicians write a prescription, the patients can elect to have it filled by
this internal pharmacy. Normally, the clinics' pharmacies are not licensed
as noted above and only provide this service to their own patients. This is
considered an extension of their medical services and the resale
exemption would not apply (P.D. 92-97).
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(Effective 7/1/2006, all licensed hospitals, nursing homes and clinics and
similar corporations are exempt on purchases of drugs and medicines)
B. Durable Medical Equipment (D.M.E.) - The exemption for durable medical

equipment only applies when the D.M.E. is purchased by or on behalf of
an individual and it meets the definition of D.M.E. set forth in the
regulations. An extensive list of D.M.E. is provided to assist in making
this determination. The seller and purchaser of these products must
maintain sufficient records to substantiate that the purchase was made for
a specific individual's use. Also, legislation passed in 1995, has changed
the taxability of purchases by a Medicaid recipient through a Department
of Medical Assistance Service (D.M.A.S.) agreement. Examples of items
that can be purchased taxe xempt under the D.M.A.S. agreement are
bandages, gauze dressings, incontininence products and wound care
products.
D.M.E. is medical equipment which can withstand repeated use, is

generally and customarily used to serve a medical purpose, is not useful
to a person in the absence of illness or injury, and is appropriate for use
in the home. If a product does not meet all four criteria, it cannot be
exempted as D.M.E. For example, adult diapers are disposable and
therefore cannot withstand repeated use, therefore the exemption does
not apply (P.D. 92-118). Supplies, which are specifically designed for use
with exempt D.M.E., are also extended the exemption. A good example
of this is P.D. 92-24, which provides an exemption for tubes, pumps, and
containers used in conjunction with enteral or parental feeding equipment.
Once it is determined that a specific medical item qualified as D.M.E., it

must be verified that it was purchased by or on behalf of an individual for
use by such individual. When taxable medical facilities and physicians
purchase D.M.E. for their patients, they must maintain sufficient
documentation to verify that it was bought for a specific patient. In many
cases a patient's name appears on the purchase order and invoice, which
is sufficient. If this is not the case, then the seller must obtain a signed
statement from the purchaser certifying to the effect that the D.M.E. is
purchased on behalf of a specific patient through a doctor's prescription
or profit hospital's order and is for sole use by such patient. The seller
must also retain a copy of the prescription or work order as part of the
record of the transaction (P.D. 95-266). Bulk purchases for later
distribution to patients by any physician or taxable facilities do not qualify
for the exemption.
When an audit is being performed on medical facilities or D.M.E. retailers,

the issue of third party billings may have to be addressed. In the past, the
tax status of transactions in which an item is sold to an individual is
determined at the time of the sale to the individual and is not effected by
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the source of reimbursement (P.D. 91-43). However, the tax due is not
on the total charge submitted to the third party for reimbursement, but is
based on the actual reimbursement amount which is allocated to sales,
nontaxed charges and tax based on the percentages to the original total
charge (P.D. 95-182). Effective April 6, 1995, legislation was passed
exempting from sales tax medical products and supplies such as
bandages, gauze dressings, incontinence products and wound care
products when purchased by a Medicaid recipient through a D.M.A.S.
provider agreement. Billings to any other third party payers will continue
to follow the procedures outlined previously.
C. Prosthetic Devices - The exemption for prosthetic devices is similar to

that for D.M.E. in that it only applies when the devices are purchased by
or on behalf of an individual using these items. The same documentation
requirements are required for these purchases as previously mentioned
for D.M.E. The purchases of prosthetic devices are normally on a per
patient basis due to the individual nature and use of the device.
The taxability of implants is an area that requires further comment.

Implants, such as breast and chin, are considered exempt when
purchased by a licensed physician (normally a plastic surgeon) on behalf
of a patient, and are used in reconstructive surgery to replace a missing
body part. However, implants used for cosmetic purposes do not meet
the definition of "prosthetic device" (VAC 10-210-940(B)) and therefore do
not qualify for exemption (P.D. 94-109 / PD 94-127). A general rule that
should aid the auditor in making this distinction is that normally, insurance
companies will not reimburse the physician when the surgery was
performed for cosmetic purposes. Also, plastic surgeons will normally
order an extra implant on behalf of the patient in case there is a defect,
which might be discovered during surgery. If the original implants were
exempt then this would extend to the extra implants purchased. Again,
bulk purchases are not exempt from tax even if an item later is withdrawn
from inventory and modified or fitted for a specific individual.
D. Nonprescription Drugs and Proprietary Medicines – The exemption for

nonprescription drugs and proprietary medicines is item specific. Who or
what entity purchases the nonprescription drugs and proprietary
medicines is not relevant because these medicines are always exempt.
No exemption certificate is necessary.
The auditor must determine whether an item purchased is a

nonprescription drug or proprietary medicine. The department considers
three factors to determine if a product falls within the scope of the
exemption: (1) Is the item a nonprescription drug (i.e., is the product a
substance or mixture of substances containing medicines or drugs for
which no prescription is required; (2) is the product for topical or internal
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use; and (3) is the product for the cure, mitigation, treatment, or
prevention of a disease in human beings. (See Nonprescription Drug
exemption Teleconference Questions & Answer Summary) If the
taxpayer is computerized, you may be able to go into its software and
determine if these drugs and medicines are marked as tax exempt.
Cosmetics, toilet articles, food products, and supplements, devices,
vitamins and mineral concentrates sold as dietary supplements or
adjuncts are taxable. If the taxpayer is not computerized, each individual
sale must be examined to insure tax is not charged on the exempt
medicines but is charged on the taxable items. Retail dealers making
sales of nonprescription drugs and proprietary medicines must keep
records segregating purchases and sales of exempt items.
If tax is being charged on nonprescription drugs and proprietary

medicines the auditor must insure that this sales tax is being remitted to
the state. No refund is to be made to the retailer until it demonstrates that
it has refunded this overcollection of sales tax to the corresponding
customer(s).
Effective July 1, 1998 samples of nonprescription drugs and proprietary

medicines distributed free of charge by the manufacturer, including
packaging materials and constituent elements and ingredients are exempt
from sales and use tax
At the conclusion of the audit, the auditor should ensure the taxpayer is
operating in accordance with the law change effective July 1, 1998 as it
applies to nonprescription drugs.
V. Use of ST-13 Exemption Certificates
The ST-13 has been revised as of July 2001 and should be used by the
specific purchasers listed and for the specific items and products listed on
the exemption certificate form.
The ST-13 should not be used by nonprofit hospitals, nonprofit hospital

cooperatives and nonprofit hospital corporations, nonprofit nursing
homes, nonprofit adult homes, and other nonprofit medical facilities that
are entitled to exemptions. These entities are provided an exemption
letter and registration number by the department, which should be
provided to their vendors to make tax exempt purchases.

Mining and Mineral Processing
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Objective: Discuss the application of sales and use tax as it applies to mining and
mineral processing.
I. History
Prior to March 1983. Mining and mineral processing was a part of

manufacturing and processing.
March 1983. A separate section of the Retail Sales and Use Tax
Regulations was created for mining and mineral processing, and included gas
and oil well drilling.
September 7, 1984 and after. Commonwealth of Virginia v. Wellmore

Coal Corporation modified the interpretation of used directly.
July 1985 and after. The Code of Virginia was amended to include in
the definition of the term “used directly” in relation to mining, any reclamation
activity of the land previously mined by the mining company required by state
or federal law.
July 1, 1994 and after. Gas and oil well drilling was removed from the
mining and mineral processing exemption.
II. References
A. Code of Virginia Section 58.1-602 and 609.3.2
C. Ruling Letters PD 92-236 PD 95-187

PD 95-321 PD 96-16
D. Commonwealth of Virginia v. Wellmore Coal Corporation
E. Applicable exemption certificate ST-11, ST-11A

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III. General
A. Code of Virginia Section 609.3.2 exempts machinery or tools or repair

parts therefor or replacements thereof, fuel, power, energy, or supplies,
used directly in processing, manufacturing, refining, mining or converting
products for sale or resale. Machinery, tools and equipment, or repair
parts therefor or replacements thereof, shall be exempt if the
preponderance of their use is directly in processing, manufacturing,
refining, mining or converting products for sale or resale.
B. Definitions
"Used directly," refers to all steps of the integrated mining process, but
does not include ancillary activities such as general maintenance or
administration. It also includes reclamation activities required by state or
federal law when performed by the mining company on land which it has
previously mined.
The fact that particular property may be considered essential to the

conduct of the business of mining or mineral processing because its use is
required either by law or by practical necessity does not, of itself, mean
that the property is used directly in mining or mineral processing.
Mining and processing are separate and distinct activities. If the ore or
mineral excavated is subject to further mineral processing, the exemption
continues.
“Mining” means both deep and strip mining, quarrying, and other industrial
removal of natural resources, minerals, or mineral aggregates from the
earth. It does not include the extraction from tailing piles which because
of technological advances in processing have become economic mineral
deposits.
Direct use in mining begins with the drilling of the shaft in deep mining or
the removal of the overburden in strip mining, auger mining or quarrying
and ends with the conveyance of the mined product to storage or stockpile
at the mine site.
"Mineral processing," is the preparation, refining or concentrating of the

ore, resource or mineral subsequent to extraction and prior to distribution
for sale and includes cleaning, grading, washing, cracking, crushing,
refining and similar processing of the mineral or resource.
Direct use in mining processing begins with the handling and storage of
the raw material at the processing plant site and ends with the
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conveyance of the processed product to storage at a stockpile at the plant

site.
C. Exploration
Exploration is the search for economic deposits of minerals, ore or coal,

and includes the mapping and design of the mine site. All tangible
personal property used in exploration is subject to the tax, including drilling
equipment used to test the earth and surveying equipment.
D. Site Preparation
Site preparation is the preparation of the mine and includes the removal of
the overburden, the clearing of the land at the mine site, construction of
access roads, and the construction of tunnels, shafts, and passageways in
underground mines.
Removal of the overburden in surface mining operations and at the

opening of a deep mine tunnel are part of the mining process, and tangible
personal property used in these removal processes is not subject to the
tax. Construction of tunnels, shafts, and passageways in underground
mines is also an exempt activity.
Other land clearing activities at the mine site or the mineral processing
plant site, such as for the construction of a processing plant or office
buildings, and the construction and maintenance of access roads, are not
a part of mining and property used in such activities is subject to the tax.
E. Extraction
Extraction is the actual removal of the mineral, ore or natural resource

from the earth. It includes severing of the mineral, hauling the mine
product from the mine face to a stockpile at the mine site for storage, and
reconstruction of tunnels, shafts, and passageways in deep mines.
Tangible personal property used directly in extraction is not subject to the
tax.
Such items include digging, blasting, and extracting equipment, mine roof
support materials, drainage pumps used within the mine, ventilation and
dust control equipment used in the mines, transportation devices and
equipment used to haul extracted product from the mine face or pit to a
stockpile located outside the mine or pit, personnel and supply cars, fuel,
supplies, lubricants and repair or replacement parts for exempt equipment,
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telephones used within the mine, and protective apparel and protective
materials furnished to production employees.
In Commonwealth v. Wellmore Coal Corporation, it was ruled that

methanometers and first aid supplies are also protective materials and are
therefor exempt.
Items found to be both essential and used immediately in deep mining,

may not meet the direct use test in surface mining. In PD 95-231 the Tax
Commissioner upheld the taxing of water trucks used to control dust in
surface mining, although dusting control equipment used in deep mining is
exempt. He did, however, rule that because of the broad expanse of land
involved in a surface mining operation, two-way radio systems used to
coordinate work from different areas of the job site are exempt.
Mining does not include the extraction from tailing piles. No mining or
processing occurs in this process. It does not entail the severance or
extraction of minerals from the earth as extraction from the mine has
already occurred, and no further processing occurs.
F. Transportation from the mine site
Transportation of the mined product to another location other than for

further mining processing is taxable. When the mine and mineral
processing plant is owned and operated by the same person,
transportation from the mine site to the mineral processing site is an
exempt activity.
Prior to the Wellmore court case, all road building and maintenance
equipment and supplies, and automotive parts, tires and supplies used on
licensed vehicles were taxable. If the mine and the mineral processing
sites were not connected by a private transportation system, they were
deemed to be two separate sites and the transportation between the two
was taxable.
The Virginia Supreme Court in Wellmore ruled that transporting the coal to
the tipple is part of the mining process. Exempt transportation is not
limited to the transportation occurring at the plant site. The Court ruled
that repair parts and supplies for all trucks used to haul coal between
mines and the tipple are exempt. Materials used to build and maintain coal
haul roads are used directly in the process of mining and are not taxable.
The road maintenance materials facilitate transportation of the coal from
the mines to the tipple for processing.
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G. Mineral Processing
Mineral processing begins with the handling and storage of the raw
material at the processing plant site and ends with the conveyance of the
processed product to storage at a stockpile at the plant site. It was ruled
in the Wellmore Court Case that weighing of the coal at the tipple, or
processing site, is a part of processing because it constitutes handling of
raw materials.
Tangible personal property used to clean, grade, wash, crack, crush, and
similarly process the mineral or resource is exempt.
Plant construction and administration are not a part of mineral processing

and are taxable activities. Construction materials such as concrete,
structural steel, and roofing which become permanently incorporated into
the processing plant, and machinery and tools used in the construction of
the plant are subject to the tax.
Steel or similar supports which are component parts of exempt processing

equipment or machinery and which do not become permanently affixed to
realty are not subject to tax. Concrete foundations onto which such
supports are bolted, floors on which machinery rests, and structures
housing equipment and machinery are not used directly in processing and
are subject to the tax.
Inspection and testing to determine the quality of the product and to

determine if the product meets industry standard is deemed to be a part of
mining and mineral processing and is an exempt activity.
Any testing not related to product quality control is not part of mining or
mineral processing and is a taxable activity. Examples of taxable
research are efficiency surveys, management studies, consumer surveys,
economic surveys, advertising, or promotions.
H. Refuse
Transportation of a waste product from the processing plant to a waste

dump at the plant site is a part of production line quality control and is
included in mineral processing. Systems used to transport the waste
product from the production line at the processing plant to the dump are
not subject to tax provided the dump is located at the processing plant site
and the transportation to the dump is continuous and without interruption.
The dump must be connected to the processing plant via a private
transportation system entirely owned or leased by the processor. If public
roadways or transportation systems are used between the processing
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plant and the dump, no exemption is available for property used to convey
the waste between the two sites.
In PD-236, the Tax Commissioner ruled that materials used in the

construction of refuse hauling roads are taxable. Only roads used in the
transportation of coal for further processing are exempt.
I. Repairs and Maintenance
Repair and maintenance is the repair of machinery, tools and equipment,

routine maintenance in order to insure that machinery and equipment are
in good working order, and the repair and maintenance of offices,
outbuildings, and other real or tangible personal property connected with
the operation of the mine.
Repair and maintenance is not mining. Therefore, repair and

maintenance facilities, including tools, supplies, machinery and equipment
used in performing repair and maintenance work are subject to the tax.
Replacement and repair parts for exempt machinery and equipment, as

well as operating supplies which are actively and continually consumed in
the operation of exempt machinery and equipment, are deemed used
directly in mining and mineral processing and are not subject to the tax.
Machinery and tools used by the person engaged in mining or mineral

processing to fabricate exempt machinery or equipment are exempt from
the tax if the preponderance of their use is in an exempt manner.
J. Distribution
Distribution is the transport or conveyance after the completion of mining

or processing of the product and is not a part of mining or mineral
processing. It includes the storage of the product subsequent to its
extraction (other than for further processing) or processing, and the actual
transport of the product for sale. All tangible personal property used to
convey, transport, handle or store the product is taxable.
K. Reclamation
Reclamation is the restoration or conversion of mined land to a stable

condition and the ongoing restoration or conversion of land currently being
mined prior to total site reclamation. The process includes recontouring,
reseeding, and reforesting the land. Reclamation activities required by
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state or federal law are a part of the mining process when performed by a
mining company on land which it has previously mined. Reclamation
activities which are not required by federal or state law are not a part of
mining and tangible personal property used in such activities is subject to
the tax.
The Tax Commissioner ruled in PD 95-187 that, although required by law,

the reclamation of access roads, refuse areas and areas other than the
land that was actually mined, is not considered part of the mining process.
L. Pollution Control
Any property or facility which has been certified by the Department of

Environmental Quality as being used primarily for the purpose of
preventing or abating air or water pollution is not subject to the tax. This is
applicable to both real and tangible personal property. Only certified
property or facilities qualify for exemption.
Tangible personal property used in or at settling ponds, refuse areas and

other spoil areas are typically used to prevent or abate pollution. Once
certified, such property is exempt.
M. Contracted Activities
The mining and mineral processing exemption extends to persons

engaged in any phase of mining or mineral processing, provided such
activities qualify for exemption. This requires that activities be performed
at the mine or mineral processing plant site.
In PD 96-16, the Tax Commissioner ruled that a trucking company under

contract to haul coal from the mine to the tipple with a coal company who
owns both the mine and the processing facility may purchase trucks and
truck parts tax exempt.
N. Preponderance of Use
When a single item of tangible personal property is used in both exempt

and taxable activities, the sales and use tax shall apply in full when the
preponderance of the item's use (fifty percent or more) is in taxable
activities. Likewise, the item will be totally exempt from the tax if the
preponderance of its use is in exempt activities.
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IV. Audit Procedures
When auditing coal mining companies, the auditor will primarily reviewing
expensed purchases and fixed assets. Typically the only sales requiring
review are disposals of fixed assets.
Begin with a discussion of the taxpayer’s operation. Some mining companies

perform all the functions of mining and mineral processing. Others perform
only the mining function. Others will contract out such functions as extraction,
coal hauling, and reclamation. The taxpayer may have locations both within
and without Virginia.
Request a listing of all the taxpayer’s related companies. The listing should
include a brief description of each company’s business and the location of the
business operation. It is not unusual for a coal company to have several
related mining companies, as well as non-mining entities. Utilize the
taxpayer’s income tax returns to verify that the listing is complete.
Determine the type of mines, such as deep or strip, that the taxpayer
operates and the type of facilities owned by the taxpayer. Schedule a tour of
the facilities prior to reviewing invoices so that areas of potential liability such
as clean coal stock piles, loadouts, refuse haul roads, repair shops,
bathhouses and administrative buildings can be identified. Especially note
which pieces of heavy equipment are being used in taxable areas.
Review the disposals of fixed assets for possible taxable sales.
Determine how each item listed on the depreciation schedule or other fixed
asset listing is being used. Determine the preponderance of use for items
used in both taxable and exempt activities. The burden of proof is on the
taxpayer to document that an item’s use is more than 50% exempt. Assets
used indirectly in mining transferred from a related company may be taxable
at their current value if no tax was paid on the original purchase. The use of
the asset may have changed, making it taxable, or it may have been
transferred from a non-Virginia location where the item enjoyed a sales tax
exemption.
Purchases of equipment used to abate or control air or water pollution must

be certified in order to be exempt. The taxpayer should provide
documentation that the equipment has been certified, or obtain certification
during the audit. If not, the equipment should be taxed.
Some expensed items purchased by the taxpayer may be exempt or taxable

depending upon their use. For example, stone for refuse haul roads is
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taxable, but stone purchased for use on coal haul roads is exempt. When
reviewing purchase invoices, a chart of accounts or general ledger with a brief
account description should be used to help determine the taxability of
expensed purchases. Information written on the purchase order or on the
invoice itself may assist the auditor in determining how an item is used. If the
accounts or descriptions are too general or if the items are purchased in bulk,
the items should be taxed at an agreed to percentage. Fuel and other
supplies identified as being purchased for a particular piece of equipment
should be prorated even though the equipment, itself, may be totally taxable
or exempt because of the preponderance of its use.
Auto Dealers and Auto Repair Shops (Rev. 10/97)
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Auto Dealers and Auto Repair Shops
Objective: Discuss the application of sales and use tax (retail sales tax) as it
applies to auto dealers and auto repair shops.
I. History
1/1/90 and after. Tire Tax was imposed.
1/1/95 and after. As a result of Tax Bulletin 94-10, all dealers in the business
of selling tires, anti-freeze, motor oil, and other like automotive accessories,
who charge a disposal fee in connection with the sale of such items, are
required to collect the retail sales tax on the disposal fee, even if it is
separately stated. By contrast, dealers who provide disposal services totally
independent of the sale or provision of tpp are deemed to be providing a
nontaxable service. Taxable fees on which no retail sales tax was charged
should not be listed or extrapolated prior to 1/1/95.
1/1/96 and after. Code of Virginia § 58.1-609.5(9) subjects parts and labor
maintenance agreements to the retail sales tax at one-half (50%) of the total
charge.
12/96 and after. The department's position on certain shop supplies

transferred to customers changed. Transferable bulk supplies can now be
purchased exempt if they are included in a taxable one price charge or shown
separately as a taxable line item on the customer invoice. Since this is a
change in interpretation, it applies on a prospective basis. There is no
change regarding shop supplies that are not transferred to the customer.
I. References
58.1-602 Definition of "Motor Vehicle"

58.1-609.1(2) Motor Vehicle Exemption
58.1-609.3(10) Limited Exemption for Taxicab Operators
58.1-609.5(2) Repair Labor Exemption
58.1-609.5(9) Parts & Labor Maintenance Contracts
58.1-609.7(6) Special Equipment-Handicapped
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B. Virginia Regulations
23 VAC 10-210-10 (VR630-10-1) Adjustments, replacements

and warranties.
23 VAC 10-210-910 (VR630-10-62.1) Maintenance contracts and
warranty plans.
23 VAC 10-210-990 (VR630-10-67) Motor vehicle sales, leases,
and rentals, repair and
replacement parts and
maintenance materials;
taxicabs.
23 VAC 10-210-1000 (VR630-10-68) Motor vehicle dealers.
23 VAC 10-210-1020 (VR630-10-70) Motor vehicle refinishers,
painters and car washers.
23 VAC 10-210-3050 (VR630-10-90) Repair businesses.
23 VAC 10-210-4000 (VR630-10-95) "Sales price" and "cost price."
23 VAC 10-210-4040 (VR630-10-97.1) Services.
C. Ruling Letters
P.D. 97-73 Environmental charges for disposal or recycling are taxable.

P.D. 97-51 No DMV tax was paid so trailer rental was subject to 4.5%.
P.D. 96-392 Automotive refinishers = service - consume all supplies.
P.D. 96-389 Transferable bulk supplies may be purchased exempt.
P.D. 96-342 Vehicle painting facility must pay tax on paint purchases.
P.D. 96-331 Treatment of monitoring services and tracking devices.
P.D. 96-318 Treatment of undercoating and paint & fabric protectors.
P.D. 96-157 4.5% tax due on mobile office rental if no DMV tax paid.
P.D. 96-34 Farm licensed vehicle - may require proration by farmer.
P.D. 95-327 Vehicle pricing guides sold on subscription are exempt
P.D. 95-73 Sale of maintenance contract to common carrier is exempt.
P.D. 95-54 Automotive parts sales to churches are taxable.
P.D. 95-14 After vehicle is titled, upfittings subject to 4.5% tax.
P.D. 94-301 Parts for farm service vehicles are taxable.
P.D. 94-6 Replacement parts for long term lease vehicles are taxable.
P.D. 91-14 Motor oil used in maintenance of rental vehicles is exempt.
P.D. 89-294 Special equip. exempt if purchased by handicapped driver.
P.D. 89-115 Limited exemption for taxicab operators - paint is taxable.
P.D. 88-299 Computer database modem access is non-taxable service.
P.D. 88-210 Extended service agreement deductible is not taxable.
P.D. 88-20 Computer pricing update is taxable if transferred on disks.
P.D. 87-275 Shop supplies taxable at purchase+warranty deductibles.
P.D. 87-264 Taxed warranty plans-transactions between dealer & issuer.
P.D. 87-262 Repair parts exempt if replaced under mfr. warranty.
P.D. 87-261 Shop supply charge not taxable to customers.
P.D. 87-94 Extended warranty plans sold by the dealer are taxable.
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P.D. 86-150 Insurance companies must pay tax on policyholder parts.

P.D. 86-118 Taxability of demonstrator motor vehicles.
D. Virginia Tax Bulletins
95-8 Parts and Labor Maintenance Contracts

94-10 Application of the Sales Tax to Disposal Fees on Waste Tires
and Other Environmentally Hazardous Materials
E. Applicable exemption certificate: ST-10 Resale Certificate
III. General
A. Description of a Motor Vehicle Dealer and Scope of Training
The auditor should view an automotive dealership as a collection of

specialized automotive shops operating as one business. The dealer is
involved with some or all of the following: (1) the sale, lease, and rental
of new or used cars and trucks, (2) the sale of auto parts, (3) auto repairs
and service, and (4) auto body shop repairs. Since most automotive
businesses fall into one of these categories, the training will focus on the
operation of motor vehicle dealers, in effect, looking at the operating
procedures of most automotive companies. These activities sometimes
have unique procedures and different tax treatments. When examined
individually, however, none is particularly difficult to audit. Excerpts from
several relevant regulations illustrate this point.
B. 23 VAC 10-210-990 - Motor Vehicle Sales, Leases, and Rentals, Repair

and Replacement Parts, and Maintenance Materials; Taxicabs
• Paragraph (A) states that "[s]ales, leases, and rentals of motor

vehicles are not subject to the retail sales and use tax provided they
are subject to the Virginia motor vehicle sales and use [DMV] tax . . .
and further provided that such tax has been paid."
• Paragraph (B) describes motor vehicles subject to the DMV tax.
• Paragraph (C) allows a dealer, lessor or renter of motor vehicles to

purchase under a Resale Exemption Certificate, Form ST-10 ". . .
repair and replacement parts and accessories and oil and grease
installed on a motor vehicle before or at the time of sale, lease or
rental which are included in the sales price for measuring the [DMV]
tax or the retail sales and use tax."
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• Paragraph (D) sets out that "[m]aintenance materials such as soaps,

cleaners, etc., used on motor vehicles prior to or in preparation for
sale, lease or rental are subject to the retail sales and use tax."
• Paragraph (E) describes the limited exemption for taxicab operators.
C. 23 VAC 10-210-1000 - Motor Vehicle Dealers
Over the counter sales of parts and accessories by motor vehicle dealers
are subject to the retail sales tax as are parts used to repair customers'
motor vehicles. Charges for repair labor, however, are not taxable when
billed separately. "The tax does not apply to the exchange of parts under
a warranty or guarantee if no charge is made. However, the tax applies
to any difference charged for parts so exchanged." This regulation's last
paragraph explains that "[t]he tax does not apply to a handicapped
person's purchase of special equipment which will be installed on a motor
vehicle to enable him to operate the motor vehicle."
D. 23 VAC 10-210-1020 - Motor Vehicle Refinishers, Painters . . .
"Motor vehicle refinishers and painters are engaged primarily in rendering

personal services, and their gross receipts are not subject to the tax.
However, they are the consumers of the materials used in their business
and are required to pay tax on their purchases. When refinishers and
painters go beyond the rendition of services and sell tangible personal
property such as accessories, parts, seatcovers, etc., they are required to
register and collect and pay the tax on those retail sales."
E. 23 VAC 10-210-3050 - Repair Businesses
The retail sale of auto parts is subject to the retail sales tax and repair
labor is exempt only when separately stated. This regulation also
addresses purchases. "Replacement parts, materials and supplies which
are transferred to the customer may be purchased under certificates of
exemption. The tax must be paid on equipment, tools and all other
tangible personal property used in performing the repair work."
IV. Procedures for the Sale, Lease or Rental of New and Used Vehicles
A. Motor Vehicles Subject to the DMV Tax
Code of Virginia § 58.1-602 defines "motor vehicle" by referring to the

DMV definition found in § 58.1-2401. Importantly § 58.1-602 only
exempts a motor vehicle from the retail sales tax if upon its sale ". . . all
applicable motor vehicle sales and use taxes have been paid." 23 VAC
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10-210-990(B) provides a partial listing of vehicles subject to the DMV tax

which includes "vehicles that are self-propelled or designed for self-
propulsion and every vehicle drawn by or designed to be drawn by a
motor vehicle, including mobile homes and every device in, upon or by
which, any person or property is, or can be, transported or drawn upon a
highway, but excepting devices moved by human or animal power, . . .
and vehicles, other than mobile homes used in Virginia but not required to
be licensed by the state." Please note that off-road vehicles not subject
to safety inspections and not required to be titled in Virginia are excluded
from the definition of "motor vehicle" and are therefore subject to the retail
sales tax. Mobile offices are also excluded from the term "motor
vehicle." (See Section VIII, Paragraph E for more information on mobile
offices.)
B. Sale of Motor Vehicles
Code of Virginia § 58.1-609.1(2) exempts the sale, lease or rental of any

motor vehicle which is subject to the DMV tax provided the tax has been
paid. Any accessories added to a vehicle prior to or at the time of the
sale which are included in the DMV tax computation may be purchased
by the dealer under the resale exemption. Any sales of parts or
accessories after titling which were not included in the DMV tax
computation are subject to the retail sales tax. Note that all sales of
extended warranty plans and vehicle service contracts by motor vehicle
dealers are subject to the retail sales tax. (See Section IV, Paragraph F
- Sales of Extended Warranty Plans and Vehicle Service Contracts.)
C. Daily Rentals vs. Long-term Lease
For audit purposes, the handling of the DMV tax determines whether a
vehicle is a daily rental vehicle (i.e., an airport "rent-a-car") or a long-term
lease vehicle (i.e., a 1 to 4 year lease). The gross proceeds of a daily
rental vehicle are subject to the DMV tax which is added to the quoted
rate and collected from the customer. The rental vehicle plus all repair
parts and routine service supplies which actually become part of the
vehicle (i.e., a replacement headlight, oil, antifreeze) may be purchased
by the dealer under the resale exemption. A long-term lease vehicle,
however, is titled to the leasing company (the lessor) which pays the DMV
tax on the purchase price of the vehicle including any accessories added
to the vehicle prior to titling. The monthly lease payments are not subject
to either the DMV tax or the retail sales tax. The lessor is considered the
user and consumer of any accessories (i.e., cruise control, air
conditioning or upgraded sound system) added to a long-term lease
vehicle after the DMV tax is computed and for any repair parts and
routine service supplies purchased for the vehicle during the life of the
lease. The auditor should check fleet car, truck and trailer leases which
Page - 6
can include a provision for some or all maintenance. This provision is

rarely found in an individual retail lease.
D. Preparation of New or Used Motor Vehicles for Sale, Lease or Rental
23 VAC 10-210-990 exempts those items sold as a component part of a

motor vehicle. Purchases of these items by the dealer may be made
under the resale exemption. Exempt purchases would include
accessories and supplies such as anti-theft devices, floor mats, motor oil,
antifreeze, windshield washer fluid, etc. (Note that a used car dealer
who is not registered for sales tax may use its DMV number on an ST-
10.) The dealer is the consumer of all maintenance materials and
equipment used to prepare the vehicle for sale, lease or rental. Retail
sales tax should be paid at the time of purchase or when any such item is
withdrawn from an exempt resale inventory. Examples of taxable
materials are soaps, cleaners, rags, brushes, sponges, buffers, vacuum
cleaners, etc. Preparation materials which adhere to or are absorbed by
the vehicle (i.e., waxes, leather and fabric treatments, etc.) may be
purchased by the dealer exclusive of retail sales tax because they are
incorporated into the vehicle. Promotional items such as key tags,
personalized paper floor mats, logo umbrellas, etc. are considered
taxable to the dealer under the advertising regulation (even though they
are "sold" with the car).
E. Demonstrators and Executive Vehicles
Accessories, repair parts and routine service supplies are taxable if

purchased by a dealer for a vehicle used in a taxable manner. This
includes demonstrators which are ordinarily driven by employees of a
dealer (see P.D. 86-118), executive vehicles driven by dealership owners
or management and loaner vehicles. Even though they may remain in
the new or used vehicle inventory and are always for sale, the dealer is
considered to be operating the vehicle for his own use and denied the
resale exemption. Once the vehicle is no longer being used in a taxable
manner and is being prepared for sale, the resale exemption becomes
available to the dealer.
F. Sales of Extended Warranty Plans and Vehicle Service Contracts
The department revised its treatment of extended warranty plans and

vehicle service contracts (plans) in 1987. P.D. 87-94 explains the
rationale of this change and is extensively quoted below. This public
document deals with plans offered for sale by automobile dealers in
connection with the sale of new and used motor vehicles.
Code of Virginia § 58.1-609.5(1) "provides an exemption from the sale

Page - 7
and use tax for 'insurance . . . transactions which involve sales as

inconsequential elements for which no separate charges are made. . . .'"
In addition, 23 VAC 10-210-910 "provides in pertinent part that

'[e]xtended warranty plans issued by an insurance company regulated by
the Bureau of Insurance of the State Corporation Commission are
insurance transactions and are not subject to the tax.'"
"[I]t has been determined that [plans] which identify the seller, dealer or
manufacturer as the guarantor, (the party generally identified as 'We' in
the contract), against certain specified motor vehicle breakdowns, are not
considered contracts of insurance subject to licensure or regulation by the
Bureau of Insurance. This is true . . . notwithstanding that such contracts
might also be issued through an insurance agent or underwritten by an
insurance company which is licensed or regulated by the Bureau."
"However, [plans] which identify some party outside the manufacturing/

sales chain as the 'We' guaranteeing against the covered breakdowns are
generally considered by the Bureau of Insurance to be contracts of
insurance subject to regulation and licensure by the Bureau."
"[T]he total sales price of all extended warranty plans and/or vehicle
service contracts issued by Virginia automobile dealers is subject to tax
. . . at the time of sale to customers and the dealers must report such tax
collected to the department when filing their monthly retail sales and use
tax returns." Plans are subject to the retail sales tax - not the DMV tax.
Prior to January 1, 1996, plans were subject to the retail sales tax at
100% of the total charge to the customer. After January 1, 1996, plans
are taxed at one-half (50%) of the total charge. (Refer to Virginia Tax
Bulletin 95-8.) The auditor will have to take this statute change into
account when extrapolating a purchase sample including taxable plans.
This can be accomplished by using the Multisam program.
G. When DMV Tax is Erroneously Charged
It is good practice to check several "deal" files (dealer term referring to

the paperwork connected with an individual sale and trade, if any) to see
if the dealer is including sales subject to the retail sales tax in the DMV
tax calculation. If this occurs, a significant understatement in the taxable
sales reported on the ST-9 is possible, especially if an extended warranty
plan or vehicle service contract is taxed incorrectly. The correct retail
sales tax should be held in the audit but no penalty should be applied to
this audit liability if the DMV tax was paid. The dealer can be advised to
contact DMV to inquire about a refund.
Page - 8
H. Motor Vehicles are Subject to the Retail Tax when No DMV Tax is Paid
23 VAC 10-210-990 discusses the retail sales tax exemption of motor

vehicles subject to the DMV tax. The DMV tax is generally paid by the
purchaser when a new title is issued. The phrase ". . . and further
provided that such tax has been paid" was added to the regulation to
subject motor vehicles to the retail sales tax in situations when the DMV
tax would normally apply but was not paid. For example, old cars are
often sold to individuals for parts or restoration. If the purchaser does not
title the car, he is liable for the retail consumer use tax. However, most
sales between individuals (or when the seller is not registered to collect
the retail sales tax) would fall under the occasional sale rule. If a dealer
gives the purchaser a properly executed title, he is not required to collect
the retail sales tax. Conversely, if a dealer does not provide the
purchaser with a properly executed title, he is required to collect the retail
sales tax unless the sale would otherwise be exempt. It is important for
the auditor to understand that a vehicle that is subject to the DMV
regulations, but exempted from the DMV tax, is not subject to the retail
sales tax. For example, DMV exempts the sale of a motor vehicle
designed for the transportation of ten or more passengers when
purchased by and for the use of a nonprofit church. The sale of such a
motor vehicle creates no retail sales tax liability.
V. Procedures for the Sale of Auto Parts
A. Sale of Auto Parts
The retail sale of parts is taxable. At a dealership, there is almost always

a separate accounting for parts sales. Sales are invoiced to customers
on parts tickets or counter tickets which usually have their own numbering
sequence and are filed by ticket number. The auditor should check that
all periods within the sample are present to ensure that a package of
tickets was not used out of sequence. Since revenue figures should be
readily available for parts sales, it is appropriate to use them and the
Multisam program during the audit write-up to project any parts liability.
Code parts sales in the key field to a unique "S#" (#=1-5) as they are
entered to designate this area of the audit. Part withdrawals from an
exempt resale inventory to a dealer's inventory of motor vehicles, for
internal use, for customer repairs and warranty repairs are covered in
section VI.
B. Exemption Certificates - Parts
Some parts departments have every exemption certificate they have ever
Page - 9
accepted. Ask if the dealer is willing to go through the certificates and

pull the ones which have been active during the audit period. Stress that
no certificates should be discarded at this point. After the audit is
completed, suggest that the "dead" exemption certificates be destroyed
(or at least filed separately from the active customers). This will prevent
the next auditor from being confronted with huge exemption files. There
are many customers who can provide valid exemption certificates
including federal, state and local governments, common carriers, farmers,
auto parts stores, garages, service stations and other dealers. Parts
departments are often lax in reviewing exemption certificates so many
may not be valid on their face. The church exemption (ST-13A), for
example, cannot be accepted in good faith, even on a first audit.
Likewise, ST-10s with FEIN numbers are never valid. Remember,
however, that a used car dealer can use his DMV number on the ST-10 to
purchase parts to recondition cars for sale.
C. Cash Sales
It is not unusual to find parts tickets which have "Cash Sale" as the only
customer identification. This is acceptable for taxable sales but not for
exempt sales. If the dealer cannot identify the specific customer of an
exempt cash sale, such sale should be assumed to have been subject to
the retail sales tax and included in the audit.
D. Cash Discounts
At a motor vehicle dealer, cash discounts on account are usually only

offered to customers of the parts department. The auditor should verify
that any cash discounts offered by the dealer are being accounted for
correctly.
E. Purchases of Taxable and Exempt Inventories
Purchases of parts for dealer resale inventories may be made under a

resale exemption. Most dealers keep strict control on these inventories
and all withdrawals are recorded. Many dealers include some
consumable items (i.e., oil dry, razor blades, parts cleaner, etc.) in the
parts inventory. The auditor must determine how the dealer is operating.
Some dealers buy everything which goes into an inventory exempt
because at the time of purchase it is not known if the item will be resold or
consumed by the dealer. Other dealers attempt to correctly pay or accrue
retail sales tax on all consumable purchases (even though they may
occasionally sell such items over the counter). In the latter scenario there
is no consumer use tax liability when these already taxed items are
withdrawn from the inventory. If the dealer has purchased everything
exempt and has accrued no consumer use tax upon the withdrawal of
Page - 10
self-consumed supplies, it is probably best for the auditor to pick up any

liability from the purchase invoices. If the dealer has been accruing
consumer use tax upon the withdrawal of self consumed supplies and the
auditor is comfortable with the dealer's understanding of the regulations
and the degree of internal control, it is probably easier to audit the
inventory withdrawals (usually shown on parts tickets and/or repair orders
- see section VI) and to ignore the purchase of these items. If a parts
ticket is generated for self-consumed withdrawals, the auditor must
determine if it is priced out at retail or cost. Consumer use tax is only due
on the dealer's cost.
VI. Procedures for an Auto Repair Shop
A. Auto Repair Shop Sales
A motor vehicle dealer's auto repair shop sales are almost always
accounted for separately. Auto repair shop sales are usually divided into
three areas: (1) the repair of vehicles for which the customer is
responsible for payment, (2) warranty repairs for which the vehicle
manufacturer, dealer or issuer of an extended warranty plan or vehicle
service contract is responsible for payment and (3) internal repairs which
include any work on the dealer's own vehicles or motor vehicles in the
new and/or used inventories. Auto repair shops usually invoice their
customers on repair orders or R.O.s. One repair order could conceivably
include all three areas. In this instance, many dealers print separate
repair orders for each area using the same repair order number. The
customer usually only sees the price details for those items for which he
pays. Repair orders usually have their own numbering sequence and are
filed by repair order number. This can impact a sales sample since repair
orders can sometimes remain open for weeks before the repair is
completed. The auditor may need to examine earlier numbers to find
repair orders which were closed during the sample period. The auditor
should also check that all periods within the sample are included to
ensure that a package of repair orders was not used out of sequence.
Since revenue figures should be readily available for auto repair sales, it
is appropriate to use them and the Multisam program during the audit
write-up to project any auto repair liability. Code such sales in the key
field to a unique "S#" (#=1-5) as they are entered to designate this area of
the audit.
B. Exemption Certificates - Auto Repair Shop
There are many exemption certificates which may be accepted for vehicle
repairs. Governments, nonprofit schools and common carriers are
examples of customers who can present valid exemption certificates.
Page - 11
The resale exemption is also appropriate when another dealer or repair

business has sublet work done on their customer's vehicle. (See Section
VI, Paragraph E - Sublet Repairs.) Many dealers keep all exemption
certificates in the parts department. While a resale exemption may be
valid for the purchase of parts from the parts department (i.e., by an auto
parts store), the exemption is not valid when the same customer brings
their own business vehicle (i.e., a parts delivery truck) for service. Since
such a certificate could not have been accepted in good faith for the
repair, the dealer should be held liable for any inappropriate exempt
sales.
C. Separately Stated Repair Labor and Fabrication Labor
Code of Virginia § 58.1-609.5(2), 23 VAC 10-210-1000, 23 VAC 10-210-

3050, 23 VAC 10-210-4000 and 23 VAC 10-210-4040 all refer to the
exemption for separately stated repair labor. If only one price is quoted
which includes both parts and repair labor, then the retail sales tax will
apply to the total charge. The auditor also needs to verify that taxable
fabrication labor is not being treated as exempt repair labor. This occurs
most frequently in specialty repair shops where, for instance, instead of
repairing an existing drive shaft, a new one is fabricated.
D. Coupon and Discount Programs
Most motor vehicle dealers offer coupon or other discount programs. The
auditor needs to verify that such discounts are being accounted for
correctly. Often the discount is credited to separately stated labor so
there is no retail sales tax impact. If the offer is for a free service such as
an oil change, then the dealer becomes responsible for consumer use tax
on any supplies (oil and filter) withdrawn from an exempt resale inventory.
E. Sublet Repairs - Auto Repair Shop
Sublet repairs occur when the dealer sends a part from a customer's
vehicle or the vehicle itself to be worked on at another repair shop. Some
dealers also show towing charges in this category. The dealer should
provide the sublet shop with an ST-10 if tpp is involved. If the sublet
repair is strictly labor (i.e., grinding valves by a machine shop) and is
described as such on the repair order, then no retail sales tax applies to
the sublet repair. If the sublet repair is for both parts and labor and only
one price is quoted on the repair order, then retail sales tax must be
charged on the entire sublet repair. A good method of accounting for
sublet repairs is for the dealer to itemize the sublet parts (which do not
have to be identified as sublet) in the parts sales area of the repair order.
The customer is then taxed on the correct (and often marked-up) price.
In this method, only exempt sublet repair labor or services are shown in
Page - 12
the sublet area of the repair order. If the dealer erroneously pays tax to
the sublet shop, he is not relieved from charging his customer the retail
sales tax. On a first audit, however, the auditor may choose to pick up
the difference in retail sales tax (as taxable measure) between the
amount of tax paid to the sublet repair shop and the tax which the
customer should have been charged. This method should be utilized only
if the dealer (who benefits from it) is willing to pull the necessary sublet
shop invoices to verify the amount of retail sales tax paid. Alternatively
and in subsequent audits, if the sublet is not identifiable as a service only
charge, the entire amount should be picked up as taxable in the audit until
the dealer can prove otherwise. Since no credit is allowed for any tax
paid to the sublet business, the dealer can be advised to seek a refund of
any such tax directly from the sublet company.
F. Manufacturer's Warranty and Dealer Guarantees
There is no sales or consumer use tax liability on parts or accessories

withdrawn from an exempt resale inventory for replacement or exchange
under a manufacturer's warranty or dealer guarantee as long as there is
no charge to the customer. 23 VAC 10-210-10 states that the "tax must
be computed on the actual additional amount, if any, paid to the dealer for
the new article." The auditor needs to establish what, if any, guarantees
are offered by the dealer. Even if no formal guarantee exists, there is
usually an implied guarantee of between 30 and 90 days. If the dealer
does not have a formal guarantee exceeding this period, any
replacements withdrawn from an exempt resale inventory and given to
the customer should be considered subject to consumer use tax. The
dealer was under no obligation to make the free replacement and did so
at his own discretion.
G. Extended Warranty Plan Transactions and Customer Deductibles
If retail sales tax was charged at the time of sale of an extended warranty
plan or vehicle service contract (plan), and the plan requires that the
customer pay a deductible amount for a covered repair, such deductible
amount is not subject to the retail sales tax. Likewise, if the dealer bills
the issuer of such a taxed plan for reimbursement, there is no retail sales
tax due. Plan transactions become extremely complicated because they
seldom cover all of the repairs. Obviously, parts not covered by the plan
are taxable to the vehicle owner.
H. Internal Repair Orders
Most internal repair orders are for the preparation of vehicles for sale.
Because the parts and accessories used in this activity are exempt under
the resale exemption, no consumer use tax liability exists. There will be
Page - 13
relatively few internal repair orders for company owned vehicles (i.e., a
tow truck, parts truck or executive vehicle). TPP listed on these repair
orders is subject to consumer use tax. Since internal repair orders
frequently show prices at cost, the taxable amount is usually easy to
determine. The internal repair order is often the only record of the
withdrawal of these items for the dealer's own use. However, the auditor
must be aware that a dealer may have paid tax at the time of purchase on
some items shown on an internal repair order.
I. Transferable Bulk Supplies
Effective December 1996, the department changed its position regarding

transferable bulk supplies. Transferable bulk supplies include such items
as brake fluid, grease and lubricants, windshield washer fluid, anti-freeze,
power steering fluid and transmission fluid. Additionally automotive
adhesives and sealants, including gasket seal; automotive light bulbs and
electrical wire for automotive repairs; and small automotive hardware,
including nuts, bolts, washers, cotter pins and similar items would be
considered transferable bulk supplies. Previously such items which were
not separately listed on the customer invoice were generally treated as
shop supplies. The dealer was expected to pay tax at the time of
purchase or when such items were withdrawn from an exempt inventory.
P.D. 96-389 describes two acceptable alternatives where transferable
bulk supplies can be purchased exempt of tax and then tax charged to
the customer upon their sale. (Obviously, any withdrawal for the dealer's
own use of transferable bulk supplies is subject to consumer use tax.)
Flat Fee Charges: The [T/P's] method of invoicing includes, for

a flat fee, all parts, supplies, materials, and labor. It is therefore
evident that the Transferable Bulk Supplies and other parts
transferred to the customer are properly taxed at the time of the
sale. At the same time, the customer is aware the entire
charge is subject to the tax.
Separately Stated Charges: . . . In the event the [T/P] decides

to separately state parts and labor on its invoices, it will be
required to separately state the sales price of Transferable Bulk
Supplies on the invoices to customers and add the tax on this
charge. This is because [tpp] which has been purchased
exempt for resale must be taxed when it is sold at retail. Also,
by separately stating the Transferable Bulk Supplies on the
invoice, the customer knows that it is a taxable component of
the . . . total charge.
P.D. 389 continues by stating that these charges can be reasonable

estimates.
Page - 14
Obviously, it would be excessively burdensome to calculate the

sales price for such items as grease and brake pad adhesives.
The [T/P] may therefore calculate the sales price of the
Transferable Bulk Supplies by using a reasonable estimate
which reflects the sales price. For example, the separate
charge for these Transferable Bulk Supplies can be listed on
the invoice as a percentage of the total bill or some other
reasonable estimate which reflects the sales price of these
items.
Regardless of how the [T/P] might reasonably estimate the

charge for Transferable Bulk Supplies, this charge must appear
as a separate item on the invoice to customers. . . Also the tax
must be added on the charge for Transferable Bulk Supplies
(just as the tax is added on the sale of any other parts.)
Unless either of these two methods are used, the items listed above
would continue to be treated as consumable shop supplies.
J. Shop Supplies
Motor vehicle repair shops and dealers are required to pay retail sales tax
or accrue and remit consumer use tax on consumable supplies used in
repairing or servicing customer vehicles. Repair shops often attempt to
recoup such costs by charging customers an amount (usually a
percentage of the labor charges) called "shop supplies." Tax should not
be charged to the customer for such shop supplies. Items normally
considered shop supplies are cleaning supplies (including rags, drop
cloths, floor sweep, mops and buckets); paper/plastic seat covers; work
clothes, tools, equipment and machinery used in repair work (including
repair and replacement parts and supplies for that equipment); soaps,
degreasers, and thinners; and sand paper, steel wool, and emery cloth;
and other similar items that are not transferred to customers.
K. Purchases by Auto Repair Shops
All purchases, except for immediate resale or those placed into an

exempt resale inventory, are subject to the retail sales tax. The auditor
should determine if retail sales tax was paid on expense items as well as
tools, computer diagnostic equipment, and other assets. In-ground lifts (if
installed by the seller) are usually considered real property transactions.
Most lifts are now surface mounted and retain their identity as tpp.
VII. Procedures for an Auto Body Shop
A. Auto Body Shop Sales

Page - 15
Most motor vehicle dealers track body shop sales separately. Body shop
sales are divided into non-taxable services (i.e., the painting of a vehicle)
and taxable sales of parts and accessories. Customers are usually
invoiced on repair orders or R.O.s which normally use a numbering
sequence different than those in the dealer repair shop. Repair orders
are normally filed in numerical sequence. As with auto repair shops, this
can impact the sales sample since body shop repair orders can
sometimes remain open for months before the repair is completed. The
auditor may need to examine earlier numbers to find repair orders which
were closed during the sample period. The auditor should also check that
all periods within the sample are included to ensure that a package of
repair orders was not used out of sequence. Since revenue figures
should be readily available for auto body sales, it is appropriate to use
them and the Multisam program during the audit write-up to project any
auto repair liability. Code such sales in the key field to a unique "S#"
(#=1-5) as they are entered to designate this area of the audit.
B. Motor Vehicle Refinishers and Painters Provide Personal Services
23 VAC 10-210-1020 clearly states that motor vehicle refinishers and

painters provide personal services. Their charges to customers for these
services are not subject to the retail sales tax. Such service providers are
the consumers of all materials used in providing the service (i.e., body
filler, sandpaper, masking tape and paper, cleaners, and paint). Tax must
be paid at the time of purchase by an independent body shop. If paint is
purchased directly for the body shop by a dealer, retail sales tax must be
paid at the time of purchase. If paint is placed in an exempt resale
inventory because it is not known at the time of purchase whether paint
will be used by the dealer or resold, then retail sales tax is due at the time
of withdrawal. Paint cannot be billed to the customer as a part on a repair
order, however, it is not unusual to find body shops which charge their
customers retail sales tax on paint. In a first audit, the auditor may
"turnaround" this practice at the conclusion of the audit. If this is done,
any exempt sales of paint on repair orders should be picked up at cost
and any inventory of paint purchased exclusive of retail sales tax should
be taxed.
C. Shop Supplies
As with auto repair shops, a separately stated charge for shop supplies
(usually a percentage of the labor charges) is often invoiced to the
customer to recoup the cost of consumable items incurred by the motor
vehicle refinisher. These shop supply charges are not taxable to the
customer. This is true even after December 1996 when the issue of
transferable bulk supplies was addressed. Because motor vehicles
Page - 16
refinishers and painters render personal services, they are required to

pay the tax on their purchases of all material and supplies used in their
business regardless that such materials and supplies (i.e., body putty,
paint, etc.) are transferred to the customer.
D. Taxable Sales by Auto Body Shops
23 VAC 10-210-1020 clearly addresses taxable sales by motor vehicle

refinishers and painters. "When [they] go beyond the rendition of
services and sell tangible personal property such as accessories, parts,
seatcovers, etc., they are required to register and collect and pay the tax
on those retail sales." Auto body shops repairing accident damage may
buy repair parts (a fender, a hood, window glass, etc.) under a resale
exemption.
E. Sublet Repairs - Auto Body Shops
Refer to the sublet repair discussion in section VI. Sublet charges are
usually more substantial in body shops - particularly when accident
damage repairs are involved.
F. Insurance Transactions
The requirement to collect retail sales tax on repair transactions applies to

transactions paid for in whole or in part by insurance companies.
Insurance companies enjoy no exemption from retail sales tax when
paying for work performed on their policyholder's vehicles. The retail
sales tax applies to all sales of parts, accessories, etc. Body shops
normally give binding estimates which list all parts and repairs that will be
required. The body shop repair order is usually a duplicate of the
estimate. If additional parts are needed and the parts allocation is
increased on the repair order, the retail sales tax applies to the larger
amount.
G. Purchases by Auto Body Shops
Purchases by auto body shops are always taxable except for parts for
resale and sublet work which are itemized on the repair order. The
auditor should verify that retail sales tax has been paid on expensive
machines such as frame straighteners, color match computers and paint
booths.
VIII. Miscellaneous Procedures
A. Franchise Dealer Records

Page - 17
Any franchise dealer (GM, Chrysler, Ford, etc.) is required by the

manufacturer to keep its records using a uniform accounting system
including the chart of accounts and financial statement formats. These
are a great tool to use for sales tax payable figures as well as purchase
and sale figures for each category audited.
B. Computerized Sales Records
Most motor vehicle dealers are highly computerized. While the original
parts tickets, repair orders and other sales documents are usually readily
available, it is often easier to examine existing computer printouts. Dealer
personnel may be flexible enough to create reports or printouts of the
exact information which an auditor requests. Instead of buying preprinted
forms, dealers routinely have computers directly print parts tickets and
repair orders. Computers have made auditing faster if for no other reason
than the documents are always legible. Computers, however, can mask
obvious programming errors. Most auto dealers use an industry wide
system of account codes. Someone at the dealer probably entered the
tax status of each code into the computer. This can result in retail sales
tax never being charged on certain codes. The auditor could find, for
example, that parts sales to employees are never taxed.
C. Purchase Records
Most motor vehicle dealers continue to follow the industry standard of

filing expense purchases in monthly vendor envelopes. These envelopes
are arranged alphabetically within each month. While these envelopes
slow the auditor's work, it allows flexibility in choosing samples containing
non-contiguous months. Assets are usually filed separately. The auditor
should inquire about leased or financed equipment. These usually are
large dollar purchases which may not be filed with other invoices.
D. Gross Sales as Shown of the ST-9s
It is proper to include vehicle sales in the gross sales figure reported on

the ST-9. These vehicle sales should also be deducted as exempt sales.
Sometimes dealers do not follow the correct procedure and report no
vehicle sales on the ST-9. If the ST-9 gross sales figures are used for
extrapolation purposes, the auditor should confirm that a consistent
method of reporting was followed throughout the audit period. If not,
adjustments must be made to make the monthly figures compatible.
E. Mobile Office Rentals
P.D. 96-157 addresses the taxability of mobile office rentals. In January

Page - 18
1987, DMV removed "mobile office" from the definition of "motor vehicle"
but specifically imposed a 2% tax on the sales price of each mobile office
sold in Virginia. Since mobile offices are no longer defined as motor
vehicles, the DMV tax on motor vehicle rentals has not applied since
1987. If the 2% DMV tax was paid at the time of purchase of a mobile
office by the owner, then the lease or rental is not subject to the 4.5%
retail sales tax. Conversely, if the 2% DMV tax was not paid at the time
of purchase by the owner, then the monthly charges for the mobile office
rental are subject to the 4.5% retail sales tax. The burden of proof rests
with the lessee (person using the mobile office) as described in P.D. 96-
157.
For future rentals of mobile offices, the [T/P] should request

proof from the renter that the 2% [DMV] tax has been paid on
the purchase price of the mobile office. The [T/P] should then
retain such proof with the records of the transactions for at
least 3 years beyond the closing date of the rental.
F. Vehicle Pricing Guides
As the result of an unfavorable ruling in Carr v. Department of Taxation in

1995, the department has been forced to change its position on the
taxability of subscription pricing guides (i.e., N.A.D.A.) which list the
current market values of used cars. The department now considers that
these guides fall under the exemption provided by Code of Virginia §
58.1-609.6(3). The guides are considered to be publications available for
general distribution to the public and meet the interval test provided in the
statute. Subscription sales qualify for exemption from the retail sales tax;
however, sales of the guides at retail will remain taxable. Subscription
pricing guides published four or more times per year should not be
included in any future audit.
G. Computer Database Service
P.D. 88-299 addresses the taxability of a user-initiated database service.

Dealers are provided with access to a database which contains
information on inventory, pricing, location, and availability of automobiles
by way of leased equipment. Each month the dealer receives a monthly
hard copy of the information retrieved and a monthly subscription fee is
charged. The customer charge for access to the database is exempt,
since the true object of the transactions is the provision of a service. The
lease or rental of computer equipment by dealers or their receipt of
information on hard copy in connection with this service does not change
the exempt status of the transactions. Although the lease of computer
equipment to customers in connection with the database service is not
taxed to the dealers, the database company is required to pay use tax.
Page - 19
H. Alarm Systems and Motor Vehicle Security and Tracking Devices
P.D. 96-331 addresses the taxability of alarm systems and specifically

deals with the new type of security system that is monitored through a
satellite uplink. The charge for monitoring services is exempt from tax.
Other services provided on a cost-per-use basis, such as unlocking
customer's doors, locating lost vehicles, trip planning and giving
directions are also exempt from tax. In the P.D., the t/p sells its product
through independent dealers. Since the t/p rather than its independent
dealer, monitors the system, the sale of the security system is subject to
the DMV tax if installed prior to titling or the retail sales tax if installed
afterward. However when the t/p sells its products (which it monitors)
through the mail, it is providing a personal service as described in the
burglar alarm regulation.
I. Limited Exemption for Taxicab Operators
Code of Virginia § 58.1-609.3(10) states that the retail sales tax does not
apply to "[p]arts, tires, meters and dispatch radios sold or leased to
taxicab operators for use or consumption directly in the rendition of their
services." It was the intent of the General Assembly to limit the scope of
exemption for taxicab operators. 23 VAC 10-210-990(E) further limits the
exemption by stating that "[a]ccessories, maintenance materials, and all
other tangible personal property purchased by a taxicab operator are
subject to the retail sales and use tax." Since the term "parts" is not
specifically defined, it must be read in the context of the rest of the statute
thereby taking on a very narrow connotation. For example P.D. 89-115
ruled that paint purchased by a taxi company to maintain its fleet of cabs
was not exempt from retail sales tax. If the dealer has not previously
been informed by the department of the limited nature of the exemption
and had an ST-20 exemption certificate at the time of the sale, such
certificate should be considered to have been accepted in good faith.
J. Special Equipment for Handicapped Drivers
Code of Virginia § 58.1-609.7(6) states that the retail sales tax does not
apply to "[s]pecial equipment installed on a motor vehicle when
purchased by a handicapped person to enable such person to operate
the motor vehicle." Under Virginia's strict interpretation of statutes, the
equipment must be purchased by the handicapped person and also
enable the person to operate the vehicle. Therefore, the purchase of a
wheelchair lift by parents of a handicapped youngster which allows the
child to ride in a vehicle does not fall within the statute. If an ST-10B
exemption certificate was on file at the time of an improper exempt sale of
special equipment, such certificate should be considered to have been
Page - 20
accepted in good faith if the dealer has not previously been informed by
the department of the limited nature of the exemption.
K. Litter Tax
Motor vehicle dealers are liable for the $10.00 annual litter tax since the
tax is imposed on any person who wholesales, distributes or retails motor
vehicle parts. If the dealer services drink and/or snack machines
available to the general public, the additional $15.00 tax (imposed on a
wholesaler, distributor or retailer of groceries, soft drinks or carbonated
waters) applies. If the dealer only receives a commission from a vending
company, the additional $15.00 would not apply.
L. Tire Tax
The auditor should be aware of the tire tax status of the dealer. Many
dealers do not inventory tires and sublet work to retail tire stores. In this
case it is proper for the dealer to pay the tire tax to the tire store. If the
dealer has significant retail tire sales, a tire tax registration is required.
(Refer to the tire tax statutes, regulations and tax bulletins for details.)
M. Farm Licensed Vehicles
P.D. 96-34 addresses purchases by a farmer for a vehicle specifically

licensed by the DMV as a "farm vehicle." In this limited circumstance a
dealer can accept a valid ST-18 exemption certificate for purchases of
tires and other accessories for farm vehicles by a farmer engaged in
agricultural production for market. However, if the "farm licensed vehicle"
is used for both taxable and exempt purposes, the farmer must accrue
and report tax on the parts based on the percentage of time the vehicle is
used in a taxable manner. For example, transportation of agricultural
products to market is a taxable use. This in no way alters the
department's position that all purchases of tires and other accessories for
a vehicle having a normal DMV license (even if used on a farm) are
subject to the retail sales tax.
Newspapers, Etc.
Page - 1

Newspapers, Magazines, Periodicals and Other Publications

publications.
I. History
Prior to 07/01/95, sales of backcopies of publications by the publisher or

his agent were taxable.
Effective 07/01/95 such sales are exempt. Sales of backcopies by

anyone other than the publisher or his agent remain taxable.
II. References
A. Code of Virginia Sections 58.1-609.3.2.(v) and 58.1-609.6(3)

B. Virginia Administrative Code 23 VAC 10-210-1060, 23 VAC 10-210-920.
C. Ruling Letters - Commissioner's Ruling dated March 11, 1991, PD 94-
152, PD 94-248
D. Virginia Tax Bulletin - None
E. Applicable exemption certificate - ST-11
III. General
A. Sales. The sales and use tax does not apply to the retail sale of any
publication issued daily, or regularly at average intervals not exceeding
three months, except that newstand sales of the publications are taxable.
B. Purchases. The sales and use tax does not apply to purchases of
equipment, printing or supplies used directly to produce a publication as
defined below whether sold at retail or distributed at no cost.
C. Definitions.
1. Publication shall mean any written compilation of information available

to the general public. It does not include general reference materials and
their periodic updates.
Newspapers, Etc.
Page - 2
2. Newsstand shall mean a definite place of business at which

newspapers or magazines are sold, but does not include coin-operated
newspaper boxes.
D. Advertising inserts or supplements and other printed matter distributed

with or as a part of a nontaxable publication are not subject to the tax.
E. The purchase of other printed matter and materials distributed with or as

a part of a nontaxable publication is subject to the tax unless otherwise
specifically exempted.
IV. Procedures
A. Purchases. The industrial manufacturing exemption is extended to

publishers as provided for in the Code of Virginia Section 58.1-609.3.2(v)
- The retail sales and use tax does not apply to equipment, printing, or
supplies used directly to produce a publication as described in Section
58.1-609.6(3) whether it is ultimately sold at retail or for resale or
distribution at no cost.
Publication as described in Section 58.1-609.6(3) is any publication

issued daily, or regularly at average intervals not exceeding three months,
and advertising supplements and any other printed matter ultimately
distributed with or part of such publications. Newsstand sales of the
same are taxable.
"Used directly" is defined in 23 Virginia Administrative Code (VAC) 10-

210-920 as "those activities that are an integral part of the production of a
product, including all steps of an integrated manufacturing process, but
not including incidental activites such as general maintenance,
management, and administration.
Thus, when reviewing purchases, the auditor should follow the guidelines
for auditing manufacturers and processors. Items used in pre-production
activities, or used indirectly in production, cannot be purchased exempt of
the tax by publishers.
Newspapers, Etc.
Page - 3
B. Sales. All newsstand sales of publications are taxable. Sales of

backcopies of exempt publications by the publisher or his agent are
also exempt. In determining if the subscription sale of a publication is
exempt, the auditor must refer to the following guidelines.
1. Exempt Publications. In order to be exempt from the retail sales

and use tax, a newspaper, magazine, periodical or other publication
must be a publication, as previously defined, and be issued at the
required intervals, i.e.,
(a) It must be a compilation of information,
and
(b) it must be available to the general public,
and
(c) it must be issued daily, or regularly at average intervals not

exceeding three months.
A publication which contains articles, news stories, and letters to the

editor is consistent with the definition of a publication.
2. General Reference Materials. General reference materials and

their periodic updates are not considered exempt publications.
Reference materials include loose-leaf reference volumes published
annually and updated periodicaly. They also include "reporters"
which are devoted to matters of a specialized interest. General
reference materials are not limited to publications that are
supplemented with periodic updates.
3. Advertising Magazines The General Assembly intended for

advertising to be outside the scope of the exemption granted for
publications. Thus advertising magazines, such as those advertising
homes for sale, are not exempt publications.
Advertising supplements ultimately distributed with or as a part of

exempt publications are exempt.
Newspapers, Etc.
Page - 4
4. Publications on CD-Rom. The exemption for publications is applicable

regardless of the medium of the publication - whether it is in the
traditional print format or in microform(microfilm and microfiche) or
CD-Rom.
Provided (i) the printed version of a publication meets the exemption

criteria, (ii) the taxpayer makes such available in microform or CD-
Rom on a subscription basis with a frequency of delivery at least four
times a year, and (iii) subscribers receive the microforms of CD-Rom
at the normal subscription interval, sales of microforms, etc., are
nontaxable.
Additionally, copies of articles sent via electronic means (fax, internet,

or other electroninc means) are not taxable since no tangible
personal property is conveyed in providing this information.
DEALER--NEXUS
Objective: Discuss the application of sales and use tax as it applies to who is a
dealer and if a dealer has nexus.
I. References
A. Code of Virginia Section §58.1-612
B. Virginia Tax Administrative Code 23VAC 10-210-460

(Regulations)
C. Ruling Letters PD 89-102, PD 89-299, PD 91-286, PD 91-

314, PD 92-136, PD 93-25, PD 93-141, PD 93-240, PD 94-10,
PD 94-62, PD 94-205, PD 94-266, PD 95-111, PD 95-250, PD
96-112, PD 96-339, PD 97-45, PD 97-81, PD 97-266, PD 97-
276, PD 97-306, PD 97-402, PD 97-459, PD 98-147, PD 98-
161, PD 99-26, PD 99-60, PD 99-94, PD 99-187, PD 00-53, PD
00-61, PD 00-77,PD 00-137, PD 00-193, PD 01-105, PD 01-
115, PD 02-113,PD 04-38, PD 04-4, PD 04-129
D. Case Law Scripto, Inc. v. Carson, 361 U.S. 207 (1960);

National Geographic Society v. California Board of Equalization
430 U.S. 551(1977); Quill Corp. v. North Dakota By and
Through Heitkamp, 112 S.Ct. 1904 (1992); Current, Inc. v. State
Board of Equalization, 24 Cal. App. 4th 382 (1994); Intercard v.
Tax Tribunal, Kansas (1995); Arizona Department of Revenue
v. Care Computer Systems, Inc., Arizona Court of Appeals, Div.
One, No. 1CA-TX98-0003, July 25, 2000; Quantex
Microsystems, Inc., Louisiana Court of Appeal, First Circuit, No.
2000 CA 0307, July 3, 2001; Dell Catalog Sales v.
Commissioner of Revenue Services, Conn. Sup 179 (2003);
Comptroller v. Furnitureland South, Inc. and Royal Transport,
Inc. Maryland Tax Court, Nos. 02-SU-OO-305 & 02-SU-OO-306
(10/22/03); Borders Online LLC v. California Board of
Equalization, 129 Cal. App 4th 1179
II. General
A. Nexus describes the amount and degree of business activity that must
be present before a state can require that an entity collect sales and
1
use tax on sales made in that state. The amount of activity or
connection that is necessary to create nexus is defined by state statute
and/or regulation and case law. When there is a dispute about nexus
that is not resolved at the audit appeal level, the case may progress to
the state court and then to the Supreme Court of the United States.
Sales and use tax nexus decided by the courts is based on the
wording of the state’s law and how it relates to the Commerce Clause.
The Commerce Clause is contained in Article I, Section 8 of the U.S.
Constitution. It empowers Congress to regulate interstate commerce
and commerce with foreign countries; and is used as a basis for
judicial review of state actions by the Supreme Court. At the federal
level, the court decides if the state’s law is a burden to interstate
commerce. Cases appealed to the Supreme Court have only recently
began to deal with the states’ power to require companies who have a
significant economic impact in their state to register and collect sales
and use tax. See copies of court cases provided at the end of this
procedure.
Nexus requirements are different for different taxes. This audit

procedure deals only with nexus requirements for sales and use tax.
For discussion of Public Law 86-272, which deals with income tax, see
G below.
B. Sales or use tax is collectible from all persons who meet the definition
of a dealer and who have sufficient activity within the Commonwealth
to establish nexus.
C. Virginia Public Procurement Act; Certain Transactions Prohibited -New

House Bill 2533 (Chapter 994) and Senate Bill 938 (Chapter 1006)
prohibit state agencies from purchasing goods or services from
vendors who are required under Virginia’s sales tax nexus laws to
collect use tax on sales of goods delivered into Virginia but refuse to
do so. State agencies are also prohibited from purchasing goods or
services from vendors who are affiliated with such businesses. RAP
Unit keeps a list of restricted entities.
Effective Date: July 1, 2003
Code Section Amended: §2.2-4301 Code Section Added: § 2.2-
4321.1
Ruling of Commissioner, P.D. 04-4
D. E-Commerce Implications
Common situations where nexus is established include physical
presence by employees or agents in the state (although sporadic or
temporary presence may in some cases may not be enough to
establish nexus); agency nexus where the out-of-state seller hires in-
2
state third party contractors to perform certain activities; affiliate nexus
where the in-state activities of a registered dealer create nexus for an
out-of-state affiliate making sales in the dealer’s state; and economic
nexus where the of the out-of-state entity poses a significant economic
presence in the state through advertising. No nexus cases have been
tried in Virginia courts. Case Law from other states has been included
to provide a view of the issues as seen from their prospective.
E. Streamlined Sales Tax Project (“SSTP”)

Approximately 40 state and local governments have united in a project
to protect the local sales tax base against lost revenue due to e-
commerce. The Streamlined Sales Tax Project expands the traditional
tax nexus rules to encompass remote sellers and encourages remote
sellers to comply with their collection responsibility by simplifying and
streamlining rules to make compliance simpler. The “Uniform Sales
and Use Tax Administration Act” has been passed or is currently under
consideration in a number of states. Virginia has not signed off on it as
of this writing, but is currently evaluating its provisions and how it
would affect our revenue stream.
F. Dealer/Nexus Checklist Questionnaire

See Exhibits
Copy of questionnaire for reference in determining dealer/nexus status.
G. Public Law 86-272

When the subject of nexus comes up, some taxpayers may refer to
P L 86-272 in relation to nexus for sales and use tax. This statute
has nothing to do with sales and use tax nexus. It relates only to
the states’ powers to tax income of a company. Income tax nexus
may be different from state to state; but all states are limited by federal
statute P L 86-272 when taxing income from activities in the state.
Under P L 86-272, the only immunity from the taxation of income
stated is for the solicitation of orders for the sale of tangible personal
property. Thus, an entity performing services within the state, such as
a contractor, may not be protected from the requirements of a state to
file income tax returns under this law. Mail order sellers with retail
outlets, solicitors, or property within a state are not afforded protection;
however, the court has upheld a company’s right to communicate with
customers in a state by mail or common carrier as part of general
interstate commerce without liability.
3
III. Procedures
A. Determine if the entity meets the definition of a dealer as listed in the

Code of Virginia (§58.1-612) and the Administrative Code (Regulations
23 VAC 10-210-460), through inquiry and examination of the business
activity. Research the entity on the Internet. Many companies have a
website that will give the physical locations of the business and other
valuable information about how business is conducted.
The term “dealer” includes every person who:
1. Manufactures or produces tangible personal property for sale at

retail, for use, consumption or distribution, or for storage to be used
or consumed in this state.
2. Imports or causes to be imported into this state tangible personal
property from any state or foreign country, for sale at retail, for use,
consumption or distribution, or for storage to be used or consumed
in this state.
3. Sells 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 state, tangible
personal property.
4. Has sold at retail, or used, consumed or distributed, or stored for
use or consumption in this state, tangible personal property and who
cannot prove that the tax has been paid on the sale at retail, the
use, consumption, distribution or storage of the tangible personal
property.
5. Leases or rents tangible personal property for a consideration,
permitting the use or possession of such property without transfer of
title.
6. Is the lessee or rentee of tangible personal property, and who pays
to the owner of the property a consideration for the use or
possession of the property without acquiring title.
7. As a representative, agent or solicitor of an out-of-state principal
solicits, receives and accepts orders from persons in this state for
future delivery and whose principal refuses to register as a dealer.
8. Shall become liable to and shall owe this state any amount of tax,
whether he holds, or is required to hold, a certificate of registration
or not.
4
B. If dealer status can be established, then look at nexus requirements. A
dealer shall be deemed to have sufficient activity within the
Commonwealth to require registration under §58.1-613 if he:
1. Maintains or has within this Commonwealth, directly or through
an agent or subsidiary, an office, warehouse, or place of business
of any nature;
2. Solicits business in this Commonwealth by employees,
independent contractors, agents or other representatives;
3. Advertises in newspapers or other periodicals printed and
published within this Commonwealth, on billboards or posters
located in this Commonwealth, or through materials distributed in
this Commonwealth by means other than the United States mail;
4. Makes regular deliveries of tangible personal property within this
Commonwealth by means other than common carrier. A person
shall be deemed to be making regular deliveries hereunder if
vehicles other than those operated by a common carrier enter this
Commonwealth more than twelve times during a calendar year to
deliver goods sold by him;
5. Solicits business in this Commonwealth on a continuous, regular,
seasonal, or systematic basis by means of advertising that is
broadcast or relayed from a transmitter within this Commonwealth
or distributed from a location within this Commonwealth;
6. Solicits business in this Commonwealth by mail, if the
solicitations are continuous, regular, seasonal, or systematic and if
the dealer benefits from any banking, financing, debt collection, or
marketing activities occurring in this Commonwealth or benefits
from the location in this Commonwealth of authorized installation,
servicing, or repair facilities;
7. Is owned or controlled by the same interests which own or
control a business located within this Commonwealth;
8. Has a franchisee or licensee operating under the same trade
name in this Commonwealth if the franchisee or licensee is
required to obtain a certificate of registration under § 58.1-613; or
9. Owns 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 next paragraph of §58.1-612 deals with printing of advertising.

It basically says that dealer status (nexus) is not established when
an entity contracts with a Virginia commercial printer to print and
distribute advertising from a Virginia location.
“Notwithstanding any other provision of this section, the

following shall not be considered to determine whether a
person who has contracted with a commercial printer for
printing in the Commonwealth is a "dealer" and whether such
5
person has sufficient contact with the Commonwealth to be
required to register under § 58.1-613:
1. The ownership or leasing by that person of tangible or
intangible property located at the Virginia premises of the
commercial printer which is used solely in connection with the
printing contract with the person;
2. The sale by that person of property of any kind printed at and
shipped or distributed from the Virginia premises of the
commercial printer;
3. Activities in connection with the printing contract with the
person performed by or on behalf of that person at the Virginia
premises of the commercial printer; and
4. Activities in connection with the printing contract with the
person performed by the commercial printer within Virginia for
or on behalf of that person.”
The final paragraph in the section addresses, in part, the “dormant

commerce clause”. The U. S. Supreme Court’s interpretation of the
power given to Congress in the U. S. Constitution to regulate
commerce among the states has been construed by the court to
mean the limiting of the taxing powers of the states, even though
Congress has not affirmed this interpretation. The court has used
the Interstate Commerce Clause to prevent states going beyond
their state borders placing an “undue burden” of collecting sales
and use tax on remote sellers and to avoid “double taxation”. Over
the years, with the invention of the computer and other
technological advances, collecting tax is not so burdensome
anymore. Further, with commerce being expanded through the
Internet, states have seen huge economic shifts attributable to
these technological advances that create an unfair disadvantage to
retailers who are required to collect tax due to their physical
presence in a state. The paragraph says that in addition to the
jurisdictional standards contained in subsection C of section §58.1-
612, nothing contained in this code section (other than subsection
regarding advertising) “shall limit any authority which this
Commonwealth may enjoy under the provisions of federal law or an
opinion of the United States Supreme Court to require the collection
of sales and use taxes by any dealer who regularly or
systematically solicits sales within this Commonwealth”.
Finally, the paragraph says that although a broadcaster, printer,

outdoor advertising firm, advertising distributor, or publisher in
Virginia accepts advertising contracts from out-of-state entities, if
the Virginia seller broadcasts, publishes, or displays or distributes
paid commercial advertising in this Commonwealth which is
6
intended to be disseminated primarily to consumers located in this
Commonwealth, he must collect and report the applicable tax. This
closes the loophole, so to speak, of the advertising paragraph
explained earlier. While the out-of-state advertiser may not meet
dealer/nexus qualifications, he must pay the tax on printed
advertising directed at Virginia consumers.
B. Identify relationships between affiliated businesses, parents and subs,

etc. and gather information about how they interact with each other.
This interaction may be critical to establish nexus. For instance, do in-
state dealers receive or exchange goods ordered from catalogs or
internet? Do in-state dealers advertise for their affiliates in the store,
on their cash register tapes, bags, or as a part of their newspaper
advertising? Document your research and your discussions with the
entity. Provide the entity with ruling letters and language from case
law to support your conclusion. Give them time to digest and discuss
with their legal counsel the information that they have been given if
they need it. Respond to any questions that arise.
Request that they register for the future and negotiate what will be
done for the past. Discuss with supervision whether a three or six year
statute will apply and what steps will be taken if an agreement cannot
be reached on the handling of the past.
C. If Virginia tax has been collected in error on a Virginia sale, the entity
is automatically a dealer under §59.1-612 B(8). The tax must be paid
to Virginia (Code of Virginia §58.1-625).
1. Any dealer collecting the sales or use tax on transactions

exempt or not taxable under this chapter shall transmit to the
Tax Commissioner such erroneously or illegally collected tax
unless or until he can affirmatively show that the tax has since
been refunded to the purchaser or credited to his account.
7
IV. Exhibits
A. Sample Dealer/Nexus Questionaire

B. Ruling Letter Synopsis
C. Ruling Letters
D. Case Law Synopsis
E. Case Law
8
SAMPLE DEALER/NEXUS QUESTIONAIRE
1) Is the business registered for any other Virginia tax such as withholding or corporate?
2) Has the business filed any types of returns with VA (specify type of tax)?
3 Is the business registered with the State Corporation Commission, State Contractors Board, or
any locality (Business License)?
4) Is there an office, agency, warehouse, or other business location owned or leased in VA?
5) Does the business have employees, representatives or independent contractors who perform
any of the following activities in VA:
a) Solicit orders with or without authority to approve?
b) Manage territories or perform marketing surveys?
c) Sell tangible personal property?
d) Make collections on regular or delinquent accounts?
e) Repossess items or property of the business?
f) Offer technical assistance and training to customers before or after the sale?
g) Repair, service, or replace faulty or damaged goods?
h) Install or assemble its products?
i) “License” software for use in the state?
j) Oversee the installation of the business' products by its customers or users of its
products?
k) Pick up damaged or returned merchandise from customers?
l) Coordinate delivery of merchandise?
m) Deliver replacement parts?
n) Conduct credit investigations or arrange for credit and financing for purchasers of its
products?
o) Resolve or assist in resolving any product, credit, shipping or similar complaint arising
from the purchase or use of its products?
p) Maintain displays of products or refill displays?
q) Accept returned merchandise for customers?
r) Collect deposits on sales?
s) Make "on the spot" sales of company products?
t) Carry out engineering or design functions?
u) Advise customers or distributors as to minimum inventory levels, remove obsolete,
damaged or outdated goods?
v) Receive and resolve complaints?
9
6) Does the business own or lease real property in VA?
7) Does the business own or lease tangible personal property located in VA?
8) Does the business rent or lease tangible personal property to others who then use the property
in VA?
9) Does the business license intangible property for use in VA?
10) Does the business license software for use in VA?
11) Does the business maintain a telephone answering service in VA?
12) Does the business have a standard form of written agreement with sales representatives? If
so, please provide a copy.
13) Is the business a member of an affiliated group of corporations? If so, does the business file a
consolidated or combined return in VA?
14) Does the business have display merchandise in leased space in VA?
15) Do employees have samples in VA? If yes, then what is the average value of samples in VA?.
16) Does the business provide sales or service manuals to customers, distributors, or agents?
17) Does the business advertise in VA? If so, what kinds of advertising media are used?
18) Does the business do any cooperative advertising in VA?
19) Does the business have any employees or representatives who use their home in VA:
a) As a business address?
b) To receive business calls?
c) To store inventory or sold goods until delivery?
d) To maintain books/records?
e) To house company property?
20) Are VA independent contractors or representatives reimbursed for expenses such as

telephone, fax or utilities?
21) Are home numbers listed in local advertisements of the business?

22) Do employees of the company solicit orders for the sale of:
a) Real estate?
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b) Services?
c) Intangible property?
23) Does the business perform construction contracts in VA?
24) Is the business listed in any VA telephone directories?
25) Does the business have any consigned inventory in VA?

26) Does the business operate a mobile store in VA?
27) Has the business previously filed VA income tax returns?

28) Does the business maintain a security interest in property until the contract price or amount
borrowed has been paid?
29) Do employees investigate, recommend, or appoint potential dealers, agents, or distributors of
the company in VA?
30) Do employees ever check the inventories of customers or distributors in VA?
31) Do employees authorize credits, warranty adjustments or repairs in VA?
32) Does the business have agents or independent contractors selling products in VA? If so, are
they allowed to sell or promote competitors' services?
33) Does the business select repair facilities in VA where customers can have products serviced
or repaired?
34) Is the business a partner, limited partner or affiliate of any entity that has operations, conducts
business, or owns real property in VA?
11
B. Ruling Letter Synopsis
(PD 89-102) To recoup cost of tax paid on purchases, contractor

charged customers tax on marked-up amount of the sale, but failed
to remit tax to state. T/P was correctly assessed tax on difference in
tax paid on materials and amount collected from customers.
(PD 89-299) Dealer liable for erroneous collection of tax. Tax

collect is held in trust for the state.
(PD 91-286) Pennsylvania corporation is considered to have nexus

within VA when its first sale to a VA customer is by an in-state
representative. T/P is required to collect VA tax on the first sale and
any future sales regardless of whether sales are phoned in by
customers to the PA sales office.
(PD 91-314) Nexus; third party transaction shipped to Virginia.

Company P purchases from Company R an item that is shipped to
Virginia by Company W. Company W has no nexus.
(PD 92-136) An out-of-state retailer who uses a telemarketing firm

with an office in VA, is required to register and collect use tax on
sales to VA customers. If the telemarketing firm excludes VA
customers from its solicitation efforts, the T/P would not be required
to register to collect VA use taxes.
(PD 93-25) Nexus defined; registered dealer claiming no nexus is

liable for collection of tax.
(PD 93-141, PD 93-240) Any business or individual who advertises

in newspapers or other periodicals printed and published in Virginia
or has billboard advertising in Virginia is required to register to
collect sales or use tax.
(PD 94-10) An out-of-state T/P is engaged in the sale and

installation of tangible personal property in VA. The T/P
subcontracts out the installation. Nexus in VA is dependent upon
the T/P's relationship with the subcontractors (agency relationship?),
and whether the T/P delivers the property to VA using their own
vehicles.
(PD 94-62) A T/P who contracts with an outside vendor to

advertise, promote, market, and sell the customer's products
through TV ad programs is considered to be a dealer. The fact that
the T/P does not keep an inventory of the products it sells is
12
inconsequential, as the T/P actively solicits the retail sales and
receives the orders from consumers.
(94-205) An out of state manufacturer sells tpp to a VA customer,

shipping through a VA retail dealer is required to collect the tax.
Delivery by means other than by common carrier is sufficient
presence in VA to require collection of tax under VA code section
58.1-612.
(PD 94-266) An out of state manufacturer ships display items and

testers directly to retailers in VA at no charge. The manufacturer
has a presence in VA through sales personnel. The manufacturer
cannot be held taxable on the cost price of the displays or testers
since employees of the manufacturer do not make any use of the
items. Items deemed used in interstate commerce.
(PD 95-111) More than three sales in a year creates nexus for the
collection of tax.
(PD 95-250) An out of state manufacturer produced lightning

protection systems for sale to contractors. The out of state
manufacturer owns no facilities in VA nor does it employ any
salespersons that conduct business in VA. The manufacturer’s
products are generally shipped by common carrier. The
manufacturer held a VA Use Tax registration, but filed “0” returns
since it did not meet any of the requirements for registration. The
manufacturer was audited and the tax was assessed on taxable
sales. A registered dealer is required to collect the tax on all
taxable VA sales.
(PD 96-112) A lease of equipment without an operator is taxable.

However, a lease with an operator is considered a nontaxable
service transaction. Equipment that is used solely for lease without
an operator may be purchased exempt of tax.
(EXAMPLE) A North Carolina heavy equipment dealer rents a
loader to a VA contractor. The lease of one piece of equipment
gives the NC dealer nexus. The NC dealer is required to register
and collect the VA use tax.
(PD 96-339) An out of state computer systems and media software

and service dealer was not held liable for tax prior to registering for
collection and remittance of VA use tax because the dealer’s activity
of sending employees into the state to install and test custom
software was not sufficient to create nexus with the state.
13
(PD 97-45) T/P, an out-of-state contractor who is an affiliate of a VA
company, is liable for the tax on the cost price of materials that it
furnishes and installs in connection with a real property construction
contract in VA. The state will allow a credit against VA taxes for
any taxes properly paid on tangible personal property acquired in
another state.
(PD 97-81) A West VA retail furniture company was delivering

merchandise into VA and charging W VA sales tax. The T/P’s audit
covered the period 1990-1995. There were fewer than 12 VA
deliveries per year until 1995 where there were 17 deliveries. The
audit was adjusted to start with 1995 since the T/P did not have
nexus in the other years.
(PD 97-266) Out-of-state fabricator/contractor subcontracting

installation to a VA contractor does not have nexus for sales or use
tax.
(PD 97-276) An out-of-state photography business that solicited

sales exclusively by mail did not have nexus with VA and was not
required to collect and remit use taxes on its sales of school
photographs. Sending the T/P’s employees into VA to shoot
photographs did not create nexus with VA because the
photographers did not solicit sales while in VA. (More current
interpretation establishes “services performed by employees in VA
creates nexus”)
(PD 97-306) Internet access services and software provided on-line

by Internet access services not taxable. No tpp.
(PD 97-402) Out-of-state sign manufacturer does not have nexus

because fewer than 12 deliveries per year and use of subcontractor
for installation.
(PD 97-459) The T/P, an out-of-state dealer, is not required to

register and collect Va. use tax on its taxable maintenance
contracts with Va. customers. The actual maintenance activities
are performed by an unrelated 3rd party. The T/P is not deemed to
have nexus in Va. since it has no employees, business location,
sales representatives or inventory in Va.
(PD 98-147) The T/P, with no business locations in VA, is exempt

from the collection and remittance of the VA use tax. The T/P
makes sales in the state of VA, and is defined as a dealer.
However, the T/P does not have nexus since he does not solicit
14
sales within the state. The fact that the TP makes periodic visits to
customers as part of its consulting service does not, in itself, create
nexus with VA.
(PD 98-161) A T/P who contracts to furnish and install modular
homes is a real property contractor and remains solely liable for the
tax on the cost price of all tangible personal property incorporated
into realty. The tax collected from the customer is erroneously or
illegally collected and must be transmitted to the Tax Commissioner
unless refunded to its customers.
(PD 99-26) The burden of proving that a sale 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
the code of Va. Any person who takes such certificate or direct pay
permit, shall be relieved from any liability for the payment or
collection of the tax.
(PD 99-60) The T/P, a North Carolina retailer of golf carts, charged
the 6% NC tax in error on sales delivered to Va. The T/P made
more than 12 deliveries in all years involved so nexus was
established. Any tax collected on Va. sales must also be remitted
to Va. The T/P may obtain a refund from NC for taxes erroneously
paid.
(99-94) Registered out-of-state sign and awning dealer used

subcontractors for installation of signs and awnings shipped to VA
by common carrier. At issue is agency relationship between out-of-
state dealer and in-state dealers that were contracted to install.
Finding is that no agency relationship existed, so the out-of-state
dealer had no nexus in VA.
(99-187) Maryland tax in error was charged on construction

materials delivered to VA. VA contractor contends he met his
responsibility to pay tax by paying MD tax. Although MD dealer
may have had nexus for collection of VA tax, the purchaser is
ultimately responsible for paying correct tax.
(00-53) No nexus exists for an out-of-state seller whose only

presence in Virginia is the use of a computer server to create or
maintain a site on the Internet. Ruling conforms to the
department's interpretation of the Internet Tax Freedom Act (the
"Act"). The Act establishes a 3-year moratorium during which states
and political subdivisions may not impose, assess, collect, or
attempt to collect discriminatory taxes on electronic commerce.
15
(00-61) Twelve or more deliveries per year by other than common
carrier creates nexus. Out-of-state dealer delivers by common
carrier and his own vehicle. Dealer also sets up tangible personal
property delivered. Dealer proposes registration prospectively.
Ruling states must investigate magnitude of sales.
(00-77) Dealer is a licensed Virginia retailer with retail outlets

throughout Virginia and the United States. The dealer also provides
website and catalogue sales, the merchandise of which is shipped
from the Taxpayer's headquarters location outside Virginia. At issue
are the result of an audit of the Taxpayer's website and catalogue
sales, which are filled separately from the Taxpayer's retail
locations in Virginia. As a licensed out-of-state dealer, the
Taxpayer is required to collect the Virginia tax on all sales of
tangible personal property shipped to Virginia customers.
Estimated “gift” sales are upheld as well.
(00-137) Although the Taxpayer did not have sufficient contact with
Virginia during the audit period to establish nexus, it was a
registered dealer. Nexus is not an issue when a taxpayer voluntarily
registers to collect the tax. As a registered dealer under Code of
Virginia §58.1-615, the Taxpayer is required to collect and remit the
tax on all taxable transactions.
(00-193) The Taxpayer sells tangible personal property to Virginia

customers. Orders may be placed via telephone, catalog or
website. Distribution and call center services are handled by an
unrelated third party fulfillment service provider located outside
Virginia. Products and catalogs are shipped from an out-of-state
distribution center to customers via common carrier or the United
States mail. The Taxpayer indicates that the third party fulfillment
service provider does not solicit orders, but merely accepts orders.
The third party fulfillment service provider has notified the Taxpayer
that it intends to reroute the calls to a new call center located within
Virginia. Nexus depends on whether or not agency relationship
exists between taxpayer and fulfillment center.
(01-105) Ruling requested on the sales and use tax collection

responsibilities of third parties assigned to collect lease payments
or payments on a conditional sale. Third party must register to
collect tax on assigned leases. Assignee would generally not be
required to register as a dealer provided it does not obtain title,
control or possession of the tangible personal property at the time
of sale or at some subsequent time on conditional sales.
16
(01-115) Sales of optional software support agreements to reseller
by manufacturer are exempt to reseller. Other nexus questions
answered with regard to sales of computer hardware, software &
support agreements by manufacturer to out-of-state reseller who
sells to end user in VA.
(02-113) Taxability of online digital identification “ID” service

provider who is a registered VA dealer – service vs. tangible
personal property; software and data processing issues answered.
(04-4) Virginia Procurement Act ruling
(04-38) Taxpayer develops software that is licensed to brokers and

other end users in Virginia and elsewhere. These licenses generally
grant authority to end users to use trading software to facilitate
individual stock trading on various national stock exchanges via the
Internet. Software & licensing fees, broker fees & other fees listed
as taxable or exempt. Discusses nexus scenarios.
(04-129) The Taxpayer claims that the charges for a computer

software license and consulting services are not taxable. The
contested charges were billed by the Taxpayer's German parent
company ("Parent"), which had obtained a prewritten computer
software license from a German vendor on behalf of all users in the
Parent's international group. To implement the software, the Parent
also received consulting services from the same German vendor.
This software was subsequently installed and implemented at the
Taxpayer's Virginia location. As a result, the Taxpayer was billed by
the Parent for its proportionate share of the Parent's cost for the
software license and consulting fees. Taxpayer claims German
company has no nexus in VA. Ruling that intercompany billings are
taxable. Lump sum billings are taxable.
17
C. Ruling Letters
(The remainder of this page intentionally left blank)
18
Document 89-102
Number:
Brief Description: Erroneously collected tax
Topics: Collection of Tax; Taxability of Persons and Transactions
March 23, 1989
Re: §58.1-1821 Application: Sales and Use Tax
Dear****************
This will reply to your letter dated December 15, 1988, in which you
submitted an application for correction of assessment in the above
referenced case for the period November 1985, through July 1988.
FACTS
*********("The Taxpayer") is an electrical general contractor doing

business in the Commonwealth. This is a second generation audit and
the instant assessment stems from the Taxpayer's failure to remit sales
tax collected from customers.
The Taxpayer, as a using and consuming contractor, properly paid the

tax on purchases or tangible personal property in accord with §58.1-610
of the Code of Virginia. However, to recoup costs of goods purchased,
the Taxpayer charged customers tax on marked-up sales but did not
remit such tax collected to the Commonwealth. The department only
assessed the tax on the difference between the tax paid on materials
tax and that charged to customers. The Taxpayer protests the
assessment of the tax and the methods used in calculating the
assessment.
DETERMINATION
§58.1-625 or the Code of Virginia states in pertinent part that:

Any dealer collecting the sales or use tax on transactions
exempt or not taxable under this chapter shall transmit to
the Tax Commissioner such erroneously or illegally
collected tax unless or until he can affirmatively show that
19
the tax has since been refunded to the purchaser or
credited to his account. (Emphasis added).
Furthermore, §630-10-27(A) of the Virginia Retail Sales and Use Tax

Regulations states that "[a] contractor, whether he be a prime contractor
or subcontractor, does not pass the sales tax or use tax on to anyone
else as a tax. He [the contractor] will take the amount of the tax into
consideration in submitting bids. " (Emphasis added) .
In this case, the Taxpayer sought to recoup from its customers the tax it
had paid on materials for use in its contracts. This was done by adding
a 4 1/2% sales tax to its contract prices, but resulted in the Taxpayer
collecting more tax from its customers than it actually paid on the
purchase of materials.
Based upon Virginia Retail Sales and Use Tax Regulation §630-10-
27(A), the Taxpayer erroneously collected sales tax from its customers.
However, the department's assessment reflects only the difference
between the tax collected from customers and the amount of tax paid at
the time materials were purchased by the Taxpayer.
Based upon the foregoing, the department properly assessed the

Taxpayer for tax erroneously collected from its customers; however, the
department's Technical Services Section will contact the Taxpayer to
review the information and methods used in calculating the assessment.
Adjustments will be made to the audit if warranted as a result or this
review.
For the future, the Taxpayer should take the tax paid on materials into
account when submitting bids or pricing contracts. The Taxpayer should
not pass on the tax directly to its customers as it did during the current
audit period.
Sincerely,
W. H. Forst
Tax Commissioner
20
Document 89-299
Number:
Brief Description: Erroneous collection of tax
Topics: Collection of Delinquent Tax
November 1, 1989
Re: Request for Ruling/Sales and Use Tax
Dear****************
This will reply to your letter of May 19, 1989 in which you request the
state of Virginia's policy on the erroneous collection and remittance of
state sales and use tax.
The erroneous collection and remittance of the Virginia sales and use
tax is addressed in §58.1-625 of the Virginia Code and §630-10-24 of
the Virginia Retail Sales and Use Tax Regulations. §58.1-625 of the
Code states, in part, "any dealer collecting the sales or use tax on
transactions exempt or not taxable under this chapter shall transmit to
the Tax Commissioner such erroneously or illegally collected tax unless
or until he can affirmatively show that the tax has since been refunded
to the purchaser or credited to his account." Subsection C of Regulation
630-10-24 also deals with the erroneous collection of the tax on
nontaxable transactions and states the following:
All sales and use tax collected by a dealer is held in trust for
the state. Therefore, any dealer collecting the sales or use
tax on nontaxable transactions must remit to the
Department of Taxation such erroneously or illegally
collected tax unless he can show that the tax has been
refunded to the purchaser or credited to the purchaser's
account.
Subsection D of this same section goes on further to state,
"any dealer who collects tax in excess of a 4 1/2% rate or
who otherwise overcollects the tax,... must remit any
amount overcollected to the state on a timely basis."
As can be seen from the above, Virginia does allow a refund to the
21
dealer of any sales and use tax which has been erroneously collected
and remitted to the state. However, the dealer must provide proof to the
state that the tax has been refunded to the purchaser or credited to the
purchaser's account. Refunds cannot be authorized unless the request
is made within three years from the due date of the return.
If you should have any further questions, please feel free to contact this
department.
Sincerely,
W. H. Forst
Tax Commissioner
22
Document 91-286
Number:
Brief Description: Dealers; Dealer With Representatives in Virginia
Topics: Taxability of Persons and Transactions
November 8, 1991
Dear*********************
This will reply to your letter of September 27, 1991 in which you seek a
ruling on applicability of the sales and use tax to sales made by one of
your clients in Virginia.
FACTS
Effective October 1, 1991, one of your clients will have a representative

making sales in Virginia. While the first sale to each facility will be made
by the representative, subsequent sales/orders will be phoned in by
customers to a toll-free number in Pennsylvania.
You seek a ruling on the taxability of the sales/orders phoned in.

RULING
Va. Code §58.1-612, copy enclosed, sets forth the "nexus"

requirements which give the Commonwealth the authority to require
dealers to register for collection and remittance of the sales tax. The
statute provides in part that a dealer shall be deemed to have sufficient
activity within the state to require registration if he "[s]olicits business in
this State by employees, independent contractors, agents or other
representatives." Thus, as you indicated in your letter, the first sale is
taxable to Virginia for sales tax purposes since your client will have a
representative making sales in Virginia.
In addition, once a dealer has subjected itself to tax collection, due to
having sales representatives solicit business in Virginia or otherwise, it
is required to collect the tax on all Virginia sales regardless of the
manner in which sales orders are placed. As such, subsequent sales
phoned in by customers to a toll-free number in Pennsylvania would be
taxable.
23
If you have any further questions about this matter, please contact the
department.
Sincerely,
W. H. Forst
Tax Commissioner
24
Document 91-314
Number:
Brief Description: Out-of-state dealer
Topics: Persons Subject to Tax; Property Subject to Tax
December 30, 1991
Dear ******************
This will reply to your letter of April 19, 1991 requesting information on
the application of the sales and use tax to a transaction involving the
sale of tangible personal property between Company P (a Virginia
purchaser), Company R (based in Canada) and Company W (based in
the U.S. outside of Virginia).
FACTS
Company P purchases merchandise from Company R, who orders the

merchandise from Company W with instructions to ship the
merchandise directly to the purchaser in Virginia. Company W may ship
by common carrier or its own carrier and then invoices Company R who
invoices Company P. You ask whether Company W is required to
collect Virginia sales tax on its invoice to Company R for its sale to
Company P.
Additionally, you request information on the requirements for nexus in

Virginia.
RULING
Under Va. Code §58.1-602, "retail sale" means a sale of tangible

personal property or taxable services to any person for any purpose
other than for resale. Based upon the facts presented, the sale between
Company R and Company P is subject to the Virginia tax, unless the
transaction is otherwise exempt under Virginia law. Company W's role is
that of a supplier of merchandise to Company R for resale. Since
Company P is not making a purchase from Company W but from
Company R, Company W is not obligated to collect the Virginia tax from
Company P. Additionally, the transaction between Company W and
25
Company R is not subject to the tax as it is an exempt sale for resale,
provided adequate records are maintained.
The Virginia Department of Taxation has no authority to require out-of-

state dealers to register for collection and remittance of the sales and
use tax unless they have sufficient nexus with the state. Va. Code
§58.1-612 (copy enclosed) provides the criteria for determining whether
a dealer has sufficient activity with Virginia to require registration. In the
event Company R is not required to register with Virginia, Company P
would be required to remit use tax directly to the department.
I hope the foregoing has responded to your inquiry. If you have

additional questions, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
26
Document 92-136
Number:
Brief Description: Publishing and Broadcasting; Puzzle Magazine
August 10, 1992
Re: Request for Ruling: Retail Sales & Use Tax
Dear**************
This will reply to your letter of December 23, 1991 seeking a ruling on
behalf of an unidentified client (the "Taxpayer") regarding possible sales
and use tax collection responsibilities.
FACTS
The Taxpayer, an out-of-state publisher of a series of puzzles published

in a magazine form, is interested in entering into a contract with an
unrelated out-of-state corporation that has an office in Virginia. The
Virginia office would solicit orders for the series of puzzles by telephone
with potential customers. All orders would be delivered to the publisher
at its offices outside of Virginia. Products would be shipped via U.S. mail
to the customer from outside of Virginia. No stock of goods would be
maintained in Virginia and the publisher would have no office and no
employees in the state. In addition, billing would be sent from outside
the state.
You pose four questions relating to the Taxpayer's potential contract
and tax liability.
RULING
I will address each of the questions individually below.
Taxability of the above transactions: Va. Code §58.1-612, copy

enclosed, provides that the retail sales and use tax shall be collectible
from all persons who are dealers and who have sufficient contact with
the Commonwealth. A dealer is defined therein as including every
person who "sells at retail, or who offers for sale at retail...for use,
consumption, or distribution, or for storage to be used or consumed in
27
this Commonwealth, tangible personal property."
Further, it provides that a dealer shall be deemed to have sufficient

contact with the state to require registration if he "[s]olicits business in
this Commonwealth by employees, independent contractors, agents or
other representatives." In the instant case, the Taxpayer is utilizing a
Virginia telemarketing business to make sales to Virginia customers and
other states' residents. Thus, it would be deemed to have sufficient
contact with the state to require registration and the collection of the tax
on sales to Virginia residents.
Other taxes for which the state may claim nexus: Under Public Law 86-
272, codified at 15 U.S.C.A. §381, Virginia is prohibited from imposing
an income tax on a taxpayer if its only business activities within a state
during the taxable year are the solicitation of orders for the sale of
tangible personal property. Thus, if the Taxpayer's only activities in
Virginia will be the sales of its product to purchasers in Virginia by
representatives of the telemarketing company, the Taxpayer would be
exempt from the Virginia income tax even though it may have income
from Virginia sources.
Exclusion of Virginia customers from solicitation efforts: If the

telemarketing company excludes Virginia customers from its solicitation
efforts, the Taxpayer would not be required to register for collection of
the retail sales and use tax since it would not be making sales to
Virginia residents.
Qualification of book of puzzles for publication exemption: The Taxpayer

publishes a series of thirty volumes of puzzles in a magazine format
which are shipped as a continuity series to subscribers every four to six
weeks.
"Publication" is described in Va. Code §58.1-608(A)(6)(c) as:

[a]ny publication issued daily, or regularly at average
intervals not exceeding three months, and advertising
supplements and any other printed matter ultimately
distributed with or as part of such publications, except that
newsstand sales of the same are taxable.
Such publications are further defined in Virginia Regulation (VR) 630-
10-73 as "any written compilation of information available to the general
public."
28
While, the Taxpayer's magazines are shipped to customers at intervals
of four to six weeks, a book of puzzles cannot be deemed to be a
written compilation of information and thus does not qualify as an
exempt publication.
For your convenience, I have enclosed copies of Virginia's sales and

use tax registration form and instructions. Should you have any other
questions regarding this matter, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
29
Document 93-25
Number:
Brief Description: Nexus; Dealer defined
February 11, 1993
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This will reply to your letter in which you seek correction of sales and
use tax assessment for **** (the Taxpayer).
FACTS
The Taxpayer a Kentucky corporation is engaged in the sale trucks,

truck parts and related items. An audit for the period October 1988
through September 1991 produced an assessment for the Taxpayer's
failure to collect the tax on certain sales made to Virginia customers.
However, before the audit could be finalized and because the Taxpayer
refused to sign a waiver extending the statute of limitations, the
department issued an estimated assessment.
The auditors maintain that the Taxpayer is eligible for audit for several
reasons, but primarily because (i) it has been registered with the
department for the collection of the use tax on sales made to Virginia
customers since October 1. 1988; (ii) the Taxpayer utilizes sales
personnel in Virginia and (iii) the Taxpayer makes deliveries into Virginia
in its own vehicles.
The Taxpayer maintains that it does not have nexus with Virginia and
thus is not required to collect the tax on sales to Virginia customers. In
addition, the Taxpayer maintains that the assessment is excessive and
arbitrary.
DETERMINATION
30
I will address the Taxpayer's concerns below:
Dealer defined - Va. Code §58.1-612 provides that the sales and use
tax shall be collectible from all persons who are dealers. as defined
therein, who have sufficient contact with the Commonwealth to require
registration for collection of the tax. Subdivision (B)(3) provides that the
term "dealer" shall include every person who "[s]ells at retail, or who
offers for sale at retail, or has in his possession for sale at retail, or for
use, consumption or distribution, or for storage to be used or consumed
in Commonwealth, tangible personal property."
The Taxpayer has been making sales to Virginia customers for number
of years. In fact, it voluntarily registered with the department and began
collecting and remitting the Virginia use as of October 1, 1988. Further,
the Taxpayer uses sales personnel to solicit and take orders in Virginia
and makes deliveries of tangible personal property to Virginia in its own
vehicles. Thus, in spite of the Taxpayer's contention that it is not a
"dealer" does meet the definition of "dealer" as defined above.
Reasonableness of assessment - The Taxpayer maintains that
department's assessment is excessive and arbitrary and requests that
the proposed assessment be set aside as erroneous.
In cases where a dealer does not provide complete information on

Virginia transactions, Va. Code §58.1-618 grants the department the
authority to issue an estimated assessment, and such assessment is
deemed by the statute to be prima facie correct until information to the
contrary can be examined. However, I understand that certain records,
primarily regarding exempt sales, are currently being reviewed by the
Taxpayer and the auditors. When this review is completed, the audit
assessment will be revised accordingly.
Collection activity on the assessment has been suspended until such

time that the audit is finalized and a revised assessment issued.
Sincerely,
W. H. Forst
Tax Commissioner
31
Document 93-141
Number:
Brief Description: Advertising and deliveries in Virginia
June 7, 1993
Re: §58.1-1821 Application: Retail Sales & Use Tax
Dear*********
This will reply to your letter of August 8, 1991 in which you protest a
recent statutory assessment to your client, ************ (the "Taxpayer"),
for the period April 1988 through March 1991.
FACTS
The Taxpayer is a retail furniture dealer located in another state. When

one of the district offices contacted the Taxpayer to arrange an audit, it
was refused access since the Taxpayer maintains that it does not have
nexus with Virginia. In order to preserve the statute of limitations, an
estimated assessment was issued.
The auditors maintain that the Taxpayer is eligible for audit for several
reasons, but primarily because (I) it has been registered with the
department for the collection of the use tax on sales made to Virginia
customers since October 1981, (ii) the Taxpayer advertised in the******
"Richmond Edition" of the USA Today which is published and printed in
Virginia, and (iii) furniture sold by the Taxpayer is generally delivered to
Virginia customers by a contract carrier hired by the Taxpayer.
The Taxpayer maintains that it does not have nexus with Virginia and
thus is not required to collect the tax on sales to Virginia customers. In
addition, the Taxpayer maintains that the assessment is excessive.
DETERMINATION
32
I will address each of the grounds for audit along with the Taxpayer's
concerns below:
Dealer defined - Va. Code §58.1-612 provides that the sales and use
tax shall be collectible from all persons who are dealers, as defined
therein, who have sufficient contact with the Commonwealth to require
registration for collection of the tax. Subdivision (B)(3) provides that the
term "dealer" shall 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."
The Taxpayer has been making regular sales of furniture to Virginia

residents for a number of years. In fact, it voluntarily registered with the
department and agreed that it would begin collecting Virginia use tax on
October 1, 1981. By voluntarily registering with the department, the
Taxpayer effectively consented to the jurisdiction of the state. [See
Insurance Corporation of Ireland v. Compagnie des Bauxites de Guinee,
456 U.S. 694 at 703-705, (1982)] Thus, in spite of the Taxpayer's
contention that its continuous history of filing zero returns indicates that
it was not a "dealer," it is a "dealer" for purposes of the tax.
Advertisements in the USA Today - Va. Code §58.1-612 also sets forth
various standards defining what constitutes "sufficient contact" to
require registration. It provides that a dealer who "advertises in
newspapers or other periodicals printed and published within this
Commonwealth,..." is deemed to have sufficient contact. The fact that
the Taxpayer advertised in the********* "Richmond Edition," a regional
edition of the USA Today which is published and printed in Virginia,
further supports its liability for tax collection.
Delivery of furniture - One of the other standards for defining sufficient

contact to require registration under Va. Code §58.1-612 is whether a
dealer "[m]akes regular deliveries of tangible personal property within
this Commonwealth by means other than common carrier." A person is
deemed to be making regular deliveries if vehicles other than those
operated by a common carrier enter the Commonwealth more than
twelve times during a calendar year.
The Taxpayer maintains that the purchaser "hires" the carrier to deliver
the goods to his/her designated destination. The payment for such is by
the purchaser and thus it is the purchaser, not the Taxpayer, who is
causing delivery to be made into Virginia. The Taxpayer maintains
33
further that purchasers are billed directly by the delivery company and
generally write separate checks, one to the Taxpayer and one to the
delivery company, when furniture is delivered on a C.O.D. basis. It
provided copies of invoices which illustrated shipping charges paid by
purchasers.
In addition, the Taxpayer maintains that the delivery company was

granted authority to operate as a contract carrier by the Interstate
Commerce Commission (ICC) in July 1984, in April 1990 it applied for
common carrier status and was granted an operating permit on July 5,
1990. It suggests that the department's distinction between contract and
common carriers is burdensome on interstate commerce in that it
requires those dealing with a contract carrier that "more specifically
meets their transportation needs to pay a 'toll charge' that is not exacted
when using a 'common carrier'.
A review of the contract between the Taxpayer and the delivery
company dated October 22, 1984, however, indicates that the "Shipper
(the Taxpayer) agrees to pay on delivery the rates and charges as set
forth in Carrier's applicable Schedule of Actual Rates." (Clause #4) In
addition, the contract provides that the shipping company agreed "to
accept all lawful shipments...offered to it by the Shipper" (the Taxpayer)
and to "transport such commodities to the destination or destinations
designated by the Shipper." (Clause #2) (Emphasis added)
While the contract states that the delivery company "shall be an

independent contractor and not an agent or employee of the Shipper,"
the fact that the delivery company not only delivers the furniture to a
Virginia customer, but also, in many instances, collects payment for the
furniture (that which is shipped C.O.D.), indicates that the delivery
company is stepping beyond the role of a traditional carrier which
operates its business only within the confines of interstate commerce.
Compare Wisconsin Dept. of Revenue v. William Wrigley, Jr. Co., U.S.
Sup. Ct. No. 91-119, 6/19/92. Thus, the collection activities of the
delivery company would be deemed beyond the protections of the
Commerce Clause.
Furthermore, physical presence within a state can be established

through the activities of an independent contractor. See Scripto, Inc. v.
Carson, 362 U.S. 207 (1960) in which an entity that did not maintain any
property or employ any individuals in another state had nexus with the
other state through activities performed by agents and independent
34
contractors.
With respect to the common carrier status of the delivery company, an

auditor in the district office was informed by the ICC in April 1991 that
while common carrier status had been applied for, as of that date it had
not been granted. Thus, during the entire audit period the delivery
company was acting as a contract carrier And not a common carrier.
While the invoices and bills of lading provided by the Taxpayer which
were issued by the delivery company and other carriers indicate that
customers themselves paid the carrier for the shipping, that is not the
controlling point (rather the carrier acts as an agent and confers nexus).
In any event, these are too few in number to show if this was the normal
method of operation. Furthermore, while you maintain that the
customers themselves and not the Taxpayer actually contracted with
the delivery company, there is no evidence to indicate that this was the
case. From the information provided, it appears that the Taxpayer
arranged the shipping.
However, if the Taxpayer's customers actually contracted with the

delivery company as you maintain, this effectively causes their
purchases to be subject to North Carolina's retail sales tax since first
use would be deemed to be made in North Carolina. In that instance,
the Taxpayer would be required to collect the North Carolina tax on
such sales.
Furthermore, since the Taxpayer is making deliveries into the state via
contract carrier which the Taxpayer hires, first use of the merchandise is
attributable to the Taxpayer in Virginia, and thus the transactions are
taxable under subdivision B of VR 630-10-51. This provides that "[t]he
tax applies to the first use in Virginia of tangible personal property
purchased elsewhere in a transaction which would have been taxed had
the transaction occurred in Virginia, regardless of the fact that such
property may have been, or may be used in interstate commerce...."
In addition, by imposing use tax collection responsibilities on the
Taxpayer, the department is not imposing a "toll charge," since the tax
is collectible from Virginia residents purchasing furniture from the
Taxpayer. This same use tax would be due from the Virginia purchaser
even if the furniture were shipped by common carrier.
The Taxpayer also suggests that the ruling in P.D. 90-49 (3/20/90) does
not support the department's assessment. P.D. 90-49 specifically states
35
that the taxpayer was delivering furniture into Virginia by means other
than common carrier. More specifically, the taxpayer was delivering the
furniture in its own vehicles and had made considerable sales into
Virginia. In the instant case, while the Taxpayer shipped furniture into
Virginia via contract carrier, the department has always considered this
type of carrier to fall within the "other carrier" language of the statute. In
addition, the Taxpayer had made regular and substantial sales to
Virginia residents. Thus, P.D. 90-49 does support the assessment.
Thus, in light of the information provided to date, I find that the Taxpayer
meets the nexus requirement under the above provisions.
Reasonableness of assessment - The Taxpayer maintains that the

department's assessment is excessive and requests that the proposed
assessment be amended to reflect its actual sales volume for the audit
period. Documentation of its actual Virginia sales volume was provided
with its application for erroneous assessment.
While the audit assessment may be excessive, since the Taxpayer

refused access to its records for the purposes of an audit, it is deemed
correct until information to the contrary can be examined. Although the
Taxpayer submitted documentation of its actual Virginia sales for the
audit period, the assessment cannot be revised without a thorough
examination of its records. However, should the Taxpayer agree to an
actual audit of its records, it should contact the ***********District Office
within 30 days. If the District Office is not contacted within the allotted
time period, the assessment will be immediately due and payable, and
collection action will resume
Sincerely
W. H. Forst
Tax Commissioner
36
Document 93-240
Number:
Brief Description: Interstate transactions; Nexus requirement
December 28, 1993
Re: §58.1-1821 Application; Retail Sales & Use tax
Dear***************
This will reply to your letter of August 7, 1992, in which you have
requested an interpretation of the impact of the decision of the United
States Supreme Count in Quill Corporation v. North Dakota, 112 S. Ct.
1904 (1992) on the assessment issued for*********(the "Taxpayer")
during the periods April, 1991 through June, 1992. We have treated
your letter as an application to the Tax Commissioner to correct an
assessment of retail sales and use tax filed in accordance with Va.
Code §58.1-182l.
FACTS
The Taxpayer is a retail furniture dealer, located outside of Virginia. In

April of 1991, the Taxpayer filed a combined registration certificate with
the department. In 1992, the department contacted the Taxpayer for the
purpose of scheduling an audit by one of the department's auditors. In
July of 1992, the Taxpayer agreed to allow the department to conduct
its audit, but did not provide all of the information which was requested
by the auditors.
The audit revealed that between April of 1991, and June of 1992, the
Taxpayer sold and delivered more than*****worth of furniture to
customers in Virginia. Neither Virginia nor any other state's retail sales
and use tax was collected by the Taxpayer on these sales. The
Taxpayer's state of residence also imposes a retail sales and use tax
The Taxpayer maintains that it does not have sufficient nexus with
Virginia, and is thus not required to collect the Virginia use tax on sales
37
delivered into Virginia. The Taxpayer has also requested that its status
as an out-of-state dealer be terminated.
DETERMINATION
I will address the issues of the case, and the Taxpayer's grounds for
protest below:
Dealer defined. Va. Code §58.1-612 provides that the use tax shall be
collectible from all persons who are dealers, as defined therein, who
have sufficient contact with the Commonwealth. As provided in Va.
Code §58.1-612 B 3, dealers are defined to include every person who:
Sells 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.
Va. Code §58.1-612 C provides that a dealer shall be deemed to have
sufficient activity within the Commonwealth to require registration if he:
2. Solicits business in this Commonwealth by employees,
independent contractors, agents or other representatives;
3. Advertises in newspapers or other periodicals printed and

published within this Commonwealth, on billboards or
posters located in this Commonwealth, or through materials
distributed in this Commonwealth by means other than the
United States mail: or
4. Makes regular deliveries of tangible personal property

within this Commonwealth by means other than common
carrier. A person shall be deemed to be making regular
deliveries hereunder if vehicles other than those operated
by a common carrier enter this Commonwealth more than
twelve times during a calendar year to deliver goods sold by
him.
The Taxpayer has admitted that it advertises in the Washington Post.
The audit revealed there were 1,429 invoices for sales delivered into
Virginia during the audit period. On the advice of their lawyer, the
Taxpayer refused to reveal how deliveries were made into Virginia. The
Taxpayer has been withholding Virginia income taxes from employees
since 1991, but has offered no evidence regarding the activities of these
employees in Virginia.
38
Virginia's laws define a dealer, the responsibility of a dealer to collect
and remit the use tax, and the requirements for registration with the
department. The Taxpayer has failed to fully cooperate with the audit
process, and has refused to provide adequate evidence as to the extent
of its activities in Virginia. However, the evidence available indicates
that the Taxpayer is a dealer as defined by Virginia law, therefore the
Taxpayer is responsible for the collection and remittance of the use tax.
Determination of Nexus. In Quill Corporation v. North Dakota, 112 S. Ct.

1904 (1992), the United States Supreme Court drew a sharp distinction
between the "minimum contacts" with a taxing state as required by the
Due Process Clause, and the "substantial nexus" with the state required
by the Commerce Clause. The Court held that the Due Process Clause
does not bar enforcement of North Dakota's use tax against a mail order
retailer whose only contacts with customers within the state were by
mail or common carrier from out-of-state locations. The Court held that
its due process jurisprudence has evolved, abandoning the requirement
of physical presence. Quill had purposefully directed its activities at
North Dakota, the magnitude of those contacts were more than
sufficient for due process purposes, and the use tax related to the
benefits received from access to the state.
The Court's Due Process Clause analysis strongly suggests the

department can utilize the judicial powers of the Commonwealth to
compel the Taxpayer to fully cooperate in its investigation of the sales
and use tax obligations arising from the Taxpayer's activities in Virginia.
The Taxpayer's continued and substantial sales and advertising in the
state go well beyond the minimum contacts required for due process
nexus. Hence, if necessary, the department can require the Taxpayer to
fully cooperate with its requests for information.
In Quill, the Court went on to find that the Commerce Clause requires
"substantial nexus," which is not identical to the nexus requirements for
due process. Because the substantial nexus requirement is a means of
limiting state burdens on interstate commerce, it requires more of a
physical presence to establish nexus than for due process. Upholding
its decision in National Bellas Hess Inc. v. Department of Revenue of
Illinois 386 U. S. 753 (1967), the Court affirmed that physical presence
within a state was necessary to justify use tax collection responsibilities.
Citing the continuing value of a bright-line test and the doctrines and
principles of stare decision, the Court refused to overturn Bellas Hess,
leaving that decision to Congress.
39
The bright-line test to determine physical presence with a state has
been extended beyond maintaining a place of business within a state.
The United States Supreme Court's decision in General Trading Co., v.
State Tax Commission of Iowa, 322 U.S. 335, 64 S. Ct. 1028 (1944)
held that the presence of traveling salesmen in a state constitutes
sufficient nexus to impose use tax collection responsibilities. The
requirement to collect Iowa's use tax was upheld regardless of the fact
that General Trading Co. did not maintain a branch, office, or
warehouse in Iowa.
In National Geographic Society v. California Bd. of Equalization, 430 U.

S. 551, 559 (1977), the U. S. Supreme Court made it clear that the
requisite nexus for requiring an out-of-state seller to collect and pay
California's use tax was not whether the use tax related to the seller's
activities carried on in California, but simply whether the facts
demonstrated some definite link, some minimum connection between
the State and the Society. Accordingly, the National Geographic Society
was required to collect California's use tax even though its physical
presence in California was limited to two small offices, unrelated to the
taxable sales.
The courts have also indicated that a de minimis level of activity will not
constitute sufficient nexus to impose responsibility for use tax collection.
In Miller Bros. Co. v. State of Maryland, 347 U.S. 340 (1954) the United
States Supreme Court held that where the activities of a Delaware
retailer did not exceed the occasional delivery of goods sold at an out-
of-state store, with no solicitation other than the incidental effects of
general advertising, Maryland could not require the collection of their
sales tax. The decision was distinguished from General Trading by the
failure of Miller Bros. Co. to invade or exploit the consumer market in
Maryland. However, Miller Bros. dealt with sporadic sales into a
neighboring state. In Miller Bros., an assessment of only $365 was
generated over a four year period. The Court did not bar the imposition
of use tax responsibility where the requisite physical nexus exceeds a
de minimis level of activity within the state.
In its decision in Scripto Inc. v. Carson, 362 U.S. 207 (1960), the U. S.
Supreme Court reinforced its decision in General Trading. The Court
found the activities of independent contractors within a state constituted
sufficient nexus to compel the collection of use tax by a dealer, and to
require the payment of such tax by the dealer if he fails to collect it. The
40
Court's decision in Scripto was distinguished from that reached in Miller
Bros. by the regular exploitation of markets within a state, and the
knowledge that the goods sold were to be used and enjoyed within the
taxing state.
Accordingly, the information received to date supports the determination

that sufficient nexus exists for use tax collection responsibilities. The
nexus requirements for due process mandated by the U. S. Supreme
Court in Quill are clearly present. The Taxpayer has purposefully
directed its business at Virginia markets, through advertising and
regular deliveries. In the 15 month period audited by the department,
the Taxpayer made over*********deliveries into Virginia, producing sales
in excess of Because this cannot be considered a de minimis level of
activity, the nexus requirements for due process are satisfied.
The bright-line test for the substantial nexus required under the
Commerce Clause is satisfied by a pattern of continuous and regular
delivery by other than common carrier. The decision in National
Geographic made it clear that the physical presence creating nexus
does not need to be directly related to sales activities. Furthermore, I
find that the level of activities, intentional exploitation of Virginia
markets, and economies realized in sales to Virginia customers
distinguish the instant case from Miller Bros. Co., where occasional
delivery and incidental advertising were held to he insufficient to create
nexus.
In conclusion, I find that the Taxpayer has the requisite nexus to impose
use tax collection responsibilities, and meets the definitions of a dealer
as defined in the Code of Virginia.
In any proceeding relating to the interpretation or enforcement of the tax

laws of the Commonwealth, the burden of proof is on the Taxpayer. The
Taxpayer, having refused to provide evidence to support its application,
has not met that burden. Accordingly, the assessment is upheld.
Sincerely,
W. H. Forst
Tax Commissioner
41
Document 94-10
Number:
Brief Description: Interstate transactions; Nexus with Virginia
January 7, 1994
Dear**************
This will reply to your letter of August 24, 1993 in which you request a
ruling regarding Virginia's nexus standards for sales and use tax
purposes.
FACTS
Corporation Z is headquartered outside Virginia and is engaged in the

sale and the sub-contracting of the installation of tangible personal
property in Virginia. Sales are not solicited in Virginia by company
representatives, and Corporation Z does not have any assets in Virginia
with the exception that during the installation period Corporation Z
maintains title to the property. The inventory is in Virginia during
installation for less than one week.
Sales representatives do not perform credit checks, rectify problems

with Corporation Z's products, or attempt to collect accounts receivable
or approve sales. All orders are accepted outside Virginia and shipped
from inventory located outside Virginia. Corporation Z does not send
repair people into Virginia, and no other activities are engaged in by
sales representatives or other individuals acting on the company's
behalf in Virginia.
You ask if Corporation Z's activities are sufficient to create nexus in

Virginia for sales and use tax purposes.
RULING
42
Va. Code §58.1-612 (copy enclosed) sets forth the "nexus requirements
which give the Commonwealth the authority to require dealers to
register for collection and remittance of the sales tax. The statute
provides in part that a dealer shall be deemed to have sufficient activity
within the state to require registration if he: (1) maintains or has within
Virginia, directly or through an agent or subsidiary, an office,
warehouse, or place of business of any nature; or (2) makes regular
deliveries of tangible personal property within this Commonwealth by
means other than common carrier. A person is deemed to be making
regular deliveries if vehicles other than those operated by a common
carrier enter this Commonwealth more than twelve times during a
calendar year.
It is not clear from your letter the exact relationship between Corporation
Z and the subcontractors installing the tangible personal property. If an
agency relationship exists, and the subcontractor maintains a place of
business in Virginia, Corporation Z is deemed to have nexus with
Virginia and is required to register to collect the tax. Under Virginia law,
two factors are necessary in order for an agency relationship to be
established. First, the agent must be subject to the principal's control,
with regard to the work to be done and the manner of performing it.
Actual control is not the test; it is the right to control that is
determinative. Second, the work has to be done on the business of the
principal or for his benefit.
Similarly, your letter does not indicate the manner in which the tangible
personal property is delivered to Corporation Z's Virginia customers. If
Corporation Z makes deliveries of its goods into Virginia more than
twelve times per year by means other than common carrier, it is
required to register to collect the Virginia sales tax. If Corporation Z
does not make deliveries sufficient in number and scope to require
registration, and if it does not meet any of the other nexus requirements
in Va. Code §58.1-612, it may voluntarily register with the department
for the collection of the tax as a service to its customers.
However, as the enclosed statute indicates, if Corporation Z solicits in

Virginia through employees, independent contractors, agents or other
representatives, it would have sufficient activity in Virginia to require
registration. Corporation Z would also be liable for the tax during the
period which it met the nexus requirements within the statute of
limitations period.
43
You request that if nexus is established, may Corporation Z remit sales
tax on a transaction basis due to the sporadic nature of their business in
Virginia.
Under Virginia Regulation (VR) 630-10-31 (copy enclosed), a new

dealer is not placed on a filing basis other than monthly until the dealer
has been in business sufficient time to determine that he should fall into
another reporting category. Therefore, Corporation Z will initially be
required to file sales tax returns on a monthly basis. The returns will be
due on or before the 20th day of the month following each reporting
period even if no tax is due.
The department may determine that Corporation Z is required to file

sales tax returns on a quarterly basis. If quarterly filing status is
warranted, the department will change the filing status automatically and
notify Corporation Z. If Corporation Z is required to file on a quarterly
basis, the sales and use tax return will be due on the 20th day of the
month following the close of the reporting period.
Enclosed is a registration application which should be completed by

Corporation Z and returned to the department's Office of Tax Policy,
P.O. Box 1880, Richmond, Virginia 23282-1880. If you have any
questions regarding this matter, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
44
Document 94-62
Number:
Brief Description: Application of sales and use taxes; Dealers
March 15, 1994
Dear******************
This will reply to your letter of June 23, 1992, in which********* (the
"Parent") is contesting the sales and use tax assessment for the period
April 1, 1986 through December 31, 1991, against **********(the
"Subsidiary").
FACTS
The Subsidiary, which was acquired by the Parent during the audit
period, maintained an office in Virginia until May 1989. During that time,
it was engaged primarily in purchasing and selling cable and broadcast
air time in order to market various specialized products for
manufacturers and other clients through direct response television
advertising programs. The programs were generally produced by the
clients and broadcast on television during time slots which the
Subsidiary purchased in blocks from cable television networks or non-
cable television stations. The Subsidiary entered into arrangements with
third party vendors to perform telemarketing services, (i.e., receiving
orders from customers who purchased the client's products and making
credit card payment arrangements), fulfillment services (i.e., filling and
shipping the customer orders), and customer services (i.e. handling
customer complaints). The credit card company remitted receipts from
customer sales, less a company fee, to the Subsidiary. After the
receipts from the credit card company were reduced by the Subsidiary's
commission, the difference was remitted to the client.
The Parent contends that the Subsidiary did not act as a retailer or
45
make retail sales within the meaning of the sales and use tax statute
since they did not have the ability to transfer either title or possession of
products. In addition, the contracts with their clients were for services
essentially the same as those which might be provided by a commission
agent soliciting sales in Virginia.
DETERMINATION
Va. Code §58.1-602 (copy enclosed) defines a retailer as "every person

engaged in the business of making sales at retail, or for distribution,
use, consumption, or storage to be used or consumed in this
Commonwealth." Therefore, a person making retail sales of tangible
personal property in Virginia is considered a retailer.
Although it is argued that the Subsidiary is not a retailer of tangible
personal property, it is clear that the very nature of the business is the
marketing and sale of consumer products. From a review of the typical
sales agreements furnished to the department's auditor, the Subsidiary
does contract with individuals and businesses (its clients) to develop
videotape advertising (at the Subsidiary's expense) for the marketing of
various products. At the same time, however, the agreements typically
grant to the Subsidiary the "exclusive" and/or "unrestricted" right to
"advertise, promote, market, and sell" the products. In exchange for
developing the videos and marketing the products, the Subsidiary
typically receives 60% of the sales proceeds, with its clients receiving
the balance.
It is also apparent from reading these agreements that the Subsidiary
accepts orders from consumers, collects payments from consumers,
and causes the fulfillment of consumer orders, all of which are acts
consistent with those of a retailer. The fact that the Subsidiary does not
maintain an inventory of the products and relies on its clients and third
parties for fulfillment of orders is of no consequence, as the Subsidiary
actively solicits the retail sales and receives the orders from consumers.
A "dealer" (who is required to register for collection of the tax) is defined

in Va. Code §58.1-612 (copy enclosed) as including every person who:
Sells 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; or
46
As a representative, agent, or solicitor, of an out-of--state
principal, solicits, receives and accepts orders from persons
in this Commonwealth for future delivery and whose
principal refuses to register as a dealer under §58.1-613.
(Emphasis added.)
As a result, persons who sell tangible personal property, or

representatives or agents, including commissioned agents, who solicit,
receive or accept orders for delivery into Virginia must register as
dealer, collect the tax on retail sales, and remit the tax to the
department. The statute makes clear that the obligation to collect the tax
is present even in instances where the seller does not have title or
possession of the property sold. The mere act of offering the product for
sale or accepting orders for the product is sufficient to require collection
of the Virginia tax.
Accordingly, I find no basis for correction of the audit assessment.
However, due to the delay in responding to your letter, I will agree to
stop the accrual of interest on June 30, 1992, the date of your appeal
was received in this office, provided that******which represents tax and
interest of*****and ******respectively, be remitted to this office within 45
days from the date of this letter. The payment should be remitted to the
attention of****** Office of Tax Policy, Department of Taxation, P.O. Box
1880, Richmond, Virginia 23282-1880.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
47
Document 94-205
Number:
Brief Description: Nexus requirements; Out-of-state seller
June 30, 1994
Dear*************
This will reply to your letter of June 18, 1993 in which you request a
ruling on the obligations of an out-of-state manufacturer/dealer to collect
sales tax on items sold to Virginia residents.
Transaction #1: A national organization headquartered in State A asks

its members to purchase a commemorative product which is produced
in State B. Some of the organization's members who purchase the
product are residents of Virginia. The purchasers place their orders with
the national organization; the national organization forwards the orders
to the manufacturer in State B, who ships the products to the Virginia
residents through a dealer located in Virginia. The Virginia dealer
collects no money for the sale but does receive a nominal handling
charge. You ask who is responsible for collecting sales tax on the
transaction.
A sales or use tax is clearly applicable to all of the goods shipped to

Virginia purchasers. Under Va. Code §58.1-612 (copy enclosed), the
sales tax is collectible from all persons who are dealers and who have
sufficient contact with Virginia to require registration under Va. Code
§58.1-613. The determination of tax collection responsibility in this case
will hinge on which entity actually sells the products and the extent of
that entity's connections with Virginia.
Based on the facts presented, the manufacturer potentially qualifies as
a "dealer" under Va. Code §58.1-612 for purposes of this transaction.
That section defines "dealer" to include every person who
48
"manufactures or produces tangible personal property for sale at retail,
for use, consumption, or distribution, or for storage to be used or
consumed in this Commonwealth..."
Va. Code §58.1-612 also sets forth the "nexus" requirements which give
the Commonwealth the authority to require dealers to register for
collection and remittance of the sales tax. The statute provides in part
that a dealer shall be deemed to have sufficient activity within the state
to require registration if he (1) maintains or has within Virginia, directly
or through an agent or subsidiary, an office, warehouse, or place of
business of any nature; or (2) makes regular deliveries of tangible
personal property within this Commonwealth by means other than
common carrier. A person is deemed to be making regular deliveries if
vehicles other than those operated by a common carrier enter this
Commonwealth more than twelve times during a calendar year.
Your letter does not indicate the manner in which the tangible personal
property is delivered to the Virginia residents through the Virginia
dealer. If the manufacturer makes deliveries of its goods into Virginia
more than twelve times per year by means other than common carrier, it
is required to register to collect the Virginia sales tax. If the
manufacturer does not make deliveries sufficient in number and scope
to require registration, and if it does not meet any of the other nexus
requirements in Va. Code § 58.1-612, it may voluntarily register with the
department for the collection of the tax as a service to its customers.
You also ask what the result would be if the manufacturer maintains a
retail sales store in Virginia that is not involved in the transaction at
issue. Under Va. Code §58.1-612(C)(1), as long as a place of business
of any nature is maintained in Virginia by the manufacturer, it is deemed
to have sufficient activity in Virginia to require registration and collection
of the tax on its sales to Virginia residents. This position is consistent
with the U.S. Supreme Court's decision in National v. California Bd. of
Equalization, 430 U.S. 551 (1977), in which it was ruled that the seller
was required to collect California's use tax even though its physical
presence in California was limited to two small offices, unrelated to the
taxable sales.
However, it appears that the actual "sale" is between the national
organization and its members. Your letter states that orders are first
received by the national organization and that the price of the product to
members of the national organization is the cost of the product plus a
49
markup added by the national organization. This markup added by the
national organization indicates that there is a sale for resale made by
the manufacturer to the national organization. In such a case, the
manufacturer would be drop shipping goods in Virginia, and the national
organization would be deemed the dealer under Va. Code §58.1-612
and required to collect the tax if it has sufficient nexus with Virginia.
Transaction #2: A Virginia resident purchases a product from a

manufacturer in State B, with delivery made through a dealer in Virginia.
The dealer does not collect the purchase price for the product, but may
add a small handling fee to the transaction. You ask who would be
responsible for collecting the tax for this transaction and would the result
differ if the manufacturer also has a retail store in Virginia which plays
no role in the sale in question?
Based on the facts presented, it appears that the Virginia dealer is the
agent of the manufacturer. Furthermore, delivery to the customer is
made by means other than by common carrier. Under Va. Code §58.1-
612, the manufacturer has sufficient presence in Virginia and would be
required to collect the tax on its sales to Virginia residents.
The fact that the manufacturer has a retail store in Virginia does not
change the result, but rather is another indication that the manufacturer
has sufficient activity in Virginia to require it to register and collect tax on
sales to Virginia residents. This is true even if the retail store plays no
role in the sales in question.
I would note that in both transactions, the sales tax may be collectible
from the Virginia dealer, as it satisfies the definition of "dealer" by
possessing tangible personal property for distribution in Virginia. See
Va. Code §58.1-612(B)(3).
If you have any other questions regarding this matter, please contact
the department.
Sincerely,
Danny M. Payne
Tax Commissioner
50
Document 94-266
Number:
Brief Description: Advertising; Interstate transactions; Packaging; Resales; Promotional and
advertising materials for marketing cosmetics
August 26, 1994
Dear*****
This will reply to your letter of June 15, 1993 in which you seek
correction of sales and use tax assessed to ******* "the Taxpayer" for
the period March, 1987 through February, 1993.
FACTS
The Taxpayer is engaged in the manufacture, distribution and marketing

of cosmetics and is domiciled outside Virginia. The Taxpayer maintains
a sales force, under a separate affiliate, throughout the state to develop
sales contracts with retailers for distribution of its cosmetic products. As
a result of the department's audit, the Taxpayer was assessed use tax
on certain promotional and advertising items used to market their
products in Virginia. Displays, testers, gifts with purchase and certain
samples are marketed with the products, while advertising inserts,
mailers and other samples are the subject of direct mailing to the
general public. The aforementioned items are provided at no charge to
the retailers with the exception of the testers. Samples provided to sales
representatives are not at issue in this appeal.
The Taxpayer's primary disagreement with the application of the tax is
based on the auditor's assertion that the Taxpayer exercises a use over
the contested items in Virginia. The Taxpayer asserts that it relinquishes
ownership of the contested items once the property is placed in transit
via common carrier outside Virginia. As such, the transactions between
the Taxpayer and the Virginia retailers are sales occurring in interstate
commerce.
51
Alternatively, the Taxpayer contends that the displays qualify for the
packaging exemption provided under Va. Code §58.1-609.3(2)(iv) while
the gifts with purchase qualify for the resale exemption as items
marketed with the sale of the regular cosmetic products. Additionally, a
portion of the assessed tax constitutes labor and overhead associated
with in-house advertising and thus exempt under Virginia Regulation
(VR) 630-10-3.
DETERMINATION
VR 630-10-51 describes the interstate commerce exemption, stating

that "[t]he tax does not apply to sales of tangible personal property in
interstate or foreign commerce. A sale in interstate or foreign commerce
occurs only when title or possession to the property being sold passes
to the purchaser outside of Virginia and no use of the property is made
within Virginia." Va. Code § 58.1-602 defines use as "the exercise of
any right or power over tangible personal property incident to the
ownership thereof."
The Taxpayer contends that its position is consistent with the above and
supported by the U.S. Supreme Court's opinion in Quill Corporation v
North Dakota, 112 S. Ct. 1904 (1992) and Complete Auto Transit. Inc. v.
Brady, 430 U.S. 274 (1977), both of which held that business must have
substantial nexus within the state in order for such state to impose its
use tax.
The Taxpayer further asserts that its situation is similar to that

addressed in Hoffman-LaRouche, Inc. v. Porterfield, 243 N.E.2d 72
(Ohio 1968). In that case, the Ohio Supreme Court decided that the
taxpayer exercised no use over free samples of pharmaceutical
products and other promotional items mailed from outside Ohio to
doctors and hospitals in Ohio.
Based on the above and a review of additional information received

from the Taxpayer, I agree that the Taxpayer has made no taxable use
of the contested items in Virginia and that the sales constitute
transactions which occur in interstate commerce.
The displays and testers are generally shipped directly to Virginia
retailers with the retail product for placement in stores. The displays
serve to stock and present the product for sale to the general public
while the testers are part of the display and are used by the general
52
public to sample the product before purchase. The Taxpayer does not
require the return of the displays or testers and as such, no use is
demonstrated by the Taxpayer. Of course, had employees or
representatives of the Taxpayer made use of the items in Virginia prior
to their transfer to the retailers, the tax would apply.
The samples attached to advertising inserts, the advertising inserts

themselves, and the mailers, when the subject of direct mail to Virginia
residents, are exempt of the use tax consistent with the policy set forth
in P.D. 93-41 (3/4/93) and P.D. 85-35 (2/28/85), copies enclosed. In
both cases, catalogs were printed in another state and direct mailed by
the printer to residents in Virginia free of charge. The Tax Commissioner
held that the taxpayers exercised no use of the catalogs in Virginia and
therefore the use tax did not apply to such transactions.
The gifts with purchase and the portion of the samples packaged with
the product for ultimate sale to customers both constitute items
marketed with the product being sold and as such, qualify under the
resale exemption provided in Va. Code §58.1-602.
While the Taxpayer is involved in the promotion of its cosmetics in
Virginia by means of its sales force and by placement of certain
promotional and advertising items in Virginia, such activities are
deemed insufficient to impose the use tax as intended under Virginia
Code §58.1-604 and the cited caselaw. This is because the sales force
does not make any use of the items in Virginia prior to their transfer to
the retailers. Therefore, in accordance with my findings the assessment
will be abated.
Sincerely,
Danny M. Payne
Tax Commissioner
53
Document 95-111
Number:
Brief Description: Occasional sales, mergers; Concert sales of T-shirts and beverages
May 9, 1995
Dear*****************
This will reply to your letter of March 17,1995 in which you seek a ruling
on the tax status of sales made by your organization, ********** the
"Taxpayer".
FACTS
The Taxpayer is a organization involved in promoting one of Virginia's

cities. It sponsors free concerts during the summer at which beverages
and T-shirts are sold. Proceeds from the sales are shared with nonprofit
organizations. In the past, the Taxpayer has limited the number of
concerts to three each year and has not collected the tax on sales
made. However, this year it intends to expand the number of concerts to
six. Thus, you seek a ruling on the tax status of the sales made during
the concerts.
RULING
Code of Virginia § 58.1 -609.10(2) exempts from the sales and use tax
occasional sales of tangible personal property. Interpreting this Code
section, Virginia Regulation (VR) 630-10-75, states in part that "[t]he
term 'occasional sale' means...[a] sale by a person who is engaged in
sales on three or fewer separate occasions within one calendar year."
Applying the above regulation, the Taxpayer was correct in not
collecting the tax on sales made during its prior concert series.
However, since it will hold more than three concerts this year, it will be
required to register as a dealer with the department and collect and
remit the tax on all sales made during such concerts. In effect, the
54
Taxpayer will be holding itself out as a retailer and may be in
competition with businesses or other organizations which are required
to collect the tax due to their sales activities. As a registered dealer,
however, the Taxpayer may purchase items for resale exempt of the tax
using a resale exemption certificate, Form ST-10. 1 am enclosing a
copy of P.D. 90-39 (3/19190) which addresses this issue and copies of
the dealer registration form (Form R-1) and instructions (Form R-4).
If you have any questions regarding this matter, please contact********

my Office of Tax Policy at*************
Sincerely,
Danny M. Payne
Tax Commissioner
55
Document 95-250
Number:
Brief Description: Vendor/seller liability; Voluntarily registered dealer
September 29, 1995
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear****************:
This will reply to your letter in which you seek correction of sales and
use tax assessed to your client,**********(the "Taxpayer"), for the period
January, 1991 through December, 1993.
FACTS
The Taxpayer is a manufacturer located outside Virginia engaged in the

production of lightning protection systems for sale to electrical
subcontractors for installation in residential and commercial buildings.
The Taxpayer owns no facilities in Virginia nor does it employ any
salespersons who conduct business in Virginia on its behalf. The
Taxpayer's products are generally shipped by common carrier to its
Virginia customers.
The Taxpayer has been audited by the department because it

voluntarily registered to collect and remit Virginia sales tax. In 1991 the
Taxpayer was advised by its accountant that it was not required to
collect the Virginia tax due to its failure to meet the criteria that
determines nexus with the state. Based on this advice the Taxpayer
discontinued its collection of the sales tax but failed to terminate its
registration. Instead, the Taxpayer began filing zero returns for each
filing period.
The auditor does not dispute the nexus issue but has assessed tax on
the Taxpayer's Virginia sales because the Taxpayer did not terminate its
registration and continued to file Virginia sales tax returns through the
audit period. In support of the assessment, the auditor relies upon a
56
previous department ruling, P.D. 93-141 (6/7/93). The auditor has
terminated the Taxpayer's registration effective January 1, 1994.
The Taxpayer protests the tax and asserts that it has fully complied by
not charging the tax and shifting the responsibility for payment of the tax
to the purchaser since a contractor is required to pay the use tax on
their purchases of property used and consumed in the performance of
real property contracts in Virginia. The Taxpayer further contends that
the penalty should not be applied to the audit assessment since the
Taxpayer filed zero returns based on its belief that it was not required to
collect the tax.
DETERMINATION
P.D. 93-141 discusses an out-of-state furniture dealer who voluntarily

registered to collect Virginia sales tax and like the present Taxpayer
filed zero returns when in fact it should have collected the tax on its
Virginia sales. The department ruled that the taxpayer, by voluntarily
registering, consented to the sales tax jurisdiction of the state and
despite filing zero returns, the taxpayer was a dealer for purposes of the
sales tax.
I must agree with the auditor's assessment of the tax based on the
above ruling. At the point in which the Taxpayer voluntarily registered
with the department, it was required to collect the tax on Virginia sales
until such time as it provided written notification of termination of the
registration. See Code of Virginia § 58.1-613, copy enclosed, which sets
forth the filing requirements for dealers in Virginia.
The Taxpayer's contention that contractors are required to pay the use
tax on purchases of property used in real property contracts is correct
as provided in Code of Virginia § 58.1-610. Notwithstanding, such
requirement does not relieve the Taxpayer or any other registered
dealer of its responsibility to collect and remit the tax on Virginia
transactions subject to the tax.
Based on the facts presented, the Taxpayer does not engage in
sufficient activity in Virginia to meet the requirements for nexus.
However, it is my understanding that the Taxpayer's parent company is
engaged in certain activities in Virginia which create sufficient nexus
and that the Taxpayer sells property to its parent for use in the
performance of Virginia real property contracts. As a service to its
parent and other customers who may purchase items for use in the
performance of Virginia real property contracts, the Taxpayer may wish
57
to reconsider its decision to discontinue collecting Virginia tax.
Otherwise, its parent and other customers will be required to remit
Virginia use tax.
Penalty has been applied to the audit assessment because the

Taxpayer failed to meet the sales compliance ratio requirement for
second generation audits. While the required ratio is 75%, the
Taxpayer's ratio is only 58%. As such, the auditor was correct in
applying the penalty. However, l will agree to waive the penalty in light
of the nexus issue.
In accordance with the determination set forth, the Taxpayer will receive
a revised "Notice of Assessment" to reflect the adjustment for penalty
and will include interest accrued through the date of the letter of protest.
The assessment should be paid within 30 days to avoid the accrual of
additional interest charges.
If you have additional questions, please

contact*****************at************.
Sincerely,
Danny M. Payne
Tax Commissioner
58
Document 96-112
Number:
Brief Description: Interstate transactions; Film projectors purchased out-of-state
May 31, 1996
Dear***********
This is in response to your correspondence seeking correction of a
sales and use tax audit assessment on behalf of ***** (the Taxpayer).
FACTS
The Taxpayer is a video staging, projection and production company
providing audio-visual services for entertainment events. An audit for
the period October 1990 through July 1993 resulted in an assessment
of sales and use tax on untaxed purchases of projectors, other fixed
assets, and various supply items.
Based on the facts presented, it is my understanding that the Taxpayer

maintains that the projectors assessed in the audit are not subject to the
tax since they were acquired by the Taxpayer outside Virginia and were
brought into Virginia at a later date for use only as parts. The Taxpayer
also maintains that it rents equipment, rather than provides a service,
when it sends its staff to an event to operate equipment provided by the
Taxpayer. According to the auditor, the Taxpayer purchased its
equipment exempt of the tax under a resale certificate of exemption.
DETERMINATION
Service v. Rental: Virginia Regulation 630-10-57(A), copy enclosed,

sets out the department's general policy on leases and rentals. This
regulation states that the tax generally applies to leases or rentals of
tangible personal property without operators, i.e., a true lease or rental
of tangible personal property is deemed to occur when no operator is
furnished under the transaction. On the other hand, a lease with an
59
operator is considered a nontaxable service transaction. See PD's 89-
139 (4/28/89) and 96-48 (4/15/96), copies enclosed.
Accordingly, whenever the Taxpayer sends its staff to an event to

operate equipment provided by the Taxpayer, the Taxpayer is providing
services, the charge for which is nontaxable. As a service provider, the
Taxpayer is liable for the tax on all of its purchases of tangible personal
property used or consumed in the performance of such services.
In those instances in which the Taxpayer rents or leases equipment

without an operator, the charge to the customer is subject to the tax.
Equipment which is used solely for rental or lease purposes may be
purchased exempt of the tax.
Projectors: Since the projectors at issue were brought into Virginia for
use or storage in Virginia, they are subject to the use tax either on their
cost price or fair market value, depending on when they were first
brought into Virginia. Although the Taxpayer disputes the tax assessed
on the projectors, Code of Virginia § 58.1-205 places the burden of
proof upon the Taxpayer to show that the tax assessed on the cost price
of the projectors is improper. As such, the assessment is deemed
correct unless convincing evidence establishes otherwise.
It is my understanding that the purchase invoices reviewed by the
auditor show that the projectors were delivered by the suppliers directly
to the Taxpayer in Virginia. In such instances, there is no doubt that the
Virginia retail sales and use tax applies to the cost Price of the
projectors.
The information presented by the Taxpayer to date is not sufficient to

allow revision of the assessment. For instance, the information does not
indicate whether any of the touring events in which the projectors were
used came into Virginia, nor does it indicate that the items were
returned to the Delaware warehouse after each entertainment event,
rather than to the Taxpayer's Virginia location where the projector
operators are located. It is also unclear as to whether the information
furnished has any connection to the projectors picked up in the audit;
i.e., the auditor assessed tax on Sony projectors, but the Taxpayer only
mentions General Electric projectors.
Notwithstanding the foregoing, if the Taxpayer can show that any of the
projectors at issue were delivered to the Taxpayer at its Delaware
warehouse and were first brought into Virginia six months or more after
60
acquisition, the audit will be revised to change the assessment of tax
from the cost price of the projectors to the fair market value at the time
such items were first brought into Virginia.
In order to revise the assessment, the Taxpayer needs to provide

copies of the actual invoices furnished by its suppliers showing that
initial delivery of the projectors was directly to the Taxpayer at its
******location. If the invoice does not show a***** location as the point of
delivery, the Taxpayer may provide some other convincing evidence
(e.g., bills of lading, shipping records, etc.) furnished by the supplier or
shipper which clearly shows that the initial delivery of the property was
to the Taxpayer's******warehouse. To establish that such projectors
were first brought into Virginia six months or more after purchase, the
Taxpayer needs to provide evidence, such as a log or record
maintained by the Taxpayer.
An auditor from the department's ****** District Office will contact you
soon to schedule a meeting to review the Taxpayer's invoices and other
records of the items at issue. If such documents clearly establish that
the items were first shipped to the Taxpayer outside of Virginia and
were first brought into Virginia six months or more after acquisition, the
audit will be revised as set forth above and a revised assessment will be
sent to the Taxpayer. If such documentation does not clearly establish
that an adjustment to the assessment is in order, the assessment with
interest updated to the present will be sent to the Taxpayer.
If you have any questions concerning this response, please

contact****** at ******.
Sincerely,
Danny M. Payne
Tax Commissioner
61
Document 96-339
Number:
Brief Description: Services; Repair and installation; Maintenance contracts
November 20, 1996
Dear**************
In your letter, you seek correction of the retail sales and use tax
assessment issued to **********(the Taxpayer). I apologize for the delay
in responding to your letter. Copies of all references are enclosed.
FACTS
The Taxpayer is located outside Virginia and offers full service computer
systems and media software and services for the broadcasting industry.
An audit for the period February 1992 through January 1995 resulted in
an assessment of sales tax on untaxed sales made prior to and after the
effective date of its use tax registration.
The department's auditor determined that the Taxpayer established

nexus with Virginia prior to its use tax registration since the Taxpayer
had sent its personnel into Virginia on several occasions to install and
test custom software sold to its Virginia customers. The Taxpayer takes
exception to the use tax assessed prior to its effective date of
registration on April 1, 1993, and maintains that it has no nexus with
Virginia to require it to register for the collection and remittance of the
use tax. According to the Taxpayer, its use tax registration was purely
voluntary as it does not maintain an office in Virginia, solicit business in
Virginia, advertise in Virginia, make regular deliveries in Virginia, or
perform other activities in Virginia requiring a use tax registration. The
Taxpayer also takes exception to certain sales held taxable in the audit
and maintains that the fees represent exempt sales or leases of custom
62
software or updates and enhancements thereof.
DETERMINATION
Nexus. Although the Taxpayer is clearly a "dealer" as defined in Code

of Virginia § 58.1-612(B), the Taxpayer must also have "sufficient
activity" within Virginia as set out in Code of Virginia § 58.1-612(C)
before it would be required to register for collection and remittance of
the use tax. The fact that the Taxpayer sends its personnel into Virginia
to install and test its custom software for its Virginia customers does not,
by itself, create nexus with Virginia. Accordingly, absent evidence that
the Taxpayer had sufficient activity within Virginia as set out in the
above cited statute, the facts presented do not support a conclusion that
the Taxpayer was required to have been registered prior to the effective
date of its use tax registration.
For these reasons, I find basis to remove all of the tax and interest
assessed prior to April 1, 1993 from the department's audit assessment.
Custom Software. According to the auditor, no tax was assessed in

connection with custom software in the department's audit. Rather, tax
has been assessed on maintenance agreements which provide for the
furnishing of repair or replacement parts for covered equipment. As set
out in Virginia Regulation 630-10-62.1, the total charge for "parts only"
contracts and "parts and labor" contracts is taxable. Accordingly, the
assessment of tax on untaxed maintenance agreements sold on or after
the effective date of the Taxpayer's use tax registration is proper.
Please note that, effective January 1, 1996 and thereafter, parts and
labor maintenance contracts are subject to the tax based on one-half of
the total charge for such contracts. See Tax Bulletin 95-8 (9127195).
Under separate cover, the Taxpayer will receive a revised bill for the
balance owed of ******************The payment and the revised bill
should be sent to Department of Taxation, ATTN:*************Post Office
Box 1880, Richmond, Virginia 23218-1880,
within the next 30 days.
Sincerely,
63
Danny M. Payne
Tax Commissioner
64
Document 97-45
Number:
Brief Description: Construction; Using and consuming contractor
February 6, 1997
Dear*********************
This will reply to your letter in which you request a ruling as to the
application of the retail sales and use tax to your client (the "Taxpayer")
and an out-of-state affiliated corporation (the "Affiliate") of the Taxpayer.
FACTS
The Taxpayer is a South Carolina corporation which maintains its

commercial domicile and base of business in Virginia. The Taxpayer's
business activities include the manufacture of tangible personal property
for use in real property construction contracts. For sales and use tax
purposes the Taxpayer is classified as a dual role fabricator under
Virginia Regulation (VR) 630-10-27.E (copy enclosed), with its principal
business activity being that of fabricating for its own use and
consumption in the performance of real property contracts. On
occasion, the Taxpayer will require additional materials to fulfill a
contract. On these occasions, the Taxpayer will acquire materials from
the Affiliate who is a dual role fabricator that conducts business in a
state other than Virginia. The Affiliate's principal activity is fabricating
tangible personal property for its own use and consumption in real
property contracts. The Affiliate pays the sales tax on the raw material
cost of tangible personal property used in fabrication in its state of
domicile. The Affiliate does not have employees, a business location,
sales representatives, or inventory in Virginia. The Taxpayer is
requesting a ruling on the Virginia sales and use tax application for the
following two scenarios.
65
Scenario I
The Taxpayer contracts to furnish and install tangible personal property

tor a real property construction contract in Virginia. Rather than perform
the fabrication and erection itself, the Taxpayer subcontracts with the
Affiliate to furnish and install. The Affiliate furnishes materials and
contracts with on unrelated third party for installation.
Scenario ll
Taxpayer contracts as a general contractor or subcontractor for the

fabrication and installation of materials with respect to a real property
construction contract in Virginia. Taxpayer contracts with Affiliate for
provision of the fabricated materials. Affiliate delivers fabricated
materials to the Virginia job site and Taxpayer performs erection.
The Taxpayer is requesting a ruling on the sales and use tax application
to both the Taxpayer and the Affiliate in the above two situations.
RULING
VR 630-10-27.E addresses fabricators who operate in a dual role

capacity of fabricating tangible personal property for sale or resale and
fabricating for their own use in the performance of real property
construction contracts. This regulation states that, any dual role
fabricator who is principally fabricating tangible personal property for his
own use and consumption in real property contracts is operating as a
using and consuming contractor and must pay the tax on the cost price
of the raw materials which make up such fabricated property. This
regulation goes on to provide that should the contractor sell fabricated
tangible personal property at retail, the tax is collected upon the retail
selling price. The contractor is not entitled to a credit for tax paid to the
supplier since the transactions are separate and distinct taxable
transactions.
As provided in your letter, the Taxpayer and the Affiliate are both
principally fabricating for their own use in real property construction
contracts and are paying tax on the raw material cost price in their
respective states. In Virginia, a subcontractor takes on the role of the
using and consuming party to the contract and is liable for the tax on
tangible personal property being installed. Keeping this in mind, I will
address the Virginia sales and use tax application to Scenario I and ll
66
separately below.
Scenario I
The Taxpayer has contracted with the Affiliate to furnish and install
fabricated tangible personal property. This classifies the Affiliate as a
using and consuming contractor with respect to real property
construction and would subject the Affiliate to the tax on all fabricated
materials going into the project. It is the policy of the department to
allow an out-of-state contractor a credit against Virginia taxes for any
taxes properly paid on property acquired in another state. As provided,
the Affiliate has paid the sales tax on all raw materials in its state of
domicile. Due to the fact the sales tax in the Affiliate's state of domicile
is higher than the use tax rate in Virginia, I find that the Affiliate incurs
no additional Virginia tax liability. It should be noted, however, if the
Affiliate paid sales tax on material costs at a rate less than the 4 1/2%
Virginia use tax rate, the Affiliate would be obligated to pay a
complementary use tax to equal the 4 1/2% Virginia rate.
Scenario ll
The Taxpayer is acting as the general contractor or subcontractor

responsible for furnishing and installing fabricated property in real
property construction contracts. For reasons of convenience or
economics, the Taxpayer contracts with Affiliate solely for the provision
of fabricated tangible personal property to be delivered to the Virginia
job site. The Taxpayer will perform all installation. In this case, the
Taxpayer is acting as the using and consuming contractor and the
Affiliate is doing nothing more than selling fabricated property to the
Taxpayer.
As provided above, when a dual role fabricator sells fabricated property

at retail, the tax is collected upon the retail selling price, with no credit
available for tax paid to the supplier on raw material costs. In this
Scenario, the Affiliate is making a retail sale to the Taxpayer. Due to the
fact that the Affiliate does not have nexus in Virginia and is not required
to collect the Virginia tax, the Taxpayer would be required to pay the 4
1/2% Virginia use tax since he is the using and consuming contractor
with respect to the Virginia job.
If you should have any further questions, please contact ************* ,

Office of Tax Policy, at**************.
67
Sincerely,
Danny M. Payne
Tax Commissioner
68
Document 97-81
Number:
Brief Description: Interstate transactions; Nexus
February 19, 1997
Dear******************
This will reply to your letter in which you seek correction of the retail
sales and use tax audit of your client, ********* (the "Taxpayer"), for the
period of June 1990 through May 1996.
FACTS
The taxpayer is a West Virginia company in the retail furniture and

appliance business. The Taxpayer was audited and assessed Virginia
use tax on sales to Virginia customers. These sales were delivered to
the Virginia customer by the Taxpayer's truck. The Taxpayer collected
the West Virginia retail sales tax on these Virginia sales and remitted
the tax to West Virginia. The Taxpayer made fewer than 12 deliveries
per year into Virginia for entire audit period with the exception of 1995.
In 1995, the Taxpayer made 17 deliveries into Virginia. The Taxpayer is
taking exception to the assessment of Virginia use tax for the years
1990-1995, as the Taxpayer is not required to collect the Virginia tax in
accordance with Code of Virginia § 58.1-612.
DETERMINATION
Code of Virginia § 58.1-612, copy enclosed, defines the term "dealer"

for retail sales and use tax purposes. Subsection C of this statute sets
forth what activities a dealer must be engaged in to require registration
for collection of the Virginia tax. Based on a review of these activities,
and information provided by the auditor, the only activity carried on by
the Taxpayer to require collection of the tax is delivery of tangible
personal property into Virginia by means other than common carrier.
69
Subsection C.4 of this statute provides that the following activity shall be
sufficient to require collection of the Virginia tax by the dealer.
Makes regular deliveries of tangible personal property within
this Commonwealth by means other than common carrier. A
person shall be deemed to be making regular deliveries
hereunder if vehicles other than those operated by a
common carrier enter the Commonwealth more than twelve
times during a calendar year to deliver goods sold by him.
Based on the information provided in your letter, and verified by the

auditor, the Taxpayer did not make more than twelve deliveries into
Virginia until calendar year 1995, a year in which 17 deliveries were
made to Virginia customers by way of the Taxpayer's truck. This being
the case, the Taxpayer did not establish nexus in the state of Virginia
until 1995, thus was not required to collect the Virginia use tax until
1995. Due to the fact the Taxpayer did establish nexus with the state of
Virginia in 1995, I must deem the tax collected by the Taxpayer from
1995 forward subject to the Virginia use tax. All use tax and interest
assessed as the result of the sales and use tax audit prior to 1995 will
be abated. A revised notice of assessment will be mailed to the
Taxpayer.
If you should have any questions regarding this determination, please

contact **************, Office of Tax Policy, at***********.
Sincerely,
Danny M. Payne
Tax Commissioner
70
Document 97-266
Number:
Brief Description: Nexus; Out-of-state vendors; Construction; Retailer v. contractor
June 13, 1997
Dear********
This is in reply to your letter in which you seek a correction of the

department's sales and use tax assessment issued to****** (the
"Taxpayer"), for the period January 1994 through November 1996.
FACTS
The Taxpayer manufactures ducts, vents, hoods, and other kitchen

related equipment. In the present case the Taxpayer manufactured and
sold kitchen equipment products, shipping them via common carrier to
various locations in Virginia. In instances where the Taxpayer offers to
install the equipment, the Taxpayer subcontracts the installation to a
Virginia contractor. The Taxpayer states that it is a retailer under Code
of Virginia § 58.1-610(D), but that it does not maintain a physical
presence, nor does it perform any other activities which would generally
give rise to nexus within Virginia.
The department's auditor concluded that, due to the extent of the

integration of the equipment to the infrastructure of the building, the
Taxpayer was acting in the capacity of a consuming contractor.
Accordingly, the auditor assessed tax to the Taxpayer on the cost price
of the materials and equipment used and consumed in the performance
of a real property construction contract.
The Taxpayer disagrees with the auditor's position and states that
because of its classification as a retailer under Code of Virginia § 58.1-
71
610(D), and because it has no established nexus within Virginia, the
assessment is in error.
DETERMINATION
Code of Virginia § 58.1-610(A) provides that:

Any person who contracts orally, in writing, or by purchase
order, to perform construction, reconstruction, installation,
repair, or any other service with respect to real estate or
fixtures thereon, and in connection therewith to furnish
tangible personal property, shall be deemed to have
purchased such tangible personal property for use or
consumption.
This same section further provides under subsection (D)
that:
Tangible personal property incorporated in real property
construction which loses its identity as tangible personal
property shall be deemed to be tangible personal property
used or consumed within the meaning of this section. Any
person selling fences, venetian blinds, window shades ...
cabinets, kitchen equipment ... or other like or comparable
items, shall be deemed to be a retailer of such items and
not a using and consuming contractor with respect to them,
whether he sells to and installs such items for contractors or
other customers and whether or not such retailer fabricates
such items. (Emphasis added).
Based on the information before me, the Taxpayer maintains a retail or
wholesale place of business, has an inventory of the equipment and/or
materials or items which enter into or become a component part of the
items installed, and performs installation as part of or incidental to the
sale of the above listed items. Accordingly, under Title 23 of the Virginia
Administrative Code (VAC) 10-210-410(G), formerly Virginia Regulation
630-10-27(G), the Taxpayer meets the foregoing requirements and is
considered a retailer for Virginia sales and use tax purposes. The
Taxpayer is not a using and consuming contractor.
Code of Virginia § 58.1-612, copy enclosed, defines the term "dealer"

and sets forth the nexus requirements which give the Commonwealth
the authority to require a business to register for the collection and
remittance of the Virginia sales tax. While the Taxpayer does satisfy the
definition of a "dealer," it does not have sufficient activity in Virginia to
72
require it to register and collect the tax.
Based on the foregoing, I find that the department's assessment is in

error and has been abated.
If you should have any additional questions regarding this matter,

please contact ********** of the is department's Office of Tax Policy
at*********** .
Sincerely,
Danny M. Payne
Tax Commissioner
73
Document 97-276
Number:
Brief Description: Nexus; Out-of-state vendors; Mail order photography
June 18, 1997
Dear*****************
This will reply to your letter in which you seek a determination if
**********(the "Taxpayer") has nexus in Virginia for sales and use tax
purposes.
FACTS
The Taxpayer is a photography business located in another state that

specializes in the sale of high school and college graduation
photographs. The Taxpayer sends its own employees or hires
independent photographers to shoot photographs of graduation events
in Virginia. The film is then sent to another state for processing.
Photographic proofs and order cards are then mailed to Virginia
customers from the Taxpayer's home state to solicit orders for
photographs. The Taxpayer is currently registered with the department
and has been collecting and remitting use tax since 1993.
RULING
Although the Taxpayer is clearly a "dealer" as defined in Code of

Virginia § 58.1-612(B) (copy enclosed), the Taxpayer must also have
sufficient activity within Virginia as set out in Code of Virginia § 58.1-
612(C) before it would be required to register for collection and
remittance of the use tax. The fact that the Taxpayer sends its
employees into Virginia to shoot photographs does not, by itself, create
nexus with Virginia. If the Taxpayer's photographers solicit sales while in
Virginia, nexus is created. In this case, all solicitations are made through
the mail.
74
The facts presented by the Taxpayer indicate that sufficient nexus does
not exist with Virginia to require it to collect and remit use tax. The
Taxpayer does not meet any of the nexus criteria found in Code of
Virginia § 58.1-612(C). The Taxpayer should be aware that a change in
its Virginia business activities could alter this ruling. The Taxpayer may
wish to continue collecting use tax as a courtesy to its customers since
the customers would be liable for consumer use tax on purchases of
photographs from the Taxpayer.
If you have additional questions concerning this matter, please contact
*********** in the Office of Tax Policy at***************
Sincerely,
Danny M. Payne
Tax Commissioner
75
76
Document 97-306
Number:
Brief Description: Telecommunications; Telecommunications equipment used by Internet provider
July 18, 1997
Dear*****************
This is in reply to your letter in which you seek information on the

application of the sales and use tax to your client, the "Taxpayer,"
regarding the provision of Internet access services. I apologize for the
delay in responding to your letter.
FACTS
The Taxpayer is headquartered outside Virginia and is engaged

primarily in the provision of Internet access services. The Taxpayer also
provides on-line incidental products and services to customers. You
question the tax application regarding on-line Internet access services
and incidental services and products offered by your client to Virginia
customers.
RULING
Internet Access Services
The Taxpayer provides Internet access services to individuals and

businesses on a subscription basis for a flat monthly fee. The Taxpayer
provides services using a Point of Presence (POP) network consisting
of leased office locations throughout the United States. Each location
houses telecommunications switching and routing equipment. The
Taxpayer maintains several POP locations in Virginia. There are no
employees at the Virginia POP locations and technical or equipment
problems are corrected by remote access or a repair technician is sent
77
to the location.
The Taxpayer provides dial-up and network accounts to its customers.

A dial-up customer connects to the Taxpayer's POP by dialing a local
telephone number via personal computer. The connection is routed
through telephone lines maintained by a regional bell operating
company (RBOC) that directly bills the customer a charge for the
connection service, unrelated to the monthly fee charged by the
Taxpayer. Once connected to the POP and transmitted via the RBOC,
the customer is routed to the Taxpayer's Hub (server) outside Virginia.
From the Hub, the customer is routed to the Taxpayer's main operations
center, also outside Virginia, for identification and password verification.
The customer is routed back to the POP and through the Hub to a
network access point (NAP) for connection to the Internet.
The network customer is not continuously routed as the dial-up

customer, but instead is routed from the POP through dedicated
connection lines for direct access to the Internet. The dedicated
connection lines are leased and billed to the customer or the Taxpayer
by the RBOC, independent of the monthly fee charged by the Taxpayer.
Application of the Tax

Code of Virginia § 58.1-609.5(1) provides an exemption from the sales
and use tax for "[p]rofessional, insurance, or personal service
transactions which involve sales as inconsequential elements for which
no separate charges are made...."
The department traditionally has held that transactions involving data

accessed on-line by personal computers are nontaxable service
transactions under Code of Virginia § 58.1-609.5(1). This is also true of
information sent via fax, Internet, or other electronic means. Intangible
property or services generally are exempt from the tax unless provided
in connection with the sale of tangible personal property.
The services, as described above, involve electronic communications

activity transmitted and routed through a number of connection points in
and outside Virginia. Because there is no exchange of tangible personal
property regarding Virginia connection points, the services are deemed
nontaxable service transactions. The Taxpayer, therefore, is not
required to collect the Virginia sales tax on the charge to Virginia
customers for such services.
78
The Taxpayer maintains POP locations in Virginia in order to provide
Internet access services to customers. As a service provider, the
Taxpayer is deemed the user and consumer of all tangible personal
property used in Virginia in the provision of the services. See Title 23 of
the Virginia Administrative Code (VAC) 10-210-4040.
Code of Virginia § 58.1-604 imposes the use tax on the "use and
consumption of tangible personal property in this Commonwealth, or the
storage of such property outside the Commonwealth for use or
consumption in this Commonwealth...." The Taxpayer, in accordance
with the Code, is subject to the use tax on the cost price of the
telecommunications switching and routing equipment placed in use at
the Virginia POP locations. The Taxpayer must pay the Virginia tax at
the time of purchase; however, if the vendor fails to collect the tax or is
not registered to collect the Virginia tax, the Taxpayer must remit such
tax directly to the department using Form ST-7. See 23 VAC 10-210-
030.
Other Services/Products
The following incidental services and products are offered by the
Taxpayer to customers, generally at no extra cost.
Electronic Mail (E-mail): The Taxpayer offers customers electronic mail

for communication among individuals throughout the world via the
Internet.
Personalized Daily Electronic Newsletter: The Taxpayer contracts with

an unrelated third party (Company X) to provide an electronic news
service delivered to the Taxpayer's customers daily via E-mail. The
customer may customize the content of the newsletter by selecting up to
ten topics and receive headlines and news summaries on a daily basis.
The customer may contract with Company X for expanded service
offerings and pay an additional fee directly to Company X.
Personal Finance Services: The Taxpayer contracts with another

unrelated party (Company Y) to provide access for the Taxpayer's
customers to personal finance tools for use in developing and managing
a personal investment portfolio. The customer may contract with
Company Y to upgrade the service for an additional fee.
Web Site Creation: The Taxpayer provides customers the opportunity to
create a web site. The customer enters data on an electronic template
79
which is processed by the Taxpayer using its own software. The
customer may also create a web site using hypertext markup language
(HTML) which does not require any processing by the Taxpayer. In both
instances, the customized web site is stored on a computer outside
Virginia.
1-800 Telephone Services: The Taxpayer provides a 1-800 telephone

service for customer inquiries. In addition, customers who are not
geographically located near a POP may use the 1-800 number to
access the Taxpayer's Internet services.
Various Internet Software Tools: The Taxpayer provides customers with

various software tools such as web browers for scanning the World
Wide Web, E-mail readers, and filtering software to allow parental
control over children's access to the Internet. The customers access the
software tools by downloading a copy of the product to their personal
computer. The Taxpayer pays a royalty to the third party provider
(Company Z) based on usage by the Taxpayer's customers. The
filtering software is provided to customers free of charge conditioned
upon the customer purchasing a six month subscription to monthly
updates of the product directly from Company Z.
Application of the Tax

According to your discussions with a member of the Tax Policy Staff,
the above services are accessed by customers on-line and the various
products are provided in electronic form or downloaded for further on-
line usage by the customer. As the above transactions do not involve
the exchange of tangible personal property, the incidental services and
products provided by the Taxpayer also constitute nontaxable service
transactions exempt under Code of Virginia § 58.1-609.5(1).
In the event the Taxpayer provides products in tangible form (i.e., CD-
Rom (compact disc), diskette, etc.) to Virginia customers, a “sale" of
tangible personal property would occur and the transaction would be
subject to the tax. "Sale" is defined in Code of Virginia § 58.1-602 as
"any transfer of title or possession, or both, exchange, barter, lease or
rental, conditional or otherwise, in any manner or by any means
whatsoever, of tangible personal property....” Because the Taxpayer has
a physical presence in Virginia through its POP locations, the Taxpayer
would be required to collect the Virginia tax on sales of any products
provided in tangible form. This is consistent with prior rulings of the
department which distinguish between information provided in tangible
80
form and that which is provided electronically. See P.D. 91-224
(9/23/91) and P.D 95-68 (3/30/95).
The locations of Companies X, Y, and Z have not been disclosed. If

these entities maintain a physical presence in Virginia or engage in any
of the activities described in Code of Virginia § 58.1-612, which defines
a dealer for sales and use tax purposes, the Virginia tax may apply to
tangible personal property sold by such entities in Virginia. The use tax
would apply to tangible personal property used by these entities in the
provision of on-line services to the Taxpayer or the Taxpayer's
customers in Virginia in accordance with Code of Virginia § 58.1-604. It
is recommended that Companies X, Y, and Z seek rulings from the
department regarding their specific activities, if any, in Virginia.
Conclusion
Based on the facts presented and the additional information provided,
the Taxpayer's provision of Internet access services and incidental
services and products to customers in Virginia does not involve the
exchange of tangible personal property and therefore the transactions
constitute nontaxable service transactions. The Taxpayer is not required
to collect the Virginia tax on the flat monthly fee charged to its
customers for such services. The Taxpayer maintains a physical
presence in Virginia and as a service provider is deemed the user and
consumer of all tangible personal property used and consumed in the
provision of services. The Taxpayer, therefore, is subject to the use tax
on the cost price of the telecommunications equipment used at the
Virginia POP locations.
The ruling in this case is consistent with recent rulings issued by the
department dealing with Internet related transactions. The department,
in Public Document (P.D.) 97-213 (4/30/97) addressed certain services
provided via the Internet. In addition, P.D. 97-117 (3/6/97) addressed
the provision of a map service via the Internet; and most recently, the
department, in P.D. 97-239 (5/23/97), addressed the creation and
placement of a web site on the Internet. In all three instances, the
department deemed the transactions nontaxable service transactions
and the taxpayers were not required to collect the Virginia tax on the
charges for such services.
I hope the foregoing has responded to your inquiry. I am enclosing

copies of the cited statutes, regulations, public documents, and a
Combined Registration Form R-1 with instructions. If you have
81
additional questions, please contact *********at*************.
Sincerely,
Danny M. Payne
Tax Commissioner
82
Document 97-402
Number:
Brief Description: Application of sales and use taxes; Out-of-state vendors.
October 3, 1997
Dear******************
This is in reply to your letter in which you seek correction of sales and
use tax assessed to **************** ("Taxpayer") for the period July 1992
through September 1996. I apologize for the delay in responding to your
letter.
FACTS
The taxpayer is a ***** corporation. The taxpayer makes and sells large
specialty signs, the type which are typically attached to commercial
buildings displaying the name and logo of the company doing business
there.
The taxpayer hires independent contractors to install the signs it sells.
Between July 1992 and October 1995, on nine occasions, the taxpayer
hired independent contractors to install signs in Virginia. The taxpayer
delivered some or all these nine signs to its Virginia customers. The
taxpayer provided blueprints, the location of installation, and an install-
by date to the independent contractors performing installation. The
taxpayer billed its customers for materials and installation labor and
expenses. Independent contractors billed the taxpayer for installation
work performed.
The taxpayer did not collect use tax on the signs it sold and delivered in
Virginia. As a result, the taxpayer was assessed use tax on materials
separately stated on its invoices and was involuntarily registered as an
83
out-of-state dealer.
The taxpayer contests the assessment and involuntary registration

claiming it lacks nexus in Virginia for it to be assessed with a use tax.
DETERMINATION
Under Code of Virginia § 58.1-612 (copy enclosed), the retail sales and
use tax is collectible from all persons who are dealers. A dealer is
defined in that section and includes every person who "sells 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." The taxpayer clearly
qualifies as a "dealer" § 58.1-612.
The taxpayer must also have sufficient activity within Virginia as set out
in Code of Virginia § 58.1-612(C) before it can be assessed with a use
tax. The facts presented indicate that sufficient nexus does not exist
with Virginia. In this case, the taxpayer maintains no office, warehouse
or other place of business in Virginia. The taxpayer does not advertise
in Virginia nor does it solicit business in Virginia through employees,
independent contractors, agents, or other representatives. Sales efforts
take place in **** .
The taxpayer did deliver purchased signs directly to customers in

Virginia. At most, nine signs were delivered over a period of three years.
However, occasional deliveries made by an out-of-state merchant into
Virginia do not confer nexus subjecting a merchant to assessments of
use tax. Under Virginia law, nexus is deemed to exist if a dealer makes
more than twelve deliveries of its goods during a calendar year directly
to customers in Virginia by means other than common carrier. See
Code of Virginia § 58.1-612(C)(4). The taxpayer did not meet this
standard.
For these reasons, the assessment will be abated and your registration
canceled.
If you have any questions, please call **** in the Office of Tax Policy at
******.
Sincerely,
84
Danny M. Payne
Tax Commissioner
85
Document 97-459
Number:
Brief Description: Out-of-state computer maintenance company.
November 18, 1997
Dear***************
This is in reply to your letter of October 22, 1997, in which you request a
ruling on the application of sales and use tax to your client (Company A)
which provides computer maintenance to its customers.
FACTS
Company A is located outside of Virginia, has no employees, business

location, sales representatives, or inventory within Virginia. Company A
has contracted with a customer (Company C) to perform maintenance
on computer equipment located within Virginia. The actual maintenance
on Company C's computer equipment, however, is subcontracted to a
third party, Company B. You request a ruling on the application of sales
tax to the sale of the maintenance contract to Company C in light of
Company A's lack of physical presence in Virginia.
RULING
Maintenance Contracts
The application of the tax to maintenance contracts is set forth in Title
23 of the Virginia Administrative Code (VAC) 10-210-910. The
regulation provides that contracts which provide for both repair or
replacement parts and repair labor represent a sale of tangible personal
property and are subject to the tax. Code of Virginia § 58.1-609.5(9)
provides that effective January 1, 1996, maintenance contracts which
provide for both repair or replacement parts and repair labor are subject
to tax based on 50% of the total charge for such contracts. See the
86
enclosed Tax Bulletin 95-8.
Based on the scenario presented, I find that a taxable transaction

occurs between Company A and Company C. The performance of the
actual maintenance work by the subcontractor has no bearing on the
taxable nature of the transaction between Company A and C.
Nexus
While Company A is clearly a "dealer" as defined in Code of Virginia §
58.1-612(B), Company A does not appear to have "sufficient activity"
within Virginia requiring it to register for the collection and remittance of
the sales or use tax. As Company A does not appear to meet any of the
other nexus requirements in the foregoing statute, it may voluntarily
register with the department for the collection of the tax as a service to
its customers. Without such registration, Company A's customer will be
responsible for the accrual and remittance of use tax on the purchase of
the maintenance contract. I have enclosed a registration form and
instructions should Company A be required to register in the future or
should they decide to voluntarily register for the collection of the tax.
I trust that our response has addressed your concerns in some manner.
If you should have any additional questions regarding this matter,
please contact ******** of the department's Office of Tax Policy at ******.
Sincerely,
Danny M. Payne
Tax Commissioner
87
Document 98-147
Number:
Brief Description: Application of sales and use taxes; Visits by out-of-state dealer did not establish
nexus
October 9, 1998
Dear*************:
This will reply to your letter in which you request a ruling regarding
Virginia's retail sales and use tax nexus standards as they would apply
to your client (the "Taxpayer''). I apologize for the delay in responding to
your letter.
FACTS
The Taxpayer, an interior decorator, is located outside Virginia. The

Taxpayer provides design and consulting services to Virginia
customers. In addition, the Taxpayer makes sales of furniture, curtains,
and other items in connection with its interior decorating business. The
Taxpayer purchases these items from various suppliers, which ship the
property directly to the Virginia customer. The Taxpayer charges its
customer a marked-up price on the tangible personal property and an
hourly fee for any design or consulting services provided.
The Taxpayer has no business location in Virginia. In addition, you
indicate that the Taxpayer does not advertise in Virginia. Its only contact
within Virginia consists of periodic visits to its customers as a part of its
consulting service. You ask if the Taxpayer has sufficient activity in
Virginia to require it to register and collect tax on its sales to Virginia
customers.
RULING
Under Code of Virginia Sec. 58.1-612, copy enclosed, the sales tax is
collectible from all persons who are dealers. That same section defines
the term "dealer'' to include every person who offers tangible personal
property for sale at retail in Virginia. The Taxpayer clearly qualifies as a
"dealer'' under this definition.
Code of Virginia Sec. 58.1-612(C) sets forth the nexus requirements
88
which give the Commonwealth the authority to require a business to
register for the collection and remittance of the Virginia sales tax. Based
on the information presented, the Taxpayer does not meet any of the
nexus criteria found in Code of Virginia Sec. 58.1-612(C). The fact that
the Taxpayer makes periodic visits to its customers as a part of its
consulting service does not, by itself, create nexus with Virginia.
However, if the Taxpayer's employees, agents or other representatives
solicit sales while in Virginia, nexus is created.
If the Taxpayer's activities exceed those described in the letter, it may

be required to register for the collection and remittance of the sales tax
under Code of Virginia Sec. 58.1-613 (copy enclosed).
I trust the foregoing has responded to your inquiry. If you have any
further questions regarding this issue, you may contact ***** of the
department's Office of Tax Policy at *****.
89
Document 98-161
Number:
Brief Description: Modular home installation by contractor; "Cost price"
October 20, 1998
Dear *****
This is in response to your letter submitted on behalf of ***** (the

Taxpayer) for correction of sales and use tax assessments issued as a
result of an audit. Copies of all cited references are enclosed.
FACTS
The Taxpayer contracts with customers to furnish and install single-

family modular homes. The Taxpayer buys modular sections or units
prefabricated by a manufacturer and delivered to the Taxpayer in
Virginia. The Taxpayer subcontracts out the installation work, such as
setting and affixing the modular units on a permanent foundation at a
residential site, connecting the units together to form a finished
structure, completing finish work, and making utility connections.
An audit for the period December 1994 through November 1997
resulted in the assessment of Virginia's 4.5% consumer use tax on the
wholly or partially untaxed cost price of modular homes purchased by
the Taxpayer, including various other untaxed purchases of tangible
personal property used or consumed in its operations. However, the
Taxpayer takes exception to the entire assessment and maintains that
its modular home transactions are real property transfers not subject to
the retail sales and use tax.
Alternatively, the Taxpayer maintains that a modular home should not

be taxed on 100% of its sales price. The Taxpayer maintains that the
taxable sales price should not include costs for design, labor, set-up,
profit, freight, transfer fees, and engineering and administrative
expenses whether incurred at the manufacturer or dealer levels. The
Taxpayer claims that there is a nontaxable component that must be
recognized by the department, whether it is 30% or 60% of the sales
90
price, or something in between.
The Taxpayer maintains that it is a contractor respecting real estate

within the purview of Title 23 of the Virginia Administrative Code (VAC)
10-210-410. Within this context, the Taxpayer claims that it is engaged
as a fabricator who fabricates tangible personal property exclusively for
use and consumption in real property construction contracts. The
Taxpayer believes that this designation would allow the Taxpayer to pay
the retail sales or use tax on the cost price of raw materials which make
up the modular homes.
However, at a recent meeting between the Taxpayer and the

department's tax policy staff, it is my understanding that the Taxpayer
claims that it only acts in the capacity of a retailer of modular homes
since installation is handled by independent contractors.
DETERMINATION
Modular home sections purchased by Taxpayer

The provisions of 23 VAC 10-210-2080 set out the proper application of
the tax to prefabricated house sections. For example, retail sales of
prefabricated housing sections are taxable based on the sales price. If
anyone contracts to furnish and install such sections, the contractor
provisions of 23 VAC 10-210-410 apply.
Retail sales. When the Taxpayer sells modular home sections to a final
purchaser without any installation service element, the transaction is for
the taxable retail sale of tangible personal property. In such instances,
the Taxpayer would be acting as a retail dealer required to register to
charge and collect the sales tax on the gross sales price for remittance
to the department. However, from the information presented, this type of
situation does not appear to apply to the Taxpayer for the period of
audit.
Contractor sales. When the Taxpayer contracts, or in any fashion

agrees, to furnish and install a modular home, the Taxpayer is deemed
to be a real property contractor for sales and use tax purposes pursuant
to Code of Virginia § 58.1-610(A). The Taxpayer is the final user or
consumer of the modular home, regardless of whether the Taxpayer
installs the home or hires a subcontractor to perform all installation
tasks. As the final user or consumer, the Taxpayer is liable for the sales
and use tax based on the total cost price of modular units, i.e., the gross
91
sales price charged by the manufacturer. The Taxpayer is also liable for
the sales or use tax on the cost price of materials which it purchases in
connection with real property construction contracts. From the
information received, it is apparent that the Taxpayer is engaged as a
real property contractor with regard to the modular homes at issue.
A modular home sold at retail in Virginia is subject to the 4.5% retail

sales and use tax based on 100% of its gross sales price. Therefore,
the Taxpayer is liable for the sales or use tax based on gross sales
price of the modular home as charged by the manufacturer of such
modular units.
The Taxpayer maintains that it should be defined as a fabricator who

fabricates exclusively for use or consumption in real property contracts
and, therefore, guided by the rule set out by 23 VAC 10-210-410(D).
Although such fabricators generally pay the tax on the cost price of the
"raw materials'' which make up the fabricated property, this rule does
not allow, nor is it intended to allow, the Taxpayer to pay the tax based
only on the value or actual cost of the materials to the manufacturer for
fabricating the modular home units sold to the Taxpayer. Rather, the
modular home units sold by manufacturers to the Taxpayer constitute
retail sales of finished products, notwithstanding that additional work is
required by the Taxpayer or its subcontractors to install these units on
location.
Gross sales price or cost price

The Taxpayer must pay the sales or use tax based on the gross sales
price or cost price charged for these units by the modular manufacturer.
Code of Virginia § 58.1-602 defines the term "sales price'' to mean:
... the total amount for which tangible personal property or
services are sold, including any services that are a part of
the sale,... and includes any amount for which credit is
given to the purchaser,... without any deduction therefrom
on account of the cost of the property sold, the cost of
materials used, labor or service costs, losses or any other
expenses whatsoever.
As so defined, sales price includes any markup for overhead expenses,
profit, and other costs such as for design, fabrication labor, engineering
and administrative expenses in connection with the sale of tangible
personal property. As you can see, the sales price concept does not
permit the sales tax to be applied only to the actual costs of materials
92
incurred by the seller of the property. Rather, all expenses and profits
charged in connection with retail sales of tangible personal property are
subject to the retail sales tax imposed by Code of Virginia § 58.1-603.
If no sales tax is charged by the vendor at the time of a taxable

purchase or insufficient sales tax is charged on a taxable transaction,
the Taxpayer becomes liable to report and-pay the use tax imposed by
Code of Virginia § 58.1-604 on the untaxed cost price of the tangible
personal property purchased. Code of Virginia § 58.1-602 defines the
term "cost price'' to mean:
... the actual cost of an item or article of tangible personal
property computed in the same manner as the sales price
as defined in this section without any deduction therefrom
on account of the cost of materials used, labor, or service
costs, transportation charges, or any expenses whatsoever.
[Emphasis added.
Accordingly, the definitions cited above make it evident that the taxing
base for sales price is the same as for the cost price of the property
purchased. In this case, the Taxpayer has been assessed a consumer
use tax based only on the cost price of the modular homes and other
items purchased as charged by manufacturers or vendors.
In addition, I would note that the only allowable exemptions or

exclusions from taxable sales price are those specifically set out by
Code of Virginia § 58.1-609.5. However, there is clearly no basis in the
retail sales and use tax law for exempting, deducting, or excluding
expenses for overhead, profit, fabrication labor, and other costs (except
those set out by Code of Virginia § 58.1-609.5) in connection with the
retail sale or purchase of tangible personal property.
Manufacturing Exemption
The Taxpayer is considered a real property contractor when it contracts
to sell and install modular homes. Therefore, it is not entitled to any of
the production exemptions as noted in 23 VAC 10-210-410(F). This is
because the Taxpayer exclusively engages in real property contracts.
To be entitled to the production exemptions, the Taxpayer would need
to be principally or primarily fabricating tangible personal property for
sale at retail or resale (i.e., making sales primarily without installation)
and satisfy the minimum criteria of an industrial manufacturer as set out
by 23 VAC 10-210-920. However, the Taxpayer is not manufacturing
modular units for sale at retail or resale and, therefore, is not entitled to
93
the production exemptions.
Improper collection of the sales tax
It is my understanding that the Taxpayer has been notifying customers

that additional sales tax is due on their purchases of modular homes.
However, as the Taxpayer contracted to furnish and install these
modular homes, the transactions between the Taxpayer and its
customers are for real property installation. No sales or use tax should
be charged to the customer. Rather, the Taxpayer must take the tax into
consideration when bidding or settling on a contract amount. The
Taxpayer remains solely liable for the use tax on the cost price of the
modular home and other tangible personal property incorporated into
the realty. As such, the Taxpayer bears the ultimate liability for the use
tax assessed in connection with these homes.
Under these circumstances, Code of Virginia § 58.1-625 requires the
Taxpayer to transmit to the Tax Commissioner such erroneously or
illegally collected sales tax unless or until the Taxpayer can affirmatively
show that the sales tax has since been refunded to the purchaser or
credited to his account. As the Taxpayer has erroneously collected the
sales tax on real property construction transactions, the Taxpayer
should refund to its customers all of the collected sales tax within the
next 60 days. When such refunds are completed, the Taxpayer must
notify ***** (Audit Supervisor at the department's ***** District Office) at
***** so that he can arrange a time for an auditor to verify these
customer tax refunds.
Alternatively, the Taxpayer may remit such improper sales tax
collections to the department's ***** District Office, along with the names
and addresses of all customers involved and the amount of the sales
tax erroneously collected from each customer. However, these improper
sales tax collections cannot be applied to or used as payment for the
consumer use tax assessments at issue.
Conclusion
Based on all of the foregoing, I find no basis in which to revise the
assessments at issue. Accordingly, the assessments are correct as
issued. I note that one of the assessments has not been paid *****
therefore, the Taxpayer will soon receive an updated notice of
assessment under separate cover. To preclude further interest charges,
***** should be paid in full within the next 45 days.
94
If you have any questions about this response, please contact ***** of
my tax policy staff at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
95
Document 99-26
Number:
Brief Description: Exemption certificates and direct pay permits; Burden of proof
Topics: Collection of Delinquent Tax; Exemptions
March 15, 1999

Dear **********
This is in reply to your letter in which you seek correction and refund of
the department's sales and use tax assessment issued to ***** (the
"Taxpayer''), for the period July 1995 through April 1998. I note that the
entire assessment has been paid.
FACTS
The Taxpayer is a distributor of machinery, repair parts, hand tools and

supplies used in the textile industry. The department's audit assessed
the Taxpayer on certain untaxed sales of tangible personal property.
The Taxpayer contends that the contested items are exempt of the tax
because they are used directly by customers in their manufacturing
processes.
DETERMINATION
Code of Virginia § 58.1-623(A), copy enclosed, states that:
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.
Paragraph B of this same section provides that:
The certificate mentioned in this section shall relieve the

person who takes such certificate from any liability for the
payment or collection of the tax, except upon notice from
96
the Tax Commissioner that such certificate is no longer
acceptable.
In the instant case, the Taxpayer made untaxed sales to certain
customers. It may be that these customers are industrial manufacturers,
and, if so, these customers may have used the contested items directly
and exclusively in an exempt ***** manufacturing activity. It is difficult,
however, for the department to exempt such sales based on the seller's
assumptions and suppositions as to how its products will be used. This
is true even when other customers use the seller's products in an
exempt manner.
It is for this reason that certificates of exemption and direct pay permits
are so vitally important to retail sales and use tax transactions.
Certificates of exemption allow customers to purchase property exempt
of the tax based on the customer's knowledge of its own business
activity and how purchased property will be used.
Based on the information currently before me, I find that the assessment
is correct. However, I will pend this case for an additional 60 days to
allow the Taxpayer an opportunity to provide certificates of exemption or
direct payment permit numbers relating to the contested sales. These
documents may be sent to ***** at the department's Office of Tax Policy,
Post Office Box 1880, Richmond, Virginia 23218-1880. If you have any
questions regarding this matter, please contact ***** of the department's
Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
97
Document 99-60
Number:
Brief Description: Erroneously collected tax; Out-of-state dealer
April 9, 1999
Dear *****
sales and use tax audit of ***** (the "Taxpayer'') for the period of
January 1994 through February 1998.
FACTS
The Taxpayer is an out-of-state dealer of golf carts and golf cart parts.
The Taxpayer delivered golf carts and parts to customers in the state of
Virginia and erroneously charged its Virginia customers the 6% North
Carolina retail sales tax. As a result of the recent audit, the Taxpayer
was assessed the erroneously collected North Carolina tax. The
Taxpayer believes that the Virginia customer, i.e., the ultimate
consumer, is responsible for the 4 1/2% consumer use tax on all out-of-
state purchases, and the Taxpayer should not be held liable for the
erroneously collected North Carolina sales tax. The Taxpayer is
requesting that the audit be revised accordingly.
DETERMINATION
In order to determine if the Taxpayer is subject to the collections

requirements of the Virginia retail sales and use tax, the department
looks to the definition of "dealer'' in Code of Virginia § 58.1-612, copy
enclosed. Subsection C of this statute provides that a dealer shall have
sufficient activity in this state to require registration if the dealer:
Makes regular deliveries of tangible personal property within
this Commonwealth by means other than common carrier. A
person shall be deemed to be making regular deliveries
hereunder if vehicles other than those operated by a
98
common carrier enter this Commonwealth more than twelve
times during a calendar year to deliver goods sold by him.
Based on the information provided, the Taxpayer makes more than
twelve deliveries into Virginia during the calendar year. For this reason,
the Taxpayer is required to register as a Virginia dealer and collect the
tax on Virginia deliveries.
In the present case, the dealer collected the 6% North Carolina sales
tax on transactions subject to the Virginia sales tax. Title 23 Virginia
Administrative Code (VAC) 10-210-340, copy enclosed, addresses the
collection of the tax by dealers and Subsection D of this regulation
provides the following:
Overcollection of the tax. Any dealer who collects tax in
excess of a 4 1/2% rate or who otherwise overcollects the
tax, except as may be authorized under the bracket system
or the special provisions relating to vending machine sales,
must remit any amount overcollected to the state on a
timely basis.
Since the Taxpayer had sufficient activity in the state to require
registration as a dealer as provided in Code of Virginia § 58.1-612, any
taxes collected by the Taxpayer on sales delivered into Virginia are
legally due to Virginia. This is supported by Code of Virginia § 58.1-625,
copy enclosed, which provides that "all sums collected by a dealer as
required by this chapter shall be deemed to be held in trust for the
Commonwealth.''
Based on the above, I find that the Taxpayer was properly assessed for
tax collected and not remitted. The Taxpayer may wish to obtain a
refund from North Carolina of North Carolina sales tax erroneously
collected and remitted on taxable Virginia transactions. If you should
have any questions, please contact ***** Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
99
Document 99-94
Number:
Brief Description: Nexus; Factors required for agency relationship
April 30, 1999
Dear****************
sales and use tax audit assessment issued to ***** (the "Taxpayer'') for
the period of May 1992 through January 1998. I apologize for the delay
in responding to your letter.
FACTS
The Taxpayer is located outside Virginia and is engaged in the sale of

signs and awnings throughout the country, including Virginia. All signs
and awnings are fabricated outside the state of Virginia. Purchase
orders from Virginia customers may be "furnish only'' orders or "furnish
and install'' orders. All signs or awnings for Virginia customers are
shipped into Virginia via common carrier. In situations that require
"furnish and install'' jobs, the Taxpayer contracts with sign companies in
close proximity to the job site for the installation portion of the job. The
Taxpayer has no office, employees, salesmen, or installation personnel
in Virginia.
The Taxpayer began making sales to Virginia customers in 1990. In

May 1997, the Taxpayer voluntarily registered with Virginia as an out-of-
state dealer as a service to its Virginia customers. In May 1998, the
department completed an audit of the Taxpayer. The auditor determined
that the Taxpayer had established an agency relationship with the
Virginia installation contractors sufficient to create nexus for the
Taxpayer. This being the case, the auditor extended the audit to cover a
period of six years. The Taxpayer takes exception to this and believes
that, based on a reading of Code of Virginia § 58.1-612.C and Title 23
Virginia Administrative Code (VAC) 10-210-460, it did not have nexus
100
with Virginia during the periods at issue.
DETERMINATION
Code of Virginia § 58.1-612.C, copy enclosed, sets forth the nexus

requirements which give the Commonwealth the authority to require
dealers to register for the collection and remittance of the retail sales
and use tax. Based on the information provided in your letter, it is
apparent that the Taxpayer's activity in Virginia is not sufficient enough
to establish nexus, with the exception of Subsection 2. Subsection 2 of
this code section provides that a dealer shall have sufficient activity to
require registration if such dealer "solicits business in this
Commonwealth by employees, independent contractor, agents, or other
representatives.''
It must be determined if the Taxpayer has established an agency

relationship with the Virginia contractors they retained to perform the
installation of the signs. Under Virginia law, two factors are necessary in
order for an agency relationship to be established. First, the agent must
be subject to the principal's control, with regard to the work to be done
and the manner of performing it. Actual control is not the test; it is the
right to control that is determinative. Second, the work has to be done
on the business of the principal or for his benefit.
Based on the information you have furnished to a member of my staff
concerning the agreements between the Taxpayer and the installation
contractors, I find that a principal/agent relationship was not established
between the Taxpayer and the installation contractors retained to install
signs in Virginia. While the work done by the installation contractors was
for the benefit of the Taxpayer on "furnish and install'' jobs, I find that the
Taxpayer did not control the work to be done nor the manner in which it
was to be done. Accordingly, under the facts presented, the use of
contractors by the Taxpayer to install signs at Virginia locations did not
create nexus for the Taxpayer under Code of Virginia § 58.1-612.C.2.
Based on the above, the audit assessment will be abated in its entirety.
If you should have any questions, please contact *****, Office of Tax
Policy, at *****.
Sincerely,
101
Danny M. Payne
Tax Commissioner
102
Document 99-187
Number:
Brief Description: Deficiency assessments, asphalt supplier and paving contractor located in
Virginia
July 15, 1999
Dear*******
In your letter of June 2, 1999, you request correction of the retail sales
and use tax audit assessment issued to ***** (the "Taxpayer'').
FACTS
The Taxpayer is an asphalt supplier and paving contractor located in

Virginia. An audit for the period January 1995 through December 1997
resulted in an assessment of use tax on untaxed purchases of tangible
personal property used in its operations.
The Taxpayer takes exception to the use tax assessed on purchases of
materials from a Maryland vendor. The materials were delivered by the
vendor to the Taxpayer in Virginia. The vendor charged a 5% sales tax
on sales made to the Taxpayer and remitted it to Maryland. The
Taxpayer maintains that it has met its obligations to pay the sales tax.
DETERMINATION
It is my understanding that the Maryland vendor had not designated the

sales tax amount as a Maryland, Virginia or other state's sales tax.
Rather, the sales tax is only shown as a separately stated amount on
the invoice to the Taxpayer. It is also my understanding that this vendor
sold and delivered the materials to the Taxpayer in Virginia.
Accordingly, these sales are subject to the Virginia sales and use tax,
not a Maryland sales or use tax.
The Virginia use tax applies to the use, consumption or storage of
103
tangible personal property in Virginia when the Virginia sales or use tax
is not paid at the time the property is purchased. Under subsection 3 of
the Code of Virginia Sec. 58.1-604 which imposes the use tax, "[a]
transaction taxed under Sec. 58.1-603 (the statute imposing the sales
tax) shall not also be taxed under this section, nor shall the same
transaction be taxed more than once under either section.'' (Insert
added). In this case, the transactions at issue have not been taxed
under either the sales or use tax statutes cited above. Rather, the facts
show that the Maryland vendor collected a 5% sales tax from the
Taxpayer and remitted it to Maryland, not Virginia. Accordingly, no
Virginia sales and use tax has been charged or remitted to Virginia for
the transactions at issue.
In examining this issue, a question arises as to whether the Taxpayer

exercised reasonable care and judgment to ensure that it was properly
paying a Virginia retail sales or use tax on its purchases from this
vendor. Clearly, a 5% charge for sales tax is not the same as a 4.5%
sales tax charge. As the vendor's sales tax charges to the Taxpayer
were not of the amount imposed by Virginia, no presumption may be
relied upon that the vendor was charging and collecting a Virginia sales
or use tax.
Furthermore, had the Taxpayer examined the amount of sales tax
charged by the vendor, it would have realized that it was being
overcharged or that the wrong state's sales tax was being collected by
the vendor. Reasonable effort by the Taxpayer would have revealed this
error and prompted a vendor remedy for correcting the error. Instead,
the error was found during an audit by the department.
The Taxpayer cites Title 23 of the Virginia Administrative Code (VAC)

10-210-340(A) to support its position that its obligation for paying the
sales tax ceased when it paid the tax to the Maryland vendor. Although
dealers with sufficient nexus are legally obligated to register with
Virginia for collection of the sales or use tax, the courts have ruled that
the ultimate liability for the tax rests with the purchaser. United States v.
Forst, 442 F.Supp. 920 (W.D. Va. 1977), aff'd, 569 F.2d 811 (4th Cir.
1978). Thus, the Taxpayer's obligation for payment of the tax does not
cease when it pays the wrong state's sales tax to a vendor.
Based on the foregoing and the circumstances of this case, it appears

that the Taxpayer did not make a reasonable effort to ensure that the
Virginia sales or use tax was paid on the transactions at issue. As such,
I find no basis for removing these sales from the department's audit.
104
To avoid further interest charges, the assessment should be paid in full
within 45 days of the date of this letter. If not already done so, the
Taxpayer should request the Maryland vendor to refund the Maryland
sales tax erroneously collected on the transactions at issue.
If you have any questions about this response, please contact ***** of
my tax policy staff at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
105
Document 00-53
Number:
Brief Description: Internet/electronic commerce; Nexus; Out-of-state vendors; Use of Internet
servers and web hosting services
April 14, 2000
Dear ****
This will reply to your letter of March 21, 2000, in which you seek a
ruling on behalf of ***** (the "Taxpayer").
FACTS
The Taxpayer is in the business of selling automobile parts to end users

and resellers. The Taxpayer is located outside Virginia and has no
physical presence in Virginia. You represent that the Taxpayer does not
have sufficient activity under Code of Virginia § 58.1-612 to require it to
register to collect and remit Virginia sales and use tax.
The Taxpayer has websites by which customers can view and order
products. If an order is placed, the product is shipped from inventory
located outside of Virginia. The Taxpayer is contemplating doing
business with web hosting companies located in Virginia. One
alternative is a "managed hosting" service. Under this alternative, the
web hosting company will provide power and bandwidth connections,
other web hosting services, and Internet servers dedicated exclusively
to the Taxpayer's websites. These servers are owned by and remain the
property of the web hosting company.
A second alternative is a "co-location hosting" service. Under this
alternative, the web hosting company will provide power and bandwidth
connections and other web hosting services to servers which are owned
or leased by the Taxpayer. The Taxpayer's servers would be located in
Virginia at the web hosting service's facility. The Taxpayer's servers
would be dedicated exclusively to the Taxpayer's websites.
106
The Taxpayer requests a ruling whether it will become subject to
Virginia sales and use tax collection obligations if its websites are
hosted on servers located in Virginia at web hosting facilities. The
Taxpayer requests that the department's ruling address both the
"managed hosting" service and "co-location hosting" service
alternatives.
RULING
Under Code of Virginia § 58.1-612, the sales tax is collectible from all
persons who are dealers. That same section defines the term "dealer"
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,
this Commonwealth, tangible personal property." The Taxpayer clearly
qualifies as a "dealer" under § 58.1-612.
Code of Virginia § 58.1-612 also sets forth the nexus requirements

register to collect and remit Virginia sales and use tax. The statute
in Virginia if the dealer:
maintains in Virginia an office, warehouse, or place of business of any
nature;
solicits business in Virginia by employees, independent contractors,

agents or other representatives; or
makes deliveries into Virginia more than twelve times during a calendar
year by means other than common carrier.
Virginia law requires dealers with a physical presence in Virginia to

collect tax on all sales to its Virginia customers, including sales via the
Internet. The department applies the same nexus standards to out-of-
state vendors doing business over the Internet as are applied to other
out-of-state vendors. As long as a vendor has a physical presence in
Virginia, an obligation to collect tax on sales exists and applies to all
sales to Virginia customers.
The department does not deem nexus to exist for an out-of-state seller
whose only presence in Virginia is the use of a computer server to
create or maintain a site on the Internet. Accordingly, nexus will not be
107
established for out-of-state vendors whose only presence is the use of
computer servers provided to them under a Virginia "managed hosting"
service. Nor will nexus be established for out-of-state vendors whose
only presence is the use of computer servers owned by them in
connection with a Virginia "co-location hosting" service.
In addition, this ruling conforms to the department's interpretation of the

Internet Tax Freedom Act (the "Act"). The Act establishes a 3-year
moratorium during which states and political subdivisions may not
impose, assess, collect, or attempt to collect discriminatory taxes on
electronic commerce. A tax will be considered discriminatory if it
includes the use of a computer server by a remote seller as a factor in
determining the remote seller's tax collection obligation.
The Taxpayer does not meet the nexus requirement in Code of Virginia
§ 58.1-612 and is not required to collect and remit Virginia sales and
use tax. The Taxpayer's Virginia customers are required to remit the
consumer use tax on the cost price of tangible personal property
purchased from the Taxpayer (unless such purchases are exempt under
the law).
If you have any questions regarding this letter, please contact ****** in
the department's Office of Tax Policy via e-mail at *****@tax.state.va.us
or by phone at *****
Sincerely,
Danny M. Payne
Tax Commissioner
108
Document 00-61
Number:
Tax Type: Corporation Income Tax; Retail Sales and Use Tax
Brief Description: Nexus; Out-of-state vendors with deliveries into Virginia
April 26, 2000
Re: Ruling Request: Corporate Income and Sales and Use Tax
Dear ****
This will respond to your letter in which you request a ruling as to

whether your client (the "Taxpayer") would be required to collect and
remit the Virginia sales and use tax and file and pay Virginia corporate
income tax.
FACTS
The Taxpayer is an out-of-state corporation engaging in the sale of

tangible personal property, specifically, a single product (Product X) and
accessory items used in conjunction with the use of Product X.
Approximately 25% of the Taxpayer's revenues are generated from
sales to residents of Virginia.
Product X is delivered into Virginia 25% of the time via common carrier
and 75% of the time on the Taxpayer's trucks. The delivery drivers
unpack and set up Product X. On average, the Taxpayer's trucks enter
Virginia twelve times per year to make deliveries of Product X. Usually,
delivery is made to more than one customer per trip. All accessory items
are shipped by common carrier. You indicate that 90% of these
accessories are sold for resale.
The Taxpayer does not offer warranties on Product X, but does honor
the manufacturer's warranty. The Taxpayer's employees come into
Virginia approximately five times per year to provide warranty service
and about twice every three years to repair an item not covered under a
manufacturer's warranty for a fee. Generally, the Taxpayer does not
make separate trips to Virginia to repair items. Rather, delivery drivers
stop to make the repairs on their way to or from delivery destinations in
Virginia.
109
The Taxpayer believes that its activities in Virginia are incidental to the
solicitation and delivery of its products or are de minimis. As such, the
Taxpayer's position is that it is not liable for Virginia income tax or
required to register for the collection of Virginia sales and use taxes.
You are requesting that the department rule whether the Taxpayer is
liable for Virginia income tax and/or required to collect Virginia sales and
use tax.
DETERMINATION
Income Tax
Code of Virginia § 58.1-400 imposes income tax "on the Virginia taxable
income for each taxable year of every corporation organized under the
laws of the Commonwealth and every foreign corporation having
income from Virginia sources." Generally, a corporation will have
income from Virginia sources if there is sufficient business activity within
Virginia to make any one or more of the applicable apportionment
factors positive. The existence of positive Virginia apportionment factors
clearly establishes income from Virginia sources.
Public Law ("P.L.") 86-272, codified at 15 U.S.C.A. §§ 381-384, does
prohibit a state from imposing a net income tax where the only contacts
with a state are a narrowly defined set of activities constituting
solicitation of orders for sales of tangible personal property. The
department limits the scope of P.L. 86-272 to only those activities that
constitute solicitation, are ancillary to solicitation, or are de minimis in
nature. See Wisconsin Department of Revenue v. William Wrigley, Jr.,
Co.,112 S. Ct. 2447 (1992).
Based on the information provided, several activities in which the

Taxpayer engages in Virginia go beyond the mere solicitation of sales.
The warranty services and repairs made by the delivery drivers clearly
exceed the standards of protected activities under P.L. 86-272. In
addition, the department would not generally consider the set up or
installation of tangible personal property as part of the solicitation of
orders.
While ruling that "delivery" into Virginia using one's own trucks did not
exceed the protection afforded by P.L. 86-272 in Commonwealth v.
National Private Truck Council, 253 Va. 74, 480 S.E.2d 500 (1997), the
Virginia Supreme Court conceded that the term "may be disputed in a
particular factual situation." Because you have provided no description
110
as to what Product X is or any explanation of the set up process, the
department cannot make a definitive ruling as to whether or not the set
up process exceeds the protection afforded under P.L. 86-272.
The information provided does provide some indication as to whether or

not the activities of the Taxpayer would be considered de minimis. Title
23 of the Virginia Administrative Code ("VAC") 10-120-90 (G) exempts
activities which are de minimis in nature. Pursuant to Wrigley. all non-
ancillary activities are examined to determine if, when considered
together, they create more than a de minimis connection to the
Commonwealth.
In the instant case, the Taxpayer's drivers effect repairs, either under
warranty or for a fee, on roughly half of the delivery trips made into
Virginia. Setup services are performed with every Product X delivered to
Virginia by the Taxpayer's drivers. Taken as a whole, the department
concludes these activities constitute a continuous pattern of activity,
which is not de minimis, and not considered trivial additions to the
Taxpayer's business carried on in Virginia. Thus, it appears that
Taxpayer is subject to Virginia income tax.
Sales and Use Tax
Under Code of Virginia § 58.1-612, the sales tax is collectible from all
persons who are dealers. That same section defines the term "dealer"
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,
this Commonwealth, tangible personal property." The Taxpayer clearly
qualifies as a "dealer" under § 58.1-612.
Code of Virginia § 58.1-612 also sets forth the nexus requirements

register to collect and remit Virginia sales and use tax. The statute
in Virginia if the dealer solicits business in Virginia "by employees,
independent contractors, agents or other representatives;..." Nexus will
also be established if the dealer makes deliveries into Virginia more
than twelve times during a calendar year by means other than common
carrier.
It is not clear from your letter how the Taxpayer solicits sales from its
Virginia customers. However, it is clear that, on average, the Taxpayer's
111
trucks enter Virginia twelve times per year to make deliveries. If I
understand you correctly, there are some years during which the
Taxpayer makes more than twelve such deliveries, thus establishing
nexus with Virginia. Public Document 97-81 (2/19/87) further addresses
this issue.
Proposed Resolution
You note that the Taxpayer has made a good faith effort to determine
whether it is liable for Virginia taxes based on the above facts. In this
regard, the Taxpayer has previously telephoned the department but
received conflicting responses to its verbal inquiries. Accordingly, you
propose that in the event the Tax Commissioner determines the
Taxpayer is liable for Virginia income tax and/or required to collect
Virginia sales and use tax, that such determination have prospective
application.
I will certainly consider the Taxpayer's proposed resolution. In this
respect, the department has frequently entered into voluntary
registration agreements with out-of-state businesses. Before making a
final acceptance, however, l will need additional information, including a
more detailed understanding of the Taxpayer's Virginia activities and
some sense of the volume of sales to Virginia customers.
I am referring this matter to **** the department's Nexus Officer. He will

contact you for the additional information noted above. If you need to
contact ****, his phone number is **** and his fax number is (804)
************.
If you have any questions regarding this letter, please contact ****
(income tax) or **** (sales and use tax) in the department's Office of Tax
Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/26768(I/O)
TO WHOM IT MAY CONCERN
Under the authority of Section 58.1-1 of the Code of Virginia, l hereby
112
delegate to Janie E. Bowen, Assistant Tax Commissioner, the authority
to sign for me any and all documents, including, but not limited to,
affidavits, warrants, rulings, appeals, offers in compromise and sales tax
revocations.
This authority shall not extend to matters or documents related to my

service on any statutorily created board or commission, including, but
not limited to, the Compensation Board and the Treasury Board.
This authority will continue until revoked. The delegation of authority
dated June 3, 1994, is hereby revoked and replaced.
Done at Richmond, Virginia this tenth day of September, 1999.
Danny M. Payne
Tax Commissioner
113
Document 00-77
Number:
Brief Description: Internet and catalogue gift purchases; Situs of sale
Topics: Exemptions; Property Subject to Tax
May 12, 2000
Dear ****
sales and use tax audit of your client, ***** (the "Taxpayer"), for the
period of May 1996 through March 1999.
FACTS
The Taxpayer is a licensed Virginia retailer with retail outlets throughout

Virginia and the United States. The Taxpayer also provides website and
catalogue sales, the merchandise of which is shipped from the
Taxpayer's headquarters location outside Virginia. The audit findings at
issue are the result of an audit of the Taxpayer's website and catalogue
sales, which are filled separately from the Taxpayer's retail locations in
Virginia.
The Taxpayer was audited and assessed Virginia sales and use tax on
orders (1) taken by the Taxpayer's employees located outside Virginia
from customers who have provided them with a Virginia billing address,
(2) orders filled by the Taxpayer from outside Virginia, and (3) shipped
by the Taxpayer to customers' locations outside Virginia. The Taxpayer
is taking exception to these transactions being held taxable and
requests that the audit assessment be abated. The Taxpayer believes
that purchases by a Virginia customer from an out-of-state company
and shipped directly to third party recipients located outside Virginia are
not subject to Virginia tax. The Taxpayer is also disputing the
methodology used by the auditor in calculating the percentage of
taxable transactions in relationship to total gross sales in Virginia and
also requests waiver of audit penalty.
DETERMINATION
114
Under Code of Virginia § 58.1-612, copy enclosed, the sales tax is
collectible from all persons who are dealers. The same section defines
the term "dealer" to include every person who offers tangible personal
property for sale at retail in Virginia. The fact that the Taxpayer qualifies
as a licensed Virginia dealer is not in dispute in this case. The tax
application to certain retail transactions conducted by the Taxpayer's
out-of-state website and catalogue business is at issue.
As a licensed out-of-state dealer, the Taxpayer is required to collect the

Virginia tax on all sales of tangible personal property shipped to Virginia
customers. Based on information furnished to this office by the auditor,
"bill to", "ship to", and "gift box" information is contained on all website
and catalogue sales records. The auditor has advised this office that
only untaxed sales which were "shipped to" Virginia customers were
included in the audit findings. An out-of-state dealer with nexus in
Virginia is required to collect the Virginia tax on all sales of tangible
personal property delivered to Virginia, regardless of where the order is
taken.
With regard to tangible personal property shipped by the Taxpayer to

customers located outside Virginia, the 1995 Virginia General Assembly
passed House Bill 2286 which provided an exemption for third party gift
transactions. This legislation provides that when a nonresident, by mail,
telephone, website, etc., directs a Virginia business to deliver tangible
property as a gift to another nonresident such transaction will be exempt
from the tax. However, gifts delivered to a Virginia resident at the
direction of an out-of-state purchaser, and gifts purchased by a Virginia
resident for delivery to an out-of-state recipient, remain taxable.
In regard to the methodology used by the auditor to estimate the taxable

measure of gift sales, i.e. 25%, the taxpayer has not provided evidence
which would support their contention that this estimate is incorrect. It
should also be pointed out that no audit penalty was assessed.
Based on all of the above, I find that the audit assessment is correct as
issued. Please remit full payment in the amount of $**** within 30 days
from the date of this letter. Payment may be sent to ****, Office of Tax
Policy, P.O. Box 1880, Richmond, Virginia 23218-1880.
Sincerely,
115
Danny M. Payne
Tax Commissioner
116
Document 00-137
Number:
Brief Description: Vendor registration; Lack of nexus
Topics: Returns/Payments/Records
July 31, 2000
Dear ****
This is in response to your letter in which you seek correction of a retail

sales and use tax assessment issued to ***** (the "Taxpayer") for the
period January 1996 through June 1998. I apologize for the delay in
responding to your appeal.
FACTS
The Taxpayer operates as a retail furniture store located outside of

Virginia. In a prior audit, the Tax Commissioner determined that the
Taxpayer had nexus with Virginia. That determination, dated March 4,
1994, was based on the Taxpayer's use of delivery companies that were
not licensed as common carriers to deliver its products to Virginia
customers. To settle that prior audit, the Tax Commissioner accepted an
offer in compromise whereby the Taxpayer agreed: (1) to register for
collection of the tax on a prospective basis, and (2) pay a portion of the
audit assessment. Accordingly, the Taxpayer held a certificate of
registration effective July 1, 1994.
Further, you maintain that effective 1992, you changed the method of
delivery to your Virginia customers. In this regard, you indicate that for
the current audit period you used, and continue to use, common carriers
with whom the Taxpayer has no financial or other relationship. It is your
contention that by using these common carriers, none of the Taxpayer's
sales to Virginia customers are taxable, regardless that the Taxpayer
was a registered dealer. Accordingly, although the Taxpayer filed
monthly returns during the period it was registered, it did not collect and
remit the tax on any of its sales to Virginia customers.
In effect, the Taxpayer believes it was required to collect the tax only on
117
those Virginia sales for which it had nexus. In this respect, the Taxpayer
maintains it was never informed to collect the tax on all sales to Virginia
customers. Further, the Taxpayer maintains it contacted the
department's Customer Service representatives and was told that being
a registered dealer did not require the Taxpayer to collect sales tax on
sales delivered via common carrier.
DETERMINATION
As part of an offer in compromise which included a substantial reduction

in an audit assessment, the Taxpayer voluntarily agreed to register with
the department. By voluntarily registering with the department, the
Taxpayer consented to the jurisdiction of the state and agreed to remit
the proper amount of use tax required under Virginia law.
Although the Taxpayer did not have sufficient contact with Virginia
during the audit period to establish nexus, it was a registered dealer.
Nexus is not an issue when a taxpayer voluntarily registers to collect the
tax. As a registered dealer under Code of Virginia §58.1-615, the
Taxpayer is required to collect and remit the tax on all taxable
transactions. This issue is addressed in Public Documents 93-141
(6/7/93) and 97-440 (10/31/97).
There are other points you raise in your letter which I will address. First,
none of your Virginia customers were assessed by the department
during the current audit period. I understand that one of your customers
was contacted in 1998. Based on that contact, the audit staff realized
you were not collecting tax on sales delivered to Virginia. Accordingly,
the current audit was scheduled. Further, I have spoken with the
department's Customer Service staff regarding the July 30 and July 31,
1998 phone conversations. Although one of the representatives you
spoke with cannot recall the specific conversation, there was complete
understanding that a registered dealer was liable to collect and remit the
Virginia tax on all taxable sales, regardless that the registered dealer
does not have nexus. He was also aware that there are a number of
out-of-state vendors who voluntarily registered with Virginia and who
collect and remit the tax on sales to their Virginia customers, regardless
that these out-of-state vendors almost exclusively deliver their products
via common carrier or U.S. mail. Again, once an out-of-state dealer
voluntarily registers, nexus is no longer an issue.
In this case I find that the assessment is correct. Because of the delay
in responding to your appeal, interest will be accrued on the
118
assessment only through the date of your letter. No additional interest
will accrue provided the assessment is paid within 45 days afrom the
date of this letter.
If you have any questions regarding this letter, please contact ***** in
the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
119
Document 00-193
Number:
Brief Description: Call center in Virginia; Right to control
Topics: Collection of Tax; Taxability of Persons and Transactions
October 20, 2000
Dear ****
This is in response to your letter requesting a ruling on the application of

the retail sales and use tax to your client located outside Virginia (the
"Taxpayer"). I apologize for the delay in responding your letter. Copies
of cited sources are enclosed.
FACTS
You indicate the Taxpayer has no physical presence in Virginia. The
Taxpayer sells tangible personal property to Virginia customers. Orders
may be placed via telephone, catalog or website. Distribution and call
center services are handled by an unrelated third party fulfillment
service provider located outside Virginia. Products and catalogs are
shipped from an out-of-state distribution center to customers via
common carrier or the United States mail. The Taxpayer indicates that
the third party fulfillment service provider does not solicit orders, but
merely accepts orders.
The third party fulfillment service provider has notified the Taxpayer that
it intends to reroute the calls to a new call center located within Virginia.
You ask if the use of a call center in Virginia by the third party fulfillment
service provider will give the Taxpayer sufficient activity within Virginia
to require it to register for the collection and remittance of the Virginia
retail sales and use tax.
RULING
Code of Virginia § 58.1-612 lists several definitions of the term "dealer."
Pursuant to subsection B(2) of this statute, the term "dealer" includes
any person who "imports or causes to be imported into this
Commonwealth tangible personal property from any state or foreign
country, for sale at retail, for use, consumption, or distribution, or for
120
storage to be used or consumed in this Commonwealth." Based on the
facts presented, the Taxpayer qualifies as a "dealer" under this
definition.
Pursuant to Code of Virginia § 58.1-612(C)(1), a dealer as so defined

will be deemed to have sufficient activity within Virginia to require
registration under § 58.1-613 if the dealer "maintains or has within this
Commonwealth, directly or through an agent or subsidiary, an office,
warehouse, or place of business of any nature." (Emphasis added.)
Title 23 of the Virginia Administrative Code (VAC) 10-210-2070 is
instructive to the issue raised. Subsection B of this regulation defines a
"place of business" to include, but is not limited to, "a store, a sales or
other office or any warehouse." In subsection C, this regulation provides
the following:
An out-of-state dealer who has a place of business in Virginia is

required to register as a dealer at that place. If the same dealer, at a
place of business outside this state, receives orders from Virginia
customers directly or not through a place of business in Virginia, he
must also register as an out-of-state dealer.
Public Document (P.D.) 99-94 (4/30/99), explains the two factors

necessary for an agency relationship to be established. First, the agent
must be subject to the principal's control, with regard to the work to be
done and the manner of performing it. Actual control is not the test; it is
the right to control that is determinative. Second, the work has to be
done on the business of the principal or for his benefit.
In this case, the facts presented are not sufficient to determine if an

agency relationship exists between the Taxpayer and the third party
fulfillment service provider. Clearly, the work of the third party fulfillment
service provider is for the benefit of the Taxpayer. The question to be
addressed is the Taxpayer's right to control the work of the third party
fulfillment service provider. The Taxpayer will be deemed to have
sufficient activity in Virginia to require registration for the collection of
sales tax if it has the right to control the work to be done by the third
party fulfillment service provider and the manner in which the work is
performed.
For your convenience, I have enclosed a registration application (Form

R-1) for your client to complete and return to the department. If you
have any questions about this ruling, please contact * * * in the * * *
121
department's Office of Tax Policy at * * *
Danny M. Payne
Tax Commissioner
122
Document 01-105
Number:
Brief Description: Who is Responsible for Securing Exemption Certificate
Topics: Exemptions; Taxpayers
August 16, 2001
Dear *****
This is in response to your letter of May 21, 2001, in which you request
a ruling on the sales and use tax collection responsibilities of third
parties assigned to collect lease payments or payments on a conditional
sale. Copies of cited sources are enclosed.
FACTS
In an assigned lease of tangible personal property, you indicate that a

lessor (the "Lessor" or "Assignor") assigns the collection of payments to
a third party (the "Assignee"). You indicate that the Assignee does not
take title to the property. Rather, title to the property remains with the
Lessor. However, the Assignee does acquire a security interest in the
property and pays for the property up-front. You indicate that title to the
property may be taken by the Assignee if the lease payments are
defaulted.
In a conditional sale of tangible personal property, a broker arranges for
the sale between a retail merchant and a buyer. The broker finances the
transaction. However, the stream of payments is assigned to a third
party, i.e., an Assignee, for collection. The Assignee pays for the
property up-front.
In both instances, you ask whether the Assignee is responsible for
collecting the sales tax or obtaining exemption certificates from the
customers.
RULING
Leases
Pursuant to Code of Virginia § 58.1-612, every in-state and out-of-state
123
person who leases tangible personal property to consumers in Virginia
is deemed a dealer. Pursuant to Code of Virginia § 58.1-613, every
dealer is required to register for the collection and remittance of the
sales tax to the department. Generally, a lessor is responsible for
collecting and remitting the sales tax to the department based on the
gross proceeds derived from the lease of tangible personal property,
without deduction whatsoever for any expenses or commissions paid to
others in connection with the lease.
A review of the assignment and lease documents presented reveals that

these documents do not support a conclusion that the title to the leased
property (otherwise known as the "collateral") transfers to the Assignee
only upon default. Rather, it appears that title passes upon the
assignment of the property to the Assignee.
For example, the master lease agreement states that "all rights of
Lessor hereunder may be assigned by Lessor ...." (Emphasis added.)
Moreover, the assignment document presented reveals that "FOR
VALUE RECEIVED ,...(the) Assignor ...sells, assigns and transfers to
...Assignee...all of Assignor's rights to and a security interest in
...1)...(the) Master Lease Agreement ...2) the Assignor's interest in and
to the collateral as specified in the ...lease...and 3) all monies identified
as rental payments payable, or to become payable, under the Lease or
with respect to the collateral as specified in the ...lease...." (Inserts and
emphasis added.)
This assignment goes beyond the mere creation of a security interest,

as it conveys all rights of the Assignor in the property to the Assignee.
Using the terms "sells" and "transfers" and the phrase "for value
received," the document appears to be intended to convey title in the
property from the Assignor to the Assignee in exchange for
consideration. Accordingly, the Assignee must register for the collection
and remittance of the sales tax to the department based on the gross
proceeds received from the lease of the tangible personal property in
Virginia.
Conditional Sale
In defining the term "sale," Code of Virginia § 58.1-602 provides that "[a]
transaction whereby the possession of property is transferred but the
seller retains title as security for the payment of the price shall be
deemed a sale." Such transactions are typically known as "conditional
sales." In this regard, Section 1-28 of the 1979 Virginia Retail Sales and
124
Use Tax Regulations provides that "[a]ny person making conditional,
charge or installment sales must report the total selling price and pay
the applicable tax for the taxable period in which the contracts of sale
are entered into." The same policy still holds true today.
I would note, however, that a lease with a nominal purchase option of

$1 or some other amount does not constitute a conditional sale for
Virginia retail sales and use tax purposes. Rather, a lease with a
nominal purchase option is treated as a lease for Virginia retail sales
and use tax purposes. See Public Document 91-284 (10/31/91).
As seller, the retail merchant is the party that the department would
generally look to for the collection and remittance of the sales tax on a
conditional sale of tangible personal property. In these transactions, the
full amount of sales tax must be collected up-front and remitted to the
department on or before the twentieth day of the month following the
month in which the sales tax became due. However, if the seller fails to
collect the sales tax, the Virginia consumer becomes directly liable for
remitting the use tax to the department based on the cost price of the
item.
Thus, the Assignee would generally not be required to register as a

dealer provided it does not obtain title, control or possession of the
tangible personal property at the time of sale or at some subsequent
time. In the event of a buyer's default on making payments, and the title,
control or possession of the property is transferred to the Assignee, the
Assignee must register as a dealer to collect and remit the sales tax in
order to dispose of the property at retail or to rent or lease it at retail.
Certificates of exemption
Pursuant to Title 23 of the Virginia Administrative Code 10-210-280, all

registered dealers must charge and collect the sales tax on all sales,
leases and rentals of tangible personal property until the contrary is
established. The burden of proving that the tax does not apply rests with
the dealer unless he takes, in good faith from the purchaser or lessee, a
certificate of exemption indicating the property is exempt under Virginia
retail sales and use tax law. Thus, when an Assignee is a registered
dealer, it is required to obtain exemption certificates if the lessee,
rentee, or buyer claims an exemption from the Virginia retail sales and
use tax. Of course, failing to register as a dealer when required by law
will make the Assignee directly and personally liable for the tax
uncollected.
125
I trust that the foregoing answers your questions. If you have any
questions about this response, please contact ***** of the department's
Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
126
Document 01-115
Number:
Brief Description: Nexus; computer equipment, software
Topics: Basis of Tax; Collection of Tax; Property Subject to Tax
September 19, 2001
Dear *****

the retail sales and use tax to certain sales made by ***** (the
"Taxpayer"). I apologize for the delay in responding to your letter.
Copies of cited sources are enclosed.
FACTS
The Taxpayer is a manufacturer of computer equipment, software,

printers and related supplies. The Taxpayer also sells various computer-
related repair services on a per-incident or contractual basis. In addition,
the Taxpayer sells optional software support agreements providing
software users with phone-in support capabilities and access to
software updates, if any.
The Taxpayer's customers are both end-users and resellers. The

resellers are retailers of computer goods and software solutions. A
particular reseller has provided a resale exemption certificate from its
home state. This reseller indicates that it has no presence or nexus in
Virginia and is not registered to collect the Virginia retail sales and use
tax. This reseller contracts with the Taxpayer to purchase and resell the
Taxpayer's manufactured equipment to an end-user in Virginia. The
products are shipped via common carrier directly from the Taxpayer's
site located outside Virginia to the end user's location in Virginia.
You ask several questions regarding responsibility for collecting the

sales tax. However, your letter does not mention whether the reseller is
in any way connected to the Taxpayer. Absent information to the
contrary, this response presumes that the reseller is not a division, an
assignee, copartnership, joint venture or unit of the Taxpayer. If this
127
presumption is incorrect, the answers to the questions presented below
may differ.
RULING
Question #1. Are sales to the reseller recognized as exempt sales for
resale?
Yes. The reseller's resale exemption certificate is acceptable for use in

this situation provided the reseller is validly registered for sales and use
tax purposes in its state and the other state's resale exemption
certificate contains the minimum information required by Public
Document (P.D.) 97-95 (2/21/97) and Code of Virginia § 58.1-623. In
lieu of using the other state's resale exemption certificate, this reseller
may use Virginia's resale exemption certificate (i.e., Form ST-10) and
reference its state's registration number and the name of its state of
registration on the certificate. Also see P.D. 98-142 (10/8/98), 92-94
(6/5/92), and 91-314 (12/30/91).
Question #2. How does the tax apply to optional hardware maintenance
agreements sold to resellers when the Taxpayer performs repair
services at the end-user site or at the Taxpayer's location outside
Virginia?
The tax applies only when the hardware maintenance agreement is sold
at retail to the ultimate consumer. In this instance, the retail transaction
is between the reseller and its customer, i.e., the end-user. Thus, the
Taxpayer should not collect the sales tax from the reseller provided it
has obtained a properly completed resale exemption certificate from the
reseller.
Question #3. How does the tax apply to an optional software support
agreement providing for technical consulting services and updates?
The department has traditionally held that such agreements are (i)
taxable when any updates are transferred on a tangible medium such
as a disk, tape, etc., or (ii) exempt if all updates are transferred by
electronic means only. See P.D. 98-19 (2/9/98).
Regardless of whether the agreement is taxable or exempt when sold at

retail, the Taxpayer should not collect the sales tax from the reseller.
The sale of a taxable agreement between the Taxpayer and reseller is
considered an exempt sale for resale.
Thus, the Taxpayer must obtain a properly completed resale exemption
128
certificate from the reseller. See Title 23 of the Virginia Administrative
Code (VAC) 10-210-280.
Question #4. Without regard to Question #2 and Question #3 above,

would the Taxpayer have any sales tax collection responsibilities when
the reseller sells computer equipment and software to an end-user in
Virginia and has the Taxpayer ship the products to the end user and
install these products at the end-user site in Virginia using the
Taxpayer's employee or a contractor hired by the Taxpayer?
The presence of the Taxpayer's employees or hired contractors in

Virginia on behalf of the reseller does not necessarily create nexus for
the reseller unless (i) the installation services involve solicitation of
business on behalf of or for the benefit of the reseller, and (ii) an agency
relationship between the Taxpayer and reseller is established. See P.D.
99-94 (4/30/99). If the Taxpayer does not establish an agency
relationship with the reseller and does not solicit business on behalf of
the reseller, no nexus is created for the reseller.
Question #5. What is the taxable base used to calculate the tax if the
Taxpayer is required to collect the sales tax in any of the above
transactions?
There is no taxable base for the Taxpayer because it is selling its
product at wholesale to the reseller. In the event that the reseller is
registered to collect the sales tax, the reseller would be obligated to
collect the tax. See 23 VAC 10-210-1090. Otherwise, if the reseller has
no nexus with Virginia and has not voluntarily registered with the
department as a service to its Virginia customers, no collection of the
sales or use tax should be made by the reseller. Rather, in these
instances, it is the ultimate responsibility of the end-user to report and
pay the use tax based on the sales price charged by the reseller.
If you have any questions about this response, please contact **** in the
department's Appeals and Rulings Office at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
129
Document 02-113
Number:
Brief Description: Online digital identification service to companies, nexus
Topics: Exemptions; Property Subject to Tax
July 26, 2002
Dear *****:
This is in reply to the letter from ***** seeking a ruling on the application
of the Virginia retail sales and use tax to services provided by your client
(the "Company"). I apologize for the delay in the department's response.
FACTS
The Company provides an online digital identification ("ID") service to

companies and individuals. A digital ID is a computer software
identification device used by parties to communicate with and identify
one another prior to engaging in electronic commerce over the Internet.
Each digital ID is delivered electronically through the Company's online
digital ID center to the customer for online use. The Company does not
provide any tangible personal property to its customers as part of the
provision of its digital ID service.
The Company has sufficient physical contact with Virginia and has
established nexus for sales and use tax purposes. The Company
questions the application of the tax to its charges for the digital ID
service and raises three issues for consideration: (1) Are digital IDs
tangible personal property subject to the Virginia sales tax? (2) If a
digital ID is considered tangible software, is it "custom" or prewritten?
(3) Is the transfer of digital IDs over the Internet taxable data
processing?
RULING
130
Services v. Tangible Personal Property

and use tax for "professional, insurance, or personal service
transactions which involve sales as inconsequential elements for which
no separate charges are made."
The department traditionally has held that transactions involving data

accessed online by personal computers are nontaxable service
transactions under Code of Virginia § 58.1-609.5(1). This is also true of
information sent via fax, Internet, or other electronic means. Intangible
property or services generally are exempt from the tax unless provided
in connection with the sale of tangible personal property. See Public
Document (P.D.) 97-306 (7/18/97).
The Company's digital ID service involves electronic activity transmitted

online, and there is no exchange of tangible personal property.
Therefore, the Company's digital ID service is deemed a nontaxable
service transaction and the Company is not required to collect the
Virginia sales tax on its charge to Virginia customers.
In accordance with Title 23 of the Virginia Administrative Code (VAC)

10-210-4040, the Company, as a service provider, is the taxable user
and consumer of all tangible personal property purchased for use in
Virginia in providing exempt services. The Company must pay the tax to
its vendors at the time of purchase on all tangible personal property
used in Virginia to provide its digital ID service. If a vendor is not
registered to collect the Virginia tax, the Company must remit the tax
directly to the department.
Computer Software

and use tax for custom programs as defined in § 58.1-602. A custom
program is "a computer program which is specifically designed and
developed only for one customer. The combining of two or more
prewritten programs does not constitute a custom computer program. A
prewritten program that is modified to any degree remains a prewritten
program and does not become custom."
Code of Virginia § 58.1-602 also defines a prewritten program to mean

"a computer program that is prepared, held or existing for general or
repeated sale or lease, including a computer program developed for in-
131
house use and subsequently sold or leased to unrelated third parties."
You have clarified that the Company is not making sales of computer
software in providing its digital ID service. It is not clear, however,
whether the Company purchases computer software for use in Virginia
to provide its digital ID service. Any purchases of custom software by
the Company for use in Virginia in providing its services would be
exempt. Conversely, as a service provider, the Company is liable for the
tax on its purchases of tangible prewritten computer software used in
Virginia to provide its digital ID service. Purchases of prewritten
software that are transmitted to the Company online would be exempt,
provided there is no exchange of tangible personal property. P.D. 99-80
(4/21/99).
Data Processing
It has been the department's long-standing policy that the "true object"
of data processing services that transfer information by means of
microfiche, computer tape, or hardcopy are nontaxable services. P.D.
96-184 (7/26/96). Clearly, data processing services that involve the
transfer of data online where there is no transfer of tangible personal
property would also be a nontaxable service. In this case, there is
insufficient information to determine whether the Company's digital ID
service would be considered data processing services. In any event, the
Company's online provision of its digital ID services is not deemed a
taxable sale.
This ruling is based on the facts as presented. Any variation of the facts
from those presented may lead to a different result. The Code of
Virginia, regulations and public documents cited are available online in
the Tax Policy Library section of the Department of Taxation's web site,
located at www.tax.state.va.us. If you have additional questions, you
may contact ***** in the Office of Policy and Administration, Appeals and
Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
132
Document 04-4
Number:
Brief Description: Virginia Public Procurement Act, Vendor designated a "prohibited source" for
state purchasing
Topics: Appropriateness of Audit Methodology; Collection of Tax
January 23, 2004
Re: § 2.2-4321.1(F) - Application for Correction
Dear *****:
This will reply to your letter of December 24, 2003, in which you seek
correction
of a determination by the Department that your client, ***** (the
"Taxpayer") is prohibited from doing business with the state of Virginia
as an approved vendor under Va. Code § 2.2-4321.1.
FACTS
The 2003 Virginia General Assembly enacted legislation that amended

the Virginia Public Procurement Act by adding Va. Code § 2.2-4321.1.
This section prohibits state agencies from purchasing goods or services
from a vendor if the vendor or an affiliate of the vendor is subject to the
provisions of Va. Code § 58.1-612 but has not registered to collect and
remit sales and use tax on its Virginia sales. The Department of
Taxation is responsible for determining if a vendor or its affiliates are not
in compliance with this law and should be prohibited from selling goods
or services to Virginia state agencies.
The Taxpayer was contacted by the Department and asked to complete

a questionnaire to assist the Department in determining if the Taxpayer
or any of its affiliates were subject to the provisions of Va. Code § 58.1-
612. The Department's records indicated that one of the Taxpayer's
affiliates ( ***** - hereinafter, the "Affiliate") was making sales to Virginia
133
customers but was not registered to collect and remit Virginia sales and
use tax. The Taxpayer did not provide a complete response to the
questionnaire, and the Department was unable to determine if the
affiliate was subject to the provisions of Va. Code § 58.1-612. After
several unsuccessful attempts to obtain a completed questionnaire from
the Taxpayer, the Department issued a determination on December 8,
2003, stating that the Taxpayer should be designated a "prohibited
source" for state purchasing. The Department notified the Department of
General Services to remove the Taxpayer from its list of vendors
approved to do business with Virginia state agencies.
In your letter, you provide information regarding the activities of the

Affiliate and maintain that it is not subject to the provisions of Va. Code
§ 58.1-612. The Taxpayer has also provided the Department with a
completed questionnaire to supplement this appeal. You contend that
the Affiliate does not have nexus with Virginia and, therefore, is not
required to register for collection of the sales and use tax. As a result,
you seek correction of the Department's determination dated December
8, 2003, designating the Taxpayer as a prohibited source.
DETERMINATION
The Department relies on Va. Code § 2.2-4321.1(A) to determine
if a vendor is a prohibited source. This Code section states in part:
No state agency shall contract for goods or services
with a nongovernmental source if the source, or any
affiliate of the source, is subject to the provisions of §
58.1-612 and fails or refuses to collect and remit the
tax on its sales delivered by any means to locations
within the Commonwealth. [Emphasis added].
This statute creates a standard for vendors to be eligible to do
business with state agencies under the Virginia Public
Procurement Act. The Department is required to evaluate the
activities of each vendor and the vendor's affiliates to determine if
the criteria in Va. Code § 58.1-612 apply to the vendor or the
vendor's affiliates. This analysis is independent from the analysis
of nexus standards established under state and federal law
requiring registration and collection of the sales and use tax.
Virginia has established its own conditions for vendors to do
business with state agencies.
If a vendor or a vendor's affiliate meets the definition of a "dealer"
in Va. Code § 58.1-612(B), then the Department looks to the
criteria in Va. Code § 58.1-612(C). If a vendor or a vendor's
affiliate is subject to one or more of the criteria in § 58.1-612(C)
134
and that vendor or affiliate is not registered to collect Virginia
sales and use tax, the law prohibits state agencies from doing
business with the vendor. In this case, it is clear that the Affiliate
meets the definition of "dealer." The question to be addressed is
whether the Affiliate meets any of the criteria under Va. Code §
58.1-612(C).
Based on the information provided in your letter and in the

questionnaire, the Affiliate is subject to one or more of the criteria in Va.
Code § 58.1-612(C). The Affiliate is owned or controlled by the same
interests that own or control a business located in Virginia. See Va.
Code § 58.1-612(C)(7). Furthermore, the responses to the
questionnaire do not rule out the possibility that the Affiliate advertises
in newspapers or other periodicals printed and published within Virginia.
See Va. Code § 58.1-612(C)(3). It is also possible that the Affiliate
solicits business in Virginia on a continuous, regular, seasonal or
systematic basis by means of advertising that is broadcast or relayed
from a transmitter within Virginia or distributed from a location within
Virginia. See Va. Code § 58.1-612(C)(5). Because the Affiliate is subject
to the provisions of Va. Code § 58.1612 and has not registered to
collect and remit Virginia sales and use tax, the Taxpayer is a prohibited
source under Va. Code § 2.2-4321.1. Accordingly, the Department's
determination of December 8, 2003 is correct.
If the Taxpayer wishes to do business with Virginia state agencies, the
Affiliate is required to register and collect Virginia sales and use tax:
This determination is based on the requirements in Va. Code § 2.2-
4321.1 and does not represent a change in the Department's policy with
respect to dealer registration requirements for sales and use tax.
If you have any questions concerning this determination, or wish to

register the
Affiliate to collect Virginia sales and use tax, please contact ***** in the
Department's Office of Policy and Administration, Appeals and Rulings,
at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
135
Document 04-38
Number:
Brief Description: Use of trading software to facilitate individual stock trading on various national
stock exchanges.
Topics: Basis of Tax; Property Subject to Tax
July 28, 2004

Dear *********:

the retail sales and use tax to various charges made by ********* (the
"Taxpayer") to Virginia customers. I apologize for the delay in
responding to your letter.
FACTS
Located in ********* (“State A”) with no offices (in Virginia), the Taxpayer
develops software that is licensed to brokers and other end users in
Virginia and elsewhere. These licenses generally grant authority to end
users to use trading software to facilitate individual stock trading on
various national stock exchanges. You present a number of factual
scenarios, which are addressed below.
RULING
Software licenses
You present copies of three software license agreements. In regard to

the broker software site license agreement, a broker is granted a license
to use software "designed for sending orders and trading on the
exchanges" via Internet connection upon payment of an initial license
fee. Subsequent license fees are charged based on a fixed monthly
amount or on a per order basis if the fixed monthly amount is exceeded.
The software "also possesses the capability to supply charts, graphs
and analytics" for additional monthly license fees. If a broker enters into
an amendment to the broker software site license agreement (i.e., the
Internet Amendment) to allow the broker's customers to execute and
send trades via the Internet from a customer's remote location, such
customer must enter into a sublicense agreement with respect to the
customer's use of the software. You indicate that all software is
136
"shipped to the customer's location via common carrier, Internet or
personally delivered by an employee of the Taxpayer."
The Department has long held that the sale of computer software
transferred in tangible form (e.g., CD-ROM) is the taxable sale of
tangible personal property. In contrast, computer programs transmitted
electronically (e.g., over telephone lines, keyed directly into a computer
through its keyboard or downloaded from the Internet) are deemed to be
nontaxable transactions because there is no transfer of tangible
personal property. The application of the retail sales and use tax to the
various facts and questions presented is as follows:
• Initial and monthly license fees for prewritten software
transferred on a tangible medium (e.g., CD-ROM) and charged to
a broker or sublicense:
o Standard package fees – taxable
• Initial fee - taxable
• Minimum monthly fee or per order
fee – taxable
o Optional trade chart package fee - taxable
o Optional island book package fee - taxable
o Optional back office (reconciler) fee - taxable
o Optional historical data updates fee - taxable
• Initial and monthly license fees for prewritten software
downloaded from the Internet or otherwise electronically
transferred to the customer and no tangible software medium is
furnished to the customer:
o Standard package fee - exempt
Initial fee – exempt
Minimum monthly fee or per order fee - exempt
o Optional trade chart package fee – exempt
o Optional island book package fee – exempt
o Optional back office (reconciler) fee – exempt
o Optional historical data updates fee - exempt
• Charge for quote server or other computer hardware sold,
leased or rented for use in connection with downloaded (exempt)
software - taxable
• Charge for accessing real-time quotes via third party lines -
exempt
• In the event a broker sublicenses the software to an end user,
the fee is generally taxable unless transferred electronically. No
137
resale exemption applies because the broker is authorized to use
the software in its business. If a registered dealer, the Taxpayer
should collect and remit the tax on the sublicense fee if there is a
transfer of tangible property.
• Electronic information service charges - generally exempt
o Island book fee - follow above tax treatment for license fees
o Exchange fee - exempt, if separately stated on the customer's
invoice
o Market data feeds combined with a taxable license fee –
taxable
o Market data feeds combined with an exempt license fee –
exempt
o Charts and graphs fee - follow above tax treatment for license
fees
o Internet workstation fee - follow above tax treatment for license
fees
• Miscellaneous fees for services - taxability generally depends
upon whether charged in connection with the sale, lease or rental
of tangible personal property:
o Regardless of whether separately stated or not, the following
fees are taxable [unless charged in connection with electronically
downloaded software only]:
Internet order fee
Late count charge
Late payment fee
Administrative information tracking fee
Communication server connectivity fee
Order fee
Minimum order fee
Back office license fee
Contract change fee
o Installation labor or service fee - exempt if separately stated on
the customer's invoice
Resale certificates
The trading software site license grants a license to a licensee "to use
the Software solely for the purposes set forth in Exhibit "B" for
Licensee's customers at Licensee's principal office." A licensee is
generally a broker. Exhibit B lists the different software packages
available, such as the standard package and other packages for trade
138
charts, island book pricing, back office (reconciler), and historical data
updates. Although the broker may not use the software to execute
trades, it does use the software in its operations in the provision of
access services to its customers. The taxability of the software will
depend upon the method of delivery to the licensee. If electronically
delivered to the broker and no tangible medium is transferred, the
software is exempt. If delivered by tangible means to the broker, the
software is taxable.
Subsection A of Title 23 of the Virginia Administrative Code ("VAC") 10-
210-5010 sets out that "[c]harges made by stockbrokers for providing
consultation, trading stocks, securities and commodities and similar
transactions are charges for professional services and are not subject to
the tax." Subsection B of the above regulation provides that
"[s]tockbrokers are the consumers of all tangible personal property used
in their operations and must pay the tax on all such property at the time
of purchase."
The Taxpayer's Internet Amendment agreement sets out that a broker

"may allow its customer, in the ordinary course of business, to download
the Software from a web site." As set out above, the electronic transfer
of software is not taxable provided no tangible medium is furnished. The
Taxpayer may also provide computer hardware via its sublicensing
agreement. The charges for such hardware made to customers are
taxable. The Taxpayer may use the resale exemption certificate, Form
ST-10, when purchasing such hardware for subsequent sale, lease or
rental purposes only.
Nexus
Under Va. Code § 58.1-612, the sales tax is collectible from all persons
who are dealers. That same section defines the term "dealer" to include
every person who "[i]mports or causes to be imported into this
Commonwealth tangible personal property from any state or foreign
country, for sale at retail, for use, consumption, or distribution, or for
storage to be used or consumed in this Commonwealth." The Taxpayer
clearly qualifies as a "dealer" under Va. Code § 58.1-612.
The same statute also sets out the activities sufficient to require a
dealer to register for the collection and remittance of the Virginia retail
sales and use tax. The statute provides in part that a dealer shall be
deemed to have sufficient activity in Virginia if the dealer solicits
business in Virginia by employees, independent contractors, agents or
139
other representatives. Nexus is also established if the dealer makes
deliveries into Virginia more than twelve times during a calendar year by
means other than common carrier. In addition, nexus is established if
the dealer owns tangible personal property that is rented or leased to
consumers in Virginia or offers tangible personal property, on approval,
to consumers in Virginia.
In response to the issues you raise about nexus:

• If the Taxpayer sells licensed software to Virginia customers
exclusively via Internet download and does not establish sufficient
activity within Virginia pursuant to the provisions of Va. Code §
58.1-612(C), sufficient nexus to require use tax registration is not
established in Virginia.
• The lease or rental of computer hardware (e.g., quote servers,
routers, dongles, etc.) to Virginia customers establishes sufficient
nexus as to require use tax collection registration. See 23 VAC
10-210-840(A).
• An employee based in State A who occasionally or frequently

travels to Virginia to provide technical assistance only, has no
authority to propose or negotiate sale, and does not solicit
business in any manner from Virginia customers does not
establish nexus with Virginia as to require the Taxpayer to register
for use tax collection.
travels to Virginia to install trading software only, has no authority
to propose or negotiate sale, and does not solicit business in any
manner from Virginia customers does not establish nexus with
Virginia as to require the Taxpayer to register for use tax
collection.
travels to Virginia to make sales calls and proposals, take sales
orders, or otherwise solicit business from customers in any other
manner in Virginia does establish nexus with Virginia so as to
require the Taxpayer to register for use tax collection.
The Code of Virginia sections, regulations and public documents cited
are available on-line in the Tax Policy Library section of the Department
of Taxation's web site, located at www.tax.state.va.us. Further, the
Taxpayer may register with the Department on-line via this web site. If
you have any questions about this ruling, you may contact ********** in
140
the Department's Office of Policy and Administration, Appeals and
Rulings, at **********.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
141
Document 04-129
Number:
Brief Description: Taxpayer claims that the charges for a computer software license and consulting
services are not taxable
Topics: Manufacturing Exemption
September 16, 2004
Dear *****:
This is in response to your letter seeking correction of the sales and use
tax assessment issued to ***** (the "Taxpayer") as a result of an audit
for the period March 1999 through February 2002. I apologize for the
delay in the Department's response. I also want to thank you for
providing the English translation of the German documents at issue.
FACTS
The Taxpayer manufactures abrasive rolls, sheet belts and discs for
furniture manufacturers and others. An audit resulted in the assessment
of tax on certain fixed assets and on charges for a computer software
license and consulting services.
The Taxpayer claims that the charges for a computer software license
and consulting services are not taxable. The contested charges were
billed by the Taxpayer's German parent company ("Parent"), which had
obtained a prewritten computer software license from a German vendor
on behalf of all users in the Parent's international group. To implement
the software, the Parent also received consulting services from the
same German vendor. This software was subsequently installed and
implemented at the Taxpayer's Virginia location. As a result, the
Taxpayer was billed by the Parent for its proportionate share of the
Parent's cost for the software license and consulting fees. I understand
that the Taxpayer received the software in March 1999 and "went live
with the system on November 1, 1999." I also understand that the
software is used to perform administrative functions only.
142
The Taxpayer maintains that the licensing and consulting work
(between the German vendor and Parent) are set out in separate
documents and are completely independent of each other. Accordingly,
the Taxpayer claims that the consulting services billed to it by the
Parent are "not in connection with the sale of software" and are not
taxable. The Taxpayer also maintains that "most of the services were
performed in Germany and have no nexus with Virginia."
The Taxpayer further maintains that the software license charge is not
taxable because it is merely a reimbursement to the Parent "for its
portion of the costs associated with the system." The Taxpayer
contends that the charges invoiced by the Parent "are simply an
intercompany transfer to maintain accurate accounting."
The Taxpayer indicates that it had assistance from the Parent and an
outside consultant to implement the software in Virginia. I understand,
however, that the charges made by the outside consultant were not
included in the audit. The Taxpayer also disputes the hardware costs
because sales tax was paid. I understand, however, that the hardware
costs were also not included in the audit.
DETERMINATION
Pursuant to Va. Code §§ 58.1-602 and 58.1-603, the transfer of tangible

personal property for a consideration to the consumer constitutes a
retail sale subject to the Virginia retail sales and use tax. These statutes
support the Department's longstanding policy to apply tax to the
licensing of prewritten computer software if the license provides the
customer not only the right to use the software, but also a copy of the
software itself in some tangible form. As set out in § 58.1-602, services
charged in connection with the sale of tangible personal property are
subject to taxation. See Public Document (P.D.) 88-211 (7/26/88).
Furthermore, transfers of tangible personal property for a consideration
between separate but affiliated entities are generally deemed sales
subject to the retail sales and use tax. See P.D. 94-271 (8/30/94).
Although you contend that the contested purchases of software and
services are from a German vendor, the records presented prove that
the Parent billed the Taxpayer for a software license and consulting
services, thus establishing that the contested purchases are only
between the Parent and the Taxpayer. These records further establish
that the software and services are not independent and separate
transactions. Rather, as is evident from the Parent's invoicing and other
143
billing documents, it is established that the Taxpayer purchased a
bundled software system consisting of software and services, thus
making a clear connection between the software and services.
A close review of the billing records presented reveals that they are too
vague to establish an exemption from the tax pursuant to Va. Code §§
58.1-609.5(2) [relating to exempt installation labor] and 58.1-609.5(6)
[relating to exempt software modification labor charges]. Furthermore,
the contested "external consulting" charges appear to consist of taxable
and exempt service charges. For example, the Outline Consulting
Contract has provisions for four types of services: (1) organizational and
managerial consulting, (2) software alterations and/or additions or
support, (3) interface installation, and (4) training. It is not possible from
the documentation provided to determine the specific amounts of
exempt services. In these instances, a lump-sum charge consisting of
both taxable and exempt services is deemed taxable. I understand that
the Taxpayer has not provided an exempt and taxable breakdown of the
contested service charges although the Department's auditor requested
such information. Absent credible evidence showing the breakdown of
the specific amounts of installation labor and software modification labor
that was billed to the Taxpayer by the Parent in connection with the
contested charges, I find no basis for revising the audit.
Based on this determination, the assessment is correct. A consolidated

bill, with interest accrued to date, will be mailed shortly to the Taxpayer.
The outstanding balance must be paid within 30 days from the date of
this letter to avoid the accrual of additional interest and an additional
20% penalty on the tax due. Payment should be remitted to: Virginia
Department of Taxation, 3600 West Broad Street, Suite 160, Richmond,
Virginia 23230, Attn: *****. If you have any questions concerning
payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections and the public documents cited are
available online in the Tax Policy Library section of the Department of
Taxation's web site, located at www.tax.state.va.us. If you have any
questions about this determination, you may contact ***** in the
Department's Office of Policy and Administration, Appeals and Rulings,
at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
144
D. Case Law Synopsis
Scripto, Inc. v. Carson – U. S. Supreme Court case; Scripto, a Georgia

corporation, has no office or place of business in Florida and no property or
regular full-time employees there; but it does have 10 independent salespeople
who solicit sales on a commission basis for Scripto’s Adgif Company division.
Orders are forwarded to the Georgia office for acceptance. The orders are filled
and shipped by common carrier to Florida residents. Both the trail court and
Supreme Court of Florida upheld the assessment of tax against Scripto. The
Supreme Court also upheld the assessment.
National Geographic Society v. California Board of Equalization – U. S. Supreme

Court case where National Geographic, a nonprofit corporation headquartered in
Washington, D.C. has two offices in California from which advertising is solicited
for the nonprofit’s magazine. No activities related to the nonprofit’s mail order
business is conducted from either of these offices. Orders of the nonprofit’s
sales items are received in California on coupons or order forms contained in the
magazine and sent to Washington for filling. The Supreme Court of California
found in favor of the California Board of Equalization. The U. S. Supreme Court
upheld the assessment.
Quill Corp v. North Dakota – U. S. Supreme Court case; Quill is a leading mail
order retailer of office supplies. North Dakota’s Department of Revenue asserted
that Quill, by virtue of its sales in North Dakota, created a substantial economic
presence in the state by being the sixth largest supplier of office products in the
state, and, therefore, was liable for collecting use tax. The Supreme Court of
North Dakota agreed. The Supreme Court, however, did not agree. Case
contains at length discussion of Commerce Clause and Due Process Clause as
well as what consititutes more than minimal contact.
Current, Inc. v. State Board of Equalization – California Supreme Court decided

that Current, an Ohio corporation, did not have nexus based on the presence in
California of an affiliate.
Intercard, Inc. v. Kansas Department of Revenue – Intercard, Inc., headquartered

in Missouri, is registered as a foreign corporation doing business in Kansas with
the Kansas Secretary of State. Intercard manufactures and sells electronic data
cards and card readers that enable customers to purchase photocopies using the
cards. Technicians travel to Kinko’s stores to install the card readers. KDR ruled
that nexus was created by the installation of the card readers. After two other
hearings and appeals, Kansas Supreme Court ruled that 11 visits to the state in a
seven year audit period was insufficient to constitute nexus.
Arizona Dept of Revenue v. Care Computer Systems, Inc. – Care Computer,

located outside Arizona, sells and licenses computer hardware and software to
145
nursing homes has nexus due to their substantial activities in the state. Arizona
Court of Appeals found in favor of DOR.
Department of Revenue & Taxation v. Quantex Microsystems, Inc. – Quantex,

located in New Jersey, sells computer products through mail, telephone and
internet in Louisiana. It represented that it provided on-site service in
advertising. DOR ruled that by providing for repairs, service and/or support for its
products sold in Louisiana, Quantex had nexus for use tax and other Louisiana
taxes. Trial court had found in favor of Quantex. Court of Appeal, however,
found in favor of DOR.
Dell Catalog Sales v. Commissioner of Revenue Services – Connecticut

Department of Revenue ruled that Dell had nexus for use tax through its
agreement with an unrelated computer company to perform on-site repairs. The
contracted company made only a minimal number of on-site calls during the audit
period. Connecticut Supreme Court found that a slight presence in Connecticut
by an unrelated computer repair company did not constitute nexus.
Comptroller v. Royal Transport, Inc. & Furnitureland South, Inc. – Circuit Court
for Anne Arundel County in Maryland found that a North Carolina furniture dealer
and their delivery company are liable for use tax. The delivery company
accepted cash on delivery payments, set up and installed furniture, repaired
furniture and facilitated returns for the store, which was owned by mutual
interests.
146
E. Case Law
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147
SCRIPTO v. CARSON, 362 U.S. 207 (1960)
362 U.S. 207
SCRIPTO, INC., v. CARSON, SHERIFF, ET AL. APPEAL FROM THE
SUPREME COURT OF FLORIDA. No. 80.
Argued February 24, 1960. Decided March 21, 1960.
Appellant, a Georgia corporation, has no office or place of business in Florida
and no property or regular full-time employees there; but it does have in Florida
ten brokers, wholesalers or jobbers who solicit sales of appellant's products on a
commission basis and forward orders to Georgia, where they are accepted and
whence the goods are shipped to Florida residents. Held: A Florida statute which
levies a tax on the use of such products in Florida and makes appellant
responsible for its collection from Florida purchasers is not repugnant either to
the Commerce Clause of the Constitution or to the Due Process Clause of the
Fourteenth Amendment. General Trading Co. v. State Tax Comm'n, 322 U.S.
335 , followed. Miller Bros. Co. v. Maryland, 347 U.S. 340 , distinguished. Pp.
207-213. 105 So.2d 775, affirmed.
George B. Haley, Jr. argued the cause for appellant. With him on the brief was
Ernest P. Rogers. Joseph C. Jacobs, Assistant Attorney General of Florida,
argued the cause for appellees. With him on the brief were Richard W. Ervin,
Attorney General of Florida, and Sam Spector, Special Assistant Attorney
General.
MR. JUSTICE CLARK delivered the opinion of the Court.
Florida, by statute, 1 requires appellant, a Georgia corporation, to be responsible

for the collection of a use tax on certain mechanical writing instruments which
appellant [362 U.S. 207, 208] sells and ships from its place of business in Atlanta
to residents of Florida for use and enjoyment there. Upon Scripto's failure to
collect the tax, the appellee Comptroller levied a use tax liability of $5,150.66
against it. Appellant then brought this suit to test the validity of the imposition,
contending that the requirement of Florida's statute places a burden on interstate
commerce and violates the Due Process Clause of the Fourteenth Amendment
to the Constitution. It claimed, in effect, that the nature of its operations in Florida
does not form a sufficient nexus to subject it to the statute's exactions. Both the
trial court and the Supreme Court of Florida held that appellant does have
sufficient jurisdictional contacts in Florida and, therefore, must register as a
dealer under the statute and collect and remit to the State the use tax imposed
on its aforesaid sales.
105 So.2d 775. We noted probable jurisdiction. 361 U.S. 806 . We agree with the
result reached by Florida's courts.
Appellant operates in Atlanta an advertising specialty division trading under the

name of Adgif Company. Through it, appellant is engaged in the business of
selling mechanical writing instruments which are adapted to advertising purposes
by the placing of printed material thereon.
148
In its Adgif operation, appellant does not [362 U.S. 207, 209] (1) own, lease, or
maintain any office, distributing house, warehouse or other place of business in
Florida, or (2) have any regular employee or agent there. 2 Nor does it own or
maintain any bank account or stock of merchandise in the State. Orders for its
products are solicited by advertising specialty brokers or, as the Supreme Court
of Florida called them, wholesalers or jobbers, who are residents of Florida. At
the time of suit, there were 10 such brokers - each having a written contract and
a specific territory. The somewhat detailed contract provides, inter alia, that all
compensation is to be on a commission basis on the sales made, provided they
are accepted by appellant; repeat orders, even if not solicited, also carry a
commission if the salesman has not become inactive through failure to secure
acceptable orders during the previous 60 days. The contract specifically provides
that it is the intention of the parties "to create the relationship . . . of independent
contractor." Each order is to be signed by the solicitor as a "salesman"; however,
he has no authority to make collections or incur debts involving appellant. Each
salesman is furnished catalogs, samples, and advertising material, and is actively
engaged in Florida as a representative "of Scripto for the purpose of attracting,
soliciting and obtaining Florida customers" for its mechanical advertising
specialties. Orders for such products are sent by these salesmen directly to the
Atlanta office for acceptance or refusal. If accepted, the sale is consummated
there and the salesman is paid his commission directly. No money passes
between the purchaser and the salesman - although [362 U.S. 207, 210] the latter
does occasionally accept a check payable to the appellant, in which event he is
required to forward it to appellant with the order.
As construed by Florida's highest court, the impost levied by the statute is a tax
"on the privilege of using personal property . . . which has come to rest . . . and
has become a part of the mass of property" within the State. 105 So.2d, at 781. It
is not a sales tax, but "was developed as a device to complement [such a tax] in
order to prevent evasion . . . by the completion of purchases in a non-taxing state
and shipment by interstate commerce into a taxing forum." Id., at 779. The tax is
collectible from "dealers" and is to be added to the purchase price of the
merchandise "as far as practicable." In the event that a dealer fails to collect the
tax, he himself is liable for its payment. The statute has the customary use tax
provisions "against duplication of the tax, an allowance to the dealer for making
the collection, and a reciprocal credit arrangement which credits against the
Florida tax any amount up to the amount of the Florida tax which might have
been paid to another state." Id., at 782. Florida held appellant to be a dealer
under its statute. "The application by that Court of its local laws and the facts on
which it founded its judgment are of course controlling here." General Trading
Co. v. State Tax Comm'n, 322 U.S. 335, 337 (1944).
The question remaining is whether Florida, in the light of appellant's operations
there, may collect the State's use tax from it on the basis of property bought from
appellant and shipped from its home office to purchasers in Florida for use there.
Florida has well stated the course of this Court's decisions governing such levies,
and we need but drive home its clear understanding. There must be, as our
149
Brother Jackson stated in Miller Bros. Co. v. Maryland, 347 U.S. 340, 344 -345
(1954), "some definite link, some minimum [362 U.S. 207, 211] connection,
between a state and the person, property or transaction it seeks to tax." We
believe that such a nexus is present here. First, the tax is a nondiscriminatory
exaction levied for the use and enjoyment of property which has been purchased
by Florida residents and which has actually entered into and become a part of
the mass of property in that State. The burden of the tax is placed on the ultimate
purchaser in Florida and it is he who enjoys the use of the property, regardless of
its source. We note that the appellant is charged with no tax - save when, as
here, he fails or refuses to collect it from the Florida customer. Next, as Florida
points out, appellant has 10 wholesalers, jobbers, or "salesmen" conducting
continuous local solicitation in Florida and forwarding the resulting orders from
that State to Atlanta for shipment of the ordered goods. The only incidence of this
sales transaction that is nonlocal is the acceptance of the order. True, the
"salesmen" are not regular employees of appellant devoting full time to its
service, but we conclude that such a fine distinction is without constitutional
significance. The formal shift in the contractual tagging of the salesman as
"independent" neither results in changing his local function of solicitation nor
bears upon its effectiveness in securing a substantial flow of goods into Florida.
This is evidenced by the amount assessed against appellant on the statute's 3%
basis over a period of but four years. To permit such formal "contractual shifts" to
make a constitutional difference would open the gates to a stampede of tax
avoidance. See Thomas Reed Powell, Sales and Use Taxes: Collection from
Absentee Vendors, 57 Harv. L. Rev. 1086, 1090. Moreover, we cannot see, from
a constitutional standpoint, "that it was important that the agent worked for
several principals." Chief Judge Learned Hand, in Bomze v. Nardis Sportswear,
165 F.2d 33, 36. The test is simply the nature and extent of the activities of the
appellant [362 U.S. 207, 212] in Florida. In short, we conclude that this case is
controlled by General Trading Co., supra. As was said there, "All these
differentiations are without constitutional significance. Of course, no State can tax
the privilege of doing interstate business. See Western Live Stock v. Bureau, 303
U.S. 250 . That is within the protection of the Commerce Clause and subject to
the power of Congress. On the other hand, the mere fact that property is used for
interstate commerce or has come into an owner's possession as a result of
interstate commerce does not diminish the protection which he may draw from a
State to the upkeep of which he may be asked to bear his fair share." 322 U.S.,
at 338 .
Nor do we believe that Florida's requirement that appellant be its tax collector on
such orders from its residents changes the situation. As was pointed out in
General Trading Co., this is "a familiar and sanctioned device." Ibid. Moreover,
we note that Florida reimburses appellant for its service in this regard.
Appellant earnestly contends that Miller Bros. Co. v. Maryland, supra, is to the
contrary. We think not. Miller had no solicitors in Maryland; there was no
"exploitation of the consumer market"; no regular, systematic displaying of its
products by catalogs, samples or the like. But, on the contrary, the goods on
which Maryland sought to force Miller to collect its tax were sold to residents of
150
Maryland when personally present at Miller's store in Delaware. True, there was
an "occasional" delivery of such purchases by Miller into Maryland, and it did
occasionally mail notices of special sales to former customers; but Marylanders
went to Delaware to make purchases - Miller did not go to Maryland for sales.
Moreover, it was impossible for Miller to determine that goods sold for cash to a
customer over the counter at its store in Delaware were to be used and enjoyed
in Maryland. This led the Court to conclude [362 U.S. 207, 213] that Miller would be
made "more vulnerable to liability for another's tax than to a tax on itself." 347
U.S., at 346 . In view of these considerations, we conclude that the "minimum
connections" not present in Miller are more than sufficient here.
The judgment is therefore Affirmed.

MR. JUSTICE FRANKFURTER, deeming this case to be nearer to General
Trading Co. v. State Tax Commission, 322 U.S. 335 , than it is to Miller Bros. Co.
v. Maryland, 347 U.S. 340 , concurs in the result.
MR. JUSTICE WHITTAKER, believing that Florida's action denies to appellant
due process of law and also directly burdens interstate commerce as held in
Miller Bros. Co. v. Maryland, 347 U.S. 340 , and in McLeod v. Dilworth Co., 322
U.S. 327 , and adhering to his views expressed in Northwestern Cement Co. v.
Minnesota, 358 U.S. 450, 477 , would reverse the judgment.
Footnotes
[ Footnote 1 ] The pertinent provisions of this statute are: "212.06 Same; collectible from dealers; dealers
defined; dealers to collect from purchasers; legislative intent as to scope of tax. - "(1) The aforesaid tax at
the rate of three per cent of the retail sales price, as of the moment of sale, or three per cent of the cost
price, as of the moment of purchase, as the case may be, shall be [362 U.S. 207, 208] collectible from all
dealers as herein defined on the sale at retail, the use, the consumption, the distribution and the storage for
use or consumption in this state, of tangible personal property. "(2) . . . (g) `Dealer' also means and includes
every person who solicits business either by representatives or by the distribution of catalogs or other
advertising matter and by reason thereof receives and accepts orders from consumers in the state, and such
dealer shall collect the tax imposed by this chapter from the purchaser and no action either in law or in
equity on a sale or transaction as provided by the terms of this chapter may be had in this state by any such
dealer unless it be affirmatively shown that the provisions of this chapter have been fully complied with."
[ Footnote 2 ] Appellant Scripto does employ one salesman but he handles its regular line of products and
has no connection with Adgif. The Florida courts found that his presence was not relevant to the
determination of whether appellant was included within the terms of the statute. [362 U.S. 207, 214]
151
U.S. Supreme Court
NATIONAL GEOGRAPHIC v. CAL. EQUALIZATION BD., 430 U.S. 551 (1977)
430 U.S. 551
NATIONAL GEOGRAPHIC SOCIETY v. CALIFORNIA BOARD OF
EQUALIZATION
APPEAL FROM THE SUPREME COURT OF CALIFORNIA
No. 75-1868.
Argued February 23, 1977

Decided April 4, 1977
Appellant Society, a nonprofit corporation with headquarters in the District of
Columbia, which maintains two offices in California that solicit advertising for the
Society's magazine but perform no activities related to the Society's mail-order
business for the sale from the District of Columbia of maps, atlases, globes, and
books, challenges the constitutionality of California's use tax, as applied to the
Society's mail-order activities, which requires every retailer engaged in business
in that State and making sales of tangible personal property for storage, use, or
other consumption in that State to collect from the purchaser a use tax in lieu of
the sales tax imposed on local retailers. Orders for the Society's sales items are
mailed from California directly to appellant's headquarters on coupons or forms
enclosed with announcements mailed to Society members and magazine
subscribers or on order forms contained in the magazine. Held: California's
imposition of the use-tax-collection liability on the Society's mail-order operation
does not violate the Due Process Clause of the Fourteenth Amendment or the
Commerce Clause since the Society's continuous presence in California in the two
offices provides a sufficient nexus between the appellant and the State to justify
imposition of the use-tax-collection liability as applied to appellant. The out-of-
state seller appellant runs no risk of double taxation as the consumer's
identification as a resident of the taxing State is obvious and appellant becomes
liable for the tax only by failing or refusing to collect it from the resident
consumer. Nor, contrary to appellant's contention, is it material that there is no
relationship between the appellant's sales activity in California and the two
advertising offices, for without regard to the nature of the offices' activities, they
had the advantage of the same municipal services as they would have had if
their activities had included assistance to the mail-order operations. Pp. 555-562.
16 Cal. 3d 637, 547 P.2d 458, affirmed.
BRENNAN, J., delivered the opinion of the Court, in which STEWART, WHITE,
MARSHALL, POWELL, and STEVENS, JJ., joined. BLACKMUN, J., [430 U.S. 551, 552]
filed an opinion concurring in the result, post, p. 562. BURGER, C. J., and
REHNQUIST, J., took no part in the consideration or decision of the case.
Arthur B. Hanson argued the cause for appellant. With him on the briefs were
Michael N. Khourie, Glenn L. Archer, Jr., and Michael C. Durney.
152
Philip M. Plant, Deputy Attorney General of California, argued the cause for
appellee. With him on the brief were Evelle J. Younger, Attorney General, and
Ernest P. Goodman, Assistant Attorney General. *
[ Footnote * ] Harold T. Halfpenny filed a brief for the Direct Mail/Marketing
Assn., Inc., as amicus curiae urging reversal. Louis J. Lefkowitz, Attorney
General, Samuel A. Hirshowitz, First Assistant Attorney General, and Philip
Weinberg, Assistant Attorney General, filed a brief for the State of New York as
amicus curiae urging affirmance.
MR. JUSTICE BRENNAN delivered the opinion of the Court.
Appellant National Geographic Society, a nonprofit scientific and educational
corporation of the District of Columbia, maintains two offices in California that
solicit advertising copy for the Society's monthly magazine, the National
Geographic Magazine. However, the offices perform no activities related to the
Society's operation of a mail-order business for the sale from the District of
Columbia of maps, atlases, globes, and books. Orders for these items are mailed
from California directly to appellant's Washington, D.C., headquarters on
coupons or forms enclosed with announcements mailed to Society members and
magazine subscribers or on order forms contained in the magazine. Deliveries
are made by mail from the Society's Washington, D.C., or Maryland offices.
Payment is either by cash mailed with the order or after a mailed billing following
receipt of the merchandise. Such mail-order sales to California residents during
the period involved in this suit aggregated $83,596.48. [430 U.S. 551, 553]
California Rev. & Tax. Code 6203 (West Supp. 1976) requires every "retailer
engaged in business in this state and making sales of tangible personal property
for storage, use, or other consumption in this state" to collect from the purchaser
a use tax in lieu of the sales tax imposed upon local retailers. The California
Supreme Court held that appellant is subject to the statute as a "`retailer
engaged in business in this state,'" because its maintenance of the two offices
brings appellant within the definition under 6203 (a) that includes "`[a]ny
retailer maintaining . . . an office . . . .'" 16 Cal. 3d 637, 642, 547 P.2d 458, 460-
461 (1976). Section 6204 makes the retailer liable to the State for any taxes
required to be collected regardless of whether he collects the tax. 1 See Bank of
[430 U.S. 551, 554] America v. State Bd. of Equalization, 209 Cal. App. 2d 780,
793, 26 Cal. Rptr. 348, 355 (1962).
The question presented by this case is whether the Society's activities at the
offices in California 2 provided sufficient nexus between the out-of-state seller
appellant and the State - as required by the Due Process Clause of the
Fourteenth Amendment and the Commerce Clause - to support the imposition
upon the Society of a use-tax-collection liability pursuant to 6203 and 6204,
measured by the $83,596.48 of mail-order sales of merchandise from the District
of Columbia and Maryland. The California Supreme Court held that the imposition
of use-tax-collection liability on the Society violated neither Clause, 16 Cal. 3d
637, 547 P.2d 458 (1976). 3 We noted probable jurisdiction. 429 U.S. 883
(1976). We affirm. [430 U.S. 551, 555]
153
I
All States that impose sales taxes also impose a corollary use tax on tangible
property bought out of State to protect sales tax revenues and put local retailers
subject to the sales tax on a competitive parity with out-of-state retailers exempt
from the sales tax. H. R. Rep. No. 565, 89th Cong., 1st Sess., 614 (1965). The
constitutionality of such state schemes is settled. Henneford v. Silas Mason Co.,
300 U.S. 577, 581 (1937); Monamotor Oil Co. v. Johnson, 292 U.S. 86 (1934). 4
But the limitation of use taxes to consumption within the State so as to avoid
problems of due process that might arise from the extension of the sales tax to
interstate commerce, see, e. g., Nelson v. Sears, Roebuck & Co., 312 U.S. 359,
363 (1941); Monamotor Oil Co. v. Johnson, supra, at 95, does not avoid all
constitutional difficulties. States necessarily impose the burden of collecting the
tax on the out-of-state seller; the impracticability of its collection from the
multitude of individual purchasers is obvious. Miller Bros. Co. v. Maryland, 347
U.S. 340, 343 (1954). However, not every out-of-state seller may constitutionally
be made liable for payment of the use tax on merchandise sold to purchasers in
the State. The California Supreme Court concluded, based on its survey of the
relevant decisions of this Court, that the "slightest presence" of the seller in
California established sufficient nexus between the State and the seller
constitutionally to support the imposition of the duty to collect and pay the tax.
The California court stated, 16 Cal. 3d, at 644, 547 P.2d, at 462:
"We are satisfied that from the above cited decisions [430 U.S. 551, 556] the following principle
can be distilled and we thus hold: Where an out-of-state seller conducts a substantial mail order
business with residents of a state imposing a use tax on such purchasers and the seller's connection
with the taxing state is not exclusively by means of the instruments of interstate commerce, the
slightest presence within such taxing state independent of any connection through interstate
commerce will permit the state constitutionally to impose on the seller the duty of collecting the
use tax from such mail order purchasers and the liability for failure to do so." (Emphasis supplied.)
Our affirmance of the California Supreme Court is not to be understood as implying agreement
with that court's "slightest presence" standard of constitutional nexus. Appellant's maintenance of
two offices in the State and solicitation by employees assigned to those offices of advertising copy
in the range of $1 million annually, Tr. of Oral Arg. 6, establish a much more substantial presence
than the expression "slightest presence" connotes. Our affirmance thus rests upon our conclusion
that appellant's maintenance of the two offices in California and activities there adequately
establish a relationship or "nexus" between the Society and the State that renders constitutional the
obligations imposed upon appellant pursuant to 6203 and 6204. 5 This conclusion is supported by
several of our decisions.
The requisite nexus was held to be shown when the out-of-state sales were
arranged by the seller's local agents working in the taxing State, Felt & Tarrant
Co. v. Gallagher, 306 U.S. 62 (1939); General Trading Co. v. Tax Comm'n, [430
U.S. 551, 557] 322 U.S. 335 (1944), and in cases of maintenance in the State of
local retail store outlets by out-of-state mail-order sellers. Nelson v. Sears,
Roebuck & Co., supra; Nelson v. Montgomery Ward, 312 U.S. 373 (1941). In
Scripto, Inc. v. Carson, 362 U.S. 207 (1960), the necessary basis was found in
the case of a Georgia-based company that had "10 wholesalers, jobbers, or
`salesmen' conducting continuous local solicitation in Florida and forwarding the
resulting orders from that State to Atlanta for shipment of the ordered goods,"
154
id., at 211, although maintaining no office or place of business in Florida, and
having no property or regular full-time employees there.
Standard Pressed Steel Co. v. Washington Rev. Dept., 419 U.S. 560 (1975), is
also instructive. That case involved a direct tax upon the gross receipts of a
foreign corporation resulting from sales to a State of Washington customer, and
not imposition of use-tax-collection duties. Although "a vice in a tax on gross
receipts of a corporation doing an interstate business is the risk of multiple
taxation . . .," id., at 563, see Monamotor Oil Co. v. Johnson, supra, a concern
not present when only imposition of use-tax-collection duty is involved, Standard
Pressed Steel held that maintenance in the taxing State of a single employee, an
engineer whose office was in his Washington home and whose primary
responsibility was to consult with the Washington-based customer regarding its
anticipated needs for the out-of-state supplier's product, established a sufficient
relation to activities within the State producing the gross receipts as to support
imposition of the tax. It is particularly significant for our purposes in this case
that the Court characterized as "frivolous" the argument that the seller's in-state
activities were so thin and inconsequential that the tax had no reasonable
relation to the protection and benefits conferred by the taxing State, for the
employee "made possible the realization and continuance of valuable contractual
relations between [the seller and its Washington customer]." [430 U.S. 551, 558]
419 U.S., at 562 . Other fairly apportioned, non-discriminatory direct taxes have
also been sustained when the taxes have been shown to be fairly related to the
services provided the out-of-state seller by the taxing State. Complete Auto
Transit, Inc. v. Brady, ante, p. 274; General Motors Corp. v. Washington, 377
U.S. 436 (1964); Northwestern Cement Co. v. Minnesota, 358 U.S. 450 (1959);
Memphis Gas Co. v. Stone, 335 U.S. 80 (1948); Wisconsin v. J. C. Penney Co.,
311 U.S. 435, 444 (1940).
The case for the validity of the imposition upon the out-of-state seller enjoying
such services of a duty to collect a use tax is even stronger. See Norton Co. v.
Illinois Rev. Dept., 340 U.S. 534, 537 (1951). The out-of-state seller runs no risk
of double taxation. The consumer's identification as a resident of the taxing State
is self-evident. The out-of-state seller becomes liable for the tax only by failing or
refusing to collect the tax from that resident consumer. Thus, the sole burden
imposed upon the out-of-state seller by statutes like 6203 and 6204 is the
administrative one of collecting it. Compare McLeod v. Dilworth Co., 322 U.S.
327 (1944) (sales tax), with Scripto, Inc. v. Carson, supra, and General Trading
Co. v. Tax Comm'n, supra. See also American Oil Co. v. Neill, 380 U.S. 451, 454 -
455 (1965).
Two decisions that have held fact patterns deficient to establish the necessary
nexus to impose the duty to collect the use tax highlight the significance of the
inquiry whether the out-of-state seller enjoys services of the taxing State. Miller
Bros. Co. v. Maryland, 347 U.S. 340 (1954), struck down a Maryland assessment
against a Delaware store near the border between the two States. The store had
made over-the-counter sales to Maryland residents and occasionally shipped or
155
delivered goods by truck into that State. The store advertised in Delaware by
newspaper and radio, and some of these advertisements reached Maryland
residents. These advertisements were sometimes supplemented with [430 U.S.
551, 559] "flyers" mailed to customers, some of whom lived in Maryland. The
Court concluded that Maryland could not satisfy the due process requirement. In
addition to the almost total lack of contacts between Maryland and the Delaware
store - Marylanders went to Delaware to make purchases, the seller did not go to
Maryland to make sales - the seller obviously could not know whether the goods
sold over the counter in Delaware were transported to Maryland prior to their
use. See Scripto, Inc. v. Carson, supra, at 212.
National Bellas Hess, Inc. v. Illinois Rev. Dept., 386 U.S. 753 (1967), presented
the question in the case of an out-of-state seller whose only connection with
customers in the taxing State was by common carrier or mail. Illinois subjected
appellant Bellas Hess, a national mail-order house centered in Missouri, to use
tax liability based upon mail-order sales to customers in that State. Bellas Hess
owned no tangible property in Illinois, had no sales outlets, representatives,
telephone listings, or solicitors in that State, and did not advertise there by radio,
television, billboards, or newspapers. It communicated with potential customers
by mailing catalogues throughout the United States, including Illinois, twice a
year and occasionally supplemented this effort by mailing out "flyers." All orders
for merchandise were mailed to Bellas Hess' Missouri plant, and the goods were
sent to customers by mail or common carrier. Bellas Hess held that,
constitutionally, the basis for the requisite nexus was not to be found solely in
Bellas Hess' mail-order activities in the State. The Court's opinion carefully
underscored, however, the "sharp distinction . . . between mail order sellers with
retail outlets, solicitors, or property within [the taxing] State, and those [like
Bellas Hess] who do no more than communicate with customers in the State by
mail or common carrier as part of a general interstate business." Id., at 758.
Appellant Society clearly falls into the former category. [430 U.S. 551, 560]
II
The Society argues, however, that its contacts with customers in California were
related solely to its mail-order sales by means of common carrier or the mail,
that the two offices played no part in that activity, and that therefore this case is
controlled by Bellas Hess. 6 The Society argues in other words that there must
exist a nexus or relationship not only between the seller and the taxing State,
but also between the activity of the seller sought to be taxed and the seller's
activity within the State. We disagree. However fatal to a direct tax a "showing
that particular transactions are dissociated from the local business . . .," Norton
Co. v. Illinois Rev. Dept., supra, at 537; American Oil Co. v. Neill, supra;
Connecticut Gen. Life Ins. Co. v. Johnson, 303 U.S. 77 (1938), such dissociation
does not bar the imposition of the use-tax-collection duty. 7 It is true that Sears,
Roebuck and Montgomery Ward, relied on by appellant, involved fact patterns
that included proof of assistance by local operations of the mail-order business.
Sears maintained 12 retail stores in the taxing State and was qualified to do
156
business there. Sears' agents in the States, although not directly involved in the
solicitation of the mail-order sales, at times assisted in processing such orders.
The holding that Sears could not avoid use-tax liability did not, however, turn on
that fact. The holding, rather, was that the fact Sears' business was
departmentalized - the mail-order and retail stores operations were separately
administered - did not preclude the finding of sufficient nexus. Montgomery
Ward, a companion case to Sears, [430 U.S. 551, 561] Roebuck, presented a
somewhat similar fact pattern. There the local retail stores engaged in local
advertising of the mail-order merchandise. But here again we disagree that this
fact was crucial to the Court's decision. Even if, as the Society argues, the fact
patterns of Sears and Montgomery Ward may be regarded as the equivalent of
the in-state solicitation by local agents found sufficient to supply the nexus for
imposition of the use-tax-collection duty in Felt & Tarrant Co. v. Gallagher, 306
U.S. 62 (1939), see also Scripto, Inc. v. Carson, 362 U.S. 207 (1960) (local
solicitation by commission "salesmen"); General Trading Co. v. Tax Comm'n, 322
U.S. 335 (1944) (traveling salesmen sent into taxing State); Bowman v.
Continental Oil Co., 256 U.S. 642 (1921) (local distributor and dealer); and
Monamotor Oil Co. v. Johnson, 292 U.S. 86 (1934) (local refining, storage, and
distributing facilities), the relevant constitutional test to establish the requisite
nexus for requiring an out-of-state seller to collect and pay the use tax is not
whether the duty to collect the use tax relates to the seller's activities carried on
within the State, but simply whether the facts demonstrate "some definite link,
some minimum connection, between [the State and] the person . . . it seeks to
tax." Miller Bros. v. Maryland, 347 U.S., at 344 -345. (Emphasis added.) Here the
Society's two offices, without regard to the nature of their activities, had the
advantage of the same municipal services - fire and police protection, and the
like - as they would have had if their activities, as in Sears and Montgomery
Ward, included assistance to the mail-order operations that generated the use
taxes.
The Society's reliance on Miller Bros. Co. v. Maryland, supra, is also misplaced.
The sales with respect to which Maryland sought to impose upon Miller the duty
to collect its tax were of goods sold to residents of Maryland at Miller's Delaware
store, although Miller made occasional deliveries in Maryland. Moreover, the lack
of certainty that the merchandise sold over the counter to Maryland customers in
[430 U.S. 551, 562] Delaware was transported to Maryland prior to its use militated
against a finding of adequate nexus with respect to those purchases. Scripto,
Inc. v. Carson, supra, at 212-213. The relational defect between the taxing State
and the person or property sought to be taxed; therefore obviated any relevance
of a relationship between the State and the out-of-state retailer.
We conclude that the Society's continuous presence in California in offices that
solicit advertising for its magazine provides a sufficient nexus to justify that
State's imposition upon the Society of the duty to act as collector of the use tax.
157
Affirmed.
THE CHIEF JUSTICE and MR. JUSTICE REHNQUIST took no part in the
consideration or decision of this case.
Footnotes
[ Footnote 1 ] The relevant sections of the Cal. Rev. & Tax. Code provide: 6203 (West Supp. 1976).
"Except as provided by Sections 6292 and 6293 every retailer engaged in business in this state and making
sales of tangible personal property for storage, use, or other consumption in this state, not exempted under
Chapters 3.5 or 4 of this part, shall, at the time of making the sales or, if the storage, use, or other
consumption of the tangible personal property is not then taxable hereunder, at the time the storage, use, or
other consumption becomes taxable, collect the tax from the purchaser and give to the purchaser a receipt
therefor in the manner and form prescribed by the board. . . . . . "`Retailer engaged in business in this state'
as used in this and the preceding section means and includes any of the following: "(a) Any retailer
maintaining, occupying, or using, permanently or temporarily, directly or indirectly, or through a
subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or
place, warehouse or storage place or other place of business." 6204 (West 1970). "The tax required to be
collected by the retailer and any amount unreturned to the customer which is not tax but was collected from
the customer under the representation by the retailer that it was tax constitutes debts owed by the retailer to
this state." The magazine is exempted from sales and use taxes as a "periodical." 6362.
[ Footnote 2 ] The offices are in San Francisco and Los Angeles and have been maintained since 1956.
Each office was originally staffed with one salesman and one secretary, but each office has since increased
its personnel to four. The basic function of the offices is to solicit advertising for the magazine, 16 Cal. 3d,
at 640, 547 P.2d, at 459-460. Sales of advertising copy by the two offices aggregate about $1 million
annually. Tr. of Oral Arg. 6. During a nine-month period from August 1, 1963, to May 6, 1964, appellant
Society also used these offices to make over-the-counter sales, upon which sales taxes were paid, of maps,
atlases, globes, and books totaling $679.20 for the San Francisco office and $2,161.85 for the Los Angeles
office. The California Supreme Court found it unnecessary to consider these sales in determining whether
sufficient nexus was shown since the Society's office activities sufficed in its view adequately to prove
sufficient nexus. 16 Cal. 3d, at 641 n. 6, 547 P.2d, at 460 n. 6. We are of the same view.
[ Footnote 3 ] Although appellant's potential liability exceeds $180,000 and covers a nine-year period, ibid.,
the assessment by the California Board of Equalization for the years involved in this case is $3,838.76,
including interest and penalties. Appellant paid the assessment under protest and sued for its refund in State
Superior Court and recovered a judgment. The California Court of Appeal, First Appellate District,
affirmed. 121 Cal. Rptr. 77 (1975). The California Supreme Court reversed and sustained the assessment.
16 Cal. 3d 637, 547 P.2d 458 (1976).
[ Footnote 4 ] Henneford obviated the necessity for legislation sought by the National Association of State
Tax Administrators in the 73d through 76th Congresses to permit States to extend their sales taxes to
certain interstate transactions. See H. R. Rep. No. 565, 89th Cong., 1st Sess., 613-615 (1965). Some 45
States and the District of Columbia require out-of-state sellers to collect use taxes on sales made to state
residents. Brief for Direct Mail/Marketing Assn. as Amicus Curiae 4.
[ Footnote 5 ] Appellant Society argues that under the California Supreme Court's "slightest presence" test
6203 and 6204 could be applied even if the Society maintained no offices in the State but merely owned a
parking lot. But the sections were applied to appellant only because it maintained the offices. Appellant
was therefore only subject to the law because it fell within "retailer engaged in business in this state" as
defined in 6203 (a).
[ Footnote 6 ] Appellant conceded at oral argument that Bellas Hess would have required reversal in the
absence of the proof of maintenance of the two offices. Tr. of Oral Arg. 29, 34-35.
[ Footnote 7 ] Contrary to appellant's argument, Brief for Appellant 6, the fact that it has not registered to
do business in California is not determinative against the validity of the application of 6203 and 6204. See
General Trading Co. v. Tax Comm'n, 322 U.S. 335 (1944); Felt & Tarrant Co. v. Gallagher, 306 U.S. 62
(1939).
MR. JUSTICE BLACKMUN, concurring in the result.
158
I am not at all convinced that the Court's facile distinction of Miller Bros. Co. v. Maryland, 347 U.S. 340
(1954), on the ground that in that case "the seller obviously could not know whether the goods sold over the
counter in Delaware were transported to Maryland prior to their use," ante, at 559, and that there was a
"lack of certainty that the merchandise sold over the counter to Maryland customers in Delaware was
transported to Maryland prior to its use," ante, at 561 and this page, is a proper and acceptable distinction. I
thought that one of the factual difficulties of Miller, in the focus of the present case, was the Delaware
seller's own delivery of goods to Maryland, some by common carrier and some by the seller's own truck.
347 U.S., at 341 -342. Indeed, Miller Bros. stipulated that during the taxable period, it delivered or paid a
common carrier to deliver $9,500 worth of merchandise to customers in Maryland ($8,000 through use of
its truck, $1,500 by common carrier). Id., at 350-351, n. 5. Miller Bros. exhibited no uncertainty as to the
destination of those goods. [430 U.S. 551, 563]
The Court appears to find an additional distinction in the fact that the goods in Miller Bros. were "sold to
residents of Maryland at Miller's Delaware store," ante, at 561. If the Court intends thereby to rest a
distinction on the fact that the sales were made out of State, I am at a loss to follow its reasoning. By
definition, a use tax is imposed only on sales made out of State. In short, Miller Bros. is not so easily
explained away.
Thus, it seems to me, we have another instance where this Court's past decisions in the tax area are not fully
consistent. See Complete Auto Transit, Inc. v. Brady, ante, p. 274, and its development from its immediate
predecessor, Colonial Pipeline Co. v. Traigle, 421 U.S. 100, 101 (1975).
In any event, I find myself in accord with the Court's result in the present case. If, as I suspect, the result
today is not fully consistent with the result in Miller, I am content to let Miller go. [430 U.S. 551, 564]
159
SUPREME COURT OF THE UNITED STATES
No. 91-194
QUILL CORPORATION, PETITIONER v. NORTH DAKOTA by and

through its TAX COMMIS SIONER, HEIDI HEITKAMP
ON WRIT OF CERTIORARI TO THE SUPREME COURT OF NORTH DAKOTA
[May 26, 1992]
Justice Stevens delivered the opinion of the Court.
In this case the Supreme Court of North Dakota declined to
follow Bellas Hess because "the tremendous social, economic,
commercial, and legal innovations" of the past quarter century
have rendered its holding "obsole[te]." 470 N. W. 2d 203, 208
(1991). Having granted certiorari, 502 U. S. ___, we must either
reverse the State Supreme Court or overrule Bellas Hess.
While we agree with much of the State Court's reasoning, we
take the former course.
Quill is a Delaware corporation with offices and warehouses in
Illinois, California, and Georgia. None of its employees work or
reside in North Dakota and its ownership of tangible property in
that State is either insignificant or nonexistent. [n.1] Quill sells
office equipment and supplies; it solicits business through
catalogs and flyers, advertisements in national periodicals, and
telephone calls. Its annual national sales exceed $200,000,000,
of which almost $1,000,000 are made to about 3,000
customers in North Dakota. It is the sixth largest vendor of
office supplies in the State. It delivers all of its merchandise to
its North Dakota customers by mail or common carrier from out
of state locations.
As a corollary to its sales tax, North Dakota imposes a use tax
upon property purchased for storage, use or consumption
within the State. North Dakota requires every "retailer
maintaining a place of business in" the State to collect the tax
from the consumer and remit it to the State. N. D. Cent. Code §
57-40.2-07 (Supp. 1991). In 1987 North Dakota amended the
statutory definition of the term "retailer" to include "every
person who engages in regular or systematic solicitation of a
consumer market in th[e] state." § 57-40.2-01(6). State
regulations in turn define"regular or systematic solicitation" to
mean three or more advertisements within a 12 month period.
N. D. Admin. Code § 81-04.1-01-03.1 (1988). Thus, since
1987, mail order companies that engage in such solicitation
have been subject to the tax even if they maintain no property
or personnel in North Dakota.
Quill has taken the position that North Dakota does not have
the power to compel it to collect a use tax from its North Dakota
customers. Consequently, the State, through its Tax
Commissioner, filed this action to require Quill to pay taxes (as
160
well as interest and penalties) on all such sales made after July
1, 1987. The trial court ruled in Quill's favor, finding the case
indistinguishable from Bellas Hess; specifically, it found that
because the State had not shown that it had spent tax
revenues for the benefit of the mail order business, there was
no "nexus to allow the state to define retailer in the manner it
chose." App. to Pet. for Cert. A41.
The North Dakota Supreme Court reversed, concluding that
"wholesale changes" in both the economy and the law made it
inappropriate to follow Bellas Hess today. 470 N. W. 2d, at 213.
The principal economic change noted by the court was the
remarkable growth of the mail order business "from a relatively
inconsequential market niche" in 1967 to a "goliath" with annual
sales that reached "the staggering figure of $183.3 billion in
1989." Id., at 208, 209. Moreover, the court observed,
advances in computer technology greatly eased the burden of
compliance with a " `welter of complicated obligations' "
imposed by state and local taxing authorities. Id., at 215
(quoting Bellas Hess, 386 U. S., at 759-760).
Equally important, in the court's view, were the changes in the
"legal landscape." With respect to the Commerce Clause, the
court emphasized that Complete Auto Transit, Inc. v. Brady,
430 U.S. 274 (1977), rejected the line of cases holding that the
direct taxation of interstate commerce was impermissible and
adopted instead a "consistent andrational method of inquiry
[that focused on] the practical effect of [the] challenged tax."
Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445 U.S. 425,
443 (1980). This and subsequent rulings, the court maintained,
indicated that the Commerce Clause no longer mandated the
sort of physical presence nexus suggested in Bellas Hess.
Similarly, with respect to the Due Process Clause, the North
Dakota court observed that cases following Bellas Hess had
not construed "minimum contacts" to require physical presence
within a State as a prerequisite to the legitimate exercise of
state power. The State Court then concluded that "the Due
Process requirement of a `minimal connection' to establish
nexus is encompassed within the Complete Auto test" and that
the relevant inquiry under the latter test was whether "the state
has provided some protection, opportunities, or benefit for
which it can expect a return." 470 N. W. 2d, at 216.
Turning to the case at hand, the State Court emphasized that
North Dakota had created "an economic climate that fosters
demand for" Quill's products, maintained a legal infrastructure
that protected that market, and disposed of 24 tons of catalogs
and flyers mailed by Quill into the State every year. Id., at 218-
219. Based on these facts, the court concluded that Quill's
"economic presence" in North Dakota depended on services
and benefits provided by the State and therefore generated "a
constitutionally sufficient nexus to justify imposition of the
purely administrative duty of collecting and remitting the use
tax." Id., at 219. [n.2]
161
As in a number of other cases involving the application of state
taxing statutes to out of state sellers, our holding in Bellas Hess
relied on both the Due Process Clause and the Commerce
Clause. Although the "two claims are closely related," Bellas
Hess, 386 U. S., at 756, the clauses pose distinct limits on the
taxing powers of the States. Accordingly, while a State may,
consistent with the Due Process Clause, have the authority to
tax a particular taxpayer, imposition of the tax may nonetheless
violate the Commerce Clause. See, e. g., Tyler Pipe Industries,
Inc. v. Washington State Dept. of Revenue, 483 U.S. 232
(1987).
The two constitutional requirements differ fundamentally, in
several ways. As discussed at greater length below, see infra,
at Part IV, the Due Process Clause and the Commerce Clause
reflect different constitutional concerns. Moreover, while
Congress has plenary power to regulate commerce among the
States and thus may authorize state actions that burden
interstate commerce, see International Shoe Co. v.
Washington, 326 U.S. 310, 315 (1945), it does not similarly
have the power to authorize violations of the Due Process
Clause.
Thus, although we have not always been precise in
distinguishing between the two, the Due Process Clause and
the Commerce Clause are analytically distinct.
" `Due process' and `commerce clause'
conceptions are not always sharply separable in
dealing with these problems. . . . To some extent
they overlap. If there is a want of due process to
sustain the tax, by that fact alone any burden the
tax imposes on the commerce among the states
becomes `undue.' But, though overlapping, the two
conceptions are not identical. There may be more
than sufficient factual connections, with economic
and legal effects, between the transaction and the
taxing state to sustain the tax as against due
process objections. Yet it may fall because of its
burdening effect upon the commerce. And,
although the two notions cannot always be
separated, clarity of consideration and of decision
would be promoted if the two issues are
approached, where they are presented, at least
tentatively as if they were separate and distinct,
not intermingled ones." International Harvester Co.
v. Department of Treasury, 322 U.S. 340, 353
(1944) (Rutledge, J., concurring in part and
dissenting in part).
Heeding Justice Rutledge's counsel, we consider each
constitutional limit in turn.
The Due Process Clause "requires some definite link, some
minimum connection, between a state and the person, property
or transaction it seeks to tax," Miller Bros. Co. v. Maryland, 347
162
U.S. 340, 344-345 (1954), and that the "income attributed to
the State for tax purposes must be rationally related to `values
connected with the taxing State.' " Moorman Mfg. Co. v. Bair,
437 U.S. 267, 273 (1978) (citation omitted). Here, we are
concerned primarily with the first of these requirements. Prior to
Bellas Hess, we had held that that requirement was satisfied in
a variety of circumstances involving use taxes. For example,
the presence of sales personnel in the State, [n.3] or the
maintenance of local retail stores in the State, [n.4] justified the
exercise of that power because the seller's local activities were
"plainly accorded the protection and services of the taxing
State." Bellas Hess, 386 U. S., at 757. The furthest extension
of that power was recognized in Scripto, Inc. v. Carson, 362
U.S. 207 (1960), in which the Court upheld a use tax despite
the fact that all of the seller's in state solicitation was performed
by independent contractors. These cases all involved some
sort of physical presence within the State, and in Bellas Hess
the Court suggested that such presence was not only sufficient
for jurisdiction under the Due Process Clause, but also
necessary. We expressly declined to obliterate the "sharp
distinction . . . between mail order sellers with retail outlets,
solicitors, or property within a State, and those who do no more
than communicate with customers in the State by mail or
common carrier as a part of a general interstate business." 386
U. S., at 758.
Our due process jurisprudence has evolved substantially in the
25 years since Bellas Hess, particularly in the area of judicial
jurisdiction. Building on the seminal case of International Shoe
Co. v. Washington, 326 U.S. 310 (1945), we have framed the
relevant inquiry as whether a defendant had minimum contacts
with the jurisdiction "such that the maintenance of the suit does
not offend `traditional notions of fair play and substantial
justice.' " Id., at 316 (quoting Milliken v. Meyer, 311 U.S. 457,
463 (1940)). In that spirit, we have abandoned more formalistic
tests that focused on a defendant's "presence" within a State in
favor of a more flexible inquiry into whether a defendant's
contacts with the forum made it reasonable, in the context of
our federal system of government, to require it to defend the
suit in that State. In Shaffer v. Heitner, 433 U.S. 186, 212
(1977), the Court extended the flexible approach that
International Shoe had prescribed for purposes of in personam
jurisdiction to in rem jurisdiction, concluding that "all assertions
of state court jurisdiction must be evaluated according to the
standards set forth in International Shoe and its progeny."
Applying these principles, we have held that if a foreign
corporation purposefully avails itself of the benefits of an
economic market in the forum State, it may subject itself to the
State's in personam jurisdiction even if it has no physical
presence in the State. As we explained in Burger King Corp. v.
Rudzewicz, 471 U.S. 462 (1985):
163
"Jurisdiction in these circumstances may not be
avoided merely because the defendant did not
physically enter the forum State. Although
territorial presence frequently will enhance a
potential defendant's affiliation with a State and
reinforce the reasonable foreseeability of suit
there, it is an inescapable fact of modern
commercial life that a substantial amount of
business is transacted solely by mail and wire
communications across state lines, thus obviating
the need for physical presence within a State in
which business is conducted. So long as a
commercial actor's efforts are `purposefully
directed' toward residents of another State, we
have consistently rejected the notion that an
absence of physical contacts can defeat personal
jurisdiction there." Id., at 476 (emphasis in
original).
Comparable reasoning justifies the imposition of the collection
duty on a mail order house that is engaged in continuous and
widespread solicitation of business within a State. Such a
corporation clearly has "fair warning that [its] activity may
subject [it] to the jurisdiction of a foreign sovereign." Shaffer v.
Heitner, 433 U. S., at 218 (Stevens, J., concurring in judgment).
In "modern commercial life" it matters little that such solicitation
is accomplished by a deluge of catalogs rather than a phalanx
of drummers: the requirements of due process are met
irrespective of a corporation's lack of physical presence in the
taxing State. Thus, to the extent that our decisions have
indicated that the Due Process Clause requires physical
presence in a State for the imposition of duty to collect a use
tax, we overrule those holdings as superseded by
developments in the law of due process.
In this case, there is no question that Quill has purposefully
directed its activities at North Dakota residents, that the
magnitude of those contacts are more than sufficient for due
process purposes, and that the use tax is related to the benefits
Quill receives from access to the State. We therefore agree
with the North Dakota Supreme Court's conclusion that the Due
Process Clause does not bar enforcement of that State's use
tax against Quill.
Article I, § 8, cl. 3 of the Constitution expressly authorizes
Congress to "regulate Commerce with foreign Nations, and
among the several States." It says nothing about the protection
of interstate commerce in the absence of any action by
Congress. Nevertheless, as Justice Johnson suggested in his
concurring opinion in Gibbons v. Ogden, 9 Wheat. 1, 231-232,
239 (1824), the Commerce Clause is more than an affirmative
grant of power; it has a negative sweep as well. The clause, in
Justice Stone's phrasing, "by its own force" prohibits certain
state actions that interfere with interstate commerce. South
164
Carolina State Highway Dept. v. Barnwell Bros., Inc., 303 U.S.
177, 185 (1938).
Our interpretation of the "negative" or "dormant" Commerce
Clause has evolved substantially over the years, particularly as
that clause concerns limitations on state taxation powers. See
generally, P. Hartman, Federal Limitations on State and Local
Taxation §§ 2:9-2:17 (1981). Our early cases, beginning with
Brown v. Maryland, 12 Wheat. 419 (1827), swept broadly, and
in Leloup v. Port of Mobile, 127 U.S. 640, 648 (1888), we
declared that "no State has the right to lay a tax on interstate
commerce in any form." We later narrowed that rule and
distinguished between direct burdens on interstate commerce,
which were prohibited, and indirect burdens, which generally
were not. See, e. g., Sanford v. Poe, 69 F. 546 (CA6 1895),
aff'd sub nom. Adams Express Co. v. Ohio State Auditor, 165
U.S. 194, 220 (1897). Western Live Stock v. Bureau of
Revenue, 303 U.S. 250, 256-258 (1938), and subsequent
decisions rejected this formal, categorical analysis and adopted
a "multiple taxation doctrine" that focused not on whether a tax
was "direct" or "indirect" but rather on whether a tax subjected
interstate commerce to a risk of multiple taxation. However, in
Freeman v. Hewit, 329 U.S. 249, 256 (1946), we embraced
again the formal distinction between direct and indirect
taxation, invalidating Indiana's imposition of a gross receipts
tax on a particular transaction because that application would
"impos[e] a direct tax on interstate sales." Most recently, in
Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 285 (1977),
we renounced the Freeman approach as "attaching
constitutional significance to a semantic difference." We
expressly overruled one of Freeman's progeny, Spector Motor
Service, Inc. v. O'Connor, 340 U.S. 602 (1951), which held that
a tax on "the privilege of doing interstate business" was
unconstitutional, while recognizing that a differently
denominated tax with the same economic effect would not be
unconstitutional. Spector, as we observed in Railway Express
Agency, Inc. v. Virginia, 358 U.S. 434, 441 (1959), created a
situation in which "magic words or labels" could "disable an
otherwise constitutional levy." Complete Auto emphasized the
importance of looking past "the formal language of the tax
statute [to] its practical effect," Complete Auto, 430 U. S., at
279, and set forth a four part test that continues to govern the
validity of state taxes under the Commerce Clause. [n.5]
Bellas Hess was decided in 1967, in the middle of this latest
rally between formalism and pragmatism. Contrary to the
suggestion of the North Dakota Supreme Court, this timing
does not mean that Complete Auto rendered Bellas Hess
"obsolete." Complete Auto rejected Freeman and Spector's
formal distinction between "direct" and "indirect"taxes on
interstate commerce because that formalism allowed the
validity of statutes to hinge on "legal terminol ogy,"
"draftsmanship and phraseology." 430 U. S., at 281. Bellas
165
Hess did not rely on any such labeling of taxes and therefore
did not automatically fall with Freeman and its progeny.
While contemporary Commerce Clause jurisprudence might not
dictate the same result were the issue to arise for the first time
today, Bellas Hess is not inconsistent with Complete Auto and
our recent cases. Under Complete Auto's four part test, we will
sustain a tax against a Commerce Clause challenge so long as
the "tax [1] is applied to an activity with a substantial nexus with
the taxing State, [2] is fairly apportioned, [3] does not
discriminate against interstate commerce, and [4] is fairly
related to the services provided by the State." 430 U. S., at
279. Bellas Hess concerns the first of these tests and stands
for the proposition that a vendor whose only contacts with the
taxing State are by mail or common carrier lacks the
"substantial nexus" required by the Commerce Clause.
Thus, three weeks after Complete Auto was handed down, we
cited Bellas Hess for this proposition and discussed the case at
some length. In National Geographic Society v. California Bd.
of Equalization, 430 U.S. 551, 559 (1977), we affirmed the
continuing vitality of Bellas Hess' "sharp distinction . . . between
mail order sellers with [a physical presence in the taxing] State
and those . . . who do no more than communicate with
customers in the State by mail or common carrier as part of a
general interstate business." We have continued to cite Bellas
Hess with approval ever since. For example, in Goldberg v.
Sweet, 488 U.S. 252, 263 (1989), we expressed "doubt that
termination of an interstate telephone call, by itself, provides a
substantial enough nexus for a State to tax a call. See National
Bellas Hess . . . (receipt of mail provides insufficient nexus)."
See also D. H. Holmes Co. v. McNamara, 486 U.S. 24, 33
(1988); Commonwealth Edison Co. v. Montana, 453 U.S. 609,
626 (1981); Mobil Oil Corp. v. Commissioner of Taxes, 445 U.
S., at 437; National Geographic Society, 430 U. S., at 559. For
these reasons, we disagree with the State Supreme Court's
conclusion that our decision in Complete Auto undercut the
Bellas Hess rule.
The State of North Dakota relies less on Complete Auto and
more on the evolution of our due process jurisprudence. The
State contends that the nexus requirements imposed by the
Due Process and Commerce Clauses are equivalent and that
if, as we concluded above, a mail order house that lacks a
physical presence in the taxing State nonetheless satisfies the
due process "minimum contacts" test, then that corporation
also meets the Commerce Clause "substantial nexus" test. We
disagree. Despite the similarity in phrasing, the nexus
requirements of the Due Process and Commerce Clauses are
not identical. The two standards are animated by different
constitutional concerns and policies.
Due process centrally concerns the fundamental fairness of
governmental activity. Thus, at the most general level, the due
process nexus analysis requires that we ask whether an
166
individual's connections with a State are substantial enough to
legitimate the State's exercise of power over him. We have,
therefore, often identified "notice" or "fair warning" as the
analytic touchstone of due process nexus analysis. In contrast,
the Commerce Clause, and its nexus requirement, are
informed not so much by concerns about fairness for the
individual defendant as by structural concerns about the effects
of state regulation on the national economy. Under the Articles
of Confederation, State taxes and duties hindered and
suppressed interstate commerce; the Framers intended the
Commerce Clause as a cure for these structural ills. See
generally The Federalist Nos. 7, 11 (A. Hamilton). It is in this
light that we have interpreted the negative implication of the
Commerce Clause. Accordingly, we have ruled that that Clause
prohibits discrimination against interstate commerce, see,e. g.,
Philadelphia v. New Jersey, 437 U.S. 617 (1978), and bars
state regulations that unduly burden interstate commerce, see,
e. g., Kassel v. Consolidated Freightways Corp. of Del., 450
U.S. 662 (1981).
The Complete Auto analysis reflects these concerns about the
national economy. The second and third parts of that analysis,
which require fair apportionment and non discrimination,
prohibit taxes that pass an unfair share of the tax burden onto
interstate commerce. The first and fourth prongs, which require
a substantial nexus and a relationship between the tax and
State provided services, limit the reach of State taxing authority
so as to ensure that State taxation does not unduly burden
interstate commerce. [n.6] Thus, the "substantial nexus"
requirement is not, like due process' "minimum contacts"
requirement, a proxy for notice, but rather a means for limiting
state burdens on interstate commerce. Accordingly, contrary to
the State's suggestion, a corporation may have the "minimum
contacts" with a taxing State as required by the Due Process
Clause, and yet lack the "substantial nexus" with that State as
required by the Commerce Clause. [n.7]
The State Supreme Court reviewed our recent Commerce
Clause decisions and concluded that those rulings signalled a
"retreat from the formalistic constrictions of a stringent physical
presence test in favor of a more flexible substantive approach"
and thus supported its decision not to apply Bellas Hess. 470
N. W. 2d, at 214 (citing Standard Pressed Steel Co. v.
Department of Revenue of Wash., 419 U.S. 560 (1975), and
Tyler Pipe Industries, Inc. v. Washington State Dept. of
Revenue, 483 U.S. 232 (1987)). Although we agree with the
State Court's assessment of the evolution of our cases, we do
not share its conclusion that this evolution indicates that the
Commerce Clause ruling of Bellas Hess is no longer good law.
First, as the State Court itself noted, 470 N. W. 2d, at 214, all of
these cases involved taxpayers who had a physical presence in
the taxing State and therefore do not directly conflict with the
rule of Bellas Hess or compel that it be overruled. Second, and
167
more importantly, although our Commerce Clause
jurisprudence now favors more flexible balancing analyses, we
have never intimated a desire to reject all established "bright
line" tests. Although we have not, in our review of other types
of taxes, articulated the same physical presence requirement
that Bellas Hess established for sales and use taxes, that
silence does not imply repudiation of the Bellas Hess rule.
Complete Auto, it is true, renounced Freeman and its progeny
as "formalistic." But not all formalism is alike. Spector's formal
distinction between taxes on the "privilegeof doing business"
and all other taxes served no purpose within our Commerce
Clause jurisprudence, but stood "only as a trap for the unwary
draftsman." Complete Auto, 430 U. S., at 279. In contrast, the
bright line rule of Bellas Hess furthers the ends of the dormant
Commerce Clause. Undue burdens on interstate commerce
may be avoided not only by a case by case evaluation of the
actual burdens imposed by particular regulations or taxes, but
also, in some situations, by the demarcation of a discrete realm
of commercial activity that is free from interstate taxation.
Bellas Hess followed the latter approach and created a safe
harbor for vendors "whose only connection with customers in
the [taxing] State is by common carrier or the United States
mail." Under Bellas Hess, such vendors are free from state
imposed duties to collect sales and use taxes. [n.8]
Like other bright line tests, the Bellas Hess rule appears
artificial at its edges: whether or not a State may compel a
vendor to collect a sales or use tax may turn on the presence in
the taxing State of a small sales force, plant, or office. Cf.
National Geographic Society v. California Bd. of Equalization,
430 U.S. 551 (1977); Scripto, Inc. v. Carson, 362 U.S. 207
(1960). This artificiality, however, is more than offset by the
benefits of a clear rule. Such a rule firmly establishes the
boundaries of legitimate state authority to impose a duty to
collect sales and use taxes and reduces litigation concerning
those taxes. This benefitis important, for as we have so
frequently noted, our law in this area is something of a
"quagmire" and the "application of constitutional principles to
specific state statutes leaves much room for controversy and
confusion and little in the way of precise guides to the States in
the exercise of their indispensable power of taxation."
Northwestern States Portland Cement Co. v. Minnesota, 358
U.S. 450, 457-458 (1959).
Moreover, a bright line rule in the area of sales and use taxes
also encourages settled expectations and, in doing so, fosters
investment by businesses and individuals. [n.9] Indeed, it is not
unlikely that the mail order industry's dramatic growth over the
last quarter century is due in part to the bright line exemption
from state taxation created in Bellas Hess.
Notwithstanding the benefits of bright line tests, we have, in
some situations, decided to replace such tests with more
contextual balancing inquiries. For example, in Arkansas
168
Electric Cooperative Corp. v. Arkansas Pub. Serv. Comm'n,
461 U.S. 375 (1983), we reconsidered a bright line test set forth
in Public Utilities Comm'n of R. I. v. AttleboroSteam & Electric
Co., 273 U.S. 83 (1927). Attleboro distinguished between state
regulation of wholesale salesof electricity, which was
constitutional as an "indirect" regulation of interstate
commerce, and state regulation of retail sales of electricity,
which was unconstitutional as a "direct regulation" of
commerce. In Arkansas Electric, we considered whether to
"follow the mechanical test set out in Attleboro, or the balance
of interests test applied in our Commerce Clause cases."
Arkansas Electric Cooperative Corp., 461 U. S., at 390-391.
We first observed that "the principle of stare decisis counsels
us, here as elsewhere, not lightly to set aside specific guidance
of the sort we find in Attleboro." Id., at 391. In deciding to reject
the Attleboro analysis, we were influenced by the fact that the
"mechanical test" was "anachronistic," that the Court had rarely
relied on the test, and that we could "see no strong reliance
interests" that would be upset by the rejection of that test. Id.,
at 391-392. None of those factors obtains in this case. First, the
Attleboro rule was "anachronistic" because it relied on formal
distinctions between "direct" and "indirect" regulation (and on
the regulatory counterparts of our Freeman line of cases); as
discussed above, Bellas Hess turned on a different logic and
thus remained sound after the Court repudiated an analogous
distinction in Complete Auto. Second, unlike the Attleboro rule,
we have, in our decisions, frequently relied on the Bellas Hess
rule in the last 25 years, see supra, at 11, and we have never
intimated in our review of sales or use taxes that Bellas Hess
was unsound. Finally, again unlike the Attleboro rule, the Bellas
Hess rule has engendered substantial reliance and has
become part of the basic framework of a sizeable industry. The
"interest in stability and orderly development of the law" that
undergirds the doctrine of stare decisis, see Runyon v.
McCrary, 427 U.S. 160, 190-191 (1976) (Stevens, J.,
concurring), therefore counsels adherence to settled precedent.
In sum, although in our cases subsequent to Bellas Hess and
concerning other types of taxes we have not adopted a similar
bright line, physical presence requirement, our reasoning in
those cases does not compel that we now reject the rule that
Bellas Hess established in the area of sales and use taxes. To
the contrary, the continuing value of a bright line rule in this
area and the doctrine and principles of stare decisis indicate
that the Bellas Hess rule remains good law. For these reasons,
we disagree with the North Dakota Supreme Court's conclusion
that the time has come to renounce the bright line test of Bellas
Hess.
This aspect of our decision is made easier by the fact that the
underlying issue is not only one that Congress may be better
qualified to resolve, [n.10] but also one that Congress has the
ultimate power to resolve. No matter how we evaluate the
169
burdens that use taxes impose on interstate commerce,
Congress remains free to disagree with our conclusions. See
Prudential Insurance Co. v. Benjamin, 328 U.S. 408 (1946).
Indeed, in recent years Congress has considered legislation
that would "overrule" the Bellas Hess rule. [n.11] Its decision not
to take action in this direction may, of course, have been
dictated by respect for our holding in Bellas Hess that the Due
Process Clause prohibits States from imposing such taxes, but
today we have put that problem to rest. Accordingly, Congress
is now free to decide whether, when, and to what extent the
States mayburden interstate mail order concerns with a duty to
collect use taxes.
Indeed, even if we were convinced that Bellas Hess was
inconsistent with our Commerce Clause jurisprudence, "this
very fact [might] giv[e us] pause and counse[l] withholding our
hand, at least for now. Congress has the power to protect
interstate commerce from intolerable or even undesirable
burdens." Commonwealth Edison Co. v. Montana, 453 U.S.
609, 637 (1981) (White, J., concurring). In this situation, it may
be that "the better part of both wisdom and valor is to respect
the judgment of the other branches of the Government." Id., at
638.
The judgment of the Supreme Court of North Dakota is
reversed and the case is remanded for further proceedings not
inconsistent with this opinion.
It is so ordered.
Notes
1
In the trial court, the State argued that because Quill gave its
customers an unconditional 90 day guarantee, it retained title to
the merchandise during the 90 day period after delivery. The
trial court held, however, that title passed to the purchaser
when the merchandise was received. See App. to Pet. for Cert.
A40 A41. The State Supreme Court assumed for the purposes
of its decision that that ruling was correct. 470 N. W. 2d 203,
217, n. 13. The State Supreme Court also noted that Quill
licensed a computer software program to some of its North
Dakota customers that enabled them to check Quill's current
inventories and prices and to place orders directly. Id., at 216-
217. As we shall explain, Quill's interests in the licensed
software does not affect our analysis of the due process issue
and does not comprise the "substantial nexus" required by the
Commerce Clause. See infra n. 8.
2
The court also suggested that, in view of the fact that the
"touchstone of Due Process is fundamental fairness" and that
the "very object" of the Commerce Clause is protection of
interstate business against discriminatory local practices, it
would be ironic to exempt Quill from this burden and thereby
allow it to enjoy a significant competitive advantage over local
retailers. 470 N. W. 2d, at 214-215.
3
Felt & Tarrant Mfg. Co. v. Gallagher, 306 U.S. 62 (1939).
170
4
Nelson v. Sears, Roebuck & Co., 312 U.S. 359 (1941).
5
Under our current Commerce Clause jurisprudence, "with
certain restrictions, interstate commerce may be required to
pay its fair share of state taxes." D. H. Holmes Co. v.
McNamara, 486 U.S. 24, 31 (1988); see also Commonwealth
Edison Co. v. Montana, 453 U.S. 609, 623-624 (1981) ("[i]t was
not the purpose of the commerce clause to relieve those
engaged in interstate commerce from their just share of [the]
state tax burden even though it increases the cost of doing
business") (internal quotation and citation omitted).
6
North Dakota's use tax illustrates well how a state tax might
unduly burden interstate commerce. On its face, North Dakota
law imposes a collection duty on every vendor who advertises
in the State three times in a single year. Thus, absent the
Bellas Hess rule, a publisher who included a subscription card
in three issues of its magazine, a vendor whose radio
advertisements were heard in North Dakota on three
occasions, and a corporation whose telephone sales force
made three calls into the State, all would be subject to the
collection duty. What is more significant, similar obligations
might be imposed by the Nation's 6,000 plus taxing
jurisdictions. See National Bellas Hess, Inc. v. Department of
Revenue of Ill., 386 U.S. 753, 759-760 (1967) (noting that the
"many variations in rates of tax, in allowable exemptions, and in
administrative and record keeping requirements could entangle
[a mail order house] in a virtual welter of complicated
obligations") (footnotes omitted); see also Shaviro, An
Economic and Political Look at Federalism in Taxation, 90
Mich. L. Rev. 895, 925-926 (1992).
7
We have sometimes stated that the "Complete Auto test,
whileresponsive to Commerce Clause dictates, encompasses
as well . . . Due Process requirement[s]." Trinova Corp v.
Michigan Dept. of Treasury, 498 U. S. ___, ___ (1991) (slip op.
12). Although such comments might suggest that every tax that
passes contemporary Commerce Clause analysis is also valid
under the Due Process Clause, it does not follow that the
converse is as well true: a tax may be consistent with Due
Process and yet unduly burden interstate commerce. See, e.
g., Tyler Pipe Industries, Inc. v. Washington State Dept. of
Revenue, 483 U.S. 232 (1987).
8
In addition to its common carrier contacts with the State, Quill
also licensed software to some of its North Dakota clients. See
supra n. 1. The State "concedes that the existence in North
Dakota of a few floppy diskettes to which Quill holds title seems
a slender thread upon which to base nexus." Brief for
Respondent 46. We agree. Although title to "a few floppy
diskettes" present in a State might constitute some minimal
nexus, in National Geographic Society v. California Bd. of
Equalization, 430 U.S. 551, 556 (1977), we expressly rejected
a " `slightest presence' standard of constitutional nexus." We
therefore conclude that Quill's licensing of software in this case
171
does not meet the "substantial nexus" requirement of the
Commerce Clause.
9
It is worth noting that Congress has, at least on one occasion,
followed a similar approach in its regulation of state taxation. In
response to this Court's indication in Northwestern States
Portland Cement Co. v. Minnesota, 358 U.S. 450, 452 (1959),
that, so long as the taxpayer has an adequate nexus with the
taxing State, "net income from the interstate operations of a
foreign corporation may be subjected to state taxation,"
Congress enacted Pub. L. 86-272, codified at 15 U.S.C. § 381.
That statute provides that a State may not impose a net income
tax on any person if that person's "only business activities
within such State [involve] the solicitation of orders [approved]
outside the State [and] filled . . . outside the State." 15 U.S.C. §
381. As we noted in Heublein, Inc. v. South Carolina Tax
Comm'n, 409 U.S. 275, 280 (1972), in enacting § 381,
"Congress attempted to allay the apprehension of businessmen
that `mere solicitation' would subject them to state taxation. . . .
Section 381 was designed to define clearly a lower limit for the
exercise of [the State's power to tax]. Clarity that would remove
uncertainty was Congress' primary goal." (Emphasis supplied.)
10
Many States have enacted use taxes. See App. 3 to Brief for
Direct Marketing Association as Amicus Curiae. An overruling
of Bellas Hess might raise thorny questions concerning the
retroactive application of those taxes and might trigger
substantial unanticipated liability for mail order houses. The
precise allocation of such burdens is better resolved by
Congress rather than this Court.
11
See, e. g., H. R. 2230, 101st Cong., 1st Sess. (1989); S. 480,
101st Cong., 1st Sess. (1989); S. 2368, 100th Cong., 2d Sess.
(1988); H. R. 3521, 100th Cong., 1st Sess. (1987); S. 1099,
100th Cong., 1st Sess. (1987); H. R. 3549, 99th Cong., 1st
Sess. (1985); S. 983, 96th Cong., 1st Sess. (1979); S. 282, 93d
Cong., 1st Sess. (1973).
172
Current, Inc. v. State Board of Equalization
24 Cal. App. 4th 382 (1994)
Related corporation's liability for use tax collection. -- A corporation who had no physical presence in
California was not required to collect use tax under former subdivision (g) based on the physical presence of a
related corporation in California. Current, Inc. v. State Board of Equalization (1994) 24 Cal.App.4th 382.
173
IN THE SUPREME COURT OF THE STATE OF KANSAS
No. 83,802
IN THE MATTER OF THE APPEAL OF INTERCARD, INC.
FROM AN ORDER OF THE DIVISION OF TAXATION ON ASSESSMENT
OF COMPENSATING USE TAX
SYLLABUS BY THE COURT
1. BOTA is a specialized agency that exists to decide taxation issues, and its
decisions are given great weight and deference when it is acting in its area of
expertise.
2. The Commerce Clause has been interpreted by the United States Supreme
Court to be both an affirmative grant of power to Congress to regulate
commerce between the states and an implied prohibition on the states to do the
same.
3. The purpose of the Commerce Clause of the United States Constitution is to

ensure a national economy free from unjustifiable local entanglements. The
Commerce Clause expressly authorizes Congress to regulate commerce among
the several states.
4. It is well settled that under the Commerce Clause a state may not subject a
business to tax unless the business has a substantial nexus within the state.
Substantial nexus requires a finding of physical presence in the taxing state.
5. The continuous physical presence of offices and employees in a taxing state is

sufficient to impose a use tax collection duty even though the in-state presence
is unrelated to the transaction being taxed.
6. A "slightest presence" is not sufficient to establish a substantial nexus, but

some states have found that "more than a slightest presence" is sufficient. The
physical presence requirement may turn on the presence in the taxing state of a
small sales force, plant, or office.
Appeal from Board of Tax Appeals. Opinion filed December 8, 2000. Affirmed.
Richard L. Cram, of the Kansas Department of Revenue, argued the cause and
was on the briefs for appellant Kansas Department of Revenue.
Mark A. Burghart, of Alderson, Alderson, Weiler, Conklin, Burghart & Crow,

L.L.C., of Topeka, argued the cause and was on the briefs for appellee.
174
David Clauser, of the Kansas Department of Revenue, and Paull Mines, Sheldon
H. Laskin, and H. Beau Baez III, of Washington, D.C., appeared on the amicus
curiae brief for Multistate Tax Commission.
S. Lucky Defries, of Coffman, Defries & Nothern, of Topeka, and Stephen P. B.
Kranz, Diann L. Smith, William D. Peltz, Bobby L. Burgner, and J. Hugh
McKinnon, of Washington, D.C., appeared on the amicus curiae brief for
Committee on State Taxation.
S. Lucky Defries, of Coffman, Defries & Nothern, of Topeka, and Peter J. Brann,
and George S. Isaacson, of Brann & Isaacson, LLP, of Lewiston, Maine, appeared
on the amicus curiae brief for Direct Marketing Association, Inc.
The opinion of the court was delivered by
LOCKETT, J: This is an appeal from a notice of assessment of compensating use

tax issued against Intercard, Inc. (Intercard). The Kansas Department of
Revenue (KDR) determined that Intercard had a substantial nexus to Kansas for
the collection and remittance requirements of the Kansas Compensating Tax Act,
K.S.A. 79-3701 et seq. Intercard appealed KDR's determination. The Kansas
Secretary of Revenue upheld the assessment. Intercard appealed to the Board of
Tax Appeals (BOTA). BOTA found that Intercard did not have a substantial nexus
with the state of Kansas as required by the Commerce Clause of the United
States Constitution and reversed the Secretary's determination. In addition,
BOTA found that because KDR's assessment of compensating use tax was based
on activity which did not establish a substantial nexus with the state, the Due
Process Clause was violated as well. KDR appealed to this court claiming (1)
Intercard's contacts in the state of Kansas were a substantial nexus for imposing
the Kansas Compensating Tax Act; and (2) reasonable grounds for abating the
penalties imposed by KDR do not exist.
In an appeal from an administrative agency decision, a party is limited to the

issues it raises at the administrative hearing. Kim v. Kansas Dept. of Revenue, 22
Kan. App. 2d 319, 321, 916 P.2d 47, rev. denied 260 Kan. 994 (1996). See In re
Appeal of City of Lenexa, 232 Kan. 568, 587, 657 P.2d 47 (1983). Both parties
agree and we find that BOTA's finding as to the Due Process Clause was
gratuitous and will not be considered by an appellate court because neither party
had argued or briefed the issue.
The parties stipulated that Intercard is a corporation with its headquarters,

offices, and manufacturing facility located in Missouri. Kinko's Copies (Kinko's) is
Intercard's largest customer and uses Intercard's card reading system
exclusively. The national headquarters of Kinko's is located in Ventura, California.
The master contract between Kinko's and Intercard was negotiated by company
officials in Ventura, California, and St. Louis, Missouri. Intercard has never
175
registered with the Kansas Secretary of State as a foreign corporation doing
business in the state of Kansas.
Intercard is in the business of manufacturing and selling electronic data cards

and card readers. The system allows a customer to use a card to purchase
photocopies. The electronic data cards are of two types, copy cards and store
cards. Copy cards are either given or sold to the purchaser's customers for
payment of photocopies. The purchaser has discretion to give the copy cards to
its customers or to sell them. Store cards are for in-store use only. Intercard sells
its products to over 400 Kinko's stores nationwide. No other states subject
Intercard to the collection and remittance requirements of its compensating use
tax provisions.
Intercard's products are delivered to its customers by United Parcel Service. At

times, a Kinko's store that has purchased an Intercard card reader requests that
Intercard send a technician to its store to perform the electronic wiring needed
to install the card reader, which takes approximately 4 hours. The labor charges
for this work are listed separately on the invoice to the customer.
From April 1, 1992, to March 31, 1996, inclusively (audit period), Intercard
technicians made 11 visits to Kinko's stores in Kansas to install card readers
purchased from Intercard. The 11 contacts Intercard had with Kinko's stores in
Kansas occurred during 3 months of the 48-month audit period. The contacts
totaled 44 hours. Intercard has not sent technicians into Kansas since the
installation of the 11 card readers was completed.
No solicitation took place in Kansas during the audit period regarding the
products sold by Intercard. The sale of card readers to Kinko's stores in Kansas
resulted from a master contract negotiated between Kinko's and Intercard
outside Kansas. Intercard did not send employees, agents, or sales
representatives into Kansas to solicit sales.
On May 21, 1996, KDR conducted a field audit of Intercard's books. KDR
determined that Intercard's installation of the card readers was a substantial
nexus sufficient to support the imposition of the collection and remittance
requirements of the Kansas Compensating Tax Act. As a result of the audit, KDR
sent Intercard notices of assessment of Kansas retailers' sales tax of $399,
including penalties and interest, and retailers' compensating use tax of $13,297,
including penalties and interest. The additional Kansas retailers' sales tax
assessment was based on amounts invoiced by Intercard for work its technicians
performed in Kansas to install 11 card readers. The additional Kansas retailers'
compensating use tax assessment was based on Intercard's sales of tangible
personal property to customers located in Kansas during the audit period.
Intercard neither billed nor collected retailers' sales or compensating use tax
from customers in connection with any of the transactions noted in the audit
report.
176
Intercard appealed KDR's determination to the Kansas Secretary of Revenue.
The Secretary upheld the assessment. Intercard appealed to the BOTA. BOTA
found that Intercard did not have substantial nexus with the state of Kansas and
reversed the Secretary's determination. KDR appealed to this court. Direct
Marketing Association, Inc., and the Committee on State Taxation submitted
amicus curiae briefs in support of Intercard, and the Multistate Tax Commission
(MTC) submitted an amicus curiae brief in support of KDR's position.
BOTA is a specialized agency that exists to decide taxation issues, and its
decisions are given great weight and deference when it is acting in its area of
expertise. However, if BOTA's interpretation is erroneous as a matter of law,
appellate courts will take corrective steps. In re Tax Appeal of Univ. of Kan.
School of Medicine, 266 Kan. 737, 749, 973 P.2d 176 (1999) (citing In re Tax
Appeal of Boeing Co., 261 Kan. 508, 515, 930 P.2d 1366 [1997]).
BOTA's order abating the sales and compensating use taxes assessed by KDR
found:
"[P]ursuant to the first prong of Complete Auto [Transit, Inc. v. Brady], 430 U.S.
[274,] 280, [51 L. Ed. 2d 326, 97 S. Ct. 1076, reh. denied 430 U.S. 976 (1977)],
the Taxpayer's activities in Kansas must establish a substantial nexus with the
state in order for the assessment levied pursuant to K.S.A. 79-3701 et seq. to be
constitutional as applied to the Taxpayer. The Board finds in this case, that the
Taxpayer's activities in Kansas do not constitute a substantial nexus with Kansas.
The Taxpayer's eleven visits to Kansas during the four-year audit period do not
transcend the slightest physical presence test of Quill [Corp. v. North Dakota,
504 U.S. 298, 315 n. 8, 119 L. Ed. 2d 91, 112 S. Ct. 1904 (1992)] and National
Geographic [v. Cal. Equalization Bd., 430 U.S. 551, 556, 51 L. Ed. 2d 631, 97 S.
Ct. 1386 (1977)]. These visits were very minor activities in the Taxpayer's
business, both in time spent and in revenue generated. They were in response to
customer requests; had there been no requests, the Taxpayer would have had
no physical contacts with the state. The Taxpayer initiated none of the contacts
and did not use the contacts to promote the sales of its products. The Board
finds no evidence that the installation activities in Kansas created a market for
the card readers that were sold previous to each installation. Furthermore, the
Taxpayer's undisputed testimony is that its physical contact with Kansas ended in
March of 1994, roughly halfway through the audit period. The Board finds that
the Taxpayer's contacts with Kansas were isolated and sporadic and did not
establish a substantial nexus. The Board finds because the Department's
assessment of compensating use tax is based on activity which does not
establish a substantial nexus with the state, the Due Process Clause has been
violated as well. The Department's assessment is invalid pursuant to the rule set
out in Quill, because the Taxpayer's 'connections with the State are not
substantial enough to legitimate the State's exercise of power over him.' 504
U.S. at 312."
177
APPLICABLE KANSAS TAX STATUTES
K.S.A. 79-3702(h) defines a "retailer doing business" in Kansas as
"[a]ny retailer: (1) [h]aving or maintaining within this state, directly or by a

subsidiary, an office, distribution house, sales house, warehouse or other place
of business, or any agent or other representative operating within this state
under the authority of the retailer or its subsidiary, irrespective of whether such
place of business or agent is located here permanently or temporarily, or
whether such retailer or subsidiary is admitted to do business within the state."
(Emphasis added.)
K.S.A. 1999 Supp. 79-3703 imposes a compensating use tax upon
"the privilege of using, storing, or consuming within this state any article of
tangible personal property. . . . All property purchased or leased within or
without this state and subsequently used, stored or consumed in this state shall
be subject to the compensating tax if the same property or transaction would
have been subject to the Kansas retailers' sales tax had the transaction been
wholly within this state."
The compensating use tax is a tax imposed upon the purchaser of tangible
personal property, but the retailer is charged with the duty of collecting the tax
from the consumer. K.S.A. 79-3705a. Every retailer doing business in this state
and making sales of tangible personal property for use, storage or consumption
in this state, not exempted under the provisions of the use tax act, shall at the
time of making such sales, whether within or without the state, collect the tax
imposed by this act from the purchaser, and give the purchaser a receipt for the
payment. K.S.A. 79-3705c.
THE COMMERCE CLAUSE
The purpose of the Commerce Clause of the United States Constitution is to

ensure a national economy free from unjustifiable local entanglements. Nat.
Bellas Hess v. Dept. of Revenue, 386 U.S. 753, 760, 18 L. Ed. 2d 505, 87 S. Ct.
1389 (1967). The Commerce Clause expressly authorizes Congress to regulate
commerce among the several states. United States Const., art. 1, § 8, cl. 3. The
Commerce Clause has been interpreted by the United States Supreme Court to
be both an affirmative grant of power to Congress to regulate commerce
between the states and an implied prohibition on the states to do the same.
Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 6 L. Ed. 23 (1824).
It is well settled that under the Commerce Clause a state may not subject a
business to tax unless the business has a substantial nexus within the state. The
concept of what contacts constitute a substantial nexus to the taxing state has
been the subject of a long line of United States Supreme Court and state court
decisions. Of particular significance are the cases we will later discuss.
178
Substantial Nexus
KDR asserts that Intercard's 11 installations of card readers in Kansas during the
audit period establish a substantial nexus with the State of Kansas, subjecting
Intercard to the collection and remittance requirements of the Kansas
compensating use tax. KDR asserts that BOTA erroneously applied a substantial
physical presence requirement and improperly minimized the significance of
Intercard's installation activities in Kansas. KDR argues that BOTA's
characterization of Intercard's contacts with Kansas as "very minor activities in
the Taxpayer's business, both in time spent and in revenue generated" is
contrary to the facts.
The MTC, in its amicus curiae brief, argues that the United States Supreme
Court's determination in Quill Corp. v. North Dakota, 504 U.S. 298, 119 L. Ed. 2d
91, 112 S. Ct. 1904 (1992), affirms a "safe harbor" for vendors whose only
connection with the taxing state is by common carrier or the United States mail.
MTC asserts that Intercard's activities in Kansas went outside the safe harbor,
thereby exposing Intercard to imposition of the Kansas compensating use tax.
The Committee on State Taxation takes issue with the MTC's simplification of the
nexus issue and analysis of the United States Supreme Court decisions. The
Direct Marketing Association states that Intercard's connection with Kansas is
insubstantial and warns that if random, fortuitous physical contacts are sufficient
to constitute a substantial nexus, interstate commerce will suffer as companies
face burdens of calculating and collecting sales and compensating use taxes for a
myriad of jurisdictions across the country.
United States Supreme Court Decisions
In Scripto v. Carson, 362 U.S. 207, 211-12, 4 L. Ed. 2d 660, 80 S. Ct. 619
(1960), the United States Supreme Court held that Florida could constitutionally
impose upon a Georgia seller the duty of collecting a state use tax upon the sale
of goods shipped to customers in Florida. In that case, Scripto had 10
wholesalers, jobbers, or salesmen conducting continuous local solicitation in
Florida and forwarding the resulting orders from that state to Georgia for
shipment of the ordered goods. Subsequently, in Quill, 504 U.S. at 306, the
Court stated that Scripto represented the furthest constitutional reach to date of
a state's power to deputize an out-of-state retailer as its collection agent for a
use tax.
In Bellas Hess, 386 U.S. 753, Bellas Hess, a mail-order house, was incorporated
in Delaware, had its principal place of business in Missouri, and was licensed to
do business only in Delaware and Missouri. Bellas Hess did not maintain a place
of business in Illinois or have agents or representatives in Illinois to sell or take
orders, deliver merchandise, accept payments, or service merchandise; it did not
own tangible property, real or personal, in Illinois; it had no telephone listing in
Illinois; and it did not advertise its merchandise for sale in newspapers, on
179
billboards, or by radio or television in Illinois. Orders for Bellas Hess merchandise
were mailed to and accepted at its Missouri plant. Its merchandise was sent to
Illinois customers by mail or by common carrier. Bellas Hess mailed catalogs to
its Illinois customers twice a year; an occasional advertising flyer was mailed to
past and potential Illinois customers, and its sales to Illinois customers were
$2,174,744 during the approximately 15 months for which the taxes in issue
were assessed. Under Bellas Hess, the United States Supreme Court created a
"safe harbor" for vendors "whose only connection with customers in the [taxing]
State is by common carrier or the United States mail." It stated that such
vendors were free from state-imposed duties to collect sales and use taxes. See
Quill, 504 U.S. at 315. The Bellas Hess court fully underscored the "sharp
distinction . . . between mail order sellers with retail outlets, solicitors, or
property within [the taxing] State, and those [like Bellas Hess] who do no more
than communicate with customers in the State by mail or common carrier as part
of a general interstate business." Bellas Hess, 386 U.S. at 758.
Ten years after Bellas Hess, in Complete Auto Transit, Inc. v. Brady, 430 U.S.
274, 51 L. Ed. 2d 326, 97 S. Ct. 1076, reh. denied 430 U.S. 976 (1977), the
United States Supreme Court adopted a four-part test for determining whether a
state tax on an interstate business is valid under the Commerce Clause. A
Michigan corporation engaged in the business of transporting motor vehicles by
motor carrier for General Motors Corporation. General Motors assembled vehicles
outside Mississippi that were destined for dealers within the State. The vehicles
were shipped by rail to Jackson, Mississippi, where, usually within 48 hours, they
were loaded onto Complete Auto's trucks and transported to the Mississippi
dealers. Complete Auto was paid on a contract basis for the transportation from
the railhead to the dealers. The Supreme Court stated it would sustain a tax
under the Commerce Clause only where the tax is "applied to an activity with a
substantial nexus with the taxing State, is fairly apportioned, does not
discriminate against interstate commerce, and is fairly related to the services
provided by the State." Complete Auto, 430 U.S. at 279. It noted that the second
and third parts of the analysis, requiring fair apportionment and
nondiscrimination, prohibit taxes that pass an unfair share of the tax burden onto
interstate commerce. The first and fourth prongs, which require a substantial
nexus and a relationship between the tax and state-provided services, limit the
reach of state taxing authority so as to ensure that state taxation does not
unduly burden interstate commerce. See Quill, 504 U.S. at 313.
In National Geographic v. Cal. Equalization Bd., 430 U.S. 551, 556, 51 L. Ed. 2d
631, 97 S. Ct. 1386 (1977), the United States Supreme Court declined to adopt a
test for physical presence that would be met by "slightest presence." In that
case, a nonprofit society, which maintained two offices in California to solicit
advertising for its magazine but performed no activities related to the society's
mail-order business for the sale of various items from the District of Columbia
office, was required by California to collect California use tax from California
180
purchasers. The court found that imposition of the use tax collection burden did
not violate due process or the Commerce Clause because the society's
continuous presence in California and its two offices provided a sufficient nexus
between the society and the state to justify imposition of the use tax collection
liability. 430 U.S. at 554-56.
The Court determined that even though there was no relationship between
National Geographic's solicitation of magazine advertising and its mail-order
business, California was not precluded from imposing the duty to collect use tax
for mail-order sales. 430 U.S. at 560. The Court distinguished collection taxes
from direct taxes. It noted that a showing that particular transactions are
dissociated from the local business is fatal to a direct tax. On the other hand,
such dissociation does not bar the imposition of the use-tax-collection duty
because such a tax, unlike a direct tax, requires only a connection between the
taxing state and the entity it seeks to tax. 430 U.S. at 560-61.
In Tyler Pipe Industries v. Dept. of Revenue, 483 U.S. 232, 251, 97 L. Ed. 2d
199, 107 S. Ct. 2810 (1987), the United States Supreme Court held that having
resident sales representatives in the taxing jurisdiction to establish and maintain
the market constituted a sufficient nexus to impose Washington state business
and occupation tax on its sales. KDR asserts that Tyler appears to replace or
supplement the United States Supreme Court's previous analysis of "substantial
nexus." The Tyler court stated: "[T]he crucial factor governing nexus is whether
the activities performed [in Washington] on behalf of the taxpayer are
significantly associated with the taxpayer's ability to establish and maintain a
market in this state for the sales." 483 U.S. at 250-51.
It is important to note that the tax at issue in Tyler was a direct tax on the
manufacturer and that the Supreme Court was applying a Washington tax
statute and the implementing administrative rule which specifically defined
"nexus" as ''the activity carried on by the seller in Washington which is
significantly associated with the seller's ability to establish or maintain a market
for its products in Washington." See Wash. Admin. Code (WAC) 458-20-193(f).
Unlike the compensating use tax at issue in this case, the business and
occupation tax at issue in Tyler was a direct tax imposed on virtually all business
activities carried on within the state. See Simpson Inv. Co. v. Revenue, 141
Wash. 2d 139, 149, 3 P.3d 741.
In Quill, the United States Supreme Court noted that, like Bellas Hess, Quill
involved a state's attempt to require an out-of-state mail-order house that had
neither outlets nor sales representatives in the state to collect and pay a use tax
on goods purchased for use within the state. The Supreme Court noted that in
Bellas Hess it held that a similar Illinois statute violated the Due Process Clause
of the Fourteenth Amendment and created an unconstitutional burden on
interstate commerce. There it ruled that a "seller whose only connection with
181
customers in the State is by common carrier or the United States mail" lacked
the requisite minimum contacts with the state. 386 U.S. at 758; see Quill, 504
U.S. at 301.
In Quill, the Supreme Court of North Dakota had declined to follow Bellas Hess
because "the tremendous social, economic, commercial, and legal innovations" of
the past quarter century had rendered its holding obsolete. 504 U.S. at 301. The
United States Supreme Court noted that it would have to either reverse the
Supreme Court of North Dakota or overrule Bellas Hess. While the Supreme
Court agreed with much of the state court's reasoning, it took the former course.
504 U.S. at 301-02. It held that while the Due Process Clause no longer
presented a "physical presence" bar to state taxation, that bar persisted in the
Commerce Clause. The Quill Court observed that the nexus requirements of due
process emanate from a concern over the fundamental fairness of a state's
asserting jurisdiction. It stated the Commerce Clause, however, is concerned
with the effect of state action on the national economy. While fundamental
notions of fair play and substantial justice no longer prevented North Dakota
from exerting personal jurisdiction over Quill, the safe harbor for vendors under
the Bellas Hess rule continued to further the ends of the dormant Commerce
Clause. It concluded that physical presence still was a prerequisite for a state to
impose a use tax collection duty on an out-of-state vendor. 504 U.S. at 312-15.
The Court found that Quill's ownership of floppy diskettes in North Dakota that
allowed customers to place orders for out-of-state sales constituted the "slightest
presence" but did not rise to the level of a substantial nexus because the
Commerce Clause required more than "minimal nexus" for a state to impose
collection burdens on a vendor. 504 U.S. at 315, n. 8.
The Quill Court, therefore, reaffirmed the rule that a state may not impose a use
tax collection duty on an out-of-state vendor whose only connection with the
state is through a common carrier or the United States mail. 504 U.S. at 314-15.
This "bright line, physical presence" rule was first set out in the court's 1967
decision in Bellas Hess, 386 U.S. at 758. The continuing value of a bright line rule
in this area of law and the doctrine and principles of stare decisis indicate that
the Bellas Hess rule remains good law. Quill, 504 U.S. at 317.
Justice White stated in his concurring opinion in Quill that "[r]easonable minds
surely can, and will, differ over what showing is required to make out a 'physical
presence' adequate to justify imposing responsibilities for use tax collection."
Therefore, "the vagarities of 'physical presence' will be tested to their fullest in
our courts." 504 U.S. at 330-31.
State Court Decisions
Some state courts have minimized the concept of substantial physical presence
to uphold imposition of use tax collection and duties on out-of-state companies.
KDR relies on such a case, Orvis Co. v. Tax Tribunal, 86 N.Y.2d 165, 630
182
N.Y.S.2d 680, 654 N.E.2d 954 (Ct. App. 1995), to support its argument that
Intercard's contacts with Kansas constitute a substantial nexus.
Orvis is a consolidated case which involved two Vermont mail-order businesses.

One taxpayer, Orvis, had no offices, property, or personnel in New York. On 12
occasions over a 3-year period, Orvis personnel entered New York to
communicate with retailers that sold Orvis products and solicited sales that were
subject to approval at the company's out-of-state headquarters. The other
taxpayer, Vermont Information Processing, Inc. (VIP), a mail-order marketer of
computer software, also had no offices, outlets, telephone number, employees,
or general advertising in New York. On approximately 40 occasions over a 3-year
period, VIP personnel entered New York to correct software problems for
customers, and, occasionally, install software and train the customer's
employees.
The New York Court of Appeals held that both Orvis and VIP had failed to prove
they had less than a slight presence in New York. In so doing, the court held that
Quill requires merely "demonstrably more than a 'slightest presence'" to meet
the nexus requirements of the Commerce Clause. In reaching this conclusion, the
court rejected the "substantial physical presence" requirement formulated by the
New York Appellate Division, stating:
"We do not read Quill Corp. v. North Dakota to make a substantial physical
presence of an out-of-State vendor in New York a prerequisite to imposing the
duty upon the vendor to collect the use tax from its New York clientele. The
Appellate Division erroneously applied that exacting standard in both cases." 86
N.Y.2d at 170.
The Orvis court cited National Geographic as its source for the "more than
slightest presence" standard. 86 N.Y.2d at 178. In National Geographic the
United States Supreme Court stated, in response to the California court's
adoption of a "slightest presence" standard for finding a substantial nexus:
"Our affirmance of the California Supreme Court is not to be understood as

implying agreement with that court's 'slightest presence' standard of
constitutional nexus. Appellant's maintenance of two offices in the state and
solicitation by employees assigned to those offices of advertising copy in the
range of $1 million annually, . . . establish a much more than substantial
presence than the expression 'slightest presence' connotes. Our affirmance thus
rests upon our conclusion that appellant's maintenance of the two offices in
California and activities there adequately establish a relationship or 'nexus'
between the Society and the State that renders constitutional the obligations
imposed upon appellant pursuant to §§ 6203 and 6204. This conclusion is
supported by several of our decisions." 430 U.S. at 556.
183
It was from this statement by the United States Supreme Court that the Orvis
court adopted a "more than slightest presence" as the standard for finding a
substantial nexus. We believe that the Orvis court missed the point that the
Supreme Court was making about National Geographic's presence, i.e., that it
had a "much more substantial presence than a 'slightest presence' in the taxing
state.
The Orvis court went on to expound the holding of Quill:
"The true holding Quill Corp. v. North Dakota can best be understood by
considering the case in the context of its position in the evolution of Supreme
Court doctrine limiting the authority of a State to assess or impose a duty to
collect taxes arising out of the economic activity of a foreign business engaged in
interstate commerce." 86 N.Y.2d at 170..
"[B]oth the literal language of the Quill decision and consideration of its place in
the evolution of Supreme Court Commerce Clause jurisprudence refute the
Appellate Division's conclusion, urged by Orvis and VIP here, that 'Quill . . .
increased the requisite threshold of in-State physical presence from any
measurable amount of in-State people or property to substantial amounts of in-
State people or property.' [Citation omitted.] Quill simply cannot be read as
equating a substantial physical presence of the vendor in the taxing State with
the substantial nexus prong of the Complete Auto test, as the Appellate Division's
interpretation would require." 86 N.Y.2d at 176.
"We think the foregoing survey of the decisional law discloses the true import of
the physical presence requirement within the substantial nexus prong of the
Complete Auto test under contemporary Commerce Clause analysis. While a
physical presence of the vendor is required, it need not be substantial. Rather, it
must be demonstrably more than a "slightest presence." [Citation omitted.] And
it may be manifested by the presence in the taxing State of the vendor's
property or the conduct of economic activities in the taxing State performed by
the vendor's personnel or on its behalf." 86 N.Y.2d at 178.
The Orvis court ignores the Quill holding that sufficient physical presence is a
necessary element of the nexus required for a state to impose a use tax
collection duty. Economic presence cannot negate this requirement. The Quill
Court was wholly unconcerned with any economic benefit resulting from the
continuous physical presence of a "few floppy diskettes" in North Dakota. Rather,
Quill affirmed the "bright line" rule of Bellas Hess that the Commerce Clause
protects out-of-state vendors from the imposition of use tax requirements where
those vendors have no physical presence in the taxing state. The Quill Court
admitted that the bright line test appears artificial at its edges:
"Whether or not a State may compel a vendor to collect a sales or use tax may
turn on the presence in the taxing State of a small sales force, plant, or office.
184
[Citation omitted.] This artificiality, however, is more than offset by the benefits
of a clear rule. Such a rule firmly establishes the boundaries of legitimate state
authority to impose a duty to collect sales and use taxes and reduces litigation
concerning those taxes. This benefit is important, for as we have so frequently
noted, our law in this area is something of a 'quagmire' and the 'application of
constitutional principles to specific state statutes leaves much room for
controversy and confusion and little in the way of precise guides to States in the
exercise of their indispensable power of taxation.' [Citation omitted.]" Quill, 504
U.S. at 315-16.
The Michigan Court of Appeals adopted the reasoning of Orvis in Magnetek, Inc v
Treasury Dep't, 221 Mich. App. 400, 562 N.W.2d 219 (1997). Magnetek did not
involve sales or use taxes, but a direct tax on the corporation. The Michigan
Department of Treasury had assessed single business tax liability to Magnetek
Controls, Inc. (Magnetek), a Michigan based manufacturer. The issue was
whether Magnetek was required to apportion certain sales to the states in which
it did business or whether those sales were allocable to Michigan. Central to the
issue was the fact that Magnetek's managers annually traveled into each of the
several states for approximately 2 weeks of solicitation-related activities.
Independent commission agents handled the sale of merchandise in the target
states.
The Michigan court initially focused on whether this enterprise qualified as a type
of small sales force that Quill suggested would establish physical presence. The
court stated: "The dispositive question becomes whether plaintiff's employees by
virtue of the annual two weeks of solid sales effort, along with the activity of
independent sales representatives permanently located in the states and selling
plaintiff's lines along with those of other companies, qualify as the kind of 'small
sales force' that the Supreme Court suggested would suffice." 221 Mich. App. at
408. The court then focused on the rationale of Orvis:
"Of the many precedents cited by both parties from other jurisdictions applying
Quill, we find In re Orvis co., Inc. v. Tax Appeals Tribunal of the State of New
York, 86 NY2d 165, [630 N.Y.S.2d 680,] 654 NE2d 954 (1995), most instructive.
After a complete review of Quill in the context of Bellas Hess and other Supreme
Court precedents, the court in Orvis rejected the taxpayer's claim that Quill
increased the in-state physical presence requirement of the substantial nexus
analysis to require '"'substantial amounts of in-State people or property.'"'
[Citation omitted.] The court in Orvis noted that neither Bellas Hess, Quill, or
surrounding Supreme Court cases express 'any insistence that the physical
presence of the interstate vendor be substantial. . . .' [Citation omitted.] Further
requiring that physical presence be substantial would 'destroy the bright-line rule
the Supreme Court in Quill thought it was preserving'; it would require a
'weighing of factors such as number of local visits, size of local sales offices,
intensity of direct solicitations, etc.' to determine whether there was 'substantial'
185
physical presence in the target state. [Citation omitted.] Finally, the court in
Orvis, supra at 178, noted that in a recent case, Oklahoma Tax Comm. v.
Jefferson Lines, Inc., 514 US [175]; 115 SCt 1331; 131 LEd2d 261 (1995), the
Supreme Court 'did not apply a substantial physical presence test, but instead
strictly utilized the substantial nexus prong of the Complete Auto test without
even passing reference to the substantiality of the physical presence of the
vendor . . . in the taxing State.'" 221 Mich. App. at 410-11.
The Magnetek court applied the Orvis standard of "more than a slightest
presence." Based on that analysis, the Michigan court found that Magnetek had
sufficient physical presence to make it susceptible to imposition of a tax
obligation by those states, notwithstanding Commerce Clause restrictions. Sales
by Magnetek to taxpayers in those states during the audit period could not be
attributed to Michigan for purposes of single business tax liability. 221 Mich. App.
at 411-12.
Florida adopted a standard more consistent with Quill. In Florida Department of

Revenue v. Share International, Inc., 676 So.2d 1362 (Fla.1996), a Texas mail-
order vendor that had no offices or employees in Florida conducted a seminar in
Florida for 3 days each year. Share's products were displayed and sold at the
seminar. The Florida Supreme Court held there was not a substantial nexus with
the state for purpose of collecting use tax on the company's mail-order sales.
676 So.2d at 1363. In reaching its decision the Share court focused on the
substantiality of Share International's physical presence in the state and found it
insufficient.
In Koch Fuels, Inc. v. Clark, 676 A.2d 330 (R.I. 1996), Koch, a Delaware
corporation headquartered in Wichita, Kansas, was engaged in the sale and
distribution of fuel oil. On several occasions between 1982 and 1984, Koch sold
fuel oil to New England power for the generation of electricity in Rhode Island.
The fuel oil sold to the Rhode Island company originated in Texas, Pennsylvania,
or Massachusetts. All shipments were delivered by common carriers using barges
or vessels.
The terms of each of the sales contracts were negotiated and agreed upon in
telecommunications between Koch's representatives in Texas or New Jersey and
New England Power's representatives in Massachusetts. The Rhode Island
company received invoices for and paid the purchase price of the fuel oil outside
Rhode Island. The terms of each of the sales contracts were f.o.b. Providence,
indicating that title possession and risk of loss surrounding the fuel-oil shipments
passed from Koch to the Rhode Island company in the State of Rhode Island.
Koch did not have employees in Rhode Island, nor rent, lease, or own real
property within Rhode Island. Koch did, however, register to do business in
Rhode Island and paid Rhode Island corporate taxes for the years it sold fuel oil
to New England Power.
186
The Rhode Island Supreme Court first determined that Koch's activities fell
outside the "safe harbor" of mere "communication with its customers in the State
by mail or common carrier." 676 A.2d at 334. Based on Koch's complete control
over the oil shipments, the exclusive nature of the common carrier's contract, the
unique nature of the cargo, and the fact that the sales were consummated upon
delivery in Rhode Island, the Koch court determined that Koch's activities created
a physical presence within Rhode Island sufficient to satisfy the substantial nexus
requirement of the Complete Auto test. 676 A.2d at 334.
After briefs were filed, KDR submitted additional authority to support its position.
One case cited by KDR as additional authority, Town Crier, Inc. v. Department of
Revenue, 315 Ill. App. 3d 286, 733 N.E.2d 780 (2000), a Wisconsin retailer,
Town Crier, Inc., (Town Crier), contested the assessment of Illinois use tax. The
Illinois Department of Revenue argued that Town Crier had a taxable nexus in
Illinois by delivering furniture to Illinois customers in Town Crier vehicles and by
installing window treatments in Illinois. Town Criers sales records revealed that,
for the sampling period, over 50 percent of its gross sales constituted sales of
merchandise delivered into Illinois. During the audit period, Town Crier had
made at least 54 deliveries of merchandise to Illinois. Of the 54 deliveries, 30
were made in Town Crier's vehicles and 24 were made by common carriers.
Town Crier had installed window dressings in Illinois on five occasions. The
Illinois court concluded:
"By making deliveries into Illinois in its own vehicles, plaintiff has established a
regular presence in Illinois that enhanced its ability to establish and maintain a
market for its furniture sales. Plaintiff could have avoided use tax collection
responsibilities in Illinois by merely restricting its deliveries in this state to
common carriers or by refusing to deliver goods and supply services to Illinois.
However, instead of using these safe harbors, plaintiff chose to send its own
personnel into Illinois on multiple occasions and to reap the benefits from doing
so. By repeatedly making deliveries and performing installations in Illinois,
plaintiff's presence was demonstrably more than slight. Thus we find there was a
substantial nexus with plaintiff's activities and the State of Illinois, satisfying the
first requirement of the Complete Auto test. 315 Ill. App. 3d at ___, 733 N.E.2d
at 786.
The other case submitted by KDR is Arizona Department of Revenue v. Care

Computer Systems, Inc., 197 Ariz. 414, 4 P.3d 469 (Ct. App. 2000), involves
Arizona Department of Revenue's appeal from the State Board of Tax Appeals'
order vacating a retail transaction privilege tax imposed on Care Computer
Systems, Inc., (Care) an out-of-state taxpayer who sold and licensed computer
hardware and software to nursing homes. Care did not own or lease any real
property in Arizona and did not maintain an inventory, have a business address
in Arizona, or have employees, independent contractors, or agents based or
residing in Arizona. During the audit period, Care engaged in approximately 180
187
transactions with Arizona nursing homes. The majority of Care's Arizona
transactions were conducted by mail or telefax orders. Care had one salesperson
assigned to Arizona., who lived in California during the audit period.
On seven occasions in the 7-year audit period, the Care salesperson took 1- to 2-
day trips to Arizona to follow up on business prospects. Some sales resulted from
the trips. Training was provided to Care's Arizona customers by personnel from
Care who went to the nursing home site once. The training sessions lasted one
to several days, depending on the number of computer programs involved. The
cost of the training was insignificant compared to the cost of the hardware and
software purchased by the nursing homes. Trainings were held in Arizona 80 out
of 1370 days covered by the audit, amounting to approximately 21 days per
year.
The Care court relied on the Supreme Court's declaration in Tyler Pipe Industries
v. Dept. of Revenue, 483 U.S. 232, 97 L. Ed. 2d 199, 107 S. Ct. 2810 (1987),
that the crucial determination in Commerce Clause nexus requirements was
whether the business activities in the State were significantly associated with
establishing and maintaining a market for the business' sales. 197 Ariz. at ___, 4
P.3d at 473. Finding that Care's in-state activities were associated with
establishing and maintaining a market for the business' sales in Arizona, the
court found a substantial nexus.
Kansas Case
In In re Tax Appeal of Scholastic Book Clubs, Inc., 260 Kan. 528, 920 P.2d 947
(1996), this court considered the question of whether Scholastic Book Clubs, Inc.
(Scholastic), an out-of-state based business that sold books ordered through
Kansas elementary school teachers, had established a sufficient nexus with
Kansas to subject it to the Kansas compensating use tax. The Scholastic court
found that by soliciting orders, accepting payments and shipping merchandise to
teachers for distribution to the student purchasers, Scholastic had made the
Kansas teachers its implied agents. 260 Kan. at 541. The Scholastic court applied
the test set out in Bellas Hess and Quill and concluded that Scholastic's use of
implied agents, the Kansas teachers, to sell its product to Kansas students
provided a substantial nexus sufficient for the State to impose the collection and
remittance duties of the use tax upon Scholastic. 260 Kan. at 546.
In summary, the Commerce Clause requires a taxing state to have substantial

nexus with an out-of-state business to impose use tax collection and remittance
duties. See Complete Auto, 430 U.S. at 279. Substantial nexus requires a finding
of physical presence in the taxing state. Bellas Hess, 386 U.S. at 758. The
continuous physical presence of offices and employees in a taxing state is
sufficient to impose a use tax collection duty even though the in-state presence
is unrelated to the transaction being taxed. National Geographic, 430 U.S. at
560. Mail-order sales without more are a "safe harbor" for out-of-state vendors.
188
Bellas Hess, 386 U.S. at 758. A slightest presence is not sufficient to establish a
substantial nexus, National Geographic, 430 U.S. at 556, but some states have
found that "more than a slightest presence" is sufficient. Orvis, 86 N.Y.2d at 178.
The physical presence requirement may turn on the presence in the taxing state
of a small sales force, plant, or office. Quill, 504 U.S. at 315.
The question is whether Intercard's installation activities in the state of Kansas

constitute a physical presence sufficient to establish a substantial nexus with the
state. The parties stipulated that Intercard was not incorporated or registered as
a foreign corporation doing business in Kansas; all contracts and sales occurred
outside of Kansas; and Intercard had no offices or employees in Kansas. BOTA
found that Intercard's 11 incursions to install cardreaders in Kansas were
isolated, sporadic, and insufficient to establish a substantial nexus to Kansas. We
agree and affirm BOTA's order abating the assessed sales and use tax.
189
IN THE COURT OF APPEALS
STATE OF ARIZONA
DIVISION ONE
ARIZONA DEPARTMENT OF REVENUE,

an agency of the State of Arizona,
Plaintiff-Appellant,
v.
CARE COMPUTER SYSTEMS, INC., a Washington corporation,
Defendant-Appellee.
1 CA-TX 98-0003
DEPARTMENT T
O P I N I O N Filed 7-25-00
___________________________________
Appeal from the Arizona Tax Court
Cause No. TX 95-00642
The Honorable William J. Schafer, III, Judge
REVERSED AND REMANDED

________________________________________________________________________Janet
Napolitano, Attorney General Phoenix
by Joseph Kanefield, Assistant Attorney General
Attorneys for Appellant
Lewis and Roca LLP Phoenix

by John P. Frank and Patrick Derdenger
Attorneys for Appellee
190
N O Y E S, Judge
¶1 The Arizona Department of Revenue (“ADOR”) assessed a
retail transaction privilege tax on Care Computer Systems, Inc.
("Care"). After the State Board of Tax Appeals vacated the assessment,
ADOR appealed to the Tax Court, which granted summary judgment to Care
on grounds that Care did not have “a substantial nexus with Arizona
warranting a transaction privilege tax.” ADOR then filed this appeal.
Our jurisdiction is conferred by Arizona Revised Statutes Annotated
section 12-2101(B) (1994), and our decision is guided by Arizona
Department of Revenue v. O’Connor,Cavanagh, Anderson, Killingsworth &
Beshears, P.A., 192 Ariz. 200,963 P.2d 279 (App. 1997). We reverse and
remand with directions to grant judgment to ADOR.
¶2 The material facts in this appeal from summary judgment
are not in dispute. Our standard of review is accordingly de novo on
questions of law and the application of legal principles to the
undisputed facts. See Brink Elec. Constr. Co. v. Arizona Dep’t of
Revenue, 184 Ariz. 354, 358, 909 P.2d 421, 425 (App. 1995).
¶3 The parties have acknowledged the relevance of O’Connor
to their dispute. After ADOR filed its notice of appeal, the parties
filed a joint motion to stay the appeal because, they reasoned, “the
main issue in dispute in the [Care] case, i.e., the degree of nexus
necessary for Arizona to constitutionally assess its Transaction
Privilege Tax, is the exact same issue that is
currently before the Arizona Supreme Court on the Department’s Petition
for Review in the O’Connor case.” We granted the stay. After the
supreme court denied review of O’Connor, we vacated the stay.
¶4 Both parties also acknowledge that Complete Auto Transit,Inc. v.
Brady, 430 U.S. 274 (1977), articulates the applicable test for state
tax compliance with the “dormant” or “negative” Commerce Clause. After
reviewing its earlier cases, the Complete Auto Court stated:
These decisions . . . have sustained a tax against
Commerce Clause challenge when [1] the tax is applied to
an activity with a substantial nexus with the taxing
State, [2] is fairly apportioned, [3] does not discriminate
against interstate commerce, and [4] is fairly related to the services
provided by the State. Id. at 279. Both sides further agree that the
main dispute here is whether Care’s business activities had a
“substantial nexus” with Arizona.
¶5 In O’Connor, as here, the question was whether Arizona
activities of an out-of-state vendor created a sufficient nexus with
Arizona to permit Arizona to impose retail transaction privilege taxes.
192 Ariz. at 201-02, 963 P.2d at 280-81. The out-of-state vendor,
Dunbar Furniture, Inc., built custom workstations for an Arizona
customer, the O’Connor law firm. Dunbar had no property, employees,
offices, or showrooms in Arizona, although an Arizona retailer did
serve as its independent representative on occasion. All negotiations
between O’Connor and Dunbar took place in Arizona, either in person or
by telephone.
During that time, Dunbar employees brought two prototype
workstations to Arizona and assembled them for review by O’Connor.
Under the parties’ contract, title to the workstations passed to
O’Connor when they were delivered, and the risk of loss passed to
O’Connor when they were installed. See id. at 202, 963 P.2d at 281.
Dunbar employees delivered the workstations to Arizona. A
191
local retailer installed them under contract with Dunbar and under
supervision of a Dunbar factory representative. On three occasions
thereafter, Dunbar sent employees to the O’Connor offices on warranty
claims. See id. at 203, 963 P.2d at 282.
¶6 ADOR audited O’Connor and assessed use taxes on its
workstation purchases. O’Connor protested the tax and prevailed at the
administrative level on the theory that, because Dunbar’s sales were
subject to Arizona retail transaction privilege taxation, O’Connor was
not liable for use taxation. The tax court ruled for ADOR. See id. We
reversed the tax court. See id. at 208, 963 P.2d at 287. Relying on
Standard Pressed Steel Co. v. Department
of Revenue of Washington, 419 U.S. 560 (1975); Complete Auto, 430 U.S.
274; National Geographic Society v. California Board of Equalization,
430 U.S. 551 (1977); Tyler Pipe Industries, Inc. v. Washington State
Department of Revenue, 483 U.S. 232 (1987); and Quill Corp. v. North
Dakota By and Through Heitkamp, 504 U.S. 298 (1992), we held that the
activities performed in Arizona by and on
behalf of Dunbar were significantly associated with Dunbar’s ability to
“establish and maintain” a market in Arizona for the sales. O’Connor,
192 Ariz. at 206, 963 P.2d at 285. The court’s “establish and maintain”
expression was taken from the following section of Tyler Pipe: “As the
Washington Supreme Court determined, ‘the crucial factor governing
nexus is whether the activities performed in this state on behalf of
the taxpayer are significantly associated with the taxpayer’s ability
to establish
and maintain a market in this state for the sales.’” 483 U.S. at 250.
¶7 We begin our analysis in the present appeal by rejecting
Care’s argument that a retail transaction privilege tax requires a
higher level of nexus with the taxing state than does a use tax. This
argument is based on cases that were decided when state taxes on
interstate commerce were per se unconstitutional. See General Trading
Co. v. State Tax Comm'n of Iowa, 322 U.S. 335, 338 (1944); McLeod v.
J.E. Dilworth Co., 322 U.S. 327, 330 (1944). Later cases based on that
same philosophy included Freeman v. Hewit, 329 U.S.
249 (1946), and Spector Motor Service, Inc. v. O’Connor, 340 U.S. 602
(1951). Those two cases were expressly overruled in 1977 by Complete
Auto, which upheld a privilege tax assessment on an interstate
business’s gross receipts from the taxing state. 430 U.S. at 288-89.
[T]he Court in Complete Auto did not merely overrule
Spector, it also explicitly rejected the formalistic
Commerce Clause doctrine that provided the foundation for
the Spector rule. Thus, the court repudiated the
“underlying philosophy . . . that interstate commerce
should enjoy a sort of ‘free trade’ immunity from state
taxation.” The Court likewise disapproved Freeman v.
Hewit’s “blanket prohibition against any state taxation
imposed directly on an interstate transaction.”
1 Jerome R. Hellerstein & Walter Hellerstein, State Taxation ¶4.11[1],
at 4-46 (3d ed. 1998).
¶8 We now decide whether a sufficient nexus existed between
Care’s business activities and Arizona to subject Care to Arizona’s
retail transaction privilege tax. In answering that question, we focus
on whether the activities performed on Care’s behalf in Arizona were
“significantly associated with the taxpayer’s ability to establish and
maintain a market in this state for the sales.” Tyler Pipe, 483 U.S. at
250.
¶9 Care is a Washington corporation that sells and licenses
192
computer hardware and software to nursing homes throughout the United
States. Care does not own or lease any real property in Arizona, it
does not maintain any inventory in Arizona, it does not maintain a
business address in Arizona, and it does not have any employees,
independent contractors, or agents based or residing in Arizona.
¶10 During the audit period, Care engaged in approximately
180 transactions with Arizona nursing homes. Because Care dealt
primarily with nursing home chains, most of its business resulted from
mail orders initiated by other nursing homes in the chains. The vast
majority of Care’s Arizona transactions were conducted by mail or
telefax. Two of the transactions were leases and the rest were sales.
One lease was for a general ledger program; the other
was for three programs and a computer. At the end of both lease terms,
the lessees bought the leased goods, and Care credited seventy-five
percent of the lease payments to the sales prices. The two
transactions, including credited lease payments, totaled $21,720.39.
The non-credited rental payments totaled $2,488.47.
¶11 Care had one salesperson assigned to Arizona. He lived
in Irvine, California, throughout the audit period. His sales efforts
focused almost exclusively on southern California. Although Arizona was
part of his territory, the salesperson did not initiate sales
relationships in Arizona. On seven occasions in the seven-year audit
period, however, the Care salesperson took one- to two-day trips to
Arizona to follow up on business prospects. Some sales and licenses
resulted from these trips.
¶12 Care required that all customer contracts be approved by a
corporate officer in Washington before the goods were shipped. All
goods were shipped from Care’s home office in Washington,F.O.B. origin,
either by common carrier or U.S. mail. Title to hardware, software,
forms, and supplies sold by Care thus passed to the customer in
Washington on delivery to the common carrier or the U.S. Postal
Service. By definition, however, title to products that Care leased or
licensed to its customers did not pass to the customers. Approximately
$105,000 of Care’s income from Arizona transactions during the audit
period consisted of software
licensing fees.
¶13 Regarding the training provided by Care to its Arizona
customers, Care Executive Vice President Jerry Nelson averred:
Personnel from this company go to the nursing home
site, in almost every case, only once. This is to
conduct the initial training which may last from one to
several days, depending on the number of programs involved. The
training representative is dispatched from our home office or another
service office, and returns immediately upon completion of the
training. . . . The cost of the training is insignificant compared to
the cost of the hardware and software; e.g., the list price of a
computer system consisting of the hardware and basic accounting
software would run approximately $20,000, whereas the training for such
a purchase would cost approximately $1,400. Not all sales involve
training at the customer site. . . . [S]ales to a chain of homes may
entail training only once at a central site for a number of homes; or a
nursing home may simply opt to do its own training with the help of the
user documentation. A review of the business records of our company
indicates that we had a training representative in Arizona at widely
separated junctures 80 days out of the total 1370 days covered by the
audit, July 1, 1987 through March 31, 1991. This amounts to
approximately 21 [sic] days per year.
193
Essentially, all the subsequent support for the
computer system is rendered on an interstate basis
involving the mail or telephone. . . . It is extremely
rare for our personnel to go back on site after the
initial training, largely because the telephone support
suffices.
¶14 Although Care’s Arizona activity was of relatively low
volume, “the volume of local activity is less significant than the
nature of its function on the out-of-state taxpayer’s behalf.”
O’Connor, 192 Ariz. at 208, 963 P.2d at 287. In our opinion, the volume
and function of Care’s Arizona activity equal or exceed that seen in
O’Connor. Dunbar, the out-of-state vendor in O’Connor, had an Arizona
market of one customer, with which it engaged in seventeen
transactions. Care had an Arizona market of one industry,
with which it engaged in about 180 transactions. Dunbar maintained no
post-sale ownership of property in Arizona; Care did so with licenses
and leases. Care permanently assigned a salesperson to cover Arizona;
Dunbar did not. Care routinely sent training personnel into Arizona;
Dunbar did not, although it did send in employees to do warranty work.
¶15 The trips by Care’s salesperson to Arizona were intended to, and
did, result in additional sales of Care products. The trips by Care
trainers to Arizona were in part intended to, and presumably did,
increase the satisfaction level of Arizona customers and encourage
other members of that nursing home chain to buy Care products. The Care
leases in Arizona were few in number and duration, but they could, and
did, develop into outright sales.
We therefore conclude that the function and effect of the Arizona
activities by Care and Dunbar were the same, that the factual
differences between the two cases are therefore not material, and that
the result of the “substantial nexus” analysis should be the same in
each case.
¶16 In addition to O’Connor, ADOR relies on Brown’s
Furniture, Inc. v. Wagner, 665 N.E.2d 795, 798, 803 (Ill. 1996)(holding
that vendor with no office, plant, or sales force in Illinois but who
advertised there and made 942 deliveries there in ten months had
substantial nexus with Illinois); Magnetek Controls, Inc. v. Revenue
Division, Department of Treasury, 562 N.W.2d 219, 224 (Mich. App. 1997)
(finding substantial nexus from managers’ regular travel to other
states to assist independent sales
1 Overruling recognized in Department of Revenue v. Moki
Mac River Expeditions, Inc., 160 Ariz. 369, 373-74, 773 P.2d 474,478-79
(App. 1989), disapproved in part on other grounds, Wilderness World,
Inc. v. Department of Revenue, 182 Ariz. 196,200, 895 P.2d 108, 112
(1995).
10 representatives and attend trade shows); and Orvis Co. v. Tax
Appeals Tribunal of State of New York, 654 N.E.2d 954, 961 (N.Y. 1995)
(holding that visits by company personnel to New York for sales and
customer relations created substantial nexus). Care asserts that those
cases concerned use or sales taxes that vendors had to collect from
customers, not transaction privilege or other excise taxes for which
the vendors were themselves liable. The
assertion is correct, but those cases are nevertheless relevant because
they applied the Complete Auto test and focused on whether the
taxpayers’ activities established a “substantial nexus” with the taxing
states.
¶17 Care relies on State Tax Commission v. Murray Co. of
194
Texas, 87 Ariz. 268, 350 P.2d 674, vacated, 364 U.S. 289, op. on
remand, 89 Ariz. 61, 358 P.2d 167 (1960),1 a case that is mainly of
historical interest because it was decided when taxation of interstate
commerce was still precluded. Care also relies on City of Phoenix v.
West Publishing Co., 148 Ariz. 31, 712 P.2d 944 (App.
1985). That case relied on Murray, preceded Tyler Pipe, drew no
distinction between the Due Process and Commerce Clause nexus
requirements, and did not address the “crucial factor” articulated by
Tyler Pipe, namely, whether West’s business activities in Phoenix were
significantly associated with establishing and maintaining a market in
Phoenix for its sales. Had West Publishing focused on that crucial
factor, the case might have been decided differently. We therefore
distinguish Murray and West Publishing. Although a comparison of the
facts here to the facts there does support Care, that support
evaporates when one acknowledges the intervening evolution in Commerce
Clause law.
¶18 Care also argues that an administrative agency must

follow its own rules and regulations. We agree with that general
proposition. See, e.g., Cochise County v. Arizona Health Care Cost
Containment Sys., 170 Ariz. 443, 445, 825 P.2d 968, 970 (App. 1991).
Care correctly notes that Arizona Administrative Code (“A.A.C.”) R15-5-
23072 provides that “[s]ales made by vendors within Arizona are subject
to the Sales Tax.”
__________________
2 In context, A.A.C. R15-5-2307 provides as follows:
R15-5-2306. Distinction Between Sales Tax and Use Tax
A. The Sales Tax is imposed on sales made by vendors
located within Arizona, while the Use Tax is levied
on purchases from out-of-state vendors.
B. Since the Sales Tax and Use Tax are complementary
taxes, only one of the taxes can be applied to a
given transaction.
R15-5-2307. When a Transaction is Subject to the Sales
Tax
Sales made by vendors maintaining a place of business within Arizona
are subject to the Sales Tax. Sellers operating from a commercial
location or point of distribution, soliciting from a public place of
business, or buying and selling articles on their own account within
the state are deemed to be in business in Arizona.
For example, an office equipment dealer maintains a sales office
in Arizona, solicits business from customers in Arizona, and
orders the equipment from its home office out of state. Although
the seller maintains no stock of inventory in Arizona and the
products are shipped directly to the purchaser, he is
nevertheless considered to be engaging in business within the
state for purposes of this regulation. Such sales are taxable
under the Sales Tax statutes.
R15-5-2308. When a Transaction is Subject to the Use Tax

Purchases made from vendors not maintaining a place of
business in this state to Arizona customers are subject
to the Use Tax. For example, purchases from an
out-of-state vendor selling by mail order to Arizona
residents are subject to the Use Tax.
Because Care does not maintain a place of business
195
within Arizona, it argues that ADOR cannot impose a transaction
privilege tax on it. We do not agree with that argument. Because
“Arizona’s use tax thus functions primarily as a complement to the
retail transaction privilege tax,” O’Connor, 192 Ariz. at 204, 963
P.2d at 283, Care’s argument, if true, means that ADOR could have
imposed a use tax on Care’s Arizona customers pursuant to A.A.C. R15-5-
2308, which provides that “[p]urchases made from vendors not
maintaining a place of business in this state to Arizona customers are
subject to the Use Tax.” That argument, however, was rejected
by O’Connor.
¶19 In O’Connor, where ADOR imposed a use tax on the Arizona customer
because the vendor did not maintain a place of business in Arizona,
this court applied the Complete Auto test and the Tyler Pipe “crucial
factor” and held that ADOR could not impose a use tax on the customer--
because it could have imposed a retail transaction privilege tax on the
vendor. O’Connor, 192 Ariz. at 204-08, 963 P.2d at 283-87. That holding
illustrates that the vendor’s place of business is an overly simplistic
test in light of current Commerce Clause jurisprudence regarding
taxation. That the regulation in question specifies that vendors
maintaining a place of business in Arizona are subject to the sales tax
does not necessarily mean that other vendors are not subject to the
sales tax.
¶20 In Brink Electric, this court rejected an argument similar to the
one that Care makes here. 184 Ariz. at 360, 909 P.2d at 427. In that
case, the taxpayer argued that A.A.C. R15-5-608, which stated that
“[i]nstallation of equipment which becomes permanently attached in a
plant or other structure is taxable as a contracting activity,” stood
for the proposition that there could be no “contracting” with respect
to equipment that did not become
permanently attached. This court disagreed and held that “[t]he
regulation certainly includes permanent attachment of equipment to a
structure within the scope of contracting, but does not purport to
exclude other real property improvements.” Id. at 360 n.6, 909 P.2d at
427 n.6.
¶21 Similarly, while A.A.C. R15-5-2307 certainly says that a taxpayer
who maintains a place of business in Arizona will be subject to the
transaction privilege tax, it does not purport to exclude a taxpayer
who does not maintain a place of business from the tax. In fact,
several cases (including Brink Electric) have found a taxpayer that did
not maintain a place of business in Arizona subject to the transaction
privilege tax. Arizona State Tax Commission v. Ensign, 75 Ariz. 220,
227, 254 P.2d 1029, 1033 (1953), for example, held that an out-of-state
taxpayer that did
not maintain a place of business in Arizona, but that sold and
installed deep well turbine pumps in the state, was subject to the
transaction privilege tax on in-state sales because the elements of the
sales were effected in Arizona. See also Centric-Jones Co. v. Town of
Marana, 188 Ariz. 464, 478, 937 P.2d 654, 668 (App. 1996) (upholding a
transaction privilege tax on an out-of-state contractor for
construction work performed on a portion of the Central Arizona Project
located within the Town of Marana even
though the contractor's offices were located in Denver, Colorado); Moki
Mac, 160 Ariz. at 373-75, 773 P.2d at 478-80 (holding that a Utah river
rafting business that did not maintain a place of business in Arizona
nevertheless had enough activities in Arizona to establish a sufficient
constitutional nexus to justify imposing the transaction privilege tax
on its gross receipts); Arizona Dep't
196
of Revenue v. Hane Constr. Co., 115 Ariz. 243, 245-46, 564 P.2d 932,
934-35 (App. 1977) (holding that an out-of-state contractor that did
not maintain a place of business in Arizona but performed work on an
Indian reservation had sufficient business activity in Arizona to be
subject to the transaction privilege tax on its contracting income),
rev'd on other grounds, State of Arizona, ex rel., Arizona Dep't of
Revenue v. Blaze Constr. Co., 190 Ariz. 262,
272, 947 P.2d 836, 846 (App. 1997), rev'd, 526 U.S. 32, 39 (1999).
¶22 Arizona’s sales tax and use tax are complementary; they
are intended to reach all applicable transactions, either by imposing a
sales tax on the seller or a use tax on the purchaser. As the
“maintaining a place of business” definition expands with
constitutional interpretation, the reach of the sales tax necessarily
expands, and the reach of the use tax necessarily contracts, as
evidenced by the holding and result in O’Connor. On facts not
materially different from those in the present case, O’Connor held that
the use tax would not apply because the sales
tax would apply. We follow that analysis here, and we reach the same
result. Because the State cannot impose the use tax on Care’s customers
on the present facts and in light of the constitutional principles
stated in O’Connor, the State can lawfully impose a sales tax on Care.
¶23 Reversed and remanded with directions to enter judgment
for ADOR.
E. G. NOYES, JR., Judge
CONCURRING:
THOMAS C. KLEINSCHMIDT, Judge
F I D E L, Presiding Judge, dissenting

¶24 My colleagues acknowledge the proposition that a
regulatory agency must follow its own rules and regulations. Ante ¶ 18.
That proposition, if applied, not merely acknowledged, would bring a
swift and simple end to this unnecessarily complicated case.
¶25 The majority quotes the applicable regulations in
footnote 2 to its opinion. The regulations are remarkably clear, not
only when compared with other tax regulations but when compared with
other regulations of any sort. R15-5-2306 informs the public that sales
taxes (which, the court and parties agree, include transaction
privilege taxes) and use taxes are meant to be complementary and that
the former are imposed on sales by in-state vendors, while the latter
are levied on purchases from out-of-state vendors. In keeping with this
complementary intent, R15-5-2307 provides that “[s]ales made by vendors
maintaining a place of business within Arizona are subject to the Sales
Tax,” and R15-5- 2308 provides that “[p]urchases made from vendors not
maintaining a place of business in this state [by] Arizona customers
are subject to the Use Tax.” These regulations were drafted in harmony,
and there is nothing ambiguous about them. Because Care Computer
Systems does not maintain a place of business within Arizona, ADOR, had
it followed its own regulations, would have subjected Care’s
transactions with Arizona customers to a use tax,
not a sales tax.
¶26 But, says the majority, “the vendor’s place of business
197
is an overly simplistic test in light of current Commerce Clause
jurisprudence regarding [sales] taxation.” Ante ¶ 19. In other words,
ADOR is not constitutionally obliged to confine its sales taxing
authority to vendors who maintain a place of business within Arizona;
rather, it has constitutional leeway under current jurisprudence to
impose sales taxes upon vendors who do not maintain a place of business
within Arizona. Accordingly, the majority reasons, whatever regulations
needlessly confine sales taxing authority so narrowly may be ignored.
¶27 By taking this approach, my colleagues achieve a curious result.
They effectively invalidate R15-5-2306, -2307, and –2308 for taxing too
narrowly — for failing to tax sales to the full extent that the
Commerce Clause permits. This is curious because it reverses ordinary
constitutional analysis. Ordinarily when courts find a statute or
regulation incompatible with the Constitution, they find that it
exceeds constitutional constraints.
Here the opposite pertains; my colleagues render ADOR’s sales tax
regulations inoperative because they bite off less than ADOR is
constitutionally permitted to chew.
¶28 I disagree with this approach. That ADOR might have
adopted more comprehensive sales tax regulations is beside the point.
The immediate question is not whether ADOR might
constitutionally adopt broader regulations but whether ADOR must follow
the narrower regulations that it has adopted and has not seen fit to
change.
¶29 There are good reasons why Arizona law requires
administrative agencies to follow their own rules and regulations. Our
Administrative Procedure Act (“APA”) not only requires the publication
of existing agency rules and regulations, see A.R.S. §§41-1011, -1012,
but also the publication of a monthly register concerning “proposed
repeals, makings or amendments of rules.”
A.R.S. § 41-1013 (1999). The APA provides for public notice and comment
before the adoption or amendment of agency rules. See A.R.S. §§ 41-1021
through -1036 (1999). The APA also requires the filing of an “economic,
small business and consumer impact statement,” A.R.S. §§ 41-1055 (1999)
and 41-1056(A)(6) (Supp. 1999) and screening by a governor’s regulatory
review council before a proposed regulation takes effect. See A.R.S. §
41-1051 (Supp.
1999); A.R.S. §§ 41-1052 through -1053 (1999). Explaining this process,
this court stated, “APA rulemaking requires public notice, and the
opportunity for public participation and comment, to ensure that those
affected by a rule have adequate notice of the agency’s proposed
procedures and the opportunity for input into the consideration of
those procedures.” Carondelet Health Svcs., Inc. v. Arizona Health Care
Cost Containment System Admin., 182 Ariz.
221, 226, 895 P.2d 133, 138 (App. 1994).
¶30 Through publication of current rules and notice of
amendments, an agency not only permits members of the public to comment
on impending changes, but also to consult the evolving body of rules
and regulations, determine the agency’s approach to circumstances that
its rules and regulations define, and order their affairs accordingly.
And the purpose of permitting the public to order its affairs in
accordance with published regulations is particularly keen for tax
regulations that govern
commercial transactions. When the parties to commercial
198
transactions factor likely taxes into pricing decisions, they should do
so in the confidence that the taxing authority will tax as its
published regulations say it will tax, and not as it might tax under a
different, unproposed, unapproved, and unadopted regulatory scheme.
¶31 In consequence, I see no need to embark on the quest for elusive
nexus to resolve this case. On the far simpler ground that ADOR has
failed to follow its own regulations, I would affirm. Because my
colleagues have opened the subject of nexus, however, I will make one
further point.
¶32 Whatever the substantive validity of Commerce Clause case
jurisprudence before Complete Auto, the law then had the virtue of
clarity. The earlier case law imposed a “blanket prohibition against
any state taxation imposed directly on an interstate transaction.” Ante
¶ 7. In Complete Auto, however, the Court made “substantial nexus” the
touchstone of taxation of interstate transactions. And in Tyler Pipe,
the Court defined “sufficient nexus” to include those activities
“significantly associated with
the taxpayer’s ability to establish and maintain a market in [the
taxing] state for the sales.” Ante ¶ 8 (quoting Tyler Pipe, 483 U.S. at
250).
¶33 I do not hold the majority responsible for the Tyler Pipe standard.
They are stuck with it as are we all. To apply that standard to these
facts and those of O’Connor, however, shows it to add bulk without
nourishment to the law. What, other than ad hoc pronouncement,
distinguishes an activity significantly associated with the taxpayer’s
ability to establish and maintain a sales market from an activity not
significantly associated with that ability? One is hard pressed to say.
The best the court can do is
conclude by comparative analysis that, if the attenuated
circumstances of O’Connor meet that standard, so must the equally
attenuated circumstances of this case. And so, validating the taxation
of one attenuated transaction after another after another, the courts
erode the general standard of substantial nexus into something very
insubstantial indeed.
¶34 “Substantial nexus” is a swamp we should stay out of in
this case. If ADOR amends its regulations to detach sales taxes from
the terra firma of the vendor’s place of business, there will be time
enough to gauge nexus. Until then, we should hold ADOR to regulations
on the books.
¶35 For the foregoing reasons, I respectfully dissent.
NOEL FIDEL, Presiding Judge
199
200
201
202
203
204
205
206
207
208
209
210
211
212
213
214
Therefore, in the case as in the Quill case, summary judgment was properly granted in favor of the vendor
as the taxing state failed to show that the vendor had a substantial nexus with the state, as required by the
Commerce Clause. For the foregoing reasons, I would affirm the judgment of the trail court.
215
10/22/03
ROYAL TRANSPORT, INC.

IN THE MARYLAND TAX COURT V. COMPTROLLER OF THE
TREASURY
NOS. 02-SU-OO-0298 & 02-SU-OO-0299
MEMORANDUM OF GROUNDS FOR DECISION
Petitioner, Royal Transport, Inc., has appealed from final determinations of the
Respondent, Comptroller of the Treasury, assessing sales and use tax in the amount of
$737,044.01, plus interest and penalty for the period July 1, 1997 through June 30,2001.
Petitioner moves this Court to set aside the assessments. A hearing was held on the
Petitioner's Motions to Dismiss and the Court allowed additional time for supplemental
memorandum and documents to be filed.
The assessments at issue emanate from actions taken by the Respondent against the
Petitioner and Furnitureland South, Inc., both foreign corporations, for failure to collect
sales and use tax on the sale and delivery of furniture in the State of Maryland. Those
initial actions and the facts supporting them are best summarized in the Court of Appeals
decision, Furnitureland South, Inc. et al v. Comptroller of the Treasury, 364 Md. 126
(2001).
In brief: Petitioner is a small commercial carrier, headquartered in North Carolina,
conducting for- hire trucking operations in interstate and foreign commerce pursuant to a
certificate of license issued by the Interstate Commerce Comnission. Petitioner's primary
customer during the period in question was Furnitureland South, Inc., (hereinafter
"Furnitureland") a nationwide furniture retailer. Petitioner was hired as a common carrier
to deliver Furnitureland's goods to customers nationwide, including Maryland.
Furnitureland did not collect sales or use taxes on furniture it sold to out-of-state
customers when shipped from North Carolina by for-hire motor carriers such as
Petitioner. Furnitureland was assessed for failure to collect the tax and due to its
relationship with Furnitureland, Petitioner was deemed by the Respondent to have nexus
with Maryland and also liable for sales and use tax.
The Court of Appeals in Furnitureland South, Inc., supra found that the Respondent had
failed to "invoke and exhaust the statutory administrative and judicial review remedies"
and therefore its attempt for a declaratory judgment was barred. As a result, the subject
assessments were issued and Petitioner asserts both federal statutory violations and
procedural defects exist to warrant dismissal.
Federal Statutory Violations Issue
First, Petitioner seeks dismissal on the grounds that a federal statute, the Interstate
Commerce Act, expressly prohibits the Respondent from compelling the Petitioner to
collect and remit sales and use tax. The statute at issue can be found in 49 U.S.C. §14501
(c), a 1995 amendment to the Airline Deregulation Act of 1978 (hereinafter "ADA "),
which provides,
216
Motor Carriers of Property. (1) General Rule. Except as provided in paragraphs (2) and
(3), a State, political subdivision of a State, or political authority of two or more States
may not enact or enforce a law, regulation, or other provision having the force and effect
of law related to a price, route, or service of any motor carrier. ..or any motor private
carrier, broker, or freight forwarder with respect to the transportation of property.
The tern "motor carrier' is defined as " a person providing motor carrier transportation for
compensation", 49 U.S.C. § 13102(13). Petitioner contends that Maryland's tax statute
compelling it to collect and remit tax during the course of delivery of property constitutes
a "law related to a price, route, or service" of Petitioner "with respect to the transportation
of property". Petitioner seeks broad construction of the "related to" language in the statute
to establish that the collecting and remitting of sales/use taxes from a motor carrier's
customers during the course of delivery falls within the parameters of the preemption
provision. Petitioner also asserts that the collection and remittance function the
Respondent seeks to impose on a motor carrier constitutes significant additional
"services" that it would have to perform.
Secondly, Petitioner contends that the Respondent has impinged upon its federal right to
deliver property in the State without restriction as mandated by the Interstate Commerce
Act and thus has violated Petitioner's civil rights. Petitioner seeks an award of damages,
including its reasonable attorneys fees, pursuant to 42 U.S.C. § 1983 to compensate the
motor carrier for the injury it has suffered as a result of the illegal enforcement of a state
statute in violation of federal law. Respondent counters that the ADA does not preempt
Maryland sales and use tax law. First, he points to case law involving ERISA statutes that
narrowly construes the "related to" language when it is applied to laws of general
applicability , (i.e. sales tax laws). According to the Respondent, the tax collection law is
one of general applicability to all vendors and Petitioner's increased burden, as a vendor,
to collect the tax is not significant enough to justify preemption. In addition, Respondent
examines the legislative history of the ADA as support. Specifically, noting that other
sections of the act place restrictions on the traditional authority of the state to tax,
Respondent asserts that if Congress had intended to restrict sales tax it would have
similarly placed that limitation in the act. Finally, Respondent directs us to language in
the legislative report accompanying the subject ADA provision that states "nothing in this
amendment is intended to change the application of State tax laws to motor carriers".
H.R. Coni Rep. 103-677.
As to the Petitioner's §1983 claim, Respondent contends that such actions l) are beyond
the limited jurisdiction of the Maryland Tax Court; 2) cannot be brought against a state
official acting in his official capacity; 3) can only be addressed after all administrative
remedies have been exhausted and 4) are not permissible in cases involving ADA
violations.
The Interstate Commerce Act protects "motor carriers" by way of preemption from state
laws or regulations that pertain to "a price, route or service" provided by the motor
ca1Tier. As previously noted, motor carrier is defined in the statue as "a person providing
motor carrier transportation for compensation."
217
Respondent insists that Petitioner, due to its wholly owned subsidiary status, is not a
motor carrier, but rather, upon delivering furniture within Maryland, becomes the agent
or representative of routes or services are preempted under § 41713 ...( a) narrower
interpretation would read the "related to" language out of the statute. Slip Opinion, p. 6.
In that one of the purposes of § 14501 was to place motor carrier on a level playing field
with the deregulated air carrier industry, 4 then the broad construction applied to the air
carrier preemption statute is equally applicable to the motor carrier preemption provision.
Next, the question becomes whether the imposition of the sales and use tax law relates to
a "service" performed by the Petitioner in its delivery operatiol1S. The Court in United
Parcel Service, Inc. supra at page 6, provides: "a sufficient nexus exists if the law
expressly references the air carrier's prices, routes or services, or has a 'forbidden
significant effect' upon the same, Id at 388" citing Morales. It is clear that the sales and
use tax law does not "expressly reference" a motor carrier's price, route or service.
However, Petitioner lists 11 additional services that must be performed due to the
Respondent's imposition of the tax collection and remittance obligation, which
significantly expands its motor carrier function; that is, the delivery of property. The
additional services are:
1. Determine whether any Maryland- Destined freight is on its truck;

2. If so, determine whether the shipper, Fumitureland, has collected any sales tax on
that
Maryland- destined furniture;
3. If so, determine whether the Maryland customer has paid all of the sales tax due
in full;
4. Determine the selling price of the furniture -any unpaid tax will be a percentage of
that price;
5. If not paid in full or at all, calculate the amount of use taxes due at the time of
delivery, create a new invoice, and add that amount to the invoice to be presented
to the Maryland consignee at delivery;
6. Instruct Royal drivers how to resolve the situation (in terms of modifying the tax
invoice) should the Maryland customer refuse to accept a portion of the furniture
at the time of delivery because of loss or damage, wrong pieces tendered, missing
pieces, etc.;
7. Collect the sales/use taxes due at time of delivery;
8. Instruct Royal drivers how to resolve the situation should the Maryland resident
not be prepared or willing to pay the sales/use tax due at time of delivery;
9. Record, take possession of, and keep safe the monies collected as use taxes at
time of delivery;
10. Fill out Maryland tax reports and other forms in connection with the collection of
the use tax; and
11. Account for and remit the taxes collected to the Maryland Comptroller and
assume full responsibility for any deficiencies in the amounts remitted.
Petitioner's Motion to Dismiss, p. 8-9. Respondent disputes that these extra services as
being "significant", stating that Petitioner "performs many, if not all, these services in
conjunction with its 'standard delivery"'. Respondent's Memorandum of Law, p. 7.
218
However, Respondent fails to convince this Court that most, if not all, of the 11 listed
activities would not be required but for the tax-collection obligation sought to be imposed
on Petitioner.
The issue of their significance is resolved by the undisputed testimony, by way of
affidavit of Mr. Kenneth B. Hunt, President of Royal Transport, Inc. That affidavit, never
questioned by the Respondent, presented evidence that these 11 tax-collection steps are
not only expensive and burdensome to perform, but they "would materially delay,
complicate, and hamper the process of Royal picking up and loading the furniture in
North Carolina, initiating the transportation journey. ..delivering the furniture." Affidavit,
Paragraph 8. The burden imposed caused Petitioner 10 discontinue delivery operations
into Maryland, resulting in substantial financial losses. Affidavit, Paragraph 9.
We conclude that the Respondent's scheme has a significant effect on Petitioner's "prices,
routes or services". The significance to the Petitioner, or any motor carrier, expands
exponentially for each of the jurisdictions into which Petitioner delivers that may seek to
adopt the Respondent's approach. To force each motor carrier (i.e. UPS, Federal Express,
etc.) to be liable for collecting the sales taxes for the millions of sales transactions of its
customers is beyond daunting and burdensome.
4 SeeH.R. ConfRep 103-677, p85.
Respondent's reliance on legislative history must fail for two reasons. First, the
application of the sales and use tax to motor carriers is the same as to any other
purchaser/vendor in Maryland and has not been changed by the Respondent's scheme. As
footnoted, there is no dispute that Petitioner is liable for sales and use taxes for tangible
personal property it purchases and/or uses in Maryland. There has been no specific tax on
motor carriers affected by preemption. Second, examining the overall purpose of the
preemption statute leads us to conclude that the compelling of motor carriers to become
tax collectors for each and every taxing jurisdiction in which it operates results in the
chilling effect on the freight transportation industry that the preemption statutes were
enacted to prevent.
Based on the above analysis, we find that the Interstate Commerce Act expressly
prohibits the Respondent from compelling Petitioner to remit the sales and use tax on
which the Respondent's assessment is based. Accordingly, the Motion to Dismiss the
assessment on that basis is granted.
However, we agree with the Respondent in finding that an action under § 1983 is beyond
the jurisdiction of this Court (an administrative body) and properly resides in the judicial
courts.
Procedural Issue Petitioner also filed a Second Motion to Dismiss based on the
procedural defects asserted in similar Motions filed in the companion Furnitureland
South, Inc. (M.T.C. Nos. 02-SU-OO-0305 and 0306) appeals before this Court. Even
though those issues are moot as pertains to Petitioner due to the ruling above, we shall
incorporate by reference the rationale and reasoning of the Furnitureland Motions
decision (dismissing the first assessment) in the event the issue should return by action of
an
appellate Court.
219
Accordingly, for all of the above reasons, we shall pass an Order granting the Motion to
Dismiss the assessment made by Respondent against Petitioner.
220
10/22/03
FURNITURELAND SOUTH, INC. IN THE MARYLAND TAX
COURT V. COMPTROLLER OF THE TREASURY
NOS. 02-SU-OO-0305 & 02-SU-OO-0306
MEMORANDUM OF GROUNDS FOR DECISION
Petitioner, Furnitureland South, Inc., has appealed from formal determinations of the
Respondent, Comptroller of the Treasury, assessing sales and use tax in the amount of
$737,044.01, plus interest and penalty for the period July 1, 1997 through June 30,2001.
Petitioner moves this Court to set aside the assessments. A hearing was held on the
Petitioner's Motions to Dismiss and the Court allowed additional time for supplemental
documents to be filed.
The assessments at issue emanate from actions taken by the Respondent against the
Petitioner and Royal Transport, Inc. (hereinafter "Royal"), both foreign corporations, for
failure to collect sales and use tax on the sale and delivery of furniture in the State of
Maryland. Those initial actions and the facts supporting them are best summarized in the
Court of Appeals decision, Furnitureland South, Inc. et at v. Comptroller of the Treasury,
364 Md. 126 (2001).
In brief, Petitioner is a nationwide furniture retailer, headquartered in North Carolina.
Petitioner sold furniture throughout the United States, including Maryland and hired
Royal as a common carrier to deliver its goods to customers. Petitioner did not collect
sales or use taxes on furniture it sold to out-of-state customers when shipped from North
Carolina by for-hire motor carriers such as Royal. Both Petitioner and Royal were
assessed for failure to collect the tax. The Circuit Court for Baltimore City found that
sufficient nexus existed to establish the liability of Petitioner and Royal for the collection
of sales and use tax on the sales of furniture by Petitioner.
The Court of Appeals in Furnitureland South, Inc., supra found that the Respondent had
failed to "invoke and exhaust the statutory administrative and judicial review remedies"
and therefore its attempt for a declaratory judgment was barred.
The Assessments
Subsequent to the Court of Appeals ruling, on July 25, 2001, the Respondent issued an
assessment (hereinafter, the "2001 Assessment") for the period July 1,1997 through June
30,2001. Petitioner timely appealed and one of its arguments was that the Respondent
had failed to exhaust its administrative remedies prior to issuing the 2001 assessment. In
particular, Petitioner contended that before an assessment could be issued, the
Respondent was required to mail to Petitioner a notice and demand for the filing of a
sales and use tax return within 10 days.
In an effort to keep the issue of Petitioner's liability moving forward through the appeals
process, Respondent, on December 17, 2001, attempted to correct what may have been a
procedural defect by mailing to Petitioner a Notice and Demand for Tax Return. When
Petitioner responded by way of legal argument, Respondent issued a second assessment
221
(hereinafter the "2002 Assessment") on January 15, 2002 for the identical period as that
in the first assessment.
The 2001 Assessment (Case No. 02-SU-OO-0305)
Petitioner asserts that failure of the Respondent to provide a "notice and demand" for tax
return filing warrants dismissal. § 13-103 of the Tax-General Article provides:
If a person or governmental unit fails to file a tax return as required under this article, the
tax collector shall mail the person or governmental unit a notice and demand for the
return that requires the person or governmental unit:
(1) for the sales and use tax, to file the return and to pay the tax within 10 days after
the date on which the notice was mailed.
If a return is not filed within the 10-day period, § 13-402 requires the Respondent to
"compute the tax by using the best information in its possession and to assess the tax due.
There is no question that a final "Notice and Demand" was not issued by the Respondent.
At hearing, the Court requested that Respondent submit any documents proving
compliance with § 13-402; i.e. that a demand to file a sales tax return within 10 days was
made to the Petitioner. The submission to the Court included correspondence pertaining
to the earlier Circuit Court declaratory judgment action. These included requests by the
Respondent to audit Petitioner, requests for information from Petitioner, requests for
statements from Petitioner, a determination that Respondent has found Petitioner to be an
out-of-state vendor and finally, pleadings and decisions from the Circuit Court case. The
submission clearly indicates an awareness of the Petitioner that the Respondent was
seeking to tax Petitioner's transactions. However, while Petitioner may have had "notice"
informally of possible future action by the Respondent, the requisite statutory procedure
for issuing assessments based on non- filing was not followed. As the Court of Appeals
stated:
In addition, § 13-303 authorizes the Comptroller to demand the filing of a sales and use
tax return. If the demand is not complied with, § 13-304 and 13-402 grant to the
Comptroller alternate remedies. Section 13-304 authorizes a judicial action to require the
filing of a return. Section 13-402(a) authorizes the Comptroller to make an assessment
utilizing the best information the Comptroller has, whatever that may be.
Even though Petitioner may have had some notice, its statutory right to file a return
within 10 days upon demand in order to avoid an assessment based on § 13-303 was
denied.
Respondent counters that based on past history and as seen by the document submission.
Petitioner would not have filed a return even if a demand had been issued as Petitioner
did not believe it was required to do so. In addition, the General Assembly has provided
procedural options to the Respondent in the administration of the sales and use tax law.
To assess upon failure to file a return upon demand is one such option. Another
procedure, to which the Respondent relies, depends on the availability or records for
222
inspection. § 11-504 requires vendors to keep complete and accurate records and will
make them available for inspection upon request of the Respondent. § 13-407 allows
Respondent, when the records are not kept pursuant to § 11-504, to compute the sales and
use tax and issue an assessment. Respondent claims that although requests were
repeatedly made, records have never been provided by Petitioner and thus, the resulting
assessment, issued pursuant § 13-407 is procedurally correct.
Respondent seeks to expand the assessment authority allowed under § 13-407 to those
vendors who have records and do not make them available. However, the clear language
of the statute provides for assessments only for failure to keep the records. If the General
Assembly had wanted to include persons who refuse to make records available in § 13-
407, it would have enacted the statutes similar to those dealing with the motor carrier tax.
§ 9- 209 (similar to the § 11- 504 sales and use tax records provision) mandates record
maintenance and retention and provides for inspection by the Respondent of motor
carriers as that term is defined. However, the companion provision for motor carriers, §
13-405(b), unlike § 13-407, allows the Respondent to assess "if a person fails to keep
records or to make records available to the Comptroller as required in § 9- 209..." From
the clear and unambiguous language of the provisions, the General Assembly limited the
scope of § 13-407 to only those vendors who did not keep records. As it is undisputed
that Petitioner kept records of its sales during the assessment period, Respondent's
attempt to assess pursuant to § 13-407 was erroneous.
Therefore, since no notice and demand was sent to Petitioner prior to the issuance of the
2001 Assessment, the Respondent failed to exhaust all administrative remedies. We shall
pass an Order granting the Petitioner's Motion to Dismiss the 2001 Assessment.
The 2002 Assessment (Case No. 02-SU-OO-0306)
Petitioner moves to dismiss the 2002 Assessment claiming it is duplicative of the 2001
Assessment and that the Respondent has no statutory authority to issue identical
assessments against the same taxpayer. However, since the 2001 Assessment has been
dismissed, this issue is now moot.
Petitioner also argues that the later 2002 Assessment includes periods of time beyond the
permissible statute of limitations established under § 1102( a). Specifically, Petitioner
seeks the dismissal of a five-month period (July 1, 1997 through November 30, 1997).
However, Respondent correctly notes that subsection (b) of the limitations statute permits
"an action may be brought at any time if there is proof that the tax is not paid due to fraud
or gross negligence. Respondent is asserting either fraud or gross negligence and thus,
has the burden of proving those contentions at a trial on the merits. Therefore, the
limitations issue cannot be resolved by a preliminary motion and must wait until the trial
of fact has heard all of the evidence.
Accordingly, we shall pass an Order denying the Petitioner's Motion to Dismiss the 2002
Assessment and the matter shall be set for a trial on the merits.
223
BEFORE THE BOARD OF EQUALIZATION
OF THE STATE OF CALIFORNIA
In the Matter of the Petition for Redetermination under the Sales and Use Tax Law of
Borders Online, Inc.
SC OHA 97-638364
56270
Appearances:
For Petitioner: Scott L. Brandman
Attorney at Law
Douglas D’Agostino
Associate Director, Tax
For Sales and Use Tax Department: David H. Levine
Tax Counsel IV
For Appeals Section: Jeffrey G. Angeja
Tax Counsel III
MEMORANDUM OPINION
This opinion considers the merits of a petition for redetermination for the period
April 1, 1998, through September 30, 1999. At the Board hearing, petitioner
protested a determination related to petitioner’s sales to California purchasers.
Petitioner, an out-of-state corporation, makes online retail sales of tangible personal
property (e.g., primarily books, videos, music and gift items) via the Internet. The goods
petitioner sells to California purchasers are delivered by common carrier from outside
California. Petitioner alleges that it is a separate and distinct legal entity from Borders,
Inc. (hereafter Borders), an affiliated corporation that sells similar goods in “brick-and-
mortar” stores throughout California. Petitioner further alleges that it did not maintain,
occupy or use any place of business in California during the period in question. (See Rev.
& Tax. Code, § 6203, subd. (c)(1).)
In a letter dated July 29, 1999, the Sales and Use Tax Department (hereafter the
Department) informed petitioner that the Department had concluded that petitioner was a
retailer engaged in business in California and was obligated to collect use tax from
petitioner’s California customers. (See Rev. & Tax. Code, § 6203, subd. (a).) The
Department based its conclusion, at least in part, on the significance of a paragraph,
which petitioner had posted on petitioner’s web site under the heading of “RETURNS.”
The record of this matter reflects that this paragraph stated, in pertinent part, that: “You
may return items purchased at borders.com to any Borders Books and Music store within
30 days of the date the item was shipped. All returns must be accompanied by a valid
packing slip (your online receipt and shipping notification are not valid substitutes for a
packing slip on returns to stores). Gift items may be returned or exchanged if they are
accompanied by a valid gift packing slip. You may not return opened music or video
items, unless they are defective.”
Petitioner alleges that this paragraph first appeared on petitioner’s web site some time in
June of 1999. Petitioner further alleges that petitioner’s internal records reflect that this
paragraph was removed from petitioner’s web site on or around August 11, 1999. Thus,
petitioner apparently removed the paragraph in question shortly after petitioner received
notice that the Department considered this paragraph to be evidence that petitioner had a
use tax collection obligation under California law. Petitioner has not presented any
evidence that would establish that petitioner ever expressly disavowed, either publicly or
internally, the policy reflected by the paragraph in question.
224
Petitioner contends that, notwithstanding the restrictions stated in the posted paragraph,
petitioner’s customers could return merchandise at a Borders store without a valid
packing slip and receive a store credit. Additionally, petitioner admits that, throughout
the period in question, petitioner’s California customers could obtain cash refunds by
returning merchandise purchased from petitioner, together with a valid packing slip, to a
Borders store. In other words, petitioner’s customers’ ability to obtain such cash refunds
from Borders was not dependent on whether the paragraph at issue was posted on
petitioner’s web site. According to petitioner, Borders also provided return services to
individuals who had purchased merchandise from one of Borders’s or petitioner’s
competitors; however, Borders did not, and would not, provide cash refunds to customers
of Borders’s or petitioner’s competitors.
Petitioner alleges that any merchandise petitioner’s customers returned to Borders was
not sent back to petitioner but, instead, was added to Borders’s inventory. Petitioner
claims that Borders did not charge petitioner for return and exchange services. Finally,
petitioner further claims that Borders absorbed any losses associated with accepting
returns of defective merchandise from petitioner’s customers.
OPINION
With certain exceptions that are not relevant to this matter, Revenue and Taxation Code
section (hereafter Section) 6203 imposes a use tax collection obligation on “. . . every
retailer engaged in business in this state and making sales of tangible personal property
for storage, use, or other consumption in this state . . . .” Under subdivision (c)(2) of
Section 6203, the meaning of “retailer engaged in business in this state” includes:
“[a]ny retailer having any representative, agent,

salesperson, canvasser, independent contractor, or solicitor
operating in this state under the authority of the retailer or
its subsidiary for the purpose of selling, delivering,
installing, assembling, or the taking of orders for any
tangible personal property.”
When, as here, no dispute exists with respect to an out-of-state seller’s status as a retailer,
three additional requirements must be satisfied for the seller to be a “retailer engaged in
business in this state” under Section 6203, subdivision (c)(2).
First, the out-of-state retailer must have a representative, agent, salesperson,
canvasser, independent contractor or solicitor (hereafter, collectively, representative).
Second, this representative must be operating in California under the authority of the out-
of-state retailer or its subsidiary (i.e., the in-state representative must be authorized to act
on the out-of-state retailer’s behalf). Third, the out-of-state retailer’s authorized
representative’s operations in California must include one of the following activities:
selling, delivering, installing, assembling or taking orders for tangible personal property.
Applying this analysis to the instant matter, these three requirements are met if: (1)
Borders was petitioner’s authorized representative in this state for purposes of taking
returns from petitioner’s California customers; and (2) the taking of such returns
1
constitutes “selling.” The first issue is a matter of fact, the second is a matter of law.
As to the first issue, the greater weight of the available evidence establishes that, for the
period in question, Borders was petitioner’s authorized representative in this state for the
purpose of accepting returns from petitioner’s California customers. As indicated above,
225
petitioner expressly stated on its web site that Borders was petitioner’s authorized
representative for this purpose. Petitioner has submitted no evidence showing that
Borders ever objected to being designated as petitioner’s authorized representative or that
petitioner ever revoked this designation. Rather, the evidence shows that petitioner
removed the web site declaration of this designation in response to the Department’s July
29, 1999, letter, not because Borders’s status as petitioner’s authorized representative had
changed.
Although petitioner’s express web site declaration is sufficient to establish that Borders
was petitioner’s authorized representative for returns, in addition to this direct evidence,
circumstantial evidence sufficient to establish this fact also exists. Specifically, by
petitioner’s own admission, Borders provided unique and preferential return services to
petitioner’s customers. As discussed above, Borders purportedly would allow anyone to
exchange for store credit any merchandise Borders stocked, regardless of whether that
merchandise was purchased from Borders or petitioner or from one of their competitors.
Such exchange transactions presumably would result in little, if any, net loss for Borders
and would promote good will. However, even if petitioner were to establish, which
petitioner has not, that Borders’s practice of
1 The Department has not alleged that Borders, during the period at issue, engaged in any
activities on petitioner’s behalf in California that would constitute “delivering, installing,
assembling, or the taking of orders for any tangible personal property” as these terms are
used under subdivision (c)(2) of Section 6203.
Borders Online, Inc. SC OHA 97-638364; 56270 -4-accepting returns from petitioner’s
customers was wholly independent of petitioner’s published return policy, Borders’s
willingness to provide cash refunds to petitioner’s customers, when Borders refused to do
this for customers of Borders’s or petitioner’s competitors, indicates that Borders made
such refunds because Borders was petitioner’s authorized representative. While not
exhaustive of the circumstantial evidence indicating that Borders was petitioner’s
authorized representative for returns in California, Borders’s preferential treatment of
petitioner’s customers suffices to establish this fact.
As to the legal issue that remains, we conclude that, when accomplished through
an authorized representative, the taking of returns constitutes “selling” under subdivision
(c)(2) of Section 6203. Because neither the Sales and Use Tax Law in general, nor
Section 6203 in specific, contains a definition of “selling,” following the accepted canons
of statutory construction, we construe this term according to its common usage. In other
words, “selling” is inclusive of all activities that are an integral part of making sales.
When out-of-state retailers that make offers of sale to potential customers in
California authorize in-state representatives to take returns, these retailers acknowledge
that the taking of returns is an integral part of their selling efforts. Such an
acknowledgement comports with common sense because the provision of convenient and
trustworthy return procedures can be crucial to an out-of-state retailer’s ability to make
sales. This is especially evident in the realm of e-commerce.
For example, in this case, petitioner identified Borders as petitioner’s authorized
in-state representative for effecting the generous, convenient return policy petitioner
published on its web site. It is apparent that petitioner announced this favorable return
policy to induce potential customers, who might otherwise be wary of making purchases
from a remote seller, to place orders. Indeed, many potential online customers would not
226
place an order with an online retailer whose return policy was not worthy of confidence.
An online retailer’s ability to offer these potential customers convenient returns and
exchanges at nearby reputable “brick-and-mortar” stores, as petitioner did, would
assuredly help promote such confidence. Moreover, some online purchasers will not be
satisfied with their purchases. An online retailer that offers convenient, local return and
exchange options is much more likely to obtain repeat business from such purchasers.
The important role that an online retailer’s return policy plays in obtaining repeat
business further underscores how integral the taking of returns is to selling in e-
commerce transactions.
In Quill Corp. v. North Dakota (1992) 504 U.S. 298 [hereafter Quill], the United States
Supreme Court held that, pursuant to the Commerce Clause of the United States
Constitution, a state cannot impose a use tax collection obligation on out-of-state retailers
unless those retailers have “substantial nexus” with that state. The Quill court explained
that, to establish commerce-clause nexus, a state must show that the out-of-state retailer,
or a representative of the out-of-state retailer, has a sufficiently substantial physical
presence in the state to justify the imposition of a use tax collection obligation. (Ibid.) In
this case, petitioner had a substantial physical presence in California through the many
places of business and employees of Borders,
Borders Online, Inc. SC OHA 97-638364; 56270 -5-
petitioner’s authorized representative in this state for the purpose of selling tangible
personal property. Petitioner’s substantial physical presence in this state more than
suffices to establish that petitioner had commerce-clause nexus with California during the
period in question. (See ibid.)
In sum, both the direct and circumstantial evidence are sufficient to establish that
Borders, acting as petitioner’s authorized representative, performed return and exchange
activities in California. Such activities, when performed through an authorized
representative, are an integral part of selling tangible personal property. Thus, due to
Borders’s actions in California on petitioner’s behalf, petitioner was a “retailer engaged
in business in this state” during the period in question. Accordingly, the petition should
be denied as to these issues because petitioner was obligated to collect, and remit, use tax
from petitioner’s California customers. (Rev. & Tax. Code, §§ 6203, subds. (a) & (c)(2),
6204.)
Adopted at Sacramento, California, on September 26, 2001.
Claude Parrish , Chairman
John Chiang , Member
Johan Klehs , Member
Dean Andal , Member
Marcy Jo Mandel , Member*
*For Dr. Kathleen Connell, pursuant to Government Code section 7.9.
227
SALES AND USE TAX TRAINING
Nonprofit Organizations
Objective: Discuss the application of sales and use tax as it applies to nonprofit
organizations.
Reference Code Section 58.1-609.11, Subsections A through H
1. History
Effective July 1, 2004 All nonprofit organizations with IRS status 501 (c) (3) and
501 (c) (4), may qualify for an exemption if the following criteria are met.
Exemption Criteria:
1. Have Federal 501 (c) (3) or 501 (c) (4) status; or the organization may
qualify if it has annual gross receipts of less than $5,000 and is organized
for at least one of the purposes set forth in IRC Code Section 501 ( c ) ( 3 )
or ( c ) ( 4 ).
2. Administrative cost, including salaries and fundraising expenses must not

exceed 40% of the organization’s annual gross revenue.
3. The entity must provide proof of compliance with Chapter 5 of Title 57

(relating to solicitation of contributions) of the Code of Virginia for
organizations subject to these provisions.
4. Entities with annual gross revenues of $250,000 or greater in the previous

year, must provide a copy of their financial audit performed by an
independent certified public accountant.
5. Entities required to file Federal Form 990 or 990EZ must provide a copy of
such
form to the Virginia Department of Taxation.
6. Entities not required to file Form 990 or 990 EZ, must provide the following:
a. A list of the Board of Directors, or other responsible agents of the

entity
composed of at least two individuals, with name addresses where
the individuals can be found.
b. Location where the financial records of the entity are available for
public
inspection.
1
The new exemption covers purchases of tangible personal property; however, a
new organization applying for an exemption may qualify for sales exemption if
they fall within the small category of organizations currently exempt on sales.
The new exemption granted by the Virginia Department of Taxation will cover
purchases of tangible personal property only, with the follwing exceptions:
Exceptions
Any nonprofit organization granted an exemption by the Virginia Department of

Taxation from paying sales and use tax shall be exempt from collecting sales and
use tax if the organization is within the same class of organization of any entity
exempt from collecting sales and use tax on June 30, 2003. (Example: any new
Girl’s scout group would be exempt on their sales).
Exempt from paying sales tax on taxable services (meals and hotel
accommodations). Grandfathered organizations currently exempt on taxable
services will continue to be exempt until their current exemption certificate
expires (2007). The 2005 General Assembly passed legislation allowing
organizations exempt from paying the tax on services as of June 30, 2003 to
continue to be exempt from such services provided they meet certain exemption
criteria.
The Virginia Department of Taxation, Non-Profit exemption group, will issue the
non-
Profit exemption letters to those organizations applying for the new exemption.
The exemption number issued is in the format: SE followed by FEIN number (9

digits) followed by F (legal FEIN) or C (created #) followed by EXPIRATION
DATE (8 digits (mo/day/year) with no spaces or hyphens within the number
Example: SE9900112223CO6302008
Three exemption letters will be issued:
1. Allows exempt purchases of tangible personal property.

2. Allows exempt purchases of tangible personal property, and make exempt
sales.
3. Allow exempt purchases of taxable services (a small number of
organizations, (currently 7).
4. Each letter allows an organization to make exempt purchases and/or sales
from the effective date of the exemption certificate. The effective date is
on the top right corner of the certificate.
Two types of application procedures are available to nonprofit organizations:
1. Online at www.npo.tax.virginia.gov
2
2. Paper application that can be mailed or faxed to the Nonprofit Exemption
Team. The Nonprofit Exemption Team telephone number is: 804-377-
3712
Exception for Churches:
Churches may continue to use the ST-13A Certificate of Exemption for the
limited purchases allowed under the ST-13A, or they may apply for an SE letter
of Exemption that would exempt the church on all purchases.
NOTE: OCR anticipates that most churches will elect to use the ST-13A
Certificate of Exemption. Churches are not required to have 501 (c) (3) status, or
required to file a Federal Form 990 or 990EZ, and are not required to be
registered with the Virginia Department of Consumer Services.
Refer to the Section on Churches for more detail explanations of the Sales and
Use Tax Exemption for Churches.
3
Audit Guidelines
PRIOR APPROVAL FROM THE EXECUTIVE ASSISTANT FOR AUDITS IN

THE OFFICE OF COMPLIANCE IS REQUIRED BEFORE INITIATING AN
AUDIT FOR ANY NONPROFIT ORGANIZATION.
Recommended Procedures for conducting audits are as follows:
Review sales at a vendor: Transactions prior to July 1, 2004
1. Vendor should have copy of an (E) exemption letter for the organization,
or an ST-13A.
a. The (E) exemption letter will have the Exempt Status Code
information.
b. The ST-13A permits limited exemption.
2. If there is no (E) letter on file, check the nonprofit database to determine if

tax policy has approved the exemption for
the organization.
3. If not on the database, the nonprofit organization is subject to sales tax.
Reviewing sales at a vendor: Transactions on and after July 1, 2004.
1. Vendor should have a copy of the (SE) exemption letter for the
organization on file, or an ST-13A on file.
a. The (SE) exemption letter will be for purchases or purchases/sales

or purchases/taxable services
b. The ST-13A permits limited exemption.
2. If no (SE) letter is on file, check the nonprofit database to see if the Non-
Profit
Exemption Team has approved the organization to be exempt.
3. If the organization is not on the database, they will be subject to sales

tax.
There are four broad categories for Non-Profit exemptions:
4
1. Educational (SE) letter issued
2. Medical (SE) letter issued
3. Civic and Community Service (SE) letter issued (First half)

July 1, 2005 (Second half)
4. Cultural July 1, 2006
Any organization that the Sunset Date for their exemption has not been reached
may continue to use the (E) letter, or provide a new (SE) certificate of exemption.
APPLICATION PROCEDUTRES FOR OBTAINING A SALES and USE TAX
EXEMPTION FOR NONPROFIT ORGANIZATIONS.
Correspondence should be directed to:
Virginia Department of Taxation

Nonprofit Exemption Team
P.O. Box 27125
Richmond, Virginia 23261-7125
Fax 804-786-2645
On-line application: www.npo.tax.virginia.gov

Nonprofit Web Site Address: www.tax.virginia.gov/nonprofit
Reason for Submitting Request:
a. New Exemption application- Organization is requesting a retail sales and

use tax exemption for the first time.
b. Renewal application- Organization has a current exemption, due to expire.
Federal Exempt Designation:
When required, Nonprofit organizations must apply to the Internal Revenue

Service (IRS) for recognition of their exempt status under 501(c) (3) or 501 (c)(4)
of the Internal Revenue Code, before applying to TAX for a Virginia retail sales
and use tax exemption. If the organization has a Letter of Determination from the
IRS, the organization must attach a copy along with the application. For
additional information of how to apply for the Federal exempt tax status, contact
the IRS at www.irs.gov/eo or call 877-829-5500.
Organizations with gross receipts less than $5000, and organized for one of the
purposes under 501 (c) (3) or 501 (c) (4), may also qualify for a retail sales and
use tax exemption. You must attach a copy of the organization’s Articles of
Incorporation, Mission Statement, or Statement of Purpose that best describes
the organization’s charitable purposes.
5
The following questions must be completed when making application for the
nonprofit exemption. (See copy of blank questionnaire form at the conclusion of
this section.)
Section 1 – business information
Question 1
Enter the full legal name of the organization.
Question 2
Enter the Federal Employer Identification Number (FEIN) for the organization. Do
not enter the dash mark.
Question 3
Enter the physical street, city, state, zip code, and e-mail address for the
organization. Your exemption certificate, and/or letter will be mailed to this
address.
Question 4
List the address of where the organization’s financial records are available for
public inspection, if different from the physical address.
Question 5
Enter the name, daytime phone number, title, and address; fax number, and e-
mail address of the contact person for the organization. This must be a person
who is knowledgeable about your organization’s financial records.
Question 6
Check the group that best describes the primary basis for the organization’s
current federal tax-exempt status.
Educational Medical Civic and/or Community Service

Cultural Church Other
Churches – Applying for An Exemption
Question 7
Recent legislation provides two options for a nonprofit church requesting a retail
sales and use tax exemption. Check the group that indicates your filing option.
• Form ST-13A Churches using the self-issued certificate of exemption will

be entitled to the sales and use tax exemption available under the law, as
it existed on June 30, 2003. Title 23 of the Virginia Administrative Code
(VAC) 10-210-310 provides an illustrative listing of taxable and exempt
purchases for non-profit churches using Form ST 13-A. The exemption
also includes church bulletins, programs, newspapers, and newsletters
distributed outside the church, gifts distributed outside the church,
6
baptisteries, food, disposable serving items, cleaning supplies, teaching
materials used in carrying out the work of the church. A non-profit church
electing to use Form ST 13-A, may not purchase construction and building
materials exempt of the tax.
• Stop here if you select this option, you are now ready to download
your certificate of exemption.
• Tax-Exempt Number – This option provides a broader exemption for non-

profit churches. This exemption is not limited to tangible personal property
for use in the church, or in any rooms in the public church building in
carrying out the work of the church, and its related ministries. If you
select this option, proceed to
Section II – Financial Information.
Question 8 – Exemption from collecting sales tax
Complete this question only if the Department of Taxation granted your

organization an exemption from collecting the sales and use tax, or you are
requesting an exemption, and the organization falls within the same class of
organization of any entity exempt from collecting the sales tax on June 30, 2003,
or the entity is organized exclusively to foster and sponsor, and promote physical
education, athletic programs, and contests for youth in the Commonwealth of
Virginia. Your organization may still qualify for an exemption on its purchases
even if it does not meet the sales exemption criteria. See pages 5-6 for a list of
the organizations currently exempt from collecting the sales tax. The
organization must meet all the criteria as stated in each classification.
Question 9
Previous Year’s Annual Gross Revenue (AGR) – (a) Enter revenue received
from all sources during its annual accounting period before subtracting any costs
or expenses. If filed Federal Form 990 or Form 990 EZ, enter amount as
reported to the IRS. If you are a fiscal filer, enter the first month of your fiscal
year (same as the federal filing period).
***If the previous year’s total gross revenue is $250,000 or greater, attach a
financial audit performed by an independent Certified Public Accountant
(CPA). If the AGR is less than $5,000 you must attach a mission statement.
Previous Year’s Total Fundraising – (b) Enter fundraising expenses incurred in

soliciting contributions, gifts, grants, etc. Fundraising expenses should include all
allocable overhead costs incurred in (a) publicizing and conducting fundraising
campaigns; (b) soliciting bequests, and grants from foundation or other
organizations, or government grants (c) participating in federated fundraising
7
campaigns; (d) preparing and distributing fundraising manuals, instructions, and
other materials; (e) salaries; and (f) conducting special events that generate
contributions. If filed federal form 990, or form 990EZ, enter amount as reported
the IRS.
Previous Year’s General Administrative Cost – (c) Enter he organization’s

expenses for overall function and management, rather than for its direct conduct
of fundraising activities or program services. Overall management usually
includes the salaries and expenses of the chief officer of the organization, and
that officer’s staff. If part of their time is spent directly supervising program
services and fundraising activities, their salaries and expenses should be
allocated among those functions. If filed federal form 990 or form 990EZ, enter
the amount reported to the IRS.
Question 10
Part One – Total Taxable Purchases

Enter the dollar amount, excluding the sales tax paid on tangible personal
property purchased by the organization for the next year, the current year, and
the preceding year. This should include all items purchased for use or
consumption by the organization in
pursuing its mission. Exclude goods for resale, motor vehicles and fuel,
services, salaries, insurance, utilities, postage/shipping, rent/mortgage payments,
depreciation, and interest charges. Estimates are acceptable. If a fiscal year
filer, enter the federal filing period.
Do not leave any fields blank, enter zero if the organization had no
purchases for a specific period.
Definition – Tangible Personal Property – Include items that may be seen,

weighed, measured, felt, or touched, or is in any other manner perceptible to the
senses. The term “tangible personal property shall not include stocks, bonds,
notes, insurance or other obligations or securities, motor vehicles, fuel, services,
salaries, postage/shipping, rent/mortgage payments, depreciation, and interest
charges.
Part Two – Total Taxable Sales

Enter the dollar amount, excluding sales tax of the items sold by the organization
for the next year, the current year, and the preceding year. Exclude goods for
resale, motor vehicles and fuel, services, salaries, insurance, utilities,
8
postage/shipping, rent/mortgage payments, depreciation, and interest charges.
Estimates are acceptable. If a fiscal year filer, enter the federal filing period.
***Do not leave any fields blank, enter zero if the organization had no sales
for a specific period.
Question 11
If you are required to file a federal 990 or 990 EZ tax form, please check yes and
attach a copy of the form. If you are not required to file, please list the names,
addresses, and telephone numbers of only two members from the Board of
Directors.
Question 12
Charitable organizations that intend to solicit contributions with the
Commonwealth may be required to register with the Virginia Department of
Agriculture and Consumer Services (VDACS). If the organization is registered
to solicit contributions in Virginia, Please submit the documentation that reflects
registration with the Virginia Department of Agriculture and Consumer Services
(VDACS). You may contact VDACS at 804-786-1343 for more information or
visit their web site at http://www.vdacs.virginia.gov/allforms.html#Consumer.
Section III - Signature
This section must be completed

Read the statement and complete the section if you are authorized to sign the
application. If not authorized to sign the application, have the application signed
and dated by an authorized person. Unsigned, and/or improperly signed
applications will be returned unprocessed.
CHECKLIST
Please make sure all questions are answered and that the following
documents are included with the application, if required.
______ 501(c)(3) or 501(c) (4) IRS Determination Letter
______ Independent Financial Audit from a Certified Public Accountant
______ Mission Statement, Articles of Incorporation or Statement of Purpose
______ Copies of Federal Form 990, Federal Form 990EZ, or substitute Form
______ Proof of Chapter 5 Compliance
______ Authorized Signature
9
ORGANIZATIONS MUST BE EXEMPT ON SALES AS OF JUNE 30, 2003, OR
QUALIFY WITHIN THE SAME CLASS AS AN ORGANIZATION THAT WAS
EXEMPT FROM COLLECTING SALES TAX ON JUNE 30, 2003.
THE FOLLOWING IS A LISTING OF SOME OF THOSE ORGANIZATIONS
Organizations:
Classifications:
Organizations Exempt on Sales as of June 30, 2003
1. Cardiovascular Organizations Medical

Organized and operated exclusively for the purposes of providing education,
training, certification in emergency cardiac care, research, and other related
services to reduce disability and death from cardiovascular diseases and stroke.
2. Cancer Organizations Medical

Organized exclusively for the purpose of eliminating cancer as a major health
problem by preventing cancer, saving lives from cancer, and diminishing
suffering from cancer through research, education, and service.
3. Diabetes Organizations Medical

Organized and operated exclusively for the purpose of eliminating diabetes
through medical research, public education, focusing on disease prevention, and
education, patient education including information on coping with diabetes, and
professional education and training.
4. Physical Education Program Civic –Community

Service
Nonprofit charitable organization which is organized exclusively to foster,
sponsor, and promote physical education, athletic programs, and contests for
youth in the Commonwealth of Virginia.
5. Lung Organizations Medical

Organized and operated exclusively for the purpose of eliminating all lung
diseases, including asthma, emphysema, lung cancer, and pneumonia, through
medical research, public education, focusing on disease prevention, and
education, patient education, including information on coping with lung disease,
smoking, and air pollution prevention and professional education and training.
6. Nutrition Programs Civic – Community

Service
Nonprofit nutrition programs for the elderly qualifying under 42 U.S.C. section
3030e through 42 U.S.C.Section 3030g as amended, as administered by the
Virginia Department for the aging, and the food and the food products sold under
10
such programs to elderly persons, and the food and food products sold by such
program participants to disabled or handicapped persons under the age of sixty.
7. Nonsectarian Youth Organizations (i.e. Boys and Girl Scouts) Civic -

Community
Nonsectarian Youth Organization, which is organized for the purpose of the
character development and citizenship training of its members using the methods
now in common, use by Girl Scouts and Boy Scout organizations in Virginia.
8. Blind / Deaf Hearing Impaired Civic – Community Service

Tangible personal property purchased and sold by an organization organized
exclusively to provide aid and assistance (i) to the blind or visually impaired or
for programs devoted to the prevention of the loss of eyesight; (ii) to the deaf or
hearing impaired;
(iii) to drug abusers, and for drug awareness programs; (iv) to diabetics and for
diabetes detection; and (v) for cultural and educational opportunities for the
musical talented boys and girls of the Commonwealth of Virginia, for use in fund-
raising activities, provided the net proceeds (gross receipts less expenses) from
such sales are contributed directly to or used to fund the charitable purposes for
which the organization is organized. (i.e. Lions club)
9. Supports Public Libraries Civic – Community Service

Organized exclusively for the purpose of providing support for public libraries.
10. Youth Symphony Orchestra Cultural

Organized exclusively to foster, promote, and increase the musical knowledge,
appreciation, experience, and performing ability of young people, and of the
general public, by establishing, maintaining, and operating one or more youth
symphony orchestras in the Commonwealth of Virginia.
11. Volunteer Medical Service Organization Medical

Provide reconstructive surgery and related health care to indigent children and
young adults in developing countries, and the United States.
12. Food Banks Civic – Community

Service
Food Bank or organization organized exclusively for the distribution of foods to
infants, the ill, or the needy; the exemptions shall apply to each transaction in the
chain of commerce from manufacturer to final disposition, provided that such
food bank or organization is not conducted for profit.
13. Volunteer Fire Department & Rescue Squads Civic – Community

Service
A volunteer fire department or volunteer rescue squad, an auxiliary or junior
organization of such department or squad not conducted for profit, a nonprofit
11
association of which the regular membership is composed of such volunteer fire
departments or volunteer rescue squads, and construction materials to be
incorporated into reality when sold to and used by such organization, rather than
a contractor, in construction, maintenance, or repair of any property of such
organization.
14. Humane Societies Civic – Community

Service
Virginia Federation of Humane Societies or any chartered nonprofit organization
incorporated under the laws of this Commonwealth and organized for the
purpose of preventing cruelty to animals and promoting humane care of animals
when such property is used for the operation of such organizations, or the
construction or maintenance of animal shelters.
15. Provide Food Packages at Reduced Prices Civic – Community

Service
Organized for the purpose of providing food packages at a reduced price through
host organizations (i.e. churches, community centers, senior centers, medical
centers, Head Start programs) to individuals who agree to perform community
service.
16. School Fund Raising for Elementary or Secondary Schools (i.e. PTA)
Civic – Community
Service
A nonprofit elementary or secondary school, or Parent Teacher Association, or
other group associated with a nonprofit elementary or secondary school for use
in fund-raising activities, the net proceeds (gross receipts less direct expenses)
of which are contributed directly to the school or used to purchase certified
school equipment, and certified school equipment purchased by such group for
contribution directly to the school. For the purpose of this subdivision, “certified
school equipment” means equipment for which the Parent Teacher Association,
or other group has received certification from the school that it will accept as a
donation of equipment. The certification provided by the school shall be in
accordance with regulations promulgated by the Tax Commissioner.
Notwithstanding the other provisions of this subdivision, the tax shall not apply to
the sale of class rings, school photographs, and other fund-raising programs from
which a nonprofit elementary or secondary school receives a commission, or the
net proceeds after the payment of vendors, and other direct expenses.
17. Noncommercial Educational Telecommunications Entity

Educational
Nonprofit noncommercial educational telecommunications entity.
18. Training and Education In Law Enforcement

Educational
Exclusively provides either training and education of any type or duration for
employees of governmental law enforcement and corrections agencies or
12
education of the public in citizen cooperation with public authorities in crime
prevention and solution, provided such foundation is nonprofit.
Below is a listing of nonprofit organizations that are exempt from collecting

Sales and Use Tax on their fund raising sales.
• Services for the blind, deaf, hearing impaired, drug abuse

programs, musically talented children of Virginia
• Vascular Organizations
• Cancer Organizations
• Diabetes Organizations
• Donations to Food Banks
• Volunteer Fire Departments and Rescue Squads
• Provide Food Packages at Reduced Prices
• Virginia Federation of Humane Societies
• Nonprofit Foundation for training and education in law
enforcement
• Lung Organizations
• Volunteer Medical Service Organizations
• Nutrition Program
• Supports Public Libraries
• Physical Education Program
• School Fundraising for Elementary or Secondary (PTA’s)
• Noncommercial Educational Telecommunications Entity
• Nonsectarian Youth Organizations
• Youth Symphony Orchestras
Attachments:
Blank Copy of New or Renewal Application for Sales and Use Tax Exemption for
Nonprofit Organizations
Blank Copy of retail Sales and Use Tax Certificate of Exemption Letter Form
Listing of Public Document for Reference purposes
Current Tax Bulletin
13
OCCASIONAL SALES
Page - 1

OCCASIONAL SALES
Objective: Discuss the application of sales and use tax as it applies to occasional
sales.
I. References
A. Code of Virginia Sections 58.1-602, 58.1-609.10(2)
B. Virginia Administrative Code 23 VA 10-210-570, 23 VAC 10-210-1072,

23 VAC 10-210-1080.
C. Ruling Letters PD 91-290, PD 93-164, PD 93-178, PD 94-21, PD 94-35,

PD 94-134, PD 94-143, PD 94-61, PD 95-21, PD 95-79, PD 95-302, PD
96-5, PD 96-75, PD 97-199, PD 00-1.
D. Court Case Steuart Petroleum Co. v. Virginia Department of Taxation
II. General
A. The tax does not apply to an occasional sale provided the sale or
exchange is not one of a series of sales or exchanges sufficient in
number, scope, and character to constitute an activity requiring the
holding of a certificate of registration.
B. The occasional sale exemption is based the premise that persons not
regularly engaged in making retail sales should not be required to register
and collect the tax on occasional or isolated sales. A fundamental
characteristic of an occasional sale is that it lacks continuity and regularity
and it occurs without being expected or without design.
C. The occasional sale exemption is not founded on nexus or other issues

relating to interstate commerce, but rather on limited sales activity.
Nexus is an issue that relates to a seller's obligation to collect the tax.
The absence of nexus does not in itself negate the purchaser's
responsibility to pay the use tax if such is due.
D. Occasional sale is defined as one of the following:

OCCASIONAL SALES
Page - 2
(1) A sale by a person who is engaged in sales three or fewer separate

occasions per calendar year. Sales at fairs, flea markets, carnivals
and circuses are not occasional sales.
(2) A sale of tangible personal property not held or used by the seller in
the course of an activity for which he is required to hold a certificate
of registration.
(3) The sale or exchange of all or substantially all the assets of any
business.
(4) The reorganization or liquidation of any business.
E. Sales by nonprofit organizations may qualify for the occasional sale

exemption provided sales are made on three or fewer separate occasions
per calendar year, and the duration of each sale is for no more than a few
days.
F. If a transaction qualifies as an occasional sale, the purchaser is not liable

for any use tax.
G. A purchaser meets the definition of a dealer when he causes tangible

personal property to be imported into the Commonwealth for his own use
or consumption. Generally no occasional sale exemption is allowed on
purchases from out-of-state. Reference PD 93-164.
III. Procedures
A. Analyze the transaction. Obtain detailed information from the taxpayer

regarding the terms and nature of the sale. Determine if the transaction
meets the definition of an occasional sale. If the auditor is unable to
make a determination, the transaction should be taxed, and the taxpayer
should request a ruling from the Tax Commissioner.
B. The transaction must first meet the "number, scope, and character"
criteria:
(1) The taxpayer must generally make sales on three or fewer occasions
each year.
OCCASIONAL SALES
Page - 3
If the taxpayer has made more than three sales in a calendar year,
the auditor must determine if the sales occurred unexpectedly and
without design, and were truly occasional in nature. If so, the
taxpayer becomes a dealer and is required to collect tax beginning on
the date of the fourth sale. If not, the taxpayer is a dealer effective on
the date of his first sale.
(2) If the transaction is an integral, although infrequent, part of the

taxpayer's activities, it may not qualify as an occasional sale.
(3) The duration of a sale must be for no more than a few days.
Otherwise the taxpayer is deemed a retailer as he may be in
competition with businesses or other organizations required to collect
sales tax.
(4) A sale otherwise defined as an occasional sale will not be exempt if it

does not meet the "number, scope, and character" criteria. The
Department has historically determined that if the sale of all or
substantially all the assets of a business requires several transactions
over an extended period of time to many different purchasers, it does
not qualify as an exempt occasional sale. The Department has relied
on the “three or fewer” sales provision to deny the occasional sale
exemption in many such instances.
In the Steuart Petroleum court case, the Court stated that an

evaluation of the scope and character of such transactions should be
conducted in order to place the number of asset sales in their proper
context.
The Court stated that in the instant case, all the assets of a division
were sold pursuant to an orderly plan of liquidation - there was no
piecemeal disposition. Five packages, as determined by geographic
location, were sold over a nine-month period - there were not dozens
of buyers bidding over several years.
The Court determined that the scope and character of these sales fall
within the intent of the General Assembly to shield such transactions
from sales tax. As a result the orderly liquidation of a business over a
twelve-month period should qualify for the occasional sale exemption.
C. A registered dealer is not allowed an occasional sale exemption for the

mere fact that the article sold differs in the type or class from the products
he normally sells. For example, a dealer who operates a convience store
is not allowed an occasional sale exemption for the sale of a cash
register.
OCCASIONAL SALES
Page - 4
The property sold must not be used in the activity for which the dealer is
required to be registered. For example, a bank which holds a certificate
of registration for the sale of checks, checkbooks, and reclaimed property
may make an exempt occasional sale of data processing equipment used
by its Information Services Division.
In the case where a lessor sells all of its leased equipment, which
represents all of the lessor's assets, to the lessee, the terms of the lease
agreement will determine if the sale qualifies as an occasional sale. If the
equipment is sold through some provision in the lease agreement
allowing for the sale of the leased equipment prior to the end of the lease
period, it would not qualify as an occasional sale.
If the sale is made outside the terms of the lease contract, it would qualify
as an occasional sale as the equipment represented all the assets of the
lessor's leasing business.
D. The sale or exchange of all or substantially all the assets of any business
is an exempt occasional sale if the sale represents the sale of all or
substantially all the assets of the seller's business in Virginia. The seller
may continue to operate like businesses in other states.
A separate legal entity is a separate and distinct business. For example,

a corporation may make an exempt occasional sale of all its assets in
Virginia, although it holds an interest in a joint venture which continues to
operate in Virginia.
A disposition of a separate and distinct activity of a multifaceted business

operation may qualify as the sale of all or substantially all the assets of a
business. In determining if a division of a business is separate and
distinct from the business, certain criteria must be met:
(1) Each division must have a completely separate set of books which
are separately maintained.
(2) Separate bank accounts must be maintained.
(3) Employees must be active in only one division.
(4) Divisions must be separately housed.
(5) Each division must have its own fixed assets which are not used
interchangeably.
OCCASIONAL SALES
Page - 5
E. The transfer of assets from one business to newly-formed subsidiaries in

exchange for all of the issued and outstanding shares of stock of those
subsidiaries qualifies for nonrecognition of income under Internal
Revenue Code (I.R.C.) Section 351. This tax-exempt reorganization of
assets for stock is a qualifying "reorganization" for purposes of the
occasional sale exemption. This includes the sale of a business through
a series of transfers, each of which qualifies for nonrecognition of income
under I.R.C. Section 351 as the tax-exempt reorganization of assets for
stock.
PENALTIES AND INTEREST
Page - 1

Objective: Discuss the application of sales and use tax as it applies to penalties
and interest.
I. References

23 VAC 10-210-2032
C. Ruling Letters PD 95-59

PD 00-98
PD 04-76
D. Addendum to 23 VAC 10-210-2032 (Alternative Method of Computing

Use Tax Compliance Ratio) See PD 00-115
E. Code of Virginia Section 58.1-1840.1 Virginia Tax Amnesty Program

Effective 07-01-03
II. General
A. The application of interest to all audit deficiencies is mandatory. It

accrues at the rate established in Section 6621 of the Internal Revenue
Code, as amended, plus 2.0%.
B. Penalty is typically not applied to first generation audits unless
1. the taxpayer was previously notified in writing, but failed to follow

instructions; or
2. the taxpayer collected tax, but failed to remit it; or
3. indications of fraud exist.

Page - 2
C. In addition to the instances listed above for first generation audits, the
application of penalty on second and subsequent audits is generally
based upon the taxpayer's compliance ratio.
1. The compliance ratio is calculated by dividing the measure reported
by the total of the measure reported plus the measure found.
Measure reported does not include any measure on which tax was
paid directly to the vendor by the taxpayer. The purpose of the use
tax compliance ratio is to measure how well a taxpayer complied with
the Virginia tax laws requiring accruing and remitting the tax on
untaxed purchases.
2. On second generation audits the taxpayer's compliance ratios must

meet or exceed 85% for sales tax and 60% for use tax in order to
avoid the application of penalty.
3. On third and subsequent audits penalty will apply unless the

taxpayer's compliance ratios meet or exceed 85% for both sales and
use taxes.
4. NEW: The taxpayer can apply for penalty relief for all second and
subsequent audits using the alternative method of computing use tax
compliance. The alternative method allows taxpayers to include the
measure upon which sales tax was paid to vendors in the compliance
ratio calculation. The alternative method can be applied for all retail
sales and use tax audit assessments issued on and after October 1,
1999. The compliance ratio is calculated by dividing the use measure
reported plus the sales tax measure paid to vendors by the use
measure reported plus the sales tax measure paid to vendors plus the
deficiency. It is the taxpayer’s responsibility to compute the
Alternative Method calculations and provide the auditor with
documentation supporting the computation within 60 days of the
audit assessment. The taxpayer must compute the ratio based on a
review of the same period used to compute the compliance ratio. If the
compliance ratio computed under the alternative method meets or
exceeds the established threshold the penalty will not apply and
should be abated.
D. Penalty may be waived
1. On audit deficiencies occurring in new areas not covered on prior

audits.
2. In instances where the taxpayer has relied on information provided by

the Department.
Page - 3
3. In instances where exceptional mitigating circumstances exist.
4. If the taxpayer chooses to use the Alternative Method of Computing

Use Tax Compliance. It is the taxpayer’s responsibility to complete
the Alternate Method calculations and provide the auditor with
documentation supporting the computation within 60 days of the audit
assessment. The Alternate Method can only be used on
assessments issued on and after October 1, 1999.
E. Fraud penalty of 50% will apply in cases where the taxpayer filed false or
fraudulent returns with the intent to defraud the Commonwealth. The
Code of Virginia states that under reporting gross sales, gross proceeds,
or cost price by 50% or more is prima facie evidence of intent to defraud.
In practice, it requires additional substantial evidence to support that the
taxpayer's under reporting was intentional.
If a taxpayer does not register to collect sales tax, but collects it, and does
not remit it, the fraud penalty will apply.
III. July 1, 2003 the Virginia Tax Amnesty Program Established
A. Amnesty program – Background:
The 2003 Virginia General Assembly passed legislation creating an

amnesty program that was held September 2, 2003 through November 4,
2003. Any taxes owed, whether previously billed or not, were eligible for
this program provided that the tax period was for April 2003 or prior
(calendar year 2001 and prior for Individual and Corporate Income and
calendar year 2002 and prior for Litter Tax) and the bill, if assessed, was
at least 90 days old as of the first day of Amnesty. Any Amnesty eligible
amounts that were not satisfied during the Amnesty window may be
assessed an Amnesty Penalty that is equal to 20% of the outstanding tax
amount. If an audit contains outstanding tax that would have been
eligible for Amnesty (including Consumer Use Tax), the Amnesty
Penalty applies because of the failure to report and pay this liability
during Amnesty.
B. Application of Amnesty Penalty:
The Amnesty Penalty of 20% is in addition to other statutory penalties for

late or fraudulent filing. Subject to the guidelines established by the
Tax Commissioner for audits, the Amnesty Penalty is only applied to
those audits that are otherwise subject to penalty and only for those
Page - 4
periods that were eligible for Amnesty.
IV. Procedures
A. The sales and use tax audit program automatically calculates the
compliance ratio. The auditor should take care to ensure that the audit
reflects the correct payment record information and that the exceptions
have been properly coded. If gross sales must be altered for extrapolation
purposes, an adjusting entry needs to be made so that total taxable sales
reported is correct.
B. The sales and use tax audit program automatically calculates the
additional tax measure required for the taxpayer to achieve the Alternative
Method of Computing Use Tax Compliance.
C. The auditor should be aware that the audit sequence number does not
necessarily correspond with the audit generation. Using the wrong audit
generation number may result in an erroneous application or waiver of
penalty.
D. If the taxpayer reports delinquent tax on a current return following the

auditor's initial contact to schedule an audit, penalty, if applicable, and
interest should be computed on the late payment. The auditor should
enter the taxable measures as exceptions in the period in which they
should have been reported. Then the payment should be transferred
from the current return to the audit assessment.
If the return on which the additional tax was paid is included in the audit
period, the payment should be excluded from the measure reported for
calculation of the compliance ratios.
E. Care and sound judgment should be used in the waiver of penalty except
as indicated by the taxpayer's compliance ratio. A change in personnel, a
change in vendors, or reorganization of a company does not represent
circumstances mitigating the application of penalty.
The mere fact that an area was not an issue on a prior audit does not
make it a new issue for penalty purposes. A change in the Department's
treatment of a certain area without proper publication (Tax Bulletin), or the
Page - 5
expansion of the taxpayer into a different class and nature of business

may constitute new issues.
F. Fifty per cent penalty should be assessed on audits when it can be

supported that the taxpayer's intent is to defraud the Commonwealth.
G. In most instances, with the Audit Supervisor's approval, it is best to apply

penalty as indicated by the Compliance ratio, and allow the Office of
Policy and Administration, Appeals and Rulings to make the final
determination.
Prefabricated & Modular Homes

Prefabricated house sections & Modular homes
I. References
A. Code of Virginia Section: 58.1-203

58.1-602
58.1-610.1
B. Virginia Administrative Code: 23 VAC 10-210-2080
23 VAC 10-210-410(E)
C. Ruling Letters (give public document number):
12/20/89 Dual role operator
02/10/93 Dual role operator
PD 94-104 Sales price subject to sales tax
PD 96-024 Real property v tangible property
PD 98-161 Purchase of modular homes
D. Applicable exemption certificate:

ST-10>materials bought for re-sale
ST-11>manufacturing equipment
ST-21>direct payment permit
E. Tax Bulletins: VTB 00-3. Effective July 1, 2000
II. General
A. The sale of prefabricated modular house sections or units by manufactures

and other vendors, without installation, are sales of tangible personal
property and the tax generally applies to the sales price unless sold for
resale purposes only.
Prefabricated modular house sections or units are generally constructed at a

single site away from the intended erection site. The sections or units are
generally constructed in a manufacturing type setting. This means that the
taxpayer has a raw material inventory, a production line and a finished goods
inventory.
Prefabricated modular house sections or units are different than "mobile

homes" which are subject to the Motor Vehicles sales tax that is
administered by the Division of Motor Vehicles. Mobile homes are generally
built on a chassis with wheels that may be towed on the road and are built to
HUD specifications.
Prefab
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III. NEW: As of July 1, 2000 the following applies when auditing a Modular
Homes Manufacturer or Retailer:
“Sec. 58.1-610.1. Modular building manufacturers and retailers
The retail sale of a modular building, as defined by Section 58.1-602, by a

modular building manufacturer or modular building retailer, as defined by Section
58.1-602, shall be subject to the tax authorized by this chapter upon sixty percent
of the retail sales price. If the modular building manufacturer has paid such tax
on the cost price of materials incorporated in a modular building that has been
constructed for sale without installation, it may credit against the tax shown to be
due on the return the amount of sales or use tax paid on the cost of materials
used in fabricating such a modular building.”
This new law only applies to the Sale of Modular Homes or Buildings without
installation by the seller. Prior to July 1, 2000, a Modular Home Manufacturer or
Retailer should be audited as prescribed below.
IV. Procedures- Prior to July 1,2000
When auditing a manufacturer of prefabricated modular house sections or

units, you will first need to determine the scope of their operation.
• Does the taxpayer "set" the sections or units with their own employees or
do they subcontract it out?
• Are there any sales of sections or units that the taxpayer does not set?
• Does the taxpayer have any out of state sales?
. Is the manufacturer reimbursing, refunding or in any way returning to its

customers all of the installation/set-up fees that it charges customers?
Sales – Prior to July 1, 2000
Sales without installation: If the taxpayer is only manufacturing the

sections or units and is not setting/installing the sections or units and does
not hire someone to perform any part of the installation then the sales tax
needs to be charged on the sales price. The taxpayer should be buying all
materials that go into the units or sections without the Virginia sales tax.
The taxpayer may be entitled to the manufacture exemption on their
machinery, equipment and tools used to manufacture the sections or
units.
Prefab
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Sales with installation: If the taxpayer is manufacturing the section or

units and primarily affixes these sections or units to permanent
foundations or hires someone to perform such installation tasks, then the
taxpayer must pay the tax on the materials used in manufacturing the
sections or units. The taxpayer would not generally be entitled to the
manufacturing exemption on their machinery, equipment or tools.
Basically, the taxpayer would be treated as a using and consuming
contractor.
Dual Role: If the taxpayer is doing both, sales with and without
installation, and if the taxpayer has a common raw materials inventory,
then the auditor needs to follow the primary purpose rule, that is based on
the gross receipts in determining the sales tax application. Basically, the
auditor needs to compare the receipts for the units or sections sold without
being set or installed by the taxpayer to the receipts for the sections or
units that were set or installed by the taxpayer. The primary purpose rule
would need to be used for each year in the audit period.
Primarily fabricator/seller: If in comparing, it is found that the dealer is

selling more units without setting them, then the dealer should be treated
as a manufacturer and the sales tax would apply to the sales price on all
of these units. The taxpayer may purchase the materials without the sales
tax. On the units that the taxpayer sets, they are liable for the tax on the
fabricated cost of the unit or sections. The fabricated cost is computed by
totaling the cost of the materials, labor and overhead.
Primarily fabricator/contractor: If the taxpayer is setting more units, then

the taxpayer should be treated as a contractor and pay the sales tax on
the cost price of the materials. However, if the taxpayer does sell any units
without setting them, then they will still need to charge the sales tax on the
sales price of the unit. There is no credit given for any sales or use tax
paid on the materials that went into the manufacturing of these units.
In reviewing the sales, the auditor should note any sales into the
S.E.A.T.A. states, especially the sales on which the taxpayer did not set or
install. The auditor should also advise the taxpayer that they might be
liable for additional sales tax on the materials used in out of state sales in
which the taxpayer did the setting.
For sales (without installation by the seller) as of July 1, 2000 forward, the
taxpayer would charge tax on only 60% of the selling price. If the taxpayer
paid tax on any of the materials that went into the manufacturing of the
modular home sold, then they would be due credit for those taxes only.
For sales (with installation by the manufacturer) as of July 1, 2000, and

thereafter, the modular housing manufacturer would be liable for the tax
based on the cost price of materials only. If actual cost cannot be
determined exactly, sixty percent of the sales price (exclusive of
Prefab
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installation and delivery charges) is an acceptable substitute to use as

cost price. Note - Concerning withdrawal from inventory issues, the
fabricated cost price concept of 23 VAC 10-210-410(E) does not apply to
modular houses constructed after the law change effective on and after
July 1, 2000.
Purchases – Prior to July 1, 2000
Like sales, in auditing a manufacturer of prefabricated modular sections or

units, you will need to determine what type of operation the taxpayer has.
Is the taxpayer a manufacturer? A contractor? Both?
Once the determination has been made for sales, the purchase part of the
audit follows right along. If the taxpayer is a primarily a fabricator/seller,
then the manufacturing exemptions apply to materials, equipment,
machinery, etc. If the taxpayer is primarily a fabricator/contractor, then
there are no exemptions for material, machinery, equipment, etc. It is
possible for the taxpayer to be eligible for the manufacturing exemption
one year but not the next because an increase in installation sales may
cause its status to change to primarily that of a real property contractor. If
the taxpayer is deemed to be primarily a fabricator/seller in the first year of
the audit and purchases equipment used to build the units, the equipment
could be bought without the Virginia sales tax. If in the second year of the
audit, the taxpayer is acting primarily as a contractor, then the equipment
bought in the previous year would be subject to the sales tax on the fair
market value. If in the third year the taxpayer is primarily a
fabricator/seller, there are no provisions in the regulations for a credit on
the sales tax paid during the previous year on the equipment or
machinery.
However, as of July 1, 2000, the taxpayer is due a credit for sales and
use tax paid only on materials used in fabricating a unit or home sold
without installation.
Regardless of the taxpayer's operation, the equipment and supplies used

to set or install the sections or units onto permanent foundation will be
taxable.
Direct payment permits – Prior to July 1, 2000
If the taxpayer cannot determine at the time of purchase whether an item

will be used in a unit for sale (without installation) or in a unit that will be
set, then they may want to apply for a direct payment permit. A direct
Prefab
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payment permit (ST-21) allows the taxpayer to purchase items without the
Virginia sales tax. The taxpayer would be responsible to make sure that
the localities in which the items are purchased do not lose any local sales
tax.
Depending on the taxpayer's operation would determine how the taxpayer

reports the sales tax. The sales tax would be charged, collected and
reported on all Virginia retail sales that the taxpayer did not set or install.
The taxpayer would report the sales tax on the fabricated cost of any units
installed by the taxpayer if they were primarily operating as a
fabricator/seller. The taxpayer would only report the sales tax on the
material cost if they were operating primarily as a contractor.
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Printing and Printers
Objective: Discuss the application of sales and use tax as it applies to: printing and
printers.
I. References
A. Code of Virginia Section 58.1-602, 58.1-603, 58.1-609.3(2), 58.1-

609.3(11), 58.1-609.6(3), 58.1-609.6(4).
C. Ruling Letters - Public Documents 96-278, 95-216, 96-324, 96-180, 97-54,
88-50, 96-380, 82-26, 96-327, 96-33, 95-218, 90-79, 89-159, 95-185, 96-
304, 97-65, 97-387.
E. Applicable exemption certificate ST10-A
III. General
A. Sales of printing delivered in Virginia are generally subject to the sales tax.
However, an exemption exists for certain printed materials, other than
administrative supplies, stored for 12 months or less in Virginia for
distribution in other states.
B. The printing of tangible personal property for sale or resale is considered

industrial manufacturing and, as a result, the exemption for industrial
materials applies (VAC 10-210-920).
IV. Procedures
A. Before an audit can be completed with regard to printing, there must be a

determination as to what type of printing is being performed. There are
three types of printing defined in VAC 10-210-3010: Custom printing;
Consumer printing; and Publisher printing. Each classification has its
own tax guidelines.
1). Custom printing is the production or fabrication of printed matter in

accordance with customer specifications for the customer's own use or
consumption. Generally, the sale of custom printing represents the
taxable sale of tangible personal property. The tax is computed on the
total invoice charge made on the transaction including any service
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charges made in connection with the sale of the printed matter (eg. plate
charges, imprinting charges, folding charges, etc.). The tax is also
applicable to custom printing charges in instances where the customer
furnishes the printing stock.
Purchases by the printer of items which become part of the printed matter
for sale or resale are not subject to the tax (eg. ink, printing stock, staples,
stapling wire, binding twine, glue, etc.). Purchases by the printer of items
used directly in the production of custom printing are similarly not subject
to the tax (eg. printing plates, dies and mats, printing presses and their
repair parts, typesetting, etc.). The tax does not apply to paper, ink, and
other materials furnished to a custom printer that will become a
component or ingredient part of products fabricated by the printer.
2). Consumer printing is the production or fabrication of printed matter for

one's own use or consumption and not for resale. The manufacturing
exemptions do not apply to consumer printing since there is no sale or
resale. Although the manufacturing exemptions do not apply, other
exemptions may be applicable to the purchases made by individuals
engaged in consumer printing (eg. certain printed materials when stored
for 12 months or less in Virginia and distributed for use outside the state).
3). Publisher printing is the printing of books, newspapers, magazines or

other periodicals for sale or resale by the publisher-printer and includes
the printing of a "publication" (as defined in VAC 10-210-1060) which is
distributed free of charge. A publisher-printer making retail sales of
books, etc., must add tax to the charge. However, the sale of any
publication issued at regular intervals not exceeding three months is
exempt from the tax, except as to the newsstand sales thereof (Note: as
of 7/1/95, the term "newsstand sales" does not include sales of back
copies of publications by the publisher or his agent).
The tax applies to purchases by publisher-printers in the same manner as

custom printing. However, the manufacturing exemptions available to
publisher-printers are broader in that they apply to the necessary ancillary
activities of newspaper and magazine printing when such activities are
performed by the publisher of any newspaper or magazine. Also, based
on 58.1-609.3(2)(v), a publisher is entitled to the industrial exemptions on
equipment, printing or supplies used directly to produce a publication
whether it is sold at retail or for distribution at no cost. This means that a
publisher can subcontract out the printing of its publication and still
receive an exemption on the printing charges.
B. Although it is easy for taxpayers to understand that the sale of printing

represents the taxable sale of tangible personal property, there are
exemptions that apply to the purchase of printed materials that require
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some diligence on the part of a taxpayer to interpret and organize. Under

58.1-609.6(4) there is an exemption for catalogs, letters, brochures,
reports, and similar printed materials, and the paper furnished to a printer
for fabrication into such printed materials, when stored for 12 months or
less in the Commonwealth and distributed for use outside of the
Commonwealth. This exemption also applies to the envelopes,
containers, and labels used to package and mail such printed materials.
The only exception to this exemption is for "administrative supplies." The
term "administrative supplies" includes, but is not limited to, letterhead,
envelopes, other stationery, invoices, billing forms, payroll forms, price
lists, time cards, computer cards, certificates, business cards, diplomas,
and awards. The term also includes supplies for internal use by the
purchaser, such as menus, calendars, datebooks, desk reminders,
appointment books, employee newsletters, and other house organs.
The confusing part of this exemption is that some "administrative

supplies" may qualify for exemption if they become an integral part of the
exempt printed materials described above. For example, letterhead upon
which fundraising or promotional letters are printed, return envelopes
enclosed with fundraising letters, and price lists enclosed within catalogs
advertising tangible personal property for sale or resale are not taxable.
Also, as mentioned earlier, there are some items such as menus,
calendars, datebooks, appointment books, etc., that are taxable
"administrative supplies" when purchased for internal use by a taxpayer.
However, the same items may be exempt when used for external
promotional purposes.
The key to determining whether certain printed materials are taxable or

exempt is not in the product itself, but in the intended use of such product.
Basically, if an item is for internal use and it is received in Virginia, it is
taxable. This is true even though the item may be distributed for use
outside of Virginia within 12 months (eg. a corporate office in Virginia
receives desk planners to be distributed to their employees both within
and without Virginia). Conversely, if an item is for external promotional
purposes and will be distributed for use outside of Virginia within 12
months, it is exempt.
Below is a list of printed materials that would qualify for exemption when
stored in Virginia for 12 months or less and mailed to or distributed
outside of Virginia (this list is merely illustrative and is not designed to be
all inclusive):
Fund raising and promotional letters, circulars, folders, brochures, and

pamphlets, including those for charitable, political, and religious purposes;
Corporate stockholder meeting notices;

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Proxy materials and enclosed proxy cards;
Meeting and convention promotional materials;
A business prospectus;
Corporate monthly, quarterly, and annual stockholder reports;
Announcements, invitations, and informational pieces for external

promotional purposes;
Greeting cards, brochures, menus, calendars, datebooks, desk

reminders, appointment books, art prints, and posters for external
promotional purposes;
Printed point-of-purchase sales devices, including display racks, animated

and action pieces, posters and banners.
C. Up until 7/1/95, advertising businesses were not entitled to the exemption

on printed materials described above. Based on a legislative change,
advertising businesses now enjoy the same exemption. The exemption
for advertising businesses is valid through 6/30/02.
D. Generally speaking, the use of photocopy and photostat machines to

make reproductions of customer furnished originals is not considered to
be printing in the industrial sense. Taxpayers who operate such "quick
copy" establishments must pay tax on the machinery and tools used in
their business. Such taxpayers may purchase exempt from the tax only
those items, such as paper, that will become ingredient or component
parts of the finished products they sell. The sale of photocopies and
photostats represents a taxable sale of tangible personal property.
The primary exception to the "quick copy" scenario mentioned above is

the use of high speed electrostatic duplicators. Under 58.1-609.3(11),
taxpayers who are engaged primarily in the printing or photocopying of
products for sale or resale may purchase high speed electrostatic
duplicators (or other types of high speed duplicators) exempt of the tax.
A high speed duplicator is one that has a printing capacity of 4,000
impressions or more per hour (ie. slightly more than 1 copy per second).
E. One area of particular note is the application of printing to direct mail

agencies. Direct mail agencies typically use laser printing to
"personalize" fund raising letters for their customers. Laser
personalization consists of incorporating variable information into an
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existing letter copy in order to personalize the letter for each individual
recipient. Based on P.D. 97-65 and P.D. 97-387, when a customer
provides printing stock to a direct mail agency and the agency provides
personalization services which cause each printed piece to be unique in
nature, the transaction is deemed to be an exempt service. However, if
the direct mail agency provides the printing stock, the transaction would
be taxable. Most direct mail agencies will argue that their customers
provide all of the printing stock.
The department appears to be making a distinction between the services

provided by direct mail agencies from similar services provided by
traditional printers. If a traditional printer were to take customer furnished
printing stock and perform the same personalization services as a direct
mail agency, the transaction would represent printing in the traditional
sense.
Since direct mail agencies are considered to be providing a nontaxable

service, they are not entitled to the manufacturing exemptions on the
supplies and equipment they use.
F. The following public documents contain rulings and situations relevant to

printing and printers:
P.D. 96-380. Taxpayer held liable for the tax on stickers enclosed with
their product shipments. The stickers were provided free of charge to the
taxpayer's customers and were designed for placement in their
customer's automobile windows to display the taxpayer's business. In
this case, the stickers do not qualify as exempt promotional materials
since they only display the taxpayer's business and do not advertise
tangible personal property for sale. The stickers are considered to be
taxable "administrative supplies" since they are similar to business cards
that are used to display a taxpayer's business. Also, the total purchase of
the stickers is taxable regardless of the fact that the stickers may be
shipped to another state. First use of the stickers is deemed to be made
in Virginia.
P.D. 82-26 (Referenced in P.D. 96-327). The manufacturing exemption

was extended to a printer's subprocessing activity in which a printing
cylinder was dechromed, de-etched and replated with copper in
preparation for subsequent use.
P.D. 96-33 (see also P.D. 95-218). A printer was held liable for the tax on
a laser printer used to make proof copies of their printed product. Proof
copies are sent to the taxpayer's clients for approval. Once a proof is
approved or modified, the proof is sent to an image setter where a film is
produced from the image that will result in the making of the printing
Page - 6
plate. The proofing process is deemed to be part of a taxable pre-

production process.
P.D. 90-79. Taxpayer, a magazine publisher, may purchase photographic

prints exempt of the tax if those prints are actually used in the magazine.
The purchase of prints that are not used in the magazine are taxable.
Also, camera film and supplies used by the taxpayer to take photographs
are taxable since they are used in preproduction activities.
P.D. 89-159. Printing services rendered for the publisher of a free

newspaper were not taxable. The taxpayer published the newspaper, but
contracted with an outside party to do the printing. The publisher was
entitled to an exemption for purchases used in industrial manufacturing.
P.D. 95-185. Taxpayer was not liable for the tax on promotional
brochures purchased from Virginia and out-of-state printers and delivered
directly to an out-of-state mailing house for distribution. In this particular
case, the taxpayer made no use of the brochures in Virginia. However,
the taxpayer is liable for the tax on promotional brochures purchased from
Virginia or out-of-state printers and delivered to a Virginia mailing house.
The tax would be due on that portion of the brochures mailed to Virginia
residents.
Ruling of Commissioner, 6/6/85. Taxpayer, a newspaper publisher, may

purchase camera film, developing chemicals, and proof paper exempt of
the tax if such supplies are used to photograph a page layout for use in
making printing plates. However, these same items would be taxable if
they were used by the taxpayer to take pictures in the field for inclusion in
the newspaper.
P.D. 96-304. Taxpayer, a newspaper publisher, must pay tax on batteries

used to generate power to shut down production machinery and
equipment in case of a power outage in order to protect the machinery
from damage. While the batteries may be essential to the operation of
the business in the case of a power outage, they are not directly used in
the actual production of the tangible personal property.
Taxpayer is also liable for the tax on a press cleaner used after every
press run to clean ink, grease and particles off of the press in order to
improve the quality of the newspaper printed. The cleaner is used once
at the end of the production day to clean the parts that have been
removed from the press. The cleaner, in this case, is not "actively and
continuously" used in maintaining exempt production machinery.
Finally, the taxpayer must pay tax on computers used by their editorial
staff to write their stories. The computers are used to enter news and
Page - 7
editorial data. The data is then electronically converted into another

software system used by the copy desk editors for electronic pagination.
While the computers are an essential part of the production and printing
process, they are not an immediate part of the actual production of the
newspaper.
P.D. 97-54. The sale of printing and cutting dies by a box manufacturer
are taxable. Although the manufacturer could purchase the dies or the
materials used to make the dies exempt of the tax, since it used them
directly in manufacturing products for resale, subsequent sales of the dies
by the manufacturer were held taxable because they constituted retail
sales to customers who were not actually using the dies in an exempt
manufacturing process or for some other exempt purpose. See also P.D.
96-180 & P.D. 96-324.
P.D. 88-50. A counting system attached to a printing press was subject to

the sales and use tax. The counting system was used to supply press
operators with an accurate count of production as well as to produce skid
tickets and management reports. However, their is no indication that the
system was used to direct or control production line operations.
P.D. 95-216. Taxpayer is liable for the tax on cutting, folding, and
converting charges made in connection with their purchase of printed
materials. These charges represent services in connection with the sale
of tangible personal property and are therefore taxable.
P.D. 96-278. Taxpayer, an industrial printer, is liable for the tax on

cylinder
pallets used to store printing cylinders and to transport such cylinders
between the production line and the storage area. Although the cylinder
pallets are needed to protect the etchings on the cylinders during
transport and storage, at no time are the pallets used in production line
testing or quality control activities. Rather, these pallets only serve an
indirect role in protecting the integrity of the product by protecting the
printing cylinder before it is used in the production of the product.
P.D. 97-65. The department has traditionally held that the printing of
multiple documents of a like nature qualify as the sale of tangible
personal property, even when such printing is performed on customer
owned paper stock. However, when a customer provides the printing
stock to a direct mail agency, and the agency performs data manipulation
or "personalization" services which causes each printed piece to be
unique in nature, the transaction is deemed to be an exempt service.
Page - 8
G. The taxpayer records needed to perform an audit on printing or printers

are no different than most other audits. Sales invoices should be
checked closely to verify the shipping destination and to make sure that
the printer is charging the sales tax on the total invoice charges. If there
are exempt printing sales, the exemption certificates should be reviewed
carefully for accuracy and completion. Also, the corporate income tax
returns and sales journals are necessary to verify that all of a printer's
retail sales have been reported to the state.
PUBLIC UTILITIES
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43- PUBLIC UTILITIES
Objective: Discuss the application of sales and use tax as it applies to Public Utilities
I. References
A. Code of Virginia Section - 58.1-609.3
C. Public Documents: 87-276

89-274
89-335
89-346
90-068
91-005
91-064
D. Applicable exemption certificate - ST-20
E. Public Service Corporation Exemption Repeal 2004 Guidelines (PD 04-122)
II. General
Public utilities, as defined within sections 56-232 and 56-265.1 of the Code of
Virginia, which are engaged in the generation, transmission and/or distribution of
electricity, water, natural or manufactured gas are exempt from the tax. Prior to
September 1, 2004, these entities operated under a certificate of convenience
and necessity issued by the State Corporation Commission. Electric and gas
companies used the Uniform System of Accounts which can be found in the
FERC (Federal Energy Regulatory Commission) reference book. This book
details the accounts and what items should be a part of the account.
Please note that the company may use FERC accounts that are not listed in the
sales and use tax regulations section. This does not mean that those
accounts should not be reviewed and a ruling determination made as to its
taxability.
PUBLIC UTILITIES
Page - 2
Usually there are associated companies, subsidiaries and/or holding companies making
retail sales, intercompany/ intracompany transactions, as well as various services which
may be offered. These should be defined and determined so you will be able to make
an educated decision as to the taxability.
The primary focus is the interpretation of "direct."
Regulation 23 VAC 10-210-3020 defines direct usage. It refers to activities that

are an integral part of the rendition of a public utility service...but not including
incidental functions such as administration and management. It further
states..."used directly...are those which are both indispensable to the actual
provision of a utility service and used or consumed immediately in the
performance of such service. The fact that a particular item may be considered
essential to the rendering of a public utility service because its use is required
either by law or practical necessity does not, of itself, mean that the property is
used directly in the rendition of a public utility service."
Explanation of the regulations' footnotes to accounts. The footnotes indicate accounts

which have variable taxable items.
Footnote 1 - pertains to fuel.
Exempt when in production/distribution process.
Taxable for property used in transportation of fuel from point of acquisition,

administrative and purchasing and handling activities.
Footnote 2 - pertains to resale.
Exempt for purchases made for resale. Sales tax should be collected on all
sales unless an exemption certificate is received from the purchaser.
Footnote 3 - pertains to areas equally exempt and taxable.
This usually is an inventory withdrawal or vehicles.
Footnote 4 - pertains to exempt categories with taxable properties.
Most purchases would be exempt however structures and general

maintenance equipment and administration, record keeping and safety would
be taxable properties.
Footnote 4 is one you will refer to constantly as the accounts have such a
broad application. The application is analogous to manufacturing. The major
difference is that proration applies to public utilities. Preponderance does
not apply.
PUBLIC UTILITIES
Page - 3
Footnote 5 - pertains to transportation equipment.
Exempt property would be those vehicles that are specifically designed or

equipped for use in the production, transmission and distribution systems.
Water and sewage companies as well as some gas distributors, may not use the
Uniform Systems of Accounts as provided by the Federal Energy Regulatory
Commission. If they have a certificate of convenience and necessity by the State
Corporation Commission and pay on their gross receipts, they are considered a
public service company and fall within these regulations.
Effective September 1, 2004, the retail sales and use tax exemption available to public
utilities for the purchase or lease of tangible personal property used or consumed
directly in the rendition of their public service was repealed. Those public utilities losing
their exemption included electric suppliers, telecommunications companies, certain
telephone companies, gas, water, and sewer utilities. In addition, to the extent public
utilities generating electric power, qualify for the manufacturing exemption under Code
of Va. 58.1-609.3(2), they will be prohibited from claiming the manufacturing exemption,
except for raw materials that are consumed in the production of electricity, including
fuel.
Transitional Rules
The following rules are provided to clarify when purchases or leases of tangible
personal property, previously exempt from the retail sales tax, are subject to the tax.
Taxable
Tangible personal property purchased on and after September 1, 2004
Tangible personal property delivered to a purchaser and paid for on or after September
1, 2004, regardless of when the property was ordered.
Installment sales, when the date the contract is entered into are on or after September
1, 2004.
Exempt
Tangible personal property ordered, delivered and paid for prior to September 1, 2004.
Tangible personal property ordered and delivered prior to September 1, 2004 but paid
for on or after September 1, 2004.
Installment sales, when the date the contract is entered into is prior to September 1,
2004, regardless of when the property is delivered or when payment is made.
PUBLIC UTILITIES
Page - 4
Long-term Leasing Contracts
Notwithstanding the September 1, 2004 repeal of the public utilities exemption, no sales
and use tax will be imposed on the lease payments for any tangible personal property
leased pursuant to a bona fide contract that was entered into before March 1, 2004,
provided that such tangible personal property was delivered to or placed into service by
a public utility on or before September 1, 2004.
Inventory on Hand
Tangible personal property purchased prior to September 1, 2004, under the public
utilities exemption, and placed in a tax-exempt inventory, will not lose its exempt status
with the repeal of the public utilities exemption effective September 1, 2004. Such
property will also maintain its exempt status upon the withdrawal from inventory and put
in use in a taxable manner.
Temporary Storage
Effective September 1, 2004, tangible personal property brought into and stored in
Virginia by a public utility, regardless of the fact the tangible personal property may be
used out-of-state in an exempt capacity is subject to tax. For example, if a public utility
has its central purchasing and warehousing operation in Virginia for its entire nationwide
operation, all tangible personal property warehoused in Virginia would be subject to the
Virginia sales and use tax, unless such property qualifies for an existing Virginia
exemption. Tax shall be accrued on such tangible personal property in the month the
property is acquired by the public utility and brought into Virginia and remitted by the
20th day of the month following the month of acquisition or importation into Virginia.
Direct Payment Permits
Effective September 1, 2004 all direct payment permits issued to public utilities losing
their exemption were cancelled. Holders of direct pay permits are required to notify
each of their vendors that the permit has been cancelled and future purchases are
subject to the tax.
Front-End Agreements
Any and all front-end agreements currently in force between TAX and any public utility
were cancelled effective September 1, 2004.
Other Exemptions
Other sales tax exemptions that may be available include, but are not limited to the
exemption for research and development, certified pollution control equipment, resale
and for tangible personal property for use or consumption by the Commonwealth, any
political subdivision of the Commonwealth, or the United States.
PUBLIC UTILITIES
Page - 5
III. Procedures for Audit Periods prior to September 1, 2004
A. The initial steps for pre-audit would be:
1. Review previous audit
2. Review ruling letters
3. Obtain FERC book
4. Review registration data for all accounts known
B. The initial steps for pre-audit conference would be:
1. Determine if the uniform standard of accounts is used
2. Determine the principal activities (Generation, distribution and/or

transmission)
3. Determine if regulated by SCC (State Corporation Commission) certificate

of convenience and necessity
4. Determine how capital and expenses are recorded
5. Obtain sales tax returns, federal returns, Form 10k, FERC Form 1.
6. Ask about associated companies, holding companies, etc.
7. Request: Chart of accounts, general ledgers, journal entries, manual

checks, sales journals, list of vehicles, furniture, fixtures and equipment as
well as capital jobs (construction work in process), off-road fuel reports,
retired assets, and pollution control certifications.
PUBLIC UTILITIES
Page - 6
8. Questions would include: What type of sales do you make? How are
invoices retained and coded? How is inventory accounted for (purchases,
withdrawals, adjustments)? Where are the locations and the various
activities? Are there contractor relationships? Is there a laboratory? Are
there R & D projects?
C. Areas to review during audit
Chart of accounts - the chart of accounts is usually the same as those listed
in our regulations book. They may have added an extension to represent a
specific area, location or department.
Review their accounts noting those which are both 100% taxable as well as
those footnoted as shown in the regs. Look them up in the FERC book to
find out what the account represents. For example: 184 in the regs indicate
"clearing accounts." Most of the companies use this account for their
vehicles. Account 107 is a construction work in process account. As you will
note, this account is not shown in our regs.
It is also necessary to determine where employee sales, purchases for

resale, and disposed of items are recorded.
Expenses - sample or detail
Determine the size of the records and what financial statements you will want
to use should you decide to sample the general expense purchases. This
would follow the same procedure as a regular sales and use tax audit.
How are invoices, purchase orders retained?
If there are no invoices available, the check register, a detail general ledger
or purchase journal will be necessary. You also need to review the sales tax
payable account for accruals and the process it flows through to the return.
Stores, Materials issue or inventory withdrawals
These are usually accounted for by a monthly report which shows the
item(s), the requisitioner and the cost. An allocation of expense is recorded
with a journal entry. You will need to review the list of items withdrawn as
well as the area or department to which the items are charged.
Public service companies feel that everything they use is part of the rendition
of their service. Which of course it is, but that does not of itself make it
exempt.
PUBLIC UTILITIES
Page - 7
Vehicles
Obtain a listing of vehicles and make a determination as to how and where

the vehicles and equipment are used.
A review of the type of vehicle will give you a reasonable guide. For
instance, a trencher, backhoe, thumper truck, bucket truck, cherry picker,
and crane will be exempt (unless you determine they are using them for
some other type of activity). The fuel that would be used for these types of
vehicles would be exempt as well.
The tractors, power saws, light trucks, automobiles, and vans would or could
be administrative. (If you determine they are using them in some exempt
function, then you will need to decide on a proration percentage. Be sure the
percentage is based on reasonable factors and is measurable.)
Any accessories, parts, or supplies purchased in bulk for stock would need to
be prorated unless there is an inventory log kept which could be used to
determine the vehicles these items were used on.
There are multiple uses for vehicles and equipment depending on the
company and the services provided. Some of the uses could be as follows:
Right of way - this is usually a function that requires purchases of land,

surveying, perhaps clearing brush - this would be administrative.
Staking - this is usually marking where utility lines will be placed –

administrative.
Surveying, engineering, customer service, meter reading - these functions

are administrative - unless they perform exempt functions as well (Usually
this is very minute, if at all. However, it would require a proration if
applicable).
Equipment
This can be very confusing. As a rule, equipment that provides a record

and/or analysis is considered to be used in an administrative function. This
can mean that a percentage would apply to purchases for the equipment.
Paper for the printers or equipment however, would be fully taxable.
Fault recorders would be taxable to the extent of their administrative use.

Hot sticks are exempt. (These are used to disrupt power for work on lines).
The covers for the hot sticks that are used to hold the instrument for
protection at a substation would be taxable.
PUBLIC UTILITIES
Page - 8
General purchases
Linesmen equipment such as gloves (these are usually special as they

protect against shock), knee guards, hats and their tools are exempt.
However, the urinals, tool bag or bucket, coolers, and water would be
taxable.
Landscaping materials are taxable even though they insist that an open hole
is dangerous. We realize that they do not try to make it look pretty, but it is
not used or consumed immediately in the rendition of providing the service.
Stakes, marking flags, paint, ribbons, manuals, maps, markers, locks, pads
which are not attached to exempt equipment, numbers, tags, animal
protection items, fire and safety alarms and general maintenance items are
all considered taxable.
Purchases for meter readers would be taxable. There are sophisticated

readers/scanners which require maintenance contracts and computerized
software. These would be taxable as applicable.
Items purchased for certified pollution control projects of course would be

exempt as applicable.
R & D as well as laboratory purchases would be exempt as the statute and

regulations apply to these functions.
General maintenance purchases would be taxable. The exception would be

purchases for exempt equipment such as oil for transformers, the paint for
transformers that is specially manufactured for their use, as well as tools and
materials used in exempt functions.
An example of personal use would be water heater repair as shown on the

example enclosed. While the company provides a switch on a subscribing
customer's water heater, the service they offer would be that of a contractor.
As such, the materials used in the repair would be taxable to the company as
the consumer.
Capital
Usually the furniture, fixtures and administrative equipment are coded under
the 390 series. However, it is possible to have exempt items such as radios
for vehicles in one of these accounts.
Capital projects are usually those which require construction and are
capitalized at the completion of the project or the end of the accounting
period.
PUBLIC UTILITIES
Page - 9
The jobs can have blueprints, marking paint, stakes, security, safety and
other general items recorded in the capital account as part of the cost of the
job. Office trailer rentals, port-a-potty rentals, rental of equipment which
would be taxable. Materials for the construction of a building would be
taxable as would fences, gratings, foundations and other structures. Be
aware that there may also be items charged to the project from their
inventory which need to be reviewed as to their use and taxability.
Tours
A tour is recommended. Especially at a remote location where you cannot

observe the activities. The stores warehouse would be a recommended tour
after reviewing the items in inventory. This will allow you to ask pertinent
questions to determine the usage as well as the unique terms or names of
the items. Each company has their own language.
Sales
Verify the sales tax reported to the sales tax payable account. Verify the
accuracy of the local tax and the various locations, if applicable.
Sample or detail sales reviewing the invoices, transactions and

documentation. Also verify the exemption certificates for those taxable sales
which were not charged sales tax.
If a refund was applied for from DMV for off-road fuel, ensure it has been
included on the sales tax return. Verify the deductions or exempt
transactions as well.
There may be inter-company leases or sales which need to be reviewed. A

journal entry is usually used to record this, but invoices to the associated
company are also used.
The revenue accounts are usually in the 400 series. Review these accounts
to determine the sources of revenue.
Co-generation companies manufacture steam or energy for other companies.

Unless they are granted a certificate of convenience and necessity by the
State Corporation Commission, they will at least quality as a manufacturer if
more than 50% of their product is for resale. (See Commissioner's ruling
letter dated November 21, 1989.)
IV. Procedures for Audit Periods Beginning September 1, 2004
A. The initial steps for pre-audit would be:

PUBLIC UTILITIES
Page - 10
1. Review previous audit
2. Review ruling letters
3. Obtain Chart of Accounts
4. Review registration data for all accounts known
B. The initial steps for pre-audit conference would be:
1. Determine how capital and expenses are recorded
2. Obtain sales tax returns, federal returns, Form 10k, FERC Form 1.
3. Ask about associated companies, holding companies, etc.
4. Request: Chart of accounts, general ledgers, journal entries, manual

checks, sales journals, list of vehicles, furniture, fixtures and equipment as
well as capital jobs (construction work in process), off-road fuel reports,
retired assets, and pollution control certifications.
PUBLIC UTILITIES
Page - 11
5. Questions would include: What type of sales do you make? How are
invoices retained and coded? How is inventory accounted for (purchases,
withdrawals, adjustments)? Where are the locations and the various
activities? Are there contractor relationships? Is there a laboratory? Are
there R & D projects? Are there pollution control projects?
C. Areas to review during audit
Chart of Accounts
Review their accounts for accounts in which there would be purchases of

It is also necessary to determine where employee sales, purchases for

resale, and disposed of items are recorded.
Expenses - sample or detail
Determine the size of the records and what financial statements you will want
to use should you decide to sample the general expense purchases. This
would follow the same procedure as a regular sales and use tax audit.
How are invoices, purchase orders retained?
If there are no invoices available, the check register, a detail general ledger
or purchase journal will be necessary. You also need to review the sales tax
payable account for accruals and the process it flows through to the return.
Stores, Materials issue or inventory withdrawals
These are usually accounted for by a monthly report which shows the
item(s), the requisitioner and the cost. An allocation of expense is recorded
with a journal entry. You will need to review the list of items withdrawn as
well as the area or department to which the items are charged. Items in
inventory purchased prior to September 1, 2004 are exempt until withdrawn
from inventory and put in use in a taxable manner.
Raw Material and Fuel Purchases
Raw materials and fuel that are consumed in the production of electricity are
exempt. Rail car leases are taxable. These purchases may be both included
in the fuel purchases account.
PUBLIC UTILITIES
Page - 12
Exempt General Purchases
Items purchased for certified pollution control projects of course would be

exempt as applicable.
R & D as well as laboratory purchases would be exempt as the statute and

regulations apply to these functions.
Tours
A tour is recommended. Especially at a remote location where you cannot

observe the activities. This will allow you to ask pertinent questions to
determine the usage as well as the unique terms or names of the items.
Each company has its own language.
Sales
Verify the sales tax reported to the sales tax payable account. Verify the
accuracy of the local tax and the various locations, if applicable.
Sample or detail sales reviewing the invoices, transactions and

documentation. Also verify the exemption certificates for those taxable sales
which were not charged sales tax.
If a refund was applied for from DMV for off-road fuel, ensure it has been
included on the sales tax return.
There may be intercompany leases or sales which need to be reviewed. A

journal entry is usually used to record this, but invoices to the associated
company are also used.
Revenue the revenue accounts.
Co-generation companies manufacture steam or energy for other companies.

Unless they are granted a certificate of convenience and necessity by the
State Corporation Commission, they will at least qualify as a manufacturer if
more than 50% of their product is for resale. (See Commissioner's ruling
letter dated November 21, 1989.)
Page 1

Radio and television broadcasting
Objective: Discuss the application of sales and use tax as it applies to radio and
television broadcasting.
I. History
7/1/76. Code of Virginia §58-441.3 (d) Effective, 7/1/76 when a station

leases a film for showing, such film is exempt since in accordance with
amended Code §58-441.3 (d) the terms "lease or rental" do not encompass
the leasing, renting or licensing of copyright audio or video tapes, and films
for public exhibitions at motion pictures or by licensed radio and television
station.
Prior to 1977. Code of Virginia §58-441.6 (j) The broadcasting exemption

applied only to broadcasting equipment and accessories used directly to
disseminate the signal into the air. The Tax Department maintained the
position that the broadcasting exemption applied to live broadcasting and not
programming or pre-production activities.
1977. Code of Virginia §58-441.6 (j) Virginia Supreme Court Case (WTAR
Radio - TV Corporation v. Commonwealth of Virginia upheld that (1)
Broadcasting means transmitting a signal into the air. An exemption
continued to be allowed for equipment, parts or accessories used to
disseminate the signal into the air for a live broadcast. The Court Case also
upheld the Department's position that programming and pre-production
activities remained a taxable function. (2) The second issue concerned the
production of advertisements by a broadcasting company. The ruling stated
that the true object of a customer purchasing a taped advertisement was to
seek tangible personal property and not the service. (3) The Broadcaster
argued that the taped advertisement remained in their possession and was
available to the customer upon request.The Court deemed that the total
charge (including studio time, art work, dubs and acting (talent) would be
subject to sales tax.
Page 2
7/1/95. Code of Virginia §58.1- 609.6 (a,b) amended for the period July, 1995
through June 30,1997. Broad exemption provided to entities engaged in the
production, use, purchase, sale, or lease of audio visual tapes for licensure,
distribution, broadcast, commercial exhibition or reproduction or use in
producing another exempt audiovisual work. Examples of such entities
include, but are not limited to, program producers, (i.e., radio, television and
cable companies), film and audiovisual tape production companies,
advertisers and others. An exemption also extends to the equipment, parts
and accessories used or to be used in the production of exempt audio-visual
works.
II. References
A. Code of Virginia §58- 441.3, §58-441.6 (j), §58.1-608 (6 b) §58.1-609. 6

(2), §58.1-609.6.(6 a,b) - New legislation effective 7/1/95
C. Ruling Letters
• PD 87-219
• PD 88-331
• PD 93-96
• PD 94-51
D. Private ruling letters dated:

• 2-13-80 - antennas, transformers, cameras, control room equipment,
lease of copyright tapes.
• 12-28-83 - Sales of fabricated video tapes
E. Virginia Tax Bulletin

• 95-5 - Production of audiovisual tapes/films exempt
F. Applicable exemption certificate

• St-20 Purchase of tangible personal property
• St-20 A Purchases of production equipment for audiovisual tapes/film
G. Court Case
• WTAR - TV Corporation v. Commonwealth of Virginia
Page 3
III. General
A. Radio and television companies enjoy an exemption for equipment, parts,

accessories, and towers used directly to broadcast. Broadcasting
concerns must be regulated and supervised by the Federal
Communications Commission.
B. Broadcasting has been defined as disseminating a signal into the air and
is considered an exempt function. Programming preparation and news
gathering activities remain taxable.
C. Broadcasting companies involved in audiovisual production enjoy a broad

exemption on purchases of tangible personal property used in the
production of audiovisual works for licensure, distribution, broadcast, etc.
If audiovisual work is not used for licensure, distribution, broadcast, etc.,
purchases of tangible personal property are taxable.
D. Disclaimer: The exemption given to audiovisual companies as of 7/1/95

could impact existing laws for radio and tv broadcasters as it relates to
exempt, taxable and proratable purchases. Presently, the full extent of
this impact is not known.
IV. Procedures
A. Sales
Broadcasters may produce and sell video tapes or films. The production
of the video tapes fall within two categories, media or non-media. Media
tapes are exempt from sales tax. Examples of media films include tv
advertising, made-for-tv movies, feature films, documentaries, radio
programs, etc.
Non-media tapes have been defined as films produced for in house

training, weddings, accidents, corporate meetings, product description
tapes, etc. These types of films are taxable based upon the sales price of
the film.
Page 4
B. Purchases
Note: The following procedures have been written in accordance with the
existing rules and regulations for broadcasters. The new exemption given
to audiovisual companies is a much broader exemption than the existing
exemption given to broadcasters. The equipment and accessories used
by broadcasters that also produce audiovisual tapes and films may have
multiple uses. Determining the taxable, exempt or proratable status of
such equipment and accessories may change.
General
A tour of the broadcasting facility with a technical engineer provides

useful insight in determining the various uses of broadcast equipment. It
is important to ask questions concerning the use of the equipment and
accessories because some equipment may need to be prorated for use
tax.
Some departments which will be under review in broadcasting

companies may include weather, news, sales, graphics, control room,
studio, editing, research, tape storage and administration.
A review should be made of the chart of accounts and purchases journal.

The chart of accounts may be subdivided by departments, cost centers or
general ledger coding. It may be necessary to review the general ledger
for intercompany purchases. Purchases may be taxable, exempt or
proratable.
Exempt Purchases
The sales tax regulations have historically exempted broadcasting

equipment that is used to disseminate a signal into the air. Exempt
equipment and accessories includes, but are not limited to, towers,
satellite receivers, antennas, studio cameras and microphones (used for
live broadcast).
Page 5
Taxable Purchases
Programming, news gathering, and administration purchases are deemed

to be taxable. Purchases of equipment and supplies that are not used
directly to transmit a signal are also taxable. Examples include, but are
not limited to, the purchase of studio furniture and lighting, news sets,
interview sets, weather centers, air conditioning, heating, computers, tape
carts and storage systems, weather maps, ear phones, blank tapes and
reel degaussers (tape head cleaners).
Proratable Purchases
When the same equipment and accessories are used for transmitting the
signal as well as for news gathering, preparation and programming the
purchases should be prorated. Examples include, but are not limited to,
weather computers, routing equipment, cables, monitors, field cameras (if
shooting live and taped features), tape players and recorders, audio
equipment, and batteries.
45_Cable Companies
Objective: Discuss the application of sales and use tax as it applies to Cable TV
Companies
I. History
1975. Virginia Supreme Court case (Winchester TV Cable Company v.

State Tax Commissioner) ruled that the actual use of equipment determines
whether it qualifies for the broadcasting exemption not merely its capability.
1977. Virginia Supreme Court case (WTAR Radio-TV Corporation v.

Commonwealth of Virginia) ruled that a television station's purchase of
production items, including lighting and videotape equipment, film and props,
is subject to sales and use tax.
3/19/80. Virginia Tax Bulletin 80-3; House Bill 960: The broadcasting
exemption was granted to Cable Companies.
1988. Advertising insertion equipment is determined to be exempt.

(PD-88-205) when the equipment automatically disseminates commercial
advertisements and monitors and adjusts program signals. This differs from
Commissioner’s ruling in 87-208.
7/1/95. For period July 1, 1995 through June 30, 1997, Code of Virginia
58.1-609.6(6) amended to allow for the exemption from tax for entities
engaged in the production, use, purchase, sale or lease of audiovisual tapes
for licenser, distribution, broadcast, reproduction or use in producing
another exempt audiovisual work. The exemption covers not only the
production services and incidental tangible personal property but also
equipment, parts, and accessories.
Most if not all of the cable companies also provide broadband internet service
and digital phone service. Please refer to the information on Internet service
providers and telecommunications for how these areas of their business shall
be treated. Remember that in September 2004 the telecommunications
industry lost their tax exempt status.
II. References
A. Code of Virginia Section 58-441.6(J), 58.1-608(6B), 58.1-609.6.

B. Virginia Administrative Code 23 VAC 10-210-3030.
C. Ruling Letters
• PD-95-193 Cable Television System Defined
• PD-95-165 Production Equipment Exemption
• PD-94-51 Blank Tapes
• PD-93-205 Cable Equipment
• PD-90-184 Tangible Personal Property
• PD-90-48 Hand-held Remotes
• PD-88-331 Scrambled Signals, Pay Per View

• PD-88-230 Hand-held Remote
• PD-88-205 Advertising insertion Equipment
• PD-87-208 Remote Converters, Tools, Test Equipment
• PD-96-7 Cable Television Equipment
• PD-04-89 Cable Internet Service
• PD-96-3-2 Cable Equipment

• 95-5 Production Equipment Exemption (PD-95-165)
• 84-8 Redefines Personal Property (PD-84-112)
• 84-7 Redefines Personal Property (PD-84-72)
• 83-3 Cable Television Property (PD-83-94)
• 80-3 Broadcast Exemption to Cable Companies
E. Applicable exemption certificate

• ST-20 Purchase of TPP
• ST-20A Production Equipment
F. Private letter rulings

• June 4, 1993 Broadcasting accessories
G. VA Supreme Court Cases

• WTAR Radio-TV Corporation
• Winchester TV Cable Co.
H. House Bill 960 Broadcasting exemption; Virginia Tax Bulletin 80-3
III. General
A. 58.1-609.6(2) of the Code of Virginia, interpreted by tax regulation 23 VAC

10-210-3030, provides an exemption from sales and use tax for:
Broadcasting equipment and accessories used directly in the

amplification, transmission and distribution of a signal by a cable
company.
In short, if the signal passes through it, it is probably exempt.
B. Accessories do not have to qualify to the same degree as equipment but

"they must be a part of, joined to, and render exempt equipment more
perfect in disseminating or distributing a signal".(PD-93-205)
C. The broadcasting exemption is available only to cable companies that are

regulated by the FCC.
D. Production equipment used to produce exempt audiovisual work is

exempt. Exempt audiovisual work includes made for TV movies, feature
films, documentaries for broadcast, commercials for public viewing, video
tapes for TV. Taxable works would be in-house training films, corporate
meetings, films for other than commercial broadcast.
IV. Procedures
A. Sales
Cable companies are considered the providers of a service and any equipment
that is leased or rented is considered an inconsequential element of the service
and is not taxable. For example equipment rental such as satellite dishes,
converter boxes, or remote controls when included with cable services are
exempt from tax. Equipment that is leased or rented without the provision of
cable service is taxable.
The Cable industry is rapidly moving into new areas of telecommunications

and has begun selling equipment. Tax should be collected on the sale of any
equipment or tangible personal property sold.
B. Purchases
The chart of accounts is usually the best place to start identifying taxable
purchases. Cable companies purchase so many "high tech" items, often the
chart of accounts number is the only clue to its purpose. There are often
inventory accounts in the current assets section which are debited as supplies
and equipment are purchased. Locate the taxable accounts such as
installation parts; hardware accounts that would include cable ties and
conduits, also the equipment account for remote controls. The expense
accounts should also be reviewed for shop supplies and service materials.
Another useful tool when reviewing purchase invoices is the parts manuals.
Locate the employee who orders parts and equipment. They often have on
hand cable equipment books that not only describe the part, it's purpose, but
also include a sketch or picture. Hand-held remotes for example, may be listed
on the invoice by a stock number such as ABC-2005. You need to identify items
listed by a number, don't assume parts listed by a number are exempt. Now that
we have the internet available to us, it is also helpful to look up their vendors on
line to see pictures and explanations of items purchased. Search can be done
by vendor or item.
A tour of the cable facilities will also help identify taxable and non-taxable areas.
Exempt Purchases
Broadcasting equipment: Examples of exempt broadcasting equipment which

amplify and disseminate the signal are the head-end equipment, amplification
equipment, towers, satellite receivers and power supply equipment. Distribution
test equipment used in the analysis, adjustment and monitoring of the outgoing
cable signal is also exempt.
Parts and accessories: Parts and accessories that render exempt equipment
more perfect in disseminating or distributing a signal are: transistors, integrated
circuits, amps, capacitors, inserters, positive traps, power supply equipment and
backup batteries, lock boxes, converter boxes, F-fitting boots, locking
terminators, strand and strand link, and advertising insertion equipment.
Housing such as the CATV pedestals including closures and stakes, breaker
boxes including their parts and accessories and junction boxes are also exempt.
Production equipment, accessories, and incidental TPP: Examples of

production equipment are cameras, lighting equipment, cranes and booms,
dubbing editing and sound recording equipment. Incidental tangible personal
property would be items such as props, scripts, design and artistic supplies, and
wardrobes.
Taxable Purchases
Equipment: Examples of taxable equipment are the air conditioning and heating
to maintain the integrity of the broadcasting equipment, computers and other
equipment used for administrative purposes, tools and testing equipment used
to locate cables, and hand-held remotes. Whereas the locking terminator is an
exempt item the locking terminator tool to install or remove one is taxable.
Parts and Accessories: Examples of parts and accessories that are taxable are:
attachments such as cable hangers and ties, installation parts and accessories
such as roka clips, drive pins, trim and cove molding, and wall plates,
locking and security mechanisms and attachments, drop tags, equipment racks
and equipment housing, grounding material, conduit which may be listed as
PVC or interduct, and strand maps. Also support brackets and hooks,
deadends, markers and negative traps that scramble the signal. The traps
when not identified as either positive or negative may be identified by the
channel number. You will need to ask which channels use negative traps.
Production equipment, accessories and TPP: Examples of taxable production

items are office equipment and supplies, chairs used for convenience
purposes, and location tents. Taxable production equipment would be items
such as air conditioning/heating to maintain the integrity of equipment,
computers and other administrative equipment.
Research and Development
The authority for the Sales and Use Tax exemption derives from 58.1-609.3(5) of the Code of
Virginia, which states:
The tax imposed by this chapter or pursuant to the authority granted in §§ 58.1-603, 58.1-604, 58.1-
605 and 58.1-606 shall not apply to the following:
“Tangible personal property purchased for use or consumption directly and exclusively in basic
research or research and development in the experimental or laboratory sense.”
From this code section derives the Sales and Use Tax Regulations, 23 VAC 10-210-3070B, which
states, in part:
“The tax does not apply to tangible personal property purchased or leased and used directly and
exclusively for research in the experimental or laboratory sense.”
Definitions (23 VAC 10-210-3070):
“Basic research” means a systematic study or search in a scientific or technical field of endeavor
with the
ultimate goal of advancing knowledge or technology in that field. The development of a tangible
product
or process need not occur in basic research activities. Examples of basic research activities
include
medical, chemical, or biological experiments conducted in a laboratory environment.
“Direct use” means those activities which are an integral part of basic research or research and
development activities, including all steps of these activities, but not including secondary
activities such as
administration, general maintenance, product marketing, and other activities collateral to the
actual
research process.
“Exclusive use” means items are used solely in basic research or research and development
activities.
“Experimental sense” means work is conducted through tests, trials, tentative procedures, or
policies
adopted under controlled conditions to discover, confirm, or disprove something doubtful.
“Laboratory sense” means work is conducted in a place equipped for experimental study in a
science and
providing an opportunity for experimentation, observation, or practice in a field of basic scientific
or
traditional physical science research.
“Research” means basic research and research and development as defined in this section.
“Research and development” means a systematic study or search directed toward new
knowledge or new
understanding of a particular scientific or technical subject and the gradual transformation of this
new
knowledge or new understanding into a usable product or process. Research and development
must have as
its ultimate goal: (i) the development of new products; (ii) the improvement of existing products; or
(iii) the
development of new uses for existing products. Research and development does not include the
modification of a product merely to meet customer specifications unless the modification is
carried out
under experimental or laboratory conditions in order to improve the product generally or develop
a new use
for the product.
Research does not include testing or inspection of material or products for quality control; however, in
the case of an industrial manufacturer, processor, refiner or converter, testing and inspection for
quality control is deemed to be an exempt activity under 23 VAC 10-210-920. Additionally, research
does not include environmental analysis, testing of samples for chemical or other content, operations
research, feasibility studies, efficiency surveys, management studies, consumer surveys, economic
surveys, research in the social sciences, metaphysical studies, advertising, promotions, or research
in connection with literary, historical, or similar projects.
Extent of the research exemption. [Refer to 23 VAC 10-210-3071.]
To qualify for the exemption, the tangible personal property leased or purchased must be “used
directly and exclusively” in an actual research process. This process should be in the “experimental or
laboratory sense.” The exemption begins with the handling and storage of raw materials and supplies
at the research facility and ending after the last step of the research process when the products of the
research process are stored at the research facility.
To be exempt the item, material, or supply must be used directly and exclusively in the research
process.
Some items may be required but may not be “used directly”. When a single item is used in both an
exempt and non-exempt activity, it is not deemed to be “used exclusively” in research activities and is
taxable. An example of this would be a computer system that is used to both analyze laboratory tests
to determine the validity of the laboratory findings, but also used to perform other regular functions,
such as management reports, grant reports, and other non-research activities. In this instance, the
computer would be taxable. Pro-ration, percentage of exempt usage or preponderance of use of an
item is not permitted.
An exception to the exclusitivety test is the “de minimis usage” rule. When research property is used
in a taxable manner, it will only be exempt from the tax if the taxable use is de minimis in nature.
Taxable use of the property is considered de minimis if the taxable usage of the property (1) does not
involve a continuous or ongoing operation; (2) does not follow a consistent pattern, i.e. weekly,
monthly, quarterly, etc.; (3) is occasional in nature occurring no more than three times; and (4) in
total, accounts for no more than three days.
An example of de minimis usage would be a computer used in research and to generate a one time
report that took three or less days to produce and is not an ongoing usage, i.e. monthly, weekly,
quarterly, etc. In this case, the use of the computer to generate this report would be considered de
minimis usage and the computer would not lose its exemption.
However, if this same computer is used weekly to produce a report, as required by the conditions of a
research grant, the usage would not be considered de minimis and the computer would lose its
exempt status.
If an item, which originally qualified for the exempt status, due to its direct and exclusive use, is used
in a taxable manner that is not considered de minimis, the use tax should be remitted on a Consumer
Use Tax Return, Form ST-7, based on the purchase price of the item. If the conversion of the item to
taxable use is six months after its original purchase date then the tax may be computed on the lower
of the purchase price or the fair market value at the time of the taxable use.
The tangible personal property must be purchased or leased by the person, firm, corporation, or entity
that actually performs the exempt research in order to quality for the sales tax exemption. If the
research equipment is purchased or leased by a party other than the person providing the research
activity, the item would be taxable. This is true even if the equipment is donated or loaned to an
exempt entity.
23 VAC 10-210-3072. Research; taxable and exempt items.
Following are examples of taxable and exempt items used in research activities. These lists are
exemplary and are not intended to be all inclusive.
1. Taxable:
a. Desks, chairs, copy machines, calculators, file cabinets, typewriters, etc., used by administrative
clerical personnel in support of research activities;
b. Desks, chairs, copy machines, file cabinets, work benches, storage cabinets used to store
research equipment, tools, and supplies, etc., used by research personnel;
c. Heating and cooling equipment used to maintain an optimum temperature in a research facility
when also used for general heating and cooling purposes;
d. Items used in the publication of research findings;
e. Items used in marketing new products resulting from research;
f. Computer hardware and taxable prewritten or modified software when used for administrative and
other activities collateral to actual research activities;
g. Equipment and supplies for cleaning or sterilizing items used directly in research activities either
before or after these activities;
h. Equipment and supplies used to produce items that will be used directly in research activities;
i. Technical books and journals purchased by a research facility for general reference and training
purposes, or to keep research personnel informed of current scientific advancements,
achievements, or events, and not purchased in connection with specific research activities.
2. Exempt when used directly and exclusively in research:

a. Test tubes, flasks, reagents, microscopes, slides, and similar items;
b. Electronic instrumentation and components, laboratory tables and equipment, tools, and similar
items;
c. Technical books and journals purchased by a research facility for use in performing background
research for a specific research project;
d. Paper and supplies used to record research findings during the actual research process;
e. Computer hardware and software when used exclusively to store, retrieve, and process research
data;
f. Protective clothing provided gratuitously to employees engaged in research activities;
g. Items used to transport or store research materials during and between various steps of research
at the research facility;
h. Heating and cooling equipment used to maintain the integrity of research materials;
i. Repair parts for new equipment used during the field testing stage of research activities; and
j. Drugs, chemicals, animals, and other raw materials, including the cabinets, shelves, or cages in
which these items are stored.
23 VAC 10-210-3073. Research; contractors.
Generally, a contractor is the user and consumer of all tangible personal property furnished to or by
him in connection with real property construction, reconstruction, installation, repair, and similar
contracts as provided in 23 VAC 10-210-410. However, tangible personal property furnished to or by
the contractor which will be used directly and exclusively in research is exempt from the tax. The
contractor may purchase this property exempt of the tax by furnishing to the vendor a properly
executed exemption certificate, Form ST-11A.
23 VAC 10-210-3074. Research; use of exemption certificates.
In making purchases for use in research, a person should furnish suppliers with a certificate of
exemption, Form ST-11. However, these certificates should not be used in making purchases of
items which are not directly and exclusively used in research. If the business gives a certificate of
exemption and then uses some of the property purchased for purposes other than research, the
business must remit the tax to the department as provided in 23 VAC 10-210-3071 D.
APPLICATION
There are numerous questions and situations that the auditor(s) must review with the taxpayer to fully
determine
the scope of the taxpayer’s lab activity and if this activity qualifies the taxpayer for the R&D or
research
exemptions.
Usually the R&D question applies to a manufacturer’s Virginia operations. So, the auditor should
determine if
the manufacturer has other locations and if so what is the nature of the research/lab activities done at
the other
locations. With many manufacturers their primary R&D site is not at a production site but at or near
their
corporate headquarters or in a technologically advanced area such as a university research facility..
Usually the
lab at the production site is testing for different reasons.
These reasons can be:
1. Testing of raw materials and incoming supplies to determine if the item meets the
manufacturer’s specifications. This is not R&D but may qualify as in process Quality Control
testing.
2. Testing to determine if the customer’s product can be produced with a different material
(maybe less costly) and still be within the customer’s contracted price.
3. Testing to determine if the product produced would work in the customer’s equipment. For
example, can the print cartridge be changed to work in a different model printer? The research
must produce a new product or a new use for the same product. In this instance neither
requirement is met. It is not a new product or new use because it is still performing the same
function.
4. Testing to determine that the manufacturer’s product will meet all marketing specifications.
(Does not qualify as R&D or Quality Control testing.)
The first thing the auditor must do is to determine why the taxpayer is conducting the testing.
Is it true R&D testing or some other type of testing? Such as those mentioned above and therefore
not qualifying for the R&D exemption.
.
Once the auditor verifies that the testing does meet the Sales and Use Regulations for R&D testing
(see above), then, the auditor must review the lab procedures to ensure that the equipment and
supplies purchased are being used directly and exclusively for the R&D testing.
These are two very important requirements:
1. Used directly. If the item is necessary, but is not used directly in conducting the lab tests, then
the item is not exempt. The auditor should review each individual purchased item to ensure it
meets this test. Furniture, storage cabinets, climate control equipment used for the comfort of
the employees would be taxable, since they are not directly used in the R&D process.
2. Used exclusively. This is another important test. If a piece of lab equipment is used both in
qualifying R&D research and in other non-qualifying testing, then the piece of equipment is not
tax exempt since the use of that equipment was not exclusively for R&D unless the de minimis
rule applies.
In summary, the auditor must ensure that the taxpayer conducting the R&D testing meets all of the
Sales and Use Regulations to qualify for the exemption. It is not a matter of what the taxpayer
considers their testing to be, but the regulation’s definition. The rules are complex and very specific.
The application will vary from industry to industry and from taxpayer to taxpayer. Keep in mind that
with the growth of technology and varying testing environments the application of the R&D exemption
can vary from audit to audit. With technological advances new relationships may be created in the
R&D field. These entities are partnering to provide R&D services to the client. In this case the
auditor must ensure that both entities meet all Sales and Use Tax requirements to determine which
part of the exemption applies, if any, to each entity.
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SAMPLING & FRONT-END AGREEMENTS
Objective: Discuss the audit technique of sampling for compliance. Discuss audit
sampling and procedures for front-end agreements.
I. History
Sampling is an audit technique of significant value that is widely used in both
the public and private sectors for all types of audits where a detailed audit
would not prove beneficial either to the auditor or the client. When sampling
techniques are applied, the final results are usually within a narrow
percentage range of the actual amount that would have been determined by a
detailed audit. The purpose of the audit sample is to determine a factor for
errors within a representative selected period. Once the error factor is
determined, the factor is extrapolated over the entire audit period. The
purpose of the projection is to account for likely similar transactions on which
Virginia tax has not been paid.
II. References
A. Code of Virginia, as cited
B. Virginia Administrative Code Title 23
C. Ruling Letters
PD 01-106 Record keeping
PD 01-96 Error Factor
PD 01-51 Credits Included In Sample
PD 01-50, PD 01-36 Isolated Transactions
PD 00-93, 01-130, 01-60 Withdrawals From Inventory
III. Definitions
“Audit Sampling” is defined as the application of audit procedures to less than

100% of the population to provide a conclusion on the level of compliance with the
tax laws.
“Population” refers to all similar transactions during an audit period. There may be
multiple populations in an audit. See also “Sample Base”.
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“Sample Period” means the portion of the audit period which is reviewed in detail in
order to project the findings over the entire audit period. Depending on the volume
of records, the sample period may be days, weeks, months or years.
“Sample Base” means the data chosen to reflect the sample period for projection
purposes over the audit period. Sample base usually conforms to the population of
the sample period; but may be any consistent data on which the dealer and the
auditor agree to use. For example, a sales audit with the month of May as the
sample period may use gross sales (population) for the month of May as sample
base to be used to arrive at an error factor to compute a liability/refund against gross
sales for the entire audit period. The use of sales (population) data as a sample
base in a purchase audit is an example of an agreed upon base.
“Block Sampling" means the use of all transactions in a selected period of time,
combination of time periods, numerical sequence, or alphabetical sequence as the
test period from which the sample is based.
“Statistical Sampling” means either the use of random-based sampling selection

criteria, usually mathematically chosen random transactions throughout the audit
period as the test for compliance; or systematic sampling criteria using a fixed
interval between selections, the first interval having a random start. A computer
program may be used to define and select transactions included in the sample.
“Structured Nonstatistical Sampling” means the use of defined criteria chosen by

agreement between the taxpayer and the auditor as the test for compliance. For
example, a recurring expense purchase sample may be used which contains only
certain general ledger accounts that are identified to contain taxable transactions.
"Error Factor" refers to the percentage of records sampled which do not comply
with the Virginia Retail Sales and Use Tax Regulations or the Code of Virginia. The
error factor is computed by dividing the additional taxable sales/purchases by the
gross sales/expense purchases reported for the period in question. Also known as
“margin of error”.
"Extrapolate" means to infer or estimate by extending or projecting known

information.
“Rollup Method” means to extrapolate the error factor evenly throughout the audit
period. This assumes no fluctuation in business and produces a measure that is the
same for all the periods in the audit. For example, a three-month sample in a three-
year (36 month) audit period produces an untaxed measure of $5,040.00. Rollup
method would extrapolate $1,680.00 per month or $60,480.00 measure for the
period.
"Fixed Assets" means depreciable property used in operating a business that will
not be consumed or converted into cash or its equivalent during the current
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accounting period. Fixed assets also include property deducted under IRC Section
179. Assets may be deducted under IRC Section 179 if they are purchased for use
in the active conduct of a trade or business and meet certain criteria.
"Recurring Expense Purchases" means non-depreciable ongoing purchases used

in the everyday operation of a business.
“Withdrawals From Inventory” means the removal of tangible personal property

from an inventory of items for resale for purposes other than resale.
“Front-End Agreement” refers to an agreement between the taxpayer and the

Department of Taxation where the taxpayer will remit additional taxes on certain
categories or general ledger accounts based on a single or multiple percentages
which are derived from the results of an audit (either detail or sampled) of the
taxpayer’s records for a predetermined period of time. Front-end agreements
usually cover prospective audit periods and reduce the amount of time needed to
perform an audit.
IV. General
Audit sampling is examining less than all of the records of an audit period to
determine the audit liability. Audit sampling is a technique used to compress the
time required to perform an audit, and to minimize the volume of records examined.
Sampling may be used in all types of audits. An audit period assessment that is
based on a sample period and assessed by the Department of Taxation is prima
facie correct and valid. The burden of proof that the sample is incorrect is upon the
taxpayer.
An auditor should thoroughly “think through” the use of samples before beginning
the audit. Audit sampling assumes that a rationally selected sample period is
representative of the audit population. Consideration should be given to fluctuation
in business and categories of transactions within the business as well as volume of
records. The objective should be to choose sample periods which are
representative of all transactions of the dealer in the audit period. Choose different
periods for the different tax areas, if necessary.
In very large audits, the Department of Taxation has software that can aid in
sampling. This software may be used with sales or purchases. An auditor
experienced with the “Invoice Capture Tool” is available to work with field auditors on
audits where the use of this software is beneficial. The software is used to stratify a
population, or divide the population into relatively homogeneous subgroups called
strata. These strata then may be sampled separately; the sample results may be
evaluated separately, or combined, to provide an error factor for the total population.
Whenever items of extremely high or low values or other unusual characteristics are
segregated into separate populations, each population becomes more
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homogeneous. It is then easier to draw a representative sample from which a

smaller number of items may be examined in each strata than to sample the total
population. In addition to increasing the efficiency of sampling procedures,
stratification enables auditors to evaluate materiality and other characteristics of
items and to apply different audit procedures to each stratum.
Fixed assets should not be included in the sampling procedure. These items are not
purchases that have recurred during the audit period. Asset purchases which are
expensed (IRC Section 179) should be detailed along with capitalized fixed assets.
The depreciation schedule should show expensed asset purchases. Cross check
Form 4562 from the federal income tax return; it will show the dollar value of Section
179 property and will clue the auditor to request purchase invoices for these items if
not seen elsewhere.
V. Procedures
TO SAMPLE OR NOT TO SAMPLE

It is important to consider various aspects of the taxpayer’s business when deciding
on a sample audit. Some type of sample can usually be used on most businesses.
An evaluation of the type of business and sampling opportunities should be done.
The basic characteristics of the business and the method of reporting must be
consistent throughout the audit period. If characteristics of the business change
during the audit period, separate samples should be made for each specific period to
determine the individual error factors for each period. A sample should contain
sufficient transactions to produce an accurate error factor representative of the
business as a whole.
Check the prior audit comments for the methods used by the prior auditor.
Research payment record and returns data to get information on taxable and exempt
sales and fluctuation of business. By entering data into the STAUDN returns data
screen, the program can be used to identify potential sample periods using various
criteria. Does the return data appear to be correct in that gross sales and exempt
sales are being reported on the return rather than just taxable sales? Ask the
question in the initial contact if there is doubt. This may affect the periods chosen for
sampling. Is there any familiarity with the nature of the business and the type of
customers (exempt versus taxable)? Is the taxpayer selling to industrial and
commercial customers? Are the invoice amounts on average small amounts? Is
this taxpayer a multi-state dealer? What portion of total sales are Virginia sales?
The auditor should use the initial contact to obtain information about the business
which will aid in the decision of whether or not to use sampling and the methods of
sampling which would be most effective to obtain an accurate result. Inquire about
the volume, nature & seasonality of the business, volume and organization of
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records, changes in accounting methods, software, and personnel responsible for

administering taxes. Are invoices available in hard copy for will you be able to view
them on computer screen? Some companies now have the capability to download
information to disk for your viewing on your computer.
Suggest to the taxpayer that a sample audit could be done to minimize the number
of records and time needed to do the audit. Time and effort are as important to the
taxpayer as they are to the auditor. Discuss sampling and share with the taxpayer
the statistics from the returns screen data. Ask the taxpayer to be thinking about
sample period(s) that would be representative of the overall business during the
proposed audit period and for which records are readily available. This will give him
period(s) to consider and time to evaluate the sampling concept.
At the beginning of the audit, review sampling again. By this time, you have
evaluated the possibilities and opportunities for sampling from your initial
conversation with the taxpayer. Now is the time to firm up the sample period and
consider methods. Be sure the dealer understands the mechanics of sampling and
agrees to the months selected. Remember that taking the time to fully explain how
the audit process works generates goodwill and makes finalization much easier for
both parties. When a sample is performed, a signed sample agreement from the
dealer detailing the sample period and extent of the sampling may be desirable.
Signed sample agreements can defuse later challenges to the validity of the sample.
The sample agreement should note the sample period and class of transactions
being sampled (sales, purchases). The auditor should inform the taxpayer or his
representative that signing a sample agreement does not jeopardize his right to
contest or appeal any portion of the audit with which he is not in full agreement.
Exemption certificates should be examined before beginning sales samples. This

examination will alert the auditor to large volume, exempt customers and also give a
warning to potential liability based on the information contained on the exemption
certificate as well as helping to identify which customers for which exemption
certificates are not on file. Title 23 of the Virginia Administrative Code (VAC 10-210-
280) explains that the burden of proving that the tax does not apply rests with a
dealer unless he takes, in good faith from the purchaser or lessee, a certificate of
exemption indicating that the property is exempt under the law. A certificate that is
incomplete, invalid, infirm or inconsistent on its face is never acceptable. The
regulation further provides that an exemption certificate cannot be used to make a
tax-free purchase of any item of tangible personal property not covered by the exact
wording of the certificate. Therefore, the seller must use reasonable care and
judgement in selling tangible personal property exclusive of the tax, even when an
exemption certificate from the purchaser is in his file. Furthermore, certificates of
exemption obtained during or after an audit situation will be accepted only if the
auditor can confirm that the customer’s use of the certificate was valid and proper for
the specific transaction.
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Sample Design
Sample design covers the method of selection, the sample structure and plans for
analyzing and extrapolating the results. There are many ways in which a sample
can be selected. If the volume of invoices is small, larger sample periods may be
selected. Detail audits may be appropriate when they can be accomplished in a
short time frame. This allows the auditor to examine all facets of the business,
which may reveal other audit opportunities. A combination of methods may be the
answer, depending on the circumstances.
Records
Code of Virginia 58.1-633 requires every dealer “to keep and preserve suitable
records of the sales, leases, or purchases. . .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”. When a dealer
fails to maintain adequate records, the department is authorized by Code of Virginia
58.1-618 to use the best information available to reconstruct a dealer’s sales or
purchases to determine whether a tax liability exists. A sample of records on hand
may be used to reconstruct data for an audit. Cancelled checks, credit card
statements, bank deposits, items of public record, or statements by the taxpayer
may be used when there are no records available. Any sample projected on this
basis is considered prima facie correct.
Sales
How are the records organized? Block sampling is particularly useful in sales audits
and is the historical method used by department auditors. If sales invoices are
available by invoice number in date order, the sample period could be a block of
invoices less than a year. Monthly sales journals give flexibility to examine one-
month blocks and tie tax collected to returns. If the only invoice information
available is by customer by year, the auditor may have to examine an entire year of
invoices to see all invoices.
If the business is seasonal, both the auditor and the taxpayer must be satisfied that
the time block is representative.
Statistical sampling is useful in sales audits where the volume of transactions is

large. In the best of audit environments, a sample chosen based on the volume of
the dealer is preferable. Usually, a one-month to three-month sample is adequate.
When transactions are fairly consistent, choose an average month as a sample. A
three-month sample selecting one month from each of the three years of the audit
period, or using the high, low and average months as indicated by the return
statistics are additional options. If you are auditing a particularly large business such
as Lowes, Kmart, or Food Lion, consider a much smaller sample, such as one week.
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If there are different categories of sales where dollar amounts fluctuate, such as
equipment sales, parts sales, and repair sales, you may want to use a combination
of sample methods or a combination of sample and detail methods.
Purchases
Review the chart of accounts to identify which accounts are used for charging
taxable purchases. Make a note of construction-in-progress and other suspense
accounts used to initially charge depreciable assets. These accounts should be
examined for yet to be capitalized assets and expenses that may be reclassified
later. Negotiation with the taxpayer may be necessary to separate the items to be
considered assets and those that may be included in the expense purchase sample.
Also note intercompany accounts which may contain charges not seen elsewhere.
The method used for sampling purchases should be determined by the size of the
taxpayer and their filing system. Many taxpayers file purchase invoices by vendor,
by year. The year may be calendar or fiscal. If the volume of records is small, a
one-year block sample may be advisable. By scheduling the audit near the end of
the first six months of the year, the use of a six-month sample period instead of an
entire year would be possible.
If purchase invoices are batched and filed by voucher number sequence or by pay
dates, there is much more flexibility in negotiating a sample period with the taxpayer
that is smaller than twelve months, and covering more than one year of the audit
period. Statistical sampling is a good choice where the number of transactions is
very large.
The general ledger detail or an accounts payable ledger for a chosen sample may
be used to select invoices to be examined. This can save time over looking at all the
invoices in a sample period. Use of the general ledger assures that you are seeing
all the transactions during a certain period. This can be valuable when there are
intercompany charges for which no invoice is present. Remember to consider
withdrawals from inventory, which may or may not show up on the books of the
taxpayer.
Unusual Items
There is always the possibility that isolated errors may occur which are not typical of
a taxpayer’s operations. For an item to be removed from an audit sample, a taxpayer
must establish that the transaction was an isolated event and not a normal part of its
operations. Allow the taxpayer to produce documentation that this was an isolated
event and not a part of his regular course of business.
Before any item of unusual circumstance is omitted from the sample, the auditor
should thoroughly analyze and discuss the situation with the Audit Supervisor.
Factors that should be taken into consideration before an item is excluded or
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included are: the size of the item is excessive compared to the normal items and
occurs only at rare intervals; the sale or purchase is a type not ordinarily handled; or
the item involves some unusual circumstance. Consider expanding the sample or
reaching a compromise that would be fair to the taxpayer and to the Department of
Taxation.
Credits Against the Sample

Sales
When conducting a sales audit the taxpayer has the legal right to bill its customers
for the sales tax not originally collected. Those customers may have been audited,
or they may have properly accrued the untaxed sale made to them. Most taxpayers
feel that in this case, the exception should be removed from the sample; however,
this is not a reason to remove the sale from the sample. A one-time credit is given
on a separate schedule when it is established that a customer has paid the tax. This
is done because there are likely similar transactions outside the sample period on
which the tax has not been paid. To remove the exception would invalidate the
sample. The likelihood that every other customer with a similar transaction in the
other months of the sample accrued and paid the tax is remote.
Tax Collected in Error

Taxpayers who have nexus in other states sometimes collect taxes from their
customers based on the customer’s location rather than the ship to location. This
erroneously collected tax is remitted to the other state rather than Virginia. Any
dealer who collects tax in excess of a 4 1/2% rate or who otherwise overcollects the
tax, is required to remit the over collection to the state. Virginia sales where the
taxpayer has collected another state’s tax are included in the sample using a
measure amount to recover the amount of tax collected. If the taxpayer elects to
research over collections and either refund or credit the customer’s account, a credit
may be taken on a future return.
Expense Purchases
Sometimes it is impossible to trace accruals from the return to an invoice. In these
instances, the best approach is to list all untaxed taxable purchases made during the
sample period and all untaxed taxable fixed assets acquired during the entire audit
period. Extrapolate the sample measure and give credit for the measure accrued on
a separate schedule. This should produce an audit liability that allows for the
following:
1. Inconsistent accrual of use tax.
2. Accrual of use tax based on a percentage of sales, or some fixed

dollar amount.
3. Inability to identify the invoices and/or items accrued.

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Tax Accrued in Error

Taxpayers may accrue tax on nontaxable purchases. A credit is given on the
sample schedule for any tax accrued in error during the sample period. If the
taxpayer accrued it in the sample period you examined, it is likely he accrued in
other periods as well.
Tax Paid in Error

Many times, taxpayers do not check their invoices to determine that Virginia tax is
being correctly charged by their vendors. No credit is given for another state’s tax
paid in error. It is the taxpayer’s responsibility to get a refund from the vendor for
any tax paid in error. The purchase is included in the sample as if it was an untaxed
purchase.
VI. Reporting the Results
Sample Bases or “Population” and Error Factor

Sales tax return data is usually used as the base for extrapolation of sales samples.
If it is discovered that the taxpayer has reported only taxable sales on line 1 of the
sales tax return, using sales data from financial statements may be a better
alternative to using return data. Accounts payable totals are generally used for
purchase samples. The STAUDN software uses the total of untaxed exceptions as
the numerator of a fraction, of which the denominator is the total of the sample
period data in the sample base, to arrive at an error factor which is then extrapolated
or multiplied by the data for each month in the sample base. This gives the measure
amount for the audit liability.
If a rollup is done (not recommended for sales), the base would be the same number
for each of the months during the audit period. Rollups are used to project the same
measure amount (and audit liability) for each month throughout the audit period.
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Error Factor Computation Example
This example has been prepared to provide an illustration of how the error factor is computed from the sampling procedure, how it
is applied to the sample base to determine the taxable measure, and the effects of “altering” the sample base.
In our example, the audit period is April 1998 – March 2001.
The taxpayer has provided a schedule of Accounts Payable debit TOTALS for each month of the audit period. These monthly
totals will be used as the “Sample Base” or “Population” for extrapolation purposes. AP debit totals are generally acceptable for
the base as they accurately reflect the trends and expenses for the company, and are readily available. From these monthly totals,
our sample months (high, low, avg.) were selected for review. From each sample month, general expense purchase invoices are
reviewed. All invoices where tax was not paid on the invoice or accrued and remitted to the State are listed as purchase
exceptions.
For our example, the total untaxed purchase exceptions from the sample months are $270,517.83.
Our sample months are: May 1999, Feb. 2000, and Jan. 2001
For our Original Computation, the sample “Population” from our sample period will be:
Period Total AP Debits Total Exceptions

9905 $3,140,614.84 $270,517.83
0002 $4,510,766.69
0101 $6,020,671.52
$13,672,053.05
This represents the total Accounts Payable disbursements from the sample months
The error factor is computed as follows:
Total Exceptions = Error Factor
Population
$270,517.83 = .019786189
$13,672,053.05
The error factor from the sample periods indicates the percentage of the total disbursements that were not taxed.
It is assumed that there will be a similar rate of error in the remainder of the months of the entire audit period.
Therefore, the error factor from the sample periods is applied to the “Sample Base” for the entire audit period to determine the
total taxable measure identified by the audit. With total AP for the audit period of $170,902,694.17, the extrapolated total of
$3,382,513.01 now becomes the taxable measure ($170,902,694.17 X .019786189).
For Computation Two, assume that the taxpayer requests that certain disbursements be removed from the extrapolation base, i.e.:
salary, insurance, etc. since these represent non-taxable amounts. For the example, assume that these monthly disbursements are
13% of the total.
The error factor the second computation will be as follows:
Period Total AP Debits Total Exceptions
9905 $2,732,334.91 $270,517.83
0002 $3,924,367.02 $11,894,686.15 Population
0101 $5,237,984.22
$11,894,686.15 Error Factor .022742746
Reducing the AP by 13%, the AP total is $148,685,343.93. The extrapolated taxable measure from Computation Two is
$3,381,513.01 ($148,685,343.93 X .022742746). No difference from Computation One. Although it would seem at first thought,
reducing the sample base will reduce the potential tax liability, the only thing that changes is the error factor. The net result is that
the error factor went up, and you are now essentially taking a bigger “Bite” out of a smaller pie.
The most important factor in determining the computation of the audit is the total of untaxed exceptions. This total is what will determine the
error factor to be used in the extrapolation of the sample base.
Penalty
The application of penalty to audit deficiencies is mandatory and its application is

generally based on the percentage of compliance determined by computing the
dealer’s compliance ratio. The compliance ration for the sales or use tax is
computed by using the following formula:
____________Measure Reported______ = Compliance Ratio

Measure Reported + Measure Found
“Measure reported” means dollar amounts of sales or use measure reported on

returns for the audit period. “Measure found” means dollar amounts of additional
sales or use measure disclosed by the audit. Separate ratios for sales and use
taxes will be necessary if the audit contains deficiencies in both areas. The
STAUDN software automatically computes compliance ratios based on returns
data entered. Tax paid to vendors will not be included in the computation of the
compliance ratio for the audit period. See Alternative Method for Computing
Compliance Ratio for additional taxpayer options to avoid the penalty.
1. First generation audits. Generally, penalty cannot be waived if any of the

following conditions exist:
a. The taxpayer has been previously notified in writing to collect tax on
sales or to pay tax on purchases, but has failed to follow instructions; or
b. The taxpayer has collected the sales tax, but failed to remit to the
Department of Taxation; or
c. There are indications of fraud in which the taxpayer has willfully evaded
reporting and remitting the tax to the Department of Taxation.
2. Second generation audits. Penalty will be applied unless the taxpayer’s

compliance ratios meet or exceed 85% for sales tax and 60% for use tax.
3. All subsequent generation audits. Penalty will be applied unless the taxpayer’s
compliance ratios meet or exceed 85% for sales tax and 85% for use tax.
VII. Front-End Agreements
Front-End Agreements have traditionally been used for taxpayers that are
manufacturers or holders of direct payment permits and are recurring three-year
cycle audit candidates. The agreement covers the expense purchase portion of
the audit. The taxpayer and the Department of Taxation agree that the tax will be
paid “on the front end” rather than at audit time.
An audit is done and areas are identified where compliance is not being met. In
the case of a manufacturer, the agreement may be to remit an additional amount of
use tax based on the error factor in the audit; or an additional amount or
percentage of use tax based on account transaction information. The direct
payment permit holder may agree to remit tax based on the error factor of the
audit, on accounts payable data, or, for certain accounts which were found to be
totally taxable, tax would be remitted on the activity in these accounts. A written
agreement is drafted and signed by both parties. In subsequent audits, the auditor
does limited “testing” to determine that the agreement is being followed. This
“testing” would also determine whether or not the percentages need to be adjusted
for the next audit cycle. Negotiations with the taxpayer would fix the agreement for
the subsequent audit period.
Fixed assets are audited in detail each audit period. Front End Agreements
substantially reduce the amount of time needed to complete an audit.
Invoice Capture Tool _____________________________________________ Policies and Procedures
Invoice Capture Tool (ICT) Policies and Procedures
Version 1.1
Last Modified:
November 30, 1999

Invoice Capture Tool___________________________________________________ Policies and Procedures
Invoice Capture Tool OCT) Policies and Procedures

OVERVIEW .................................................................................................................................. 1
1. ICT AUDIT CANDIDATE DETERMINATION ............................................................................. 2
A. Identifying ICT Candidates ………………………………………………………2
B. Qualifying ICT Audit Candidates ……………………………………………….2
C. Technical Feasibility of ICT Audit ………………………………………………3
1. Data Formats …………………………………………………………………….3
2. File Size Limitations …………………………………………………………….3
3. Fields Available Electronically…………………………………………………..4
II. SUCCESSFUL IDENTIFICATION OF AN ICT CANDIDATE ………………………………………5
A. Recommendation to 1ST (Audits Outside the District of an ICT Auditor)……….5
B. Recommendation to IST (Audits Within the District of an ICT Auditor) ………..5
C. IST Approval of ICT Candidates …………………………………………………6
III ICT AUDIT TEAM AND ROLES OF INDIVIDUAL PLAYERS
6
A. Key Players in the ICT Audit Process……………………………………………..6
B. Roles and Responsibilities of Key Players in the ICT Audit Process ……………6
1. ICT Support Team (1ST) ………………………………………………………..6
2. ICT Auditor (Audit Team) ………………………………………………………7
3. District Auditor (Audit Team)…………………………………………………...8
IV. TECHNICAL ASPECTS OF ICT AUDIT PROCESS ............................................................... 10
A. Data Retrieval ..............................................................................................................................................10
C C.
B. Data Analysis .............................................................................................................................................10
Import Data Into STAUDN ..................................................................................................................... 1 I
D. Return Taxpayer Data and Archive IDEA files....................................................................................12
V. ICT AUDIT RESULTS REVIEW AND EVALUATION ............................................................ 13
A. Overview ..............................................................................................................................................13
B. ICT Report of Audit Results ...............................................................................................................13
C. Criteria ..................................................................................................................................................13
D. Assessing the Performance of ICT Audit Program ............................................................................14
E. Communicating the Results of the ICT Audit Program ....................................................................15
Invoice Capture Tool_____________________________________________ Policies and Procedures
OVERVIEW
The Invoice Capture Tool (ICT) program introduced by the Office of Compliance in January 2000 will
enhance the software that the Virginia field audit staff uses. The current audit process involves extensive
manual searching through taxpayer paper invoices. The ICT initiative will deliver software that will allow
ICT auditors to receive this information electronically from taxpayers. Furthermore, this new software will
significantly reduce the burden on the taxpayer, increase the accuracy of the audit, and decrease the time it
takes for an auditor to complete the audit.
This document outlines the Policies and Procedures for ICT Audit Program. The initial ICT rollout involves a
limited number of TAX audit personnel. Through increased usage of the ICT software, TAX may consider
expanding the ICT Audit Program. The purpose of the ICT Policies and Procedures is to provide a framework
for the limited ICT rollout. As the ICT program evolves, the Policies and Procedures should be updated to
incorporate any changes to the ICT Audit Program.
C:IWINDOWSITEMPIICT Policies and Procedures.doc
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Invoice Capture Tool ____________________________________________ Policies and Procedures
I. ICT AUDIT CANDIDATE DETERMINATION
A. Identifying ICT Candidates
The first stage of the ICT process involves the identification of audit candidates. The audit selection process
employed by OOC involves audit supervisors, district auditors, and the TAX Audit Selection program to
identify these candidates. Using the centralized audit selection program that will be employed by TAX, the
audit candidates may be assigned directly to the ICT Support Team (1ST) for assignment. Additionally,
referrals from district auditors and audit supervisors will be used to identify ICT audit candidates.
In addition to the centralized audit selection process, the following processes will also be used to identify
ICT audit candidates:
• Evaluate current audit inventory: All district supervisors and auditors will be encouraged
to evaluate their current audit inventory to identify taxpayers that may qualify for an ICT audit.
• Field audit leads: District supervisors and auditors should evaluate new audit leads to identify
taxpayers that may qualify for an ICT audit.
• Collection audit leads: All audit leads provided by collection officers should be evaluated.
• Audits at request of taxpayers: All taxpayers that request an electronic audit will be
considered potential ICT audit candidates. The ICT auditor and district auditor will evaluate
the feasibility of this request.
B. Qualifying 1CT Audit Candidates
Upon being assigned to an audit engagement, the district auditor should immediately contact the taxpayer to
establish the audit schedule and arrange any pre-audit meetings. All field auditors will be trained on the
policies and procedures employed by TAX to identify and qualify ICT audit candidates. Additionally.
detailed documentation outlining these policies and procedures will accompany this training. The district
auditors will conduct their standard pre-audit conference and identify the potential for an ICT audit.
After the successful identification of an audit candidate, the district auditor must determine if the ICT
should be used to facilitate the audit process. It is the responsibility of the audit staff to determine if
individual audits can benefit from the use of the ICT. Field auditors should consider the following issues
when making this determination:
• Does the taxpayer have an automated chart of accounts?
• Is the taxpayer's general ledger updated from posted information?
• Is the taxpayer willing to download data?
• Does the taxpayer want to participate in an ICT audit?
• Will the use of the ICT reduce the amount of time needed to complete the audit?
• • Has the taxpayer's accounting system been consistent for a known period of time (i.e. consistent
accounting codes and methodology)?
2
C. Technical Feasibility of ICT Audit
Upon the identification of a potential ICT candidate, the district auditor will arrange a meeting with the ICT
auditor and taxpayer to discuss the technical feasibility of using the 1CT on the audit. The district auditor
should directly contact an ICT auditor if they operate in the same district. Otherwise, the district auditor
should contact the IST, who will then identify an ICT auditor in a neighboring district. This audit team (the
District Auditor and ICT Auditor) will arrange a second pre-audit conference with the taxpayer to discuss the
technical feasibility of applying the ICT software to this audit engagement.
The following factors should be considered when analyzing the technical feasibility of the ICT audit.
2. Data Formats
The ICT software (IDEA) can work effectively with a wide may of data formats. These formats
include:
Application Data and Databases
• Access • Excel
• Lotus 123 • SQL Server
• Oracle • Sybase
• Various accounting packages including • XBASE (the DBF format from dBASE,
Accpac, Simply accounting, Pegasus, Foxpro, and others)
Sage and many others
• Btriev
Flat Files /Unformatted Data

• ASCII (fixed length and variable length) • ASCII Delimited
• EBCDIC (fixed length) • EBCDIC (variable length ANSI/IBM)
• AS/400 DIF (Data Interchange Format)
Most software applications can effectively export a flat, or ASCII, file type. The ICT auditor
should work with the taxpayer to identify a usable file format.
1. File Size Limitations
The largest file that IDEA can handle is 2.1 gigabytes, unless you are working with ODBC data
(application data - Excel and Access), in which case you can access files that are much larger.
The 2.1 gig limit is a function of the operating system rather than a limitation of IDEA. The 32-
bit version of IDEA will overcome this limitation. IDEA can handle files with up to 2.1 billion
records and files with up to 32,766 fields per record.
For additional information, view the IDEA website at www.cica.caiidea/v3faq.htm or the user manual
accompanying the IDEA software.
3
3. Fields Available Electronically
The ICT auditor must ensure that the appropriate data is available to effectively conduct the audit.
ICT and district auditors should work with the taxpayer to identify the fields that are available
electronically.
The following fields are required to perform an audit based on gross sales:
1. Customer name or number
2. Amount of sale
3. Sales tax collected (if any)
4. Ship to location
5. Date of sale
6. Description of the item sold
The following fields are required to perform an audit based on purchases:

1. Vendor name or number
2. Account number purchase is being charged to
3. Sales tax paid to vendor separately stated
4. Date of purchase
5. Cost of item
6. Description of item purchased
7. If no sales tax paid to vendor, is accrual being posted and how
As documented in Section IV: Technical Aspects of ICT Audit Process, many of these fields can
be directly imported into the S T A N exceptions list. Additionally, many of these fields can
facilitate the generation of an exceptions list in the ICT software but may not need to be imported
into STAUDN.
4
H. SUCCESSFUL IDENTIFICATION OF AN ICT CANDIDATE
A. Recommendation to 1ST (Audits Outside the District of an ICT Auditor)
Upon the successful identification of an ICT audit candidate from sources outside the district, the ICT auditor
will review the audit candidate with the District Audit Supervisor and will obtain approval from the IST to
proceed with the audit engagement. On the fifteenth day of each month, the ICT auditors will submit a list of
ICT audit candidates and an audit workplan to the 1ST. The 1ST will evaluate the list of ICT candidates and
will provide final approval of the use of the ICT tool for individual audit engagements.
B. Recommendation to 1ST (Audits Within the District of an ICT Auditor)
Upon the successful identification of an ICT audit engagement within a district with an ICT auditor, the
ICT auditor will review with the district audit supervisor the audit to obtain approval from the IST. On the
fifteenth day of each month, the ICT engagement auditor(s) will submit a list of approved ICT audit
engagements to the 1ST. These audit engagements will be part of the ICT auditor's workplan.
C. 1ST Approval of ICT Candidates
Upon receiving the ICT audit candidate list from the ICT auditors, the IST will select the accounts that
should be worked using the ICT software. The 1ST will evaluate the feasibility and advantages of using the
ICT tool on the identified audit engagements, and will assign auditors to the approved ICT audit
engagements by the first day of each month.
The assignment of an ICT engaged audit will reside within the responsibility of the 1ST. An ICT auditor and
a district auditor will have previously reviewed the ICT candidate. Upon receiving an ICT audit
recommendation, the 1ST will work with the audit supervisors to assign the appropriate ICT auditor to
work on the assignment.
The 1ST will use the following criteria when approving an ICT audit candidate:
• Feedback from ICT Auditor and District Auditor

• Documentation reviewed for the following:
Business classification of audit candidate
− Special audit issues and/or tax policy concerns regarding business classification
− Availability of ICT auditor resources
Geographic location of audit candidate
Current inventory of the District where the ICT audit candidate is located
• Feedback from District Audit Supervisor
5
III. ICT AUDIT TEAM AND ROLES OF INDIVIDUAL PLAYERS A. Key Players in the
ICT Audit Process
The ICT audit process utilizes various personnel from the Office of Compliance. These individuals include:
District Audit Supervisor: Coordinate ICT audits with district audit plan.
• District Office Audit staff: All OOC audit staff.
• ICT Audit Staff Three auditors, one from Norfolk, Fairfax, and Richmond district offices. As the
ICT program expands, additional auditors will be added.
• ICT Support Team (1ST): Richard Dotson will perform the 1ST functions. B. Roles
and Responsibilities of Key Players in the ICT Audit Process 1. ICT Support Team (IST)
The primary objectives of the 1ST team will be to ensure the standardized use of the ICT software, to
identify new opportunities for the ICT software, and to manage the expansion of the ICT program.
Through the use of a centralized team, TAX can closely manage and assess the use of this new tool.
The IST will perform a wide array of tasks, including:
• (Dis)Approve the Use of ICT - Using feedback from other audits, information gathered by the
district auditor in the initial meeting with the taxpayer, and feedback from the ICT auditor, the
1ST will either approve or disapprove the use of the ICT on the engagement on all audits outside
of an ICT audit district.
The 1ST also approves the use of ICT on all audits within an ICT audit district. The
1ST will work with the District Audit Supervisor when scheduling ICT auditors.
• Assigns ICT Auditor - The IST will identify and assign an auditor trained to use the ICT
software in the corresponding district office, interstate office, or in an adjacent district office.
Typically the ICT auditor will provide an audit recommendation to the 1ST and will serve as
the ICT auditor for the recommended candidate. However, the 1ST may assign an ICT
auditor to potential audit candidates based on auditor availability and audit location.
• Measures Performance of ICT and Refines Deployment Strategy - Upon completion of an

audit, the ICT audit team will submit an ICT audit report to
6
the 1ST. The 1ST uses this feedback to continuously refine the use of this resource.
• Informs Audit Supervisors of ICT Results and Auditor Schedule - The IST informs all Audit
Supervisors of ICT activities and programs. Additionally, the IST coordinates with all
district Audit Supervisors when deploying ICT auditors on ICT audit assignments.
2. ICT Auditor (Audit Team)
The role of the ICT auditor involves a wide array of technical and analytical processes. Through
the course of the ICT training, auditors will learn to perform the tasks needed to electronically
capture the taxpayer data and perform the requisite analysis. These tasks include:
+ Understanding and, if necessary, defining the layout of the data

• Assessing the taxpayer's data file formats and determining if any compatibility
issues exist
• Working with the taxpayers technology representatives to perform the data transfer
• Generating queries to extract specific records from the taxpayer's file;
• Statistically analyzing the taxpayer's file
• Importing and exporting databases
+ Working with external storage devices (i.e. Jaz drives and Superdisks) to facilitate
the data importation process
The ICT auditor will work with district auditors to perform the tasks needed to complete an audit.
In addition to the aforementioned technical roles, the ICT auditor will be responsible for:
• Working with field auditors to schedule ICT audits: Upon being notified of a
potential ICT audit engagement, the ICT auditor will work with the district auditor to
schedule a second pre-audit meeting. The ICT audit team should gather information
that will allow them to qualify the candidate as an ICT audit candidate. Additionally,
the audit team will determine the overall audit schedule during this session.
• Working with field auditors to recommend ICT audit candidates: Upon completion of
the second pre-audit conference, the ICT auditor should work with the field auditor to
determine if the ICT software will benefit the audit.
• Submit ICT audit reports and workplans to 1ST: On the fifteenth day of each
month, the ICT auditor should submit to the IST an ICT Audit
7
Report and a work plan for the following month if proposed ICT assignments
have been scheduled.
• Obtains approval from 1ST to proceed with ICT software: The IST will provide the
ICT auditor and district auditor with an approval to proceed with the use of the ICT
software for individual audit engagements.
• Reviews results of ICT analysis with field auditor: After generating an exceptions list
using the ICT software, the ICT auditor will review the list with the district auditor.
The ICT auditor and district auditor will review the exceptions list, IDEA log file, and
any additional documentation to ensure the results meet the audit strateu defined by
the audit team. Additionally, this information may be included in the final audit
report.
• Imports data into STA UDN worksheet on the field auditor's laptop: Upon agreeing
on the exceptions list, the ICT auditor will assist the district auditor in importing
the exceptions list into the district auditor's STAUDN worksheet.
• Communicates and coordinates ICT activities with the appropriate district audit
supervisor: Prior to scheduling audit engagements, the ICT auditor should obtain
approval from the district audit supervisor.
3. District Auditor (Audit Team)
District auditors serve as the primary auditor on all ICT audit engagements. As the primary
auditor, the district auditor will be responsible for:
• Contacting taxpayer to schedule audit and pre-audit meetings

• Serve as the primary liaison between the taxpayer and TAX
• Working with taxpayer to arrange the data transfer
• Writing a confirmation letter (using approved template) to ensure the agreed upon
approach and data requirements are explicitly documented
• Developing audit program and schedule
• Performing audit fieldwork
• Concluding audit activities and review audit results with taxpayer
• Generating the final audit reports
• Generating assessments and refunds
• Coordinating ICT audit assignments with the appropriate district audit supervisor
District auditors serve as the primary link between the ICT Audit Program and taxpayers. To
support the use of the ICT software, district auditors need to communicate the benefits of ICT to
taxpayers and should continuously try to
8
Invoice Capture Tool_____________________________________________ Policies and Procedures
identify potential ICT candidates. Upon identifying a potential ICT candidate, the district auditor
should contact an ICT auditor to arrange a second pre-audit meeting. The district auditor and ICT
auditor will work together to determine the feasibility of applying the ICT software for audit
candidates.
As part of the ICT Audit Team, the district auditor works with the ICT auditor in the generation of
an exception list. With assistance from the ICT auditor, the district auditor will import the data into
the STAUDN audit template on their laptop computer. Furthermore, the district auditor completes
the remainder of the audit activities and presents the audit results to the taxpayer. Although district
auditors will not report directly to the 1ST in Richmond, they will participate in the assessment of
the audit results (e.g. benefits, issues, and recommendations).
C:IWINDOWSIIEMPIICT Policies and Procedures.doc 9

W. TECHNICAL ASPECTS OF ICT AUDIT PROCESS
A. Data Retrieval
During the second pre-audit conference, the ICT auditor and District Auditor will work with the
taxpayer's technical team to discuss the data retrieval requirements. The audit team should consider the
following:
• File format: The audit team should work with the taxpayer's technical team to identify an
acceptable format (Section I-C: Technical Feasibility of ICT Audit). To facilitate the data
importation process, the audit team should try to obtain a file in either an application file format (i.e.
Access or Excel) or in a fixed ASCII file layout.
• File si:e: The audit team must consider the file size limitations associated with a floppy diskette
(1.44 MB) and a superfloppy diskette (120
• These two storage devices will be available to the audit team when transferring files.
• Taxpayer willingness to work with superfloppy drive: When transferring data using a superfloppy
diskette, hardware drivers need to be installed on the source computer. Taxpayers must agree to
the use of an external superfloppy drive on their computer. Additionally, a representative of the
taxpayer's information system team should perform the installation process.
B. Data Analysis
When using the ICT software to generate an exceptions list, auditors should consider the following:
• Target a small percentage of transaction volume to achieve a high percentage of dollar coverage.
• Data analysis and manipulation will be performed on like transactions.
• Completeness testing on all areas of ICT audits must be performed on the front end of the data
manipulation process.
+ The ICT auditor will maintain a log of activities for each audit engagement, which details file
manipulations, file names, and data analysis. IDEA 3.0 produces a log file that tracks these activities.
• The ICT auditor will provide audit comments as they pertain to the data manipulation process.
Per the district auditor's discretion, these comments may be incorporated into the final audit
report. The ICT auditor will also maintain a copy of these comments in their own files
The methodology employed when analyzing taxpayer data will be established as the ICT Audit Program
matures. The ICT auditors should continuously communicate their data analysis strategies with one another.
Additionally, as data analysis strategies become
10
identified and approved, they will be documented in the Data Analysis section of the ICT Policies and
Procedures.
C. Import Data Into STAUDN
The STAUDN audit worksheet contains a file importation feature. Using this feature, district auditors
can import ICT produced output (i.e. exceptions list) into STAUDN. This importation process will create
new records in the taxpayer exceptions list. Note that this process appends the existing exceptions list
and does not write over existing records.
Prior to importing the exceptions list into STAUDN, the ICT auditor must perform the following critical
steps:
• Review the exceptions list with the district auditor. It is essential that the ICT auditor and
district auditor agree on the exceptions list prior to importing it into STAUDN.
• Identify and rename fields in the ICT database to names recognized by STAUDN.
STAUDN will only import fields that have specific names. The following table lists the
fields that can be in the import file:
Field Name Type Description Format Notes
INVOICE_DATE Date
Date field holding Month, day, and Year Any valid date format This field cannot be left blank
of invoice (preferably 4-digit
year)
MEASURE Text Measure type for invoice Interface will have auditor
match values in this field to
STAUDN measures. Any
blank values in this field will
also be mapped to a STAUDN
LOCALITY Text Locality to use for distribution Must be blank or a valid
numeric locality code
INVOICE AMT Currency Amount on invoice #.#1# (can have '$' if This field cannot be left blank
needed)
ACCOUNT_NUM Text Account number that the taxpayer uses
ITEMS Text Description of Item on invoice
INVOICE_NUM Text 'Invoice number that the taxpayer uses
VENDOR_NAME f Text Vendor name If blank, the invoice will be
mapped to a new vendor
named "Imported"
COMMENTS Text Comments about invoice
BUSADDR1 Text Business Address line I {
BUSADDR2 Text Business Address line 2 _
CITY Text Vendor City
STATE Text Vendor State If blank, the state will be
assumed to be "VA'
ZIPCODE Text Vendor Zip ~ # # # # or
PHONE Text Vendor Phone #>~##
COUNTRY Text Vendor Country
11
Invoice Capture Tool Policies and Procedures
Field Name Type Description Format Notes
(
UD1 Text Custom field 3
UD2 Text Custom field 2
NOTE: At a minimum, the INVOICE DATE and INVOICE_AMT fields must be included. My fields
included in the file that are not listed above will simply be ignored.
• Export the approved exceptions list to an Access 2.5 file. This feature is located under
File Export in the IDEA 3.0 software.
I
• Save the Access 2.5 file to a diskette.

• Import the Access 2.5 file into the District Auditor's STAUDN audit file. This function
is located under File Import in the STAUDN worksheet.
I
+ Identify the measures corresponding to individual exceptions. This procedure can be done
during either the file importation process via the File Importation Wizard or during the
generation of an exceptions list in the 1CT software.
D. Return Taxpayer Data and Archive IDEA files.
After successfully importing the taxpayer data into STAUDN and concluding all audit activities, the
taxpayer data should be returned to the taxpayer in it's original format. Additionally, all manipulations of
the taxpayer data should be explained to the taxpayer placed onto the diskette sent into the TAX archive.
These manipulations include all IDEA 3.0 audit files.
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Invoice Capture Tool _____________________________________________Policies and Procedures
V. ICT AUDIT RESULTS REVIEW AND EVALUATION
A. Overview
The review of the effectiveness of the ICT Audit Program is the responsibility of the ICT Support Team
(1ST). To support the achievements of the ICT Audit Program, standard criteria has been developed to assist
the IST and TAX management in reviewing the effectiveness of the program. These criteria found in the
ICT Report of Audit Results, will compare the audit results obtained from "normal" audit review procedures
against those obtained from ICT audit review procedures.
B. ICT Report of Audit Results
At the completion of each ICT audit engagement, the ICT audit team will complete the ICT Report of Audit
Results. This Excel template, which will be installed on each of the ICT auditor laptop computer's, will be
submitted to the IST and other ICT auditors. Performance information gathered by the ICT auditor
corresponds to the ICT evaluation criteria and includes:
• ICT auditor hours • District auditor hours

• Audit expenses • Audit results (Assessments, collections,
assessments / collections)
• Previous audit information (if any), • Auditor commentary
including assessment amounts, hours,
and expenses.
• Comparison to previous audit results (if applicable)
C. Criteria
The criteria used to evaluate the effectiveness of the ICT program includes:
1. Compare ICT audit results with previous audit results on all assignments using the ICT tool
• Total audit assessments
• Total audit hours used to complete the audit assignment
+ Total travel expenses used to complete the audit assignment
2. Analyze the impact on OOC audit program

+ Impact on OOC objectives
• Impact on taxpayer operations
• Impact on customer service objectives
• Total audits performed by ICT auditor to previous year(s)
13
D. Assessing the Performance of ICT Audit Program
A set of compliance codes has been developed for the ICT Audit Program. Auditors should utilizes these
compliance codes when entering audit results into STARS so that management can effectively use the
codes and audit information to assess the performance of the ICT audit program. The compliance codes
established for the ICT Audit Program are:
130F FAFOR ICT
1301 SPFOR ICT
1302 BRFOR ICT
1303 DAFOR ICT
1304 PNF . ICT
1305 NOFOR ICT
1306 RIFOR ICT
1307 R O B ICT
1308 VAFOR ICT
1310 NRIBDCM ICT
1319 NRIADOM ICT
1320 NRIBFOR ICT
1329 NRIBFOR ICT
134F FAADJ ICT
1341 SPADJ ICT
1342 BRAD) ICT
1343 DAADJ ICT
1344 PNADJ ICT
1345 NOADJ ICT
1346 RIADJ ICT
1347 ROADJ ICT
1348 VAADJ ICT
1350 IBDOM ICT
1359 IADOM ICT
1360 IBFOR ICT
1369 IAFOR ICT
139F FADOM ICT
1391 SPDOM ICT
1392 BRDCtvf ICT
1393 DADOM ICT
1394 PNDOM ICT
1395 NODOM ICT
1396 RIDXM ICT
1397 RODCM ICT
1398 VADOM ICT
The 1ST and TAX management should utilize the compliance codes for the automated review of ICT
program results. The results of this analysis will assist TAX management in defining the future direction of
the ICT audit program, including the purchase of new hardware and software, the use of additional ICT
auditor resources, and the expansion of the ICT audit program into additional districts.
E. Communicating the Results of the ICT Audit Program
The ICT Audit Program involves many OOC resources. In addition to the ICT auditors, all Audit
Supervisors and district office personnel will be involved in this program. In an
14
effort to involve all relevant personnel in the ICT Audit Program, the ICT auditors and IST should
continuously inform TAX Management, Audit Supervisors, and District Auditors on the status and results of
the program. The ICT auditors will distribute appropriate reports to OOC and appropriate TAX personnel. In
this manner, the program will remain visible to all employees and will promote the increased usage of the
ICT tool.
15
16
Page - 1
SUCCESSOR LIABILITY
Objective: Discuss the application of sales and use tax as it applies to sale/quitting
a business.
I. References

B. Virginia Administrative Code 23VAC 10-210-3090
C. Ruling Letters 200-802 and 200-814; and Public Document 96-161
II. General
A taxpayer who purchases all of the stock of an existing business may be

liable for sales and use tax owed by the seller unless certain precautions are
taken as provided by Code of Virginia 58.1-629. A dealer is required to submit
a final return and remit the applicable tax, penalty, and interest within 15 days
of selling or quitting a business. The final return should note the name and
address of the successor, if applicable.
When a business is sold, the purchaser must withhold sufficient funds to

cover tax, penalty, and interest owed by the previous owner. The funds may
not be released until the seller produces a receipt showing that all liability has
been paid, or until the purchaser receives a certificate from the Department
showing that no tax, penalty, or interest are due from the prior owner. If a
purchaser fails to withhold funds, he or she may be personally liable for tax,
penalty, and interest owed by the prior owner.
A certificate of registration may not be issued to a successor who has been

notified by the Department that tax, penalty, and interest are due and unpaid
by a prior owner until the amount is paid in full.
Virginia Code 58.1-629 applies only to sales and use tax. Furthermore, it
applies only to those situations when a business is sold for a cash
consideration. Successor liability may not be imposed when a business is
sold for non-monetary assets such as stock or other property.
Page - 2
III. Procedures
The applicability of successor liability should be evaluated as the situation

arises. The auditor should evaluate the situation using the best
information available to resolve the issue.
Items to look for when you suspect you may have a successor problem:
• Type of business-individual, partnership or corporation?

• What did purchaser buy?
• Obtain copy of sales agreement.
• Was there a sale?
• Is business at the location, is the name the same, is the successor a
like business?
• Was the sale for cash or other consideration?
• Is there a contractual agreement to purchase debts?
If there is a contractual agreement for the purchaser to be responsible

for the debts of the seller, then the provision of successor in liability
does not come into play.
SUCCESSOR LIABILITY
The policy of the Department of Taxation states that "in order to hold a successor of
a business liable for unpaid sales tax under the provisions of Section 58.1-629, a
sale must have taken place and purchase money must have changed hands. A
taxpayer taking over a business abandoned by former owner does not fulfill the
meaning of "successor" in that a sale of transfer of ownership did not take place and
purchase money did not change hands. Furthermore, exchange of non-money
items such as stock or land would not allow the Department to proceed against the
successor."
PARTNERSHIP
The liability of successor businesses depends on the facts. If a partnership adds or
subtracts partners but continues without dissolving ( and all creditors must be paid if
the partnership goes through dissolution) it is still liable for all debts and crimes
committed before the change. If the partnership is dissolved and sold to another set
of partners, the new partners may agree to assume the debts of the old, in which
case both the old partners and the new partnership may be liable for debts, but the
new partnership has no criminal liability.
Page - 3
CORPORATION
Corporations may be dissolved, merged, consolidated or sold. In any of the last

three, the successor should be liable for debts and subject to criminal prosecution
rising from dealings of the old corporation. If the assets of a corporation are sold
(rather than the stock), and the original corporation either stays in existence or is
later dissolved, the liability for debts is not transferred unless there is an agreement
to do so. However, it is illegal to sell all assets of a business without going through
certain procedures to protect creditors.
Page - 1

Service vs Sales
Objective: Discuss the application of sales and use tax as it applies to Services vs
Sales.
I. References
A. Code of Virginia Section 58.1-203 and 58.1-609.5(1)
B. Virginia Administrative Code- 23 VAC 10-210-4040
C. Ruling Letters
- Ruling of Commissioner, Sales and Use--Definitions--"Sales Price"--

Services--10/25/84
- Ruling of Commissioner, Sales and Use--Definitions--"Tangible Personal
Property"--Computer Software--, 2/8/85
- Professional, Insurance or Personal Service Transactions, 2/15/85
- 60-310.42, CCH, Conversion of word processing diskettes
- P.D. 86-22., Conversion of Word Processing Diskettes, 1/16/86
- P.D. 90-6., Calligraphy, 1/11/90
- P.D. 90-218., Specialized Word Processing Products, 12/14/90
- P.D. 91-185., Fax Services, 8/30/91
- P.D. 91-207, Computer Software and Equipment--Price Updates Stored on
Tapes or Diskettes, 9/6/91
- P.D. 91-268., Architectural Blueprints--10/23/91
- P.D. 92-13., Trash Bags for Garbage Collection, 4/1/92
- P.D. 92-112., Word Processing Products. 6/24/92
- P.D. 92-138., Multiple Real Estate Listing Service, 8/10/92
- P.D. 92-159., Computer-Aided Drafting Designs, 8/27/92
- P.D. 93-87., Video production company, 3/29/93
- P.D. 93-139., Computer-generated lists, 6/4/93
- P.D. 94-120., Mapping services, 4/20/94
- P.D. 94-147., Resales--Warranty documents, 5/16/94
- P.D. 94-156., Sales training seminars, 5/23/94
- P.D. 94-230., Account reconciliation services, 7/28/94
- P.D. 94-299., Duplicating services, 9/29/94
- P.D. 94-315., Video clippings--Newspapers on CD-ROM, 10/18/94
- P.D. 95-5., Insurance companies--Video tapes, 1/9/95
- P.D. 95-15., Miscellaneous service enterprises--Abstracts, 1/27/95
- P.D. 95-195., Medical records and legal depositions, 7/31/95
- P.D. 95-234.,Publishing and broadcasting--Videotapes, films or other
audiovisual work, 9/8/95
- P.D. 95-252., Computerized drafting services, 9/29/95

- P.D. 95-265, Photocopied medical records, 10/17/95
Page - 2
- P.D. 95-270., Cleaning and laundry--Linen services, 10/24/95

- P.D. 95-286., Repair and installation, 11/7/95
- P.D. 95-300., Marketing services, 11/21/95
- P.D. 96-2., Telecommunications--Prepaid telephone cards, 1/4/96
- P.D. 96-67., Electrical services, 4/26/96
- State Leg- Summary, CCH 192-060.04, Contractors--Locksmiths
- State-Leg- Summary, CCH, 192-060.05, Contractors--Locksmiths
D. Applicable exemption certificate---ST-10--From 23 VAC 10-210-4040.

Services. Section E. Final paragraph, "When making bulk purchases of
items, some of which will be used in providing services and some of
which will be used in making retail sales, a person may purchase all such
items exempt from the tax using a ST-10. The person shall remit use tax
on any tangible personal property purchased for resale but used in
providing exempt services based on the cost price of the items used."
III. General
A. Charges for services generally are exempt from the retail sales and use
tax. However, services provided in connection with sales of tangible
personal property are taxable.
B. Total charges for fabrication of tangible personal property for users or

consumers on a special order for a consideration, including labor, even if
charges for labor are separately stated --are taxable. (see 23 VAC 10-210-
560)
C. Transaction involving both the sale of tangible personal property (tpp)

and the provision of services, generally are either taxable or exempt on the
full amount charged, regardless of whether the charges for the service and
property components are separately stated. The "true object" test is used to
determine the taxability of these transactions.
IV. Procedures
In order to determine whether a particular transaction which involves

both the rendering of a service and the provision of tpp constitutes an exempt
service or a taxable retail sale, the "true object" of the transaction must be
examined. If the object of the transaction is to secure a service and the tpp
which is transferred to the customer is not critical to the transaction, then the
transaction may constitute an exempt service. However, if the object of the
transaction is to secure the property which it produces, then the entire
charge, including the charge for any services provided, is taxable.
Additional factors, such as monetary significance, as when a CPA firm

Page - 3
buys a computer for a client in order to provide accounting services, need to

be looked at to determine the "true object" along with the ownership status of
the tpp in question. In this situation the CPA firm retains ownership of the
computer, although the cost of the equipment is monetarily significant related
to provision of the services the "true object" is the provision of the services to
the client. The CPA firm should pay use tax on the purchase of the computer
at the time of purchase. This example is comparable to data
communications services, including equipment as listed below under, "2.
Exempt. d. Data communications...".
In instances where both the services rendered and the property

transferred are critical elements of a transaction, the degree of
customization, uniqueness or specific services provided in connection with
the product shall be considered in determining its appropriate tax status.
Examples of transactions in which the tax status is based on these

factors:
1. Taxable.
a. Standard data lists, reports
b. Extra copies of reports, letters
c. Equipment rentals
d. Data communications equipment
2. Exempt.
a. Customized data lists, reports
b. Original letters, reports
c. Equipment rentals with operators
d. Data communications services, including equipment
Example. A taxpayer provides information retrieval services and in

connection therewith leases or rents computer equipment to its
customers. Charges for the retrieval service, which include charges for
the lease or rental of the equipment, are exempt from the tax. However, if
the tp leases or sells computer equipment to customers without the
provision of the information services, such lease or sale is taxable.
To assist in determining whether transactions are services or sales the

auditor should ask for or look for documents such as lease agreements,
contracts, and related documents that describe the specifics of the service or
sales agreement. Look for statements that include tpp as part of the
agreement and other wording in the agreements that assist in defining the
"true object" and indicate what the tp is entitled to receive or not receive.
A tp that is a service provider may also be making retail sales. Many

traditional service providers (attorneys, doctors, CPA's etc.) are making
significant purchases to support their services businesses and should be
registered for Consumers Use Tax and or Sales Tax.
Page - 4
As an additional aid to determine the "true object of the buyer" test in

distinguishing between sales of services and sales of tpp, determine whether
the buyer's primary purpose is to acquire a tangible product. Example: An
equipment rental situation where a customer does not take possession of the
equipment and goes to the computer store to use the equipment. If the
buyer's primary purpose is to acquire the tangible product (the computer) the
contract is for the sale of tpp and is taxable. In this case the "true object" is
to attain the use of the computer for the service it provides ("computer time")
and not the actual tpp.
Common exempt services are:
1. Personal, professional, or insurance transactions which involve sales as

inconsequential elements for which no separate charge is made
2. Separately stated services performed by repairmen
3. Separately stated labor or service charges for the repair, installation, application
or remodeling of tangible personal property
4. Separately stated transportation charges
5. Separately stated charges for alterations to apparel, clothing and garments
6. Charges for gift wrapping services performed by a nonprofit organization
7. An amount separately charged for labor or services rendered in connection with

the modification of prewritten programs
8. Computer programs that meet the requirement of "custom programs"

Page - 1

Schools and Colleges, Certain Educational Institutions and Other Institutions
of Learning
Objective: Discuss the application of sales and use tax as it applies to Schools and
Colleges, certain educational institutions and other institutions of learning.
I. References
A. Code of Virginia Section- 58.1-203 and 58.1-609.4(1),(2),(5) of the Code

of Virginia
B. Virginia Administrative Code-23 VAC 10-210-4020
C. Ruling Letters (give public document number)
- P.D. 89-290, Sales Made by School Store located in nonprofit school,
Exempt, 10/27/89
- P.D. 90-35, Yearbooks Sold to Schools, Exempt, 3/19/90
- P.D. 91-23, Nonprofit Cooperative Preschool- Fund Raising Activities,
Taxable/Exempt, 3/4/91
- P.D. 91-168, Status of School that did not meet all criteria for exemption,
Taxable, 8/15/91
- P.D. 93-145, Nonprofit institution Riding Center purchases, Exempt, 6/23/93
- P.D. 93-241, Scientific educational institution, Taxable, 12/28/93
- P.D. 94-16, Nonprofit Corporation- Educational--Status??, Taxable- not
exclusively..., 1/28/94
- P.D. 94-343, Foundation promoting vocational-technical education,
Taxable, 11/17/94
- P.D. 95-100, Organization promoting education, Taxable, 5/4/95
- P.D. 95-255, Professional education association, Taxable, 10/4/95
- P.D. 96-6, Law student organization, Taxable, 2/28/96
- P.D. 96-25, Schools-Lunches and tpp Sold by Nonprofit Schools, Exempt,
3/29/96
- P.D. 96-53, Nonprofit organizations, private schools, and churches,
Fundraising, Exempt, 4/19/96
- P.D. 96-98, Food Served At College Events, Taxable, 5/24/96

Page - 2
- TB 201-340, P.D. 86-208, Nonprofit Boarding School, Exempt, 10/17/86

- TB 201-353, P.D. 86-222, Parent Teacher Association- Fund Raising Sales
to School Organizations, Exempt, 11/3/86
- TB 86-8, Parent Teacher Organization, Exempt, 6/1/86
- TB 201-617, P.D. 88-92, School Yearbook Purchases, Exempt, 5/10/88
- TB 201-707, P.D. 88-291, Parent Teacher Association--Book Fair, Taxable-
-book store not affiliated with a school, 10/27/88
- TB 201-835, School in Formative Stages, Taxable, May claim refund after it
becomes operational and meets criteria, 10/26/89
- TB 202-520, PD 94-305, Information requirements, 9/30/94
- TB 202-116, Public School Contracts, Sale and Installation of Public School
Equipment, 4/1/92
E. Applicable exemption certificate
-- ST-13 (Blue) Nonprofit Organizations--Educational exemptions 1-4
-- ST-12 (Mint Green) (For use by the Commonwealth of Virginia, a political
subdivision of the Commonwealth of Virginia, or the United States)
II. General
A. When conducted not for profit. The tax does not apply to sales of tpp to
nonprofit schools, colleges and other institutions of learning for their use
or consumption and paid for out of their funds. An "other institution of
learning" must be similar to a college, that is, it must (a) employ a
professionally-trained faculty; (b) enroll and graduate students on the
basis of academic achievement; (c) prescribe courses of study; and (d)
provide instruction at regular intervals over a reasonable period of time.
The tax does apply to purchases by day care centers and other pre-grade
school establishments other than kindergartens, unless otherwise exempt
(church run).
Sales to institutions of learning owned and operated by the state have the
same status as other sales to the state for its use or consumption. Sales
of tpp to the United States, or to the Commonwealth of Virginia or its
political subdivisions, are exempt from the tax if the purchases are
pursuant to required official purchase orders to be paid out of public
funds. Sales made without the required purchase orders and not paid for
out of public funds are taxable. Sales to governmental employees for
their own consumption or use in carrying out official government business
are taxable.
Page - 3
Charges for meals, catered events, lodging, and other accommodations,

such as meeting or conference rooms, are subject to the tax when paid
for by the state or local government or public institutions of learning, or
employees of such, regardless of whether the purchases are made
pursuant to required official purchase orders.
B. Educational institutions. ** This section provides a very restricted

exemption. Colleges and Universities do not fall under this section.**
TPP and services (emphasis added- includes services, which differs from
nonprofit schools, colleges and other institutions of learning, which are
not exempt on services) may be purchased exempt from the tax by an
educational institution doing business in the Commonwealth which (a)
admits regularly enrolled high school and college students, and (b)
provides a face-to-face educational experience in American government,
a program which (i) leads toward the successful completion of courses in
high school in United States history, civics, and problems of democracy,
or (ii) which is acceptable for full credit towards an undergraduate or
graduate level college degree, provided such institution is conducted not
for profit. The property or services must be purchased by the educational
institution. Individuals are not eligible for the exemption even if they are
reimbursed by the institution for their expenditures. However, the
exemption applies even if students, teachers or other educators
participating in the institution's program use or consume the purchased
property or services, including meals and lodging. The "Close Up"
organization would be an example of an exempt "Educational institution".
They are an organization in Northern Va that provides a civics program
and meets all of the above criteria. Thus they are exempt on purchases
of both tpp and services, such as meals and lodging.
C. Public school system. The tax does not apply to purchases by public free
schools for their use or consumption, provided purchases are made
pursuant to official purchase orders to be paid for out of public funds. The
tax applies to purchases not paid for out of public funds.
D. Sales. The exemption does not extend to sales by the institution (other
than school textbooks) For example, the institution must collect the tax
on retail sales of meals to students or others if the price of the meals is
not included in room, board or tuition charges or fees.***exception-see
school lunches, Section G.
Page - 4
E. Independent associations. The tax does apply to sales to independent

athletic and other such associations, whether or not affiliated with a
nonprofit institution of learning (including state institutions). When these
associations make retail sales, they should contact the Department to
determine if they should register as a dealer.
F. School Activity funds.
1. On purchases of tpp paid for out of funds other than public funds or
funds of the nonprofit institution of learning, the tax applies if the tpp is for
the use of any school class, club, group, organization, association or
individual. Such items cannot be purchased under certificates of
exemption, and the tax must be paid to dealers. Examples would be :
yearbooks, class rings, graduation gowns and caps, photos, school
supplies, etc. for use by students.
2. The tax does not apply to purchases of tpp by a school, such as athletic
equipment, band instruments, etc. to be paid for out of school activity
funds if the purchases become the property of the school. These items
may be purchased under certificates of exemption.
G. School lunches. The tax does not apply to school lunches sold and
served to pupils and employees of schools and subsidized by
government at any level. Equipment and supplies purchased by a school
for its use in preparing and serving school lunches, and which become
the property of the school, can be purchased under certificates of
exemption.
H. School textbooks. The tax does not apply to school textbooks sold by a
local school board or its authorized agency. It also does not apply to
school textbooks for use by students attending a college or other
institution of learning not conducted for profit when sold (a) by such
institution or (b) by any other dealer (provided such textbooks are certified
by the institution as required course materials for its students).
I. The tax does not apply to tpp purchased for use, consumption, or sale at
retail by an elementary or secondary school conducted not for profit, or
Parent Teacher Association or other group associated with an elementary
or secondary school conducted not for profit for use in fund-raising
activities, the net proceeds of which are contributed directly to the school
or used to purchase certified school equipment, and certified school
equipment purchased by such groups for contribution directly to the
school.
Page - 5
WHEN CONDUCTED FOR PROFIT
The tax applies to sales of tpp to schools, colleges and other institutions
of learning when they are conducted for profit. They are required to pay
the tax to their vendors at the time of purchase, unless their purchases
are made for resale as dealers. All sales of tpp made by such institutions
are taxable. In addition, these institutions must collect the tax on any
retail sales of meals to students or others, if the price of the meals is not
included in room, board, or tuition charges or fees.
III. Procedures
During an audit of a vendor that deals with a school

look at the exemption certificate files to validate exempt sales to schools
and colleges, certain educational institutions and other institutions of
learning. Insure that the purchases meet the wording of the certificate.
Schools and colleges are not exempt on the purchases of items such as
meals and lodging. Look for a ST-13 in the file for nonprofit schools that
are not owned and operated by the state. An ST-12 should be on file for
entities that are owned and operated by the state and have the same
status as other sales to the state for its use or consumption.
Be aware of the current status of PTA's and similar organizations.

Effective July 1987, but retroactive to July 1, 1986 the Virginia Code
provides an exemption from the tax for, "tangible personal property
purchased for use, consumption, or sale at retail by an elementary or
secondary school conducted not for profit , for use in fund-raising activities,
the net proceeds of which are contributed directly to the school or used to
purchase certified school equipment...". Block 3 of the ST-13 covers this
exemption.
This exemption (PTA and similar organizations) is unusual in that it applies

to both purchases and sales of tpp in connection with fund-raising activities
of nonprofit elementary or secondary schools and school-affiliated
organizations. The statute further provides that sales of tpp (such as class
rings, school photographs, pencils, notebooks, etc) by private vendors are
exempted when any portion of the receipts from the sale are returned to the
school in the form of a commission. This exemption for sales by private
vendors is unique because it is the use of the funds resulting from the sale,
and not the nature of the product being sold or the person/group purchasing
the item, that determines whether the item is taxable.
Throughout the state, schools are under construction. Generally,

contractors are subject to Virginia sales tax on the purchase of any property
furnished and affixed to real estate under contracts with public school
Page - 6
systems. However, the sale of tpp directly to a public school system is

exempt as a sale to a government entity, but taxable when sold to the
contractor. A contractor has some exceptions to the general rule on the
taxability of tpp purchased by them to use on public school contracts. Refer
to TB 92-2 Contractors---Public School Contracts--4/1/92 for a complete
discussion of this issue.
Remember in the area of schools and nonprofit categories in general that

taxation is the rule and exemption is the exception. Insure that you read the
exemption certificate or available tax ruling to determine the extent of the
exemption for each entity. Does it provide for exemption on purchases of
tpp? Services? Meals or lodging? Sales at retail?
The ST-12 should not be used for an exemption for a state other than
Virginia. (It's use is limited to the Commonwealth, political subdivisions of the
Commonwealth, or the Federal Government) The ST-13 should be used by
other states, provided they meet the criteria of the certificate.
Insure that various organizations are actually a part of the school or

college they are claiming affiliation to. Insure that purchases are made
pursuant to official purchase orders to be paid for out of public funds.
Individuals are not eligible for the exemption even if they are reimbursed by
the institution for their expenditures.
Remember that "Certain Educational Institutions", such as "Close Up" may

purchase both tpp and services exempt, including meals and lodging. These
entities must meet all the requirements specified in the paragraph on
Educational Institutions.
Colleges and universities are not in this category and are taxable on
lodging and meals.
Ship Repair Training
Page - 1

Ship Repair
I. History
Prior to July 1, 1994 - The code Section 58.1-608 3d and Section 630-10-98 of the
Virginia Rules and Regulations gave little detail into the auditing of ship repair
concerns and other waterborne businesses. The manufacturing section of the Code
and the Virginia Rules and Regulations was referenced when trying to determine
the taxable and exempt status of particular items. Other waterborne businesses
assumed a broad exemption for the purchase of consumable supplies and tools as
well as items of tangible personal property which become an integral part of a ship
or vessel.
July 1, 1994 And After - Virginia Regulation 630-10-98 detailed the statutory
exemption and its application. Many terms were defined in order to clarify the
exemption. Guidance was given to the ship repair industry in that although many
accommodation services are necessary to the repair process, tangible personal
property used in providing these services is taxable. Letter dated 6-20-96
The exemption provided to other waterborne concerns has also been confined to
the exact wording of the statute. New Virginia Rules and Regulations Section 10-
210-4050, Letter dated 7-31-95, P.D. 93-55.
II. References
A. Code of Virginia 58.1-608 3d
B. Virginia Rules and Regulations Old 630-10-98

New 10-210-4050
C. Ruling Letters P.D. 93-55

P.D. 92-140
D. Opinion Letters 1) 6-20-96

2) 7-14-94
3) 7-31-95
Page - 2
III. General
Shipbuilding , Conversion, and Repair - A close reading of the statute details the
exemptions. The first exemption is for ships and/or vessels used or to be used
exclusively or principally in interstate or foreign commerce. The repairs and
alterations to such ships and/or vessels are exempt from the tax. Any item of
tangible personal property that becomes an integral part of such ships or vessels is
exempt from the tax. The second exemption concerns the supplies consumed
aboard ships or vessels which ply the high seas either in inter-coastal trade
between ports in this state and ports in other states of the United States or its
territories or possessions or in foreign commerce between Virginia ports in this state
and ports in foreign countries. These are two separate and distinct exemptions. A
ship or vessel may receive the interstate or foreign commerce exemption on ship or
vessel parts, but not receive the exemption on supplies because these ships or
vessels do not ply the high seas. Another exemption is for tangible personal
property used directly to repair these exempt ships or vessels. The important
implication within the wording of the statute is that a business does not have to be a
ship repair business to have the exemption on tangible personal property used
directly in building, converting, or repairing of such ships or vessels. Persons
engaged in the building, conversion, or repair of such vessels and/or ships, for
example, shipyards receive an exemption similar to the manufacturing exemption.
Shipyards receive an exemption for safety apparel given to workers directly involved
in the ship building, conversion, or repair process. There is an exemption for the
storage and handling of raw materials. Shipyards receive a broader exemption than
businesses that may repair exempt ships or vessels from time to time. The separate
exemptions will be dealt with below, as well as the general audit procedures for each
concern.
An exemption is provided for those items "directly" used in the building, conversion,
and repair of exempt ships or vessels. Many times all consumables and purchases
that are charged directly to a job by the repair yard are exempted from the tax. The
fact that an item can be directly charged to a job does not guarantee the tax
exemption. Most repair yards have been quite prudent with the proper taxing of
overhead accounts (with the exception of fuel oil). The direct charging of items to
particular jobs is an area with significant tax exposure. For example, tangible
personal property costed to temporary services including but not limited to: on site
and off site berthing, temporary illumination, temporary electrical service, temporary
phone service, and temporary sanitation service all constitute taxable areas. Items
of tangible personal property used in providing such services would be taxable to the
shipyard.
Other Waterborne Commerce (Tug Boat and Fuel Bunkering Companies) -

Businesses which transverse the waterways have assumed that a broad exemption
applies to their operations. There is an exemption for parts which become an
integral part of ships or vessels involved principally or exclusively in interstate or
foreign commerce. Supplies consumed aboard a ship or vessel which ply the high
seas in inter-coastal trade or foreign commerce are tax exempt. Tools and supplies
Page - 3
used directly in repairing, converting, or building such ships or vessels are also tax
exempt. This exemption only applies if the vessels or ships being repaired, built, or
converted are principally or exclusively involved in interstate or foreign commerce or
ply the high seas in inter-coastal trade between ports in the commonwealth and
ports in other states or foreign commerce. For example, a vessel or ship which
transverses the Chesapeake Bay and delivers goods or people from a location in
Virginia to a location in another state would be exempt on parts which become an
integral part of such ships or vessels and would be exempt on tools and supplies
used in repairing, converting, or building such ships or vessels. The business would
be taxable on consumable supplies (i.e., provisions, sanitation supplies etc.) which
are consumed aboard the ship or vessel since the ship or vessel does not ply the
high seas. See P.D. 93-55
IV. Definitions
Foreign Commerce - A business venture between persons in the United

States and those in a foreign country.
High Seas - That portion of the ocean which is beyond the territorial
jurisdiction of the United States. It does not include the
Chesapeake Bay, inter-coastal waterways, or inland rivers or
waterways.
Inter-coastal Trade - The exchange of goods or commodities between ports.
Interstate Commerce - A business venture between the people of two states.
Principally - Means more than 50%.
Used Directly - Those items which are both indispensable to the building,
conversion, or repair process and which are used as an
immediate part of such process.
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V. Procedure
Shipbuilding, Conversion, and Repair - A complete understanding of the accounting

cost system is important to an audit of a shipbuilding, conversion, or repair facility. If
individual task are not detailed in the contract a cost account titled temporary
services should be noted. In the later case all items of tangible personal property
costed to such an account should be taxed. (See letter dated June 20, 1996)
The size of the facility is paramount to understanding the areas of audit concern.
Large shipyards provide much more in the way of accommodation services than the
smaller "down river" repair facilities. Many times the smaller repair concerns act as
subcontractors to the larger yards.
Expense purchases, inventory withdrawals, assets, and sales should be reviewed

when auditing a ship repair operation. Each area has potential tax exposure.
Inventory withdrawals and purchases which are charged directly to a job many times
have been exempted from the tax. Tangible personal property which provides for
temporary services is taxable and is stated in the statute. By viewing the specifics of
the contract many items can be deemed taxable or exempt. Normally each contract
is divided into separate tasks with a detailed description. The accounting cost
records are usually quite detailed and purchases as well as inventory withdrawals
are accounted for in detail. Items can be taxable even though they may be costed to
an exempt task. The nature of the item and its use must be understood clearly
before a decision can be made on the tax status. Usually the above is most notable
in the area of inventory withdrawals. Items withdrawn from inventory which are
taxable are: coffee, cups, Gatorade, padlocks (for storage of tools and supplies),
trash bags, office supplies, flashlight bulbs and batteries, temporary ID tags and wire
(used to identify items removed from the ship and stored while repairs are ongoing),
rat guards, protective coverings, etc.. The above list is not all inclusive. Given the
voluminous nature of inventory withdrawals a workable sample is required. The
items listed above can be charged to a task which is part of the repair process or a
task which is not. Under either circumstance the nature of the products and their
specific use determines their taxable status. Rags are an inventory item that is pro-
rated. Lint free rags are normally exempt if they are charged to a repair task. These
type of rags are often used to wipe turbines or dust sensitive parts of the ship or
vessel. Regular cloth rags can be used to wipe part of the ship or vessel under
repair or wipe tools or even workers hands. A 50 % pro-ration has been used in
past audits of shipyards, unless a more accurate percentage is provided.
Purchases and inventory costed to overhead accounts as well as internal contracts

should be viewed carefully. As with manufacturers , items used directly in the repair,
building, or conversion process (i.e. cranes, welding machines, tools, the mechanical
dry-dock, lathes, work platforms including man lifts and work platform barges) are
exempt from the tax to the shipyard. Work scaffolding, man lifts, and work platform
barges are indispensable to the repair, building, or conversion process.
Replacement parts of exempt ships or vessels are also exempt. As with a
manufacturer, supplies and tools used to work on exempt machinery and equipment
are taxable. For example, the rental of man lifts and the purchase of welding gases
Page - 5
to repair the mechanical dry-dock would be taxable. Rags and cleaner used in
crane maintenance would also be taxable as would replacement parts for piers and
bulkheads in that these are real property. Vehicle parts are taxable if the vehicles
are for over the road use as compared to vehicles which transport parts to be
repaired throughout the yard to various shops. The later is similar to the movement
of inventory items within a manufacturing concern. The plant site test is not
applicable to a ship repair facility. If a particular repair shop is located away from the
yard, but is directly part of the repair, building, or converting of ships or vessels the
exemption still applies. Many "down river" operations do not have a yard but are still
directly involved in the repair, building, or conversion process. It is important to note
that the section of the Rules and Regulations dealing with manufacturers should
serve only as a "guide."
The income areas of sales and services should be reviewed for possible tax liability.
As stated earlier a review of the contracts will identify taxable tasks. There may
exist repair transactions involving taxable ships or vessels. In this case tax should
be charged at retail on items which become an integral part of these ships or vessels
and tangible personal property which sails with these ships or vessels. Fabrication
labor involved in these transactions of taxable ships or vessels should also be taxed
at retail. Some examples of these taxable ships or vessels are: tugs and barges
owned by real estate contractors such as bridge builders, or pier and bulkhead
construction companies, diving and salvage ships or vessels, yachts, and ships
which leave a point in one state and return to that same point without docking in
another state (dinner cruises). Consumables and supplies used directly in repairing,
building, or converting the above taxable ships would still be exempt to the business
which is primarily involved in shipbuilding, conversion, and repair.
Clarification should be made between businesses that are primarily shipbuilding,

conversion, and repair operations and those businesses which may occasionally
repair ships or vessels. For example a business which does other things besides
ship repair, conversion, or building more than 50 % may repair exempt vessels and
ships. Items used directly in this process can be purchased tax exempt. However,
since this business is not primarily a shipyard, items such as workers' safety apparel
would be taxable. Any work done on a taxable ship or vessel by a business not
primarily involved in ship repair would be taxable. This business would be taxable
on equipment and tools used directly in the building, conversion, and repair of these
taxable ships or vessels. Items which become part of the ship or vessel or sail with
the ship or vessel can of course be purchased tax exempt and taxed at retail.
Ship repair facilities may also be involved in some transactions which do not meet
the definitions detailed in the statute. Miscellaneous sales of tangible personal
property and the sale of fabricated items need to be audited. Other services which
provide income to the yards such as the deactivation of a ship or vessel would be
considered a taxable service and all tangible personal property consumed in
providing this service would be taxable in that deactivation does not meet the
definition of repair, building, or conversion. In some ship repair and building facilities
service contracts with the government are conducted. These contracts are usually
Page - 6
for design or testing services. These transactions fall under the federal government
contract guidelines.
Assets used directly in the building, repairing, or converting, of ships by a shipyard

would be exempt from the tax. Assets which are used both in a taxable and exempt
manner are governed by the preponderance of use calculation. This is most evident
in the boilers that are used throughout the yard. The procedure to do a boiler
function analysis and a fuel oil consumption analysis will be summarized below.
Maintenance chemicals which are used in a boiler from time to time to impede
mineral deposit build up would be taxable regardless of the taxable status of the
boiler. Many times larger shipyards will have internal contracts which may include:
the updating of facilities, the maintenance of parking lots, the relocation of certain
shops, the refurbishing of the dry-docks, etc. These internal jobs should be detailed
and analyzed in depth. Many consumables and supplies costed to these internal
jobs would be taxable.
Fuel oil is a major consumable supply for a ship building and/or repair facility. Diesel
fuel which is used to power exempt machinery would of course be tax exempt. Fuel
oil used to run the boilers which produce steam used throughout the yard present a
special problem. The steps to analyze fuel oil consumption are detailed below. If
the analysis concludes that a particular boiler is used primarily for a taxable
purposes then the boiler and its replacement parts would be taxable.
Fuel Oil - The following steps can be followed to determine the taxability of fuel oil
when auditing a ship building and/or repair facility.
1. Determine accurate figures to use for the basic of calculating total taxable fuel oil,
whether it be through actual invoices or monthly usage/cost reports to give you the
gallons and cost of the amount of fuel oil purchased.
2. Arrive at the audit period and then pick a representative calendar year to use as a
basis for comparison.
3. Determine the months of the year where the average mean temperatures below
55 degrees Fahrenheit. This can vary, based on audit site location, and it can be
concluded that any excess over the mean average amount used each month was
used strictly for heating purposes (shipboard, work buildings, and administrative
buildings).
4. Take the other months (those where the temperature is above 55 degrees
Fahrenheit), add the total amount of fuel oil purchased and divide by the same
number to arrive at the average mean amount of fuel oil each month that is used for
some purpose other than heating. This figure now becomes the average monthly
amount of fuel oil that will be used for the entire audit period.
5. Take all the "winter months" during the audit period and take the difference
between the total amount of fuel oil purchased and the mean amount to come up
with the taxable amount of fuel oil purchased during the audit period that can be
Page - 7
directly linked to heating. You can then develop a monthly percentage in each of the
winter months that is directly related to heat usage.
6. Since the primary purpose of fuel oil usage at a ship repair facility is for the
production of steam, develop a comprehensive list of the various usage's of steam
that the fuel oil is used for and determine the taxability of each.
7. From the list you come up with, determine a taxable percentage and an exempt
percentage to apply to the monthly mean average amount for each month of the
audit period. For the winter months, add the additional amount that was developed
earlier and was determined to be heat related.
8. This now becomes the total amount of taxable fuel oil used during the audit
period and these monthly amounts can be either cumulative or individually broken
down into percentages by taking the amount of taxable monthly fuel oil and dividing
that by the total amount purchased during the month.
Other Waterborne Commerce - The definitions listed above are important when
dealing with other waterborne industries. A complete understanding of a business's
operation is necessary. Vessel/ship logs detail the voyage history. This history
must be analyzed to determine the application of the interstate/foreign commerce
exemption as well as the high seas exemption. A ship or vessel which transverses
the Chesapeake Bay, inter-coastal waterways, or inland rivers or waterways, but
does not leave Virginia waters does not receive any of the exemptions detailed
above. A waterborne operation must be analyzed ship by ship and vessel by vessel.
A ship or vessel which transverses the Chesapeake Bay, inter-coastal waterways, or
inland rivers and waters, and delivers goods or people from one state to another
over 50 % of the time would be exempt on items which become an integral part of
the ship or vessel, and on tangible personal property used directly in the building,
repairing, or converting of such vessels or ships. However, supplies consumed
aboard such ships or vessels (i.e. provisions for the crew, cleaning supplies, and fuel
to operate machinery) would be taxable since these ships or vessels do not ply the
high seas in inter-coastal trade or foreign commerce. Fuel used for propulsion of the
ships would be exempt for all ships under the marine diesel statute.
Signs (Manufacturing versus Contracting)
Page - 1


manufacturers of signs and sign contractors.
I. History
The application of sales and use tax with respect to sign

manufacturers and contractors has remained constant and the degree of
taxability depends on the nature and classification of the sign company itself.
II. References
A. Code of Virginia Sections 58.1-610.A (Contractors), 58.1-609.3.2

(Commercial and industrial exemptions), 58.1-603 (Imposition of sales tax),
and 58.1-602 ("Sale").
B. (1) Old Virginia Retail Sales And Use Tax Regulations 630-10-
100 (Sign manufacturers and painting), 630-10-63 (Manufacturing and
processing), and 630-10-27 (Contractors respecting real estate).
(2) New Virginia Retail Sales and Use Tax Regulations 23 VAC
10-210-4070 (Sign manufacturers and painting), 23 VAC 10-210-920
(Manufacturing and processing), and 23 VAC 10-210-410 (Contractors
respecting real estate).
C. Ruling Letters that are relevent to sign manufacturers and sign

contractors are (1) Commissioner ruling dated 6/27/96, (2) public document
96-133, (3) public document 92-93, and (4) public document 94-338. (See
attachments)
D. Exemption Certificates - St-10 - For sign contractors who also

make retail sales of signs, and ST-11 - for sign manufacturers who principally
manufacture signs for resale. (See attachments)
III. Generally
Sign manufacturers and sign contractors can be broken down into

the following four categories.
Page - 2
(A) Sign contractors - this area applies only to contractors who

purchase and install signage that becomes a part of realty. Companies of
this type are required to pay sales tax on everything that it buys, both
administratively and for use in all phases of construction.
(B) Sign contractor/retailer - in this instance, where the sign

contractor may also be in the business of selling tangible personal property,
he then becomes a dealer with respect to such sales, and is required to
obtain a Certificate of Registration. He is entitled to buy exempt from sales
tax tangible personal property that will be sold at retail to customers, but may
not purchase under a resale exemption certificate any tangible personal
property that he knows at time of purchase will be furnished by him in
connection with any specific contract involving realty. If at any time, in
performance and in connection with any specific contract, he removes from
his sales inventory any tangible personal property purchased under a resale
certificate, he then must report this amount of inventory withdrawn on his
dealer's return and pay the tax.
(C) Sign manufacturer(>50% retail) - a sign manufacturer is deemed

to be fabricating principally for sale or resale if more than 50% of his gross
receipts are derived from making sales of signs to other customers. This is
sited in public document 92-93. As such, he must add the sales tax to the
sales price and collect it from his customers. Raw materials, component
parts, and other tangible personal property used in making the product for
sale may be purchased using the appropriate certificate of exemption. In
addition, if any tangible personal property is withdrawn from inventory for use
and consumption in the performance of real property construction contracts,
then he is liable for the tax based on the fabricated cost price of the tangible
personal property withdrawn. Fabricated cost price is computed by totaling
the cost of all materials, labor, and overhead charged to the unit(sign) being
withdrawn from inventory. Since his principal or primary business is the
manufacturing of signs for sale or resale, and as a lessor part of his
business, manufactures for his own use and consumption, he is entitled to
the production exemption set forth in 630-10-63(23 VAC 10-210-920-new).
(D) Sign manufacturer(>50% contract) - a sign manufacturer is

deemed to be fabricating principally for his own use or consumption, if more
than 50% of his gross receipts are derived from the fabrication of signage for
his own use in real estate construction contracts. Thus, he is classified as a
using and consuming contractor and must pay the tax to his suppliers based
on the cost price of the raw materials that make up the cost of the property
used. This is sited in public document 92-93. In addition, he must register,
collect, and pay the tax on the retail selling price of all tangible personal
property sold at retail. He is entitled to purchase exempt from the tax only
that tangible personal property which can be identified at the time of
Page - 3
purchase as purchases for resale. If the sign manufacturer cannot determine
at the time of purchase the tangible personal property which will be resold,
then he is required to pay the tax to his supplier. If at a later date, the
tangible personal property is sold at retail, then the tax is required to be
collected at the selling price. A credit for tax paid to the supplier cannot be
taken, since the transactions are separate and distinct taxable transactions.
When a sign manufacturer fabricates tangible personal property principally
for his own use and consumption, he is not entitled to the production
exemptions as set forth under 630-10-63(23 VAC 10-210-920 - new).
There are two conditions that are available to sign manufacturers where
sections (C) and (D) above apply that may act as an aid in their tax exposure
to the State of Virginia.
(1) A sign manufacturer who fabricates tangible personal property,

both for sale or resale and for use in real property construction contracts,
may apply to the State Tax Commissioner to pay any tax directly to the state
and avoid the collection of tax by suppliers, if the purchases are made under
circumstances which normally make it impossible at the time of sale to
determine the manner in which such tangible personal property will be used.
This is sited in Commissioner ruling letter dated 6/27/96.
(2) In order to arrive at a percentage of sales at retail versus contract,

which has a direct impact on whether the sign company receives production
exemptions or not, a sign manufacturer who has sales outside of Virginia
may include these contract sales in the base in order to determine whether
he is a manufacturer fabricating principally for resale or a manufacturer
fabricating principally for use or consumption.
IV. Procedures
Sign Contractors
A sign contractor can be defined as any person who contracts to

perform the construction, installation, repair, or any other service with respect
to signs that become a part of realty. Virginia sales tax law treats this
individual as the user and consumer of all tangible personal property
furnished to him or by him in the performance of this service. In the course
of auditing this type of company, the auditor needs to key in on making sure
that everything that the sign contractor buys has sales tax added to the
invoice.
The auditor needs to determine within the areas of examination what

audit period the audit will encompass and what type of sample and/or detail
time periods the auditor will use to base the audit findings on. The time
Page - 4
period to be examined can be up to six years, however this can be shorted to
three years if the company being audited has filed use tax returns for every
month in the current three years. There are two areas that need to be
examined in the auditing of a sign contractor. The first is fixed assets, and a
detailed examination of this area is normally correct procedure. The second
is operating expenses, with a sample to be projected, as the most effective
and efficient course to take. Samples are something that the auditor needs
to discuss with the taxpayer and may vary in size from one company to the
next.
There are several areas of a sign contractor's records that the

auditor should examine to determine potential liability during the audit
examination. When examining fixed assets, copies of supplier invoices for
the entire audit period as well as a detailed depreciation schedule is needed.
To cover expense purchases, the auditor should examine paid purchase
invoices. Other records that would aid in determining whether or not all
invoices for the sample period have been examined would include the
purchase journal or cash disbursements journal. The auditor can also
examine the sign contractor's contracts as a monitor to help determine
whether he feels that he has seen all material invoices and accounted for all
inventory withdrawals. Copies of any use tax returns(ST-7) should be
furnished to the auditor at the beginning of the audit process to show the sign
company's compliance with 630-10-109(23 VAC 10-210-6030 - new) use tax
guidelines and proper reporting procedures.
Sign contractors are responsible for following the basic rules as they
apply in the Virginia Retail Sales And Use Tax Regulations 630-10-27 (23
VAC 10-210-410 - new). When it is necessary for the auditor to make
reference to the application of the law, this can be found in the Code Of
Virginia Title 58.1-610.
Sign Contractor/Retailer
A sign contractor who performs the construction, installation, repair,

or any other service with respect to signs that becomes a part of realty may
also be engaged in the business of selling tangible personal property to
customers for use or consumption by them. This company is then required
to obtain a Certificate of Registration in order to report the collection of tax
from such sales. Virginia sales tax law allows this company to only buy
those items exempt from the tax that are known at the time of purchase will
be sold at retail and will not be used in the performance of any real property
contracts. In the course of auditing this type of company, the auditor needs
to verify that the sign contractor/retailer has paid use tax on everything that
went into the performance of real property contracts including those items
purchased to be used in the performance of such construction projects.
Page - 5
Since this dealer is also a retailer, the auditor will need to examine sales to
ensure that all retail sales of signs and/or related materials have sales tax
added to the invoice or that the sign company has on hand a valid certificate
of exemption from the party that made the corresponding purchase exempt
from the tax.

period to be examined will generally be no longer than three years based on
the premise that the sign company is a registered dealer. There are four
areas that need to be examined while auditing a sign contractor/retailer. The
first is fixed assets, and a detailed examination of this area is normally
correct procedure. The other areas are operating expenses, sales, and
inventory withdrawals, and a sample of each area is the most efficient and
effective course to take. Samples are something that the auditor needs to
discuss with the taxpayer and they may vary in size from one company to the
next.
There are several areas of a sign contractor/retailer's records that

the auditor should examine to determine potential liability during the audit
When examining purchases, the auditor should look at paid purchase
invoices. The cash disbursement journal should be looked at to ensure that
all invoices during the sample period have been examined. Copies of the
company's contracts are helpful in determining the volume of material
necessary in relation to the paid invoices already looked at so as to ensure
that the auditor has seen everything necessary. The amount of use tax
reported should be examined and documented in order to determine what
purchases have gone untaxed. Inventory withdrawals should be looked at on
a sample basis to make certain that any items withdrawn from a tax free
inventory have had the proper use tax accrued. When examining sales, the
auditor should have all copies of ST-9 worksheets with the supporting
documentation attached for verification. Exemption certificates need to be
examined in order to make sure that all are properly filled out and correct for
the type of company that provided the certificate. Sales invoices for the
sample period, agreed upon beforehand, should be examined to verify that
sales tax has been properly charged, and if not, that the proper exemption
certificate is on file. Another source document to tie back to in the auditing of
sales would be the sales journal.
Sign contractors/retailers are responsible for following the basic rules

as they apply in the Virginia Retail Sales And Use Tax Regulations 630-10-
27 (23 VAC 10-210-410 - new). When it is necessary for the auditor to make
Page - 6
reference to the application of the law, this can be found in the Code Of
Virginia Title 58.1-610.
Sign Manufacturer(>50% Retail)
A sign manufacturer who operates in a dual capacity of fabricating

tangible personal property for sale or resale and who also fabricates tangible
personal property for his own use and consumption in the performance of
real property construction contracts is required to follow the primary purpose
rule in determining how Virginia sales and use tax laws will apply to him.
Following the primary purpose rule, the auditor will verify that the sign
company is charging tax appropriately when making sales of signs to
customers. When the sign manufacturer fabricates signs and withdraws from
inventory such items for use and consumption in the performance of real
property construction contracts, then he is liable for the tax based on the
fabricated cost price of such property withdrawn. A plant tour of the sign
manufacturer will help to pin point the areas of administration, production,
and distribution. This will help the auditor have a better understanding of the
company when it comes to deciding what purchases are an integral part of
the production process and what purchases are indirect and secondary.

period to be examined will generally be no longer than three years based on
the fact that the sign manufacturer who primarily fabricates for sale or resale
is a registered dealer. There are four areas that need to be examined while
auditing a sign manufacturer. The first is fixed assets, and a detailed
examination of this area is necessary. The other areas are operating
expenses, sales, and inventory withdrawals, and a sample of each area is
the most efficient and effective course to take. Samples are something that
the auditor needs to discuss with the taxpayer and they may vary in size from
one company to the next.
There are several areas of a sign manufacturer's records that the

auditor should examine to determine potential liability during the audit
A knowledge of the entire production process is necessary so the auditor will
know whether the asset is for the company's own use or can be deemed a
part of the production line. When examining purchases, the auditor should
look at all paid purchase invoices for the sample period selected. The cash
disbursement journal should be reviewed to ensure that all invoices have
been examined. A knowledge of the production line is necessary, as well as,
what materials makes up the sign itself, so as to be able to identify what
Page - 7
types of purchases would be exempt as opposed to what expenses the sign
manufacturer purchases for his own use. Inventory withdrawals should be
looked at on a sample basis to make certain that any items withdrawn from a
tax free inventory have had the proper use tax accrued. When examining
sales, the auditor should have all copies of ST-9 worksheets with the
supporting documentation attached for verification. Exemption certificates
need to be examined in order to make sure that all are properly filled out and
correct for the type of company that provided the certificate. Sales invoices
for the sample period, agreed upon beforehand, should be examined to verify
that sales tax has been properly charged, and if not, that the proper
exemption certificate is on file. Another source document to tie back to in the
auditing of sales would be the sales journal.
Sign manufacturers who primarily fabricate for sale or resale are

responsible for following the basic rules as they apply in the Virginia Retail
Sales And Use Tax Regulations 630-10-100 (23 VAC 10-210-4070 - new)
and 630-10-63 (23 VAC 10-210-920 - new).
Sign Manufacturer(>50% Contract)
A sign manufacturer who operates in a dual capacity of fabricating

tangible personal property for sale or resale and who also fabricates tangible
personal property for his own use and consumption in the performance of
real property construction contracts is required to follow the primary purpose
rule in determining how Virginia sales and use tax laws will apply to him. If
the auditor determines that the sign company is principally fabricating signs
for his own use and consumption to perform services with respect to real
estate construction, thereby causing it to lose its identity and become real
property, then the sign manufacturer is classified as a using and consuming
contractor and must pay the tax on the cost price of the raw materials which
make up the signage installed. This is sited in public document 92-93. In
addition, if he sells tangible personal property to consumers, then he will be
required to register to collect Virginia sales tax and report the tax on the retail
selling price of the finished goods sold. The auditor will need to verify that
the sign manufacturer only purchases tax exempt those items that become a
component part of the finished goods being resold. If the manufacturer
cannot distinguish at the time of purchase which items will be resold, then he
is required to pay sales tax to his supplier. A plant tour of the sign
manufacturer's facility is not necessary in this case due to the fact that no
production exemptions are applicable for a manufacturer who fabricates
tangible personal property for his own use and consumption.

time periods the auditor will use to base the audit findings on. In most
Page - 8
instances, the sign manufacturer who primarily fabricates tangible personal
property for his own use and consumption will be making retail sales and will
be required to hold a Certificate of Registration. The time period of the
auditor's examination then will generally be no longer than three years.
There are four primary areas that the auditor will examine while auditing the
sign manufacturer(>50% contract). The first is fixed assets, and a detailed
examination of this area is necessary. The other areas are expense
purchases, sales, and withdrawals from inventory, and a sample of each
area is the most efficient and effective way to proceed. Samples of each
area and the size of such should be mutually agreed upon between the
taxpayer and the auditor, and although not binding, a written statement
disclosing the agreed upon sample periods is preferable.
There are several areas of a sign manufacturer's(>50% contract)

records that the auditor should examine to determine potential liability during
the audit examination. When auditing fixed assets, copies of supplier
invoices for the entire audit period as well as a detailed depreciation
schedule is needed. All assets of this company are taxable, since he is not
entitled to any production exemptions set forth under 630-10-63(23 VAC 10-
210-920 - new). When examining purchases, the auditor should look at all
paid purchase invoices for the sample period selected. The cash
disbursement journal should be examined to ensure that all invoices have
been seen. Being able to distinguish between what is purchased for resale
as opposed to what is being purchased for the sign company's own use and
consumption is important to help enable the auditor to determine taxability.
Inventory withdrawals should be looked at on a sample basis to make certain
that any items withdrawn from a tax free inventory for the sign company's
own use and consumption have had the proper use tax accrued. When
examining sales, the auditor should have all copies of ST-9 worksheets with
the supporting documentation attached for verification. Exemption
certificates need to be examined in order to make sure that all are properly
filled out and correct for the type of company that provided the certificate.
Sales invoices for the sample period should be examined to verify that sales
tax has been charged correctly, and if not, that the proper exemption
certificate is on file. Another source document to tie back to in the auditing of
sales would be the sales journal.
Sign manufacturers who primarily fabricate tangible personal

property for their own use and consumption are responsible for following the
basic rules as they apply in the Virginia Retail Sales And Use Tax
Regulations 630-10-27 (23 VAC 10-210-410 - new).
STATUTE OF LIMITATIONS
Page - 1

Objective: Discuss the application of sales and use tax as it applies to the statute
of limitations.
I. References
A. Code of Virginia Sections 58.1-104, 58.1-220, 58.1-634, 58.1-1820

B. Virginia Regulation 10-20-150(B)
C. Ruling Letter PD 96-65, PD 96-179, Statute of Limitations Table
II. General
A. As provided by Section 58.1-634 of the Code of Virginia, the statute of

limitations for the assessment of sales and use tax is generally three
years from the date on which such taxes are due.
B. The statute of limitations for the assessment of sales and use tax may be
expanded to six years if a false or fraudulent return has been filed, or the
taxpayer has failed to file a return and reasonable cause exists that the
taxpayer was required to file a return.
C. The period for assessing taxes may be extended, if a waiver of time

limitation on assessment of omitted taxes is executed on or before the
expiration date of the statute of limitations by the taxpayer and the Tax
Commissioner's representative.
III. Procedures
A. For all sales and use taxes, if no returns have been filed, the statute is six
years.
For taxpayers that have been registered for less than three years, the
statute may be extended to a maximum of six years if it is determined that
the taxpayer was liable for the collection and/or remittance of taxes prior
to registration.
Page - 2
If it is determined within the three year statute that the taxpayer failed to
file a return for a period in which tax was due, the audit period may be
extended to six years, but including only those months for which no return
was filed.
B The fact that related corporations have filed returns does not prevent the
Department from extending the statute beyond three years for an entity
that has failed to file any returns.
C. The Department is not prohibited from making an assessment of omitted

taxes which were missed in a prior audit as long as the assessment is
made within the statute of limitations and there exists no likelihood that a
reassessment of tax has occurred.
D. Waivers to extend the statute of limitations must be signed, by both the

Tax Commissioner's representative and the taxpayer, on or before the
date of expiration. ALL waivers are to be scanned into the STAUDN
work papers.
E. If the taxpayer fails or refuses to execute a waiver, a statutory, or

estimated assessment may be made prior to the expiration of the statute
in order to protect the audit liability. The assessment amount should
include all potential liability due, as no additional assessment of taxes can
be made on periods outside the statute. The assessment is to be
subsequently adjusted to reflect the actual liability due.
F. Assessments are deemed to be made when written notice has been

delivered to the taxpayer by an employee of the Department or mailed to
the taxpayer at his last known address. The taxpayer must receive an
assessment or the assessment must be postmarked on or before the
statute of limitations expires for any period covered in the assessment.
G. If an audit assessment is revised and the revision lowers the liability, the
existing assessment should not be abated in full and a new assessment
issued. Periods covered by the new assessment may be out of statute on
the date that the new assessment is issued. Rather, the existing
assessment should be abated down to the correct liability. (see P.D 00-
056)
TELECOMMUNICATION
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TELECOMMUNICATION
Revised 08/2006
Objective: Discuss the application of sales and use tax to telecommunication

companies.
I. History
Prior to January 1, 1989: Both cellular phone and paging companies were
taxable on purchases of equipment and supplies.
January 1, 1989: Through a legislative change, providers of cellular phone

and paging services obtained a public utility exemption on property utilized
directly in the rendition of communications services.
July 1, 1995: The State Corporation Commission deregulated paging

companies and they lost their public utility exemption. Providers of cellular
phone services continue to qualify for the public utility exemption.
September 1, 2004: The retail sales and use tax exemption available to
public service corporations, a.k.a. public utility companies, for the purchase or
lease of tangible personal property used or consumed directly in the rendition
of their public service was repealed for telecommunications companies (as
defined in Code of Virginia Section 58.1-400.1), and certain telephone
companies.
II. References
A. Code of Virginia Sections: 58.1-609.3 and 58.1-400.1.D.2
B. Virginia Administrative Code: VAC 10-210-3020 and VAC 10-210-5040
C. Ruling Letters: Public Documents, (P.D.): 88-75, 88-115, 88-221, 89-156,

90-228, 92-137, 95-40, 95-71, 96-361, 97-225, 98-190, 99-124, 00-55
and 01-3.
D. Virginia Supreme Court Case: Commonwealth of Virginia vs. Community

Motor Bus Company, Inc.
E. Applicable Exemption Certificates: ST-10 and ST-20
F. Federal Communications Commission website www.fcc.gov/wtb

TELECOMMUNICATION
Page - 2
G. Code of Virginia Section 58.1-609.3 Amended September 1, 2004
H. Ruling Letter: Public Document (P.D.) 04-122, Public Service

Corporation Exemption Repeal Guidelines.
III. General
A. Pre-September 1, 2004:
Telephone companies regulated as public utilities as defined in VAC 10-210-

3020 (B) are entitled to an exemption on tangible personal property used
directly in the rendition of their public service. Convenient or facilitative items
are not exempt. Items which are essential to the operation of a business but
not an immediate part of actual performance of public utility service (e.g.,
equipment used in customer billing) are not exempt.
Paging companies are no longer public service corporations subject to a state

franchise tax. Also, these businesses are generally no longer defined in 58.1-
400.1 as telecommunication companies. Therefore, they are not generally
eligible for sales and use tax exemption on purchases as of July 1, 1995.
Charges for paging services are exempt.
Cellular phone companies, although no longer certified and regulated by the

State Corporation Commission, are defined as telecommunication companies
in 58.1-400.1; therefore, cellular phone companies still enjoy the sales and
use tax exemption as public utilities. Cellular services are exempt from sales
and use tax.
Retailers of communications equipment are entitled to purchase their

equipment inventory under a ST-10 resale certificate of exemption. At the
time of resale, tax is collected on the sales price to the final consumer unless
otherwise exempt. Installation charges, if separately stated, are exempt.
Retailers of communications equipment are treated as consumers of tools,
cable affixed to real estate, and similar supplies used in the installation of
communications systems.
Digital personal communications service (PCS) companies are defined as

telecommunication companies in 58.1-400.1 and are, therefore, entitled to the
exemption under Code of Virginia 58.1-609.3(3).
B. Post-September 1, 2004:
Repeal of exemptions for public service corporations: Effective September 1,

2004, the retail sales and use tax exemption available to public service
corporations, which includes telecommunication companies and certain
telephone companies, for the purchase or lease of tangible personal property
TELECOMMUNICATION
Page - 3
used or consumed directly in the rendition of their public service was

repealed.
Despite the loss of the public service corporation exemption, other

overlapping exemptions may be available to a public service corporation.
Other sales tax exemptions that may be available include, but are not limited
to the exemption for research and development, resale, and for tangible
personal property for the use or consumption by the Commonwealth, any
political subdivision of the Commonwealth, or the United States.
Contractor’s Use Tax:
A. Pre-September 1, 2004:
Prior to September 1, 2004, contractors purchasing and installing exempt

tangible personal property under contract with an exempt public service
corporation were allowed to “stand in the shoes” of the exempt public service
corporation and could purchase all such property tax exempt using a
Construction Contractors Exemption Certificate (Form ST-11A).
B. Post-September 1, 2004:
This exemption no longer applies.
IV. Procedures
A. Telephone Utilities.
1.) General Guidelines for Pre-September 1, 2004 Activities:
In auditing telecommunications companies, the auditor should first

determine if the taxpayer is entitled to the exemption provided to
telecommunications entities as provided by section 58.1-400.1 of the
Code of Virginia. The Federal Communications Commission provides
information regarding currently registered licensees at its website
www.fcc.gov/wtb. The auditor should then verify if the company has
obtained a direct payment permit from the Department of Taxation.
A pre-audit conference should be scheduled in order to establish

parameters of the audit. A telephone utility is engaged in providing a non-
taxable service; therefore, the audit will focus on consumer use tax
compliance.
The typical telephone utility is a capital-intensive operation characterized

by a large volume of purchases. Care should be taken to select sample
periods that are representative as well as manageable in terms of the
TELECOMMUNICATION
Page - 4
number of records to be reviewed. An examination of the financial

statement will aid in the selection of the audit sample. The "Uniform
System of Accounts for Telephone Utilities" (VAC 10-210-3020) should
be referenced in selecting accounts that may incur a consumer use tax
liability. Certain accounts are either exempt or taxable based upon the
use of the item; some of these accounts are footnoted in VAC 10-210-
3020. Experience indicates that taxpayers frequently treat these
footnoted accounts as being totally exempt; the possibility of non-
compliance in this area is particularly high.
It should be noted that equipment and supplies essential to conducting

the business are not necessarily tax exempt; only those items used
directly (i.e. essential and used immediately) in providing the public
service are entitled to the public utility exemption. For example, the
following purchases are frequently encountered in telephone utility audits:
Exclusive R&D to develop new products and services exempt

Coin-operated phone equipment exempt
Fiber-optic cable exempt
Central office switching equipment exempt
Repair service tools and equipment exempt
Computers used in billing and administration taxable
Management information system taxable
Vehicle parts for administrative use taxable
The auditor should ensure that purchases of taxable items have not been
misclassified by the taxpayer using an exempt account number. Should
this problem occur, it will be necessary to review purchases charged to
exempt account numbers in order to identify any misclassifications.
Certain companies may not use the "Uniform System of Accounts for
Telephone Utilities." In those cases, all asset and expense accounts
should be examined to verify if the purchases are utilized directly in the
rendition of providing communications service.
When entering asset and purchase exceptions on the STAUD program,

the auditor should include a complete description of the item in question.
A description consisting of "equipment" or "supplies" is inadequate and
will be of little assistance during the review process with the taxpayer.
The uniform account number or the utility's internal system account
number should be included on the exceptions list. Some firms may supply
the auditor with information to translate their account numbers to the
"Uniform System of Accounts for Telephone Utilities."
The vendor invoice will not always include a full description of the item
being purchased. In those instances, the taxpayer's purchase order
TELECOMMUNICATION
Page - 5
frequently has additional information that may be useful in determining

whether or not a purchase is taxable. A tour of the taxpayer's facility,
including a discussion of equipment usage with engineers, will assist the
auditor in determining the taxable status of equipment.
Equipment and supplies used in both exempt and taxable applications

should be prorated and tax applied to the non-exempt portion of use.
Telephone utilities provide service to geographical areas comprising a

number of cities and counties. Asset and purchase exceptions must
therefore be allocated to the respective localities for proper allocation of
local sales tax.
The taxpayer may have remitted use tax through either a direct payment
permit or on a consumer use tax return. Accruals of use tax should be
traced on a sample basis to the returns in order to verify payment of the
tax.
Due to the complexity of telephone utility audits, it is important to make

detailed notes concerning the taxpayer's operations and accounting
procedures. Such information will expedite the resolution process during
subsequent meetings with the taxpayer's representative. Additionally, the
information will be useful in enabling the Appeals and Rulings office to
address contested audit issues.
2.) General Guidelines for Post-September 1, 2004 Activities:
Remember when auditing a Post-September 2004 activity, the retail

sales and use tax exemption that was available prior to that date is no
longer applicable because of the repeal of the exemptions for public
service corporations. There are still some overlapping sales tax
exemptions that may be available, they include but are not limited to the
exemption for research and development, resale, and for the sales of
tangible personal property for the use or consumption by the
Commonwealth, any political subdivision of the Commonwealth, or the
United States.
B. Paging Companies.
When conducting audits of paging companies, the auditor needs to

recognize the impact of deregulation effective July 1, 1995. Prior to
deregulation, these companies were entitled to the exemptions provided
to public utilities. As of July 1, 1995, they are taxable on all purchases of
equipment and supplies. An exception may be possible, however, for
entities that are authorized by the FCC to furnish commercial mobile
TELECOMMUNICATION
Page - 6
services in which the authorization includes cellular mobile radio

communications services or digital PCS.
Subsequent to deregulation, all purchases of tangible personal property

should be reviewed for proper application of the sales tax.
If an audit spans both regulated and deregulated periods, the auditor

should select samples from each period. Different error factors should be
computed and applied to the respective periods.
Paging company sales can occur as follows:
(1) Retail sale of paging equipment without the paging

service is generally taxable sale of tangible personal
property.
(2) Paging service contract, which does not include

equipment, is a non-taxable service.
(3) Paging service contract including equipment, which is

returned at the end of the contract, is a non-taxable service.
(4) Paging equipment is sold (i.e., not leased or rented

which has a different tax result) at retail with a service
contract, the equipment constitutes a taxable sale of tangible
personal property and the charge for the service contract is
non-taxable.
In review of sales, the auditor should identify equipment sales to ensure

the proper application of the sales tax.
Since paging companies did not enjoy the retail sales and use tax
exemption provided to public utilities after July 1, 1995, they are not
affected by the repeal of the public service exemptions as of September
1, 2004.
C. Cellular Phone Companies.
1.) Pre-September 1, 2004:
Cellular phone companies are treated as a public utility as of January 1,

1989, therefore, they are entitled to an exemption on tangible personal
property used directly in the rendition of their public service.
2.) Post-September 1, 2004:

TELECOMMUNICATION
Page - 7
Effective on and after September 1, 2004, however, cellular phone

companies lost their retail sales and use tax exemption for the purchase
or lease of tangible personal property that was used or consumed directly
or indirectly in providing cellular phone service (e.g., antennas). Charges
for cellular phone service are non-taxable. The auditor should review
purchases in the same manner as a telephone utility. Please refer to
Section V for the transitional rules for the repeal of the public service
exemption.
3.) Taxability of Cellular Telephones:
Cellular telephones can be provided to the customer by an authorized

dealer/retailer (agent for the cellular phone service provider) in one of the
following scenarios:
(1) Customer pays full price for their cellular phone; or
(2) Customer purchases the cellular phone for a discounted

sales price beginning as low as $.01 upon signing a service
contract with the service provider for whom the retailer is an
agent. The agent receives a commission/rebate from the service
provider for the signed service contract; or
(3) Customer receives the cellular phone at no cost from the

retailer upon signing a service contract. The service provider
pays their agent a commission/rebate.
In Scenario 1, tax would apply to the total sales price of the phone. In
Scenario 2, the tax only applies to the discounted sales price (Ref. P.D.
96-361). In Scenario 3, the retailer is required to remit use tax on the
cost price of the telephone withdrawn from the resale inventory (Ref. P.D.
96-361).
Because of the rapidly changing nature of this industry, the auditor should
seek guidance from the audit supervisor and evaluate whether
prospective compliance on a first audit is necessary. Prospective
compliance would not be justified if the taxpayer received a timely ruling
on the matter, or if the law, regulations, or other public documents are
reasonably clear on the tax application.
D. Retailers of Telephone Equipment.
An audit of telephone equipment retailers should initially involve a review

of sales transactions. This will allow the auditor to readily identify the
types of equipment being sold and the applicable purchases entitled to a
resale exemption.
TELECOMMUNICATION
Page - 8
The retailer may purchase telephone instruments and other inventory

items under a resale certificate of exemption. The auditor should be
aware that certain purchases charged to inventory may not be entitled to
the resale exemption, such as cable affixed to real estate and similar
installation materials.
Sales and purchases should be reviewed in the same manner as audits

of similar retailers of tangible personal property. Exemption certificates
should be reviewed to support any tax-exempt sales.
Retailers of telephone equipment were not effected by the repeal of the

public service exemptions as of September 1, 2004.
E. Digital PCS
FCC authorization (license) to provide digital PCS is not the same as a

cellular license. These are separate and distinct licenses.
V. Transitional Rules for the Repeal of the Public Service Exemptions as of

September 1, 2004. (Ref. P.D. 04-122).
The following rules are provided to clarify when purchases or leases of

tangible personal property, previously exempt from the retail sales tax, are
subject to the tax.
Taxable:
• Tangible personal property purchased on and after September 1, 2004

• Tangible personal property delivered to a purchaser and paid for on or
after September 1, 2004, regardless of when the property was ordered
• Installment sales, when the date the contract is entered into is on or
after September 1, 2004
Exempt:
• Tangible personal property ordered, delivered and paid for prior to

September 1, 2004
• Tangible personal property ordered and delivered prior to September
1, 2004, but paid for on or after September 1, 2004
• Installment sales, when the date the contract is entered into is prior to
September 1, 2004, regardless of when the property is delivered or
when payment is made
Long-term Leasing Contracts:

TELECOMMUNICATION
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No sales and use tax will be imposed on the lease payments for any
tangible personal property leased pursuant to a bona fide contract that
was entered into on or before March 1, 2004, provided that such tangible
personal property was delivered to or placed into service by a public
service corporation on or before September 1, 2004. A “bona fide”
contract is one that includes specific set terms and a payment schedule
with a fixed duration.
Extension of Contracts:
The extension of a bona fide leasing contract does not constitute a new
contract and such equipment would remain exempt if the original contract
is extended, provided the original contract was entered into on or before
March 1, 2004 and the extension is executed prior to September 1, 2004.
Extension of a bona fide contract after September 1, 2004 constitutes a
new contract and property leased under that contract will become
taxable.
Other Changes in the Terms of a Contract:
Other changes in the terms of the contract, e.g., pricing, lease payments,
finance charges, etc., will not change the exempt status of the tangible
personal property provided the original contract was entered into on or
before March 1, 2004 and the change to the bona fide contract is
executed prior to September 1, 2004. Changes in terms occurring on or
after September 1, 2004 shall be viewed as a new contract for purposes
of taxation.
Assignment of a Contract:
The assignment of a bona fide contract does not constitute a new

contract provided there is no change in the terms of the contract or the
original contract terms are not extended as a result of the assignment.
Inventory on Hand:
Tangible personal property purchased prior to September 1, 2004, under

the public service corporation exemption, and placed in a tax-exempt
inventory, will not loose its exempt status with the repeal of the public
service corporation exemption effective September 1, 2004. Such
property will also maintain its exempt status upon the withdrawal from
inventory and put in use in a taxable manner.
TELECOMMUNICATION
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Temporary Storage:
Effective September 1, 2004, tangible personal property brought into and

stored in Virginia by a public service corporation, regardless of the fact
the tangible personal property may be used out-of-state in an exempt
capacity is subject to the tax. For example, if a public service corporation
has its central purchasing and warehousing operation in Virginia for its
entire nationwide operation, all tangible personal property warehoused in
Virginia would be subject to the Virginia sales and use tax, unless such
property qualifies for an existing Virginia exemption. Tax shall be accrued
on such tangible personal property in the month the property is acquired
by the public service corporation and brought into Virginia and remitted by
the 20th day of the month following the month of acquisition or importation
into Virginia.
Motor Vehicle Carriers of Property
Page 1
Sales and Use tax Audit Procedures

Objective: To discuss the application of sales and use to Motor Vehicle Carriers
of Property.
History:
Prior to January 1, 1996, intrastate trucking was regulated by the State

Corporation Commission (SCC) while interstate trucking was regulated by the
Interstate Commerce Commission. A limited exemption existed for public service
corporations engaged as common carriers of property by motor vehicle that
were authorized to operate under a certificate of convenience and necessity that
was issued by either the SCC or the ICC. No exemption existed for contract
carriers. (Source: 23 VAC 10-210-370)
The 2001 General Assembly revised and reenacted those sections of the Virginia
Code that deal with property and passengers operating for-hire on an intrastate
basis by enacting Chapter 596. The bill was based on the recommendations of
the Motor Carrier Reform Task Force of the Department of Motor Vehicles. The
specifics for Motor Carriers of Property is contained Chapter 21 of Title 46 of the
Virginia Code while those for passengers are contained in Chapter 20.
The Special Session I of the 2004 General Assembly adopted Chapter 3

amending § 58.1-609.3(3) to repeal the exemption previously granted to motor
vehicle common carriers effective September 1, 2004.
References:
Current Virginia Code Sections Cited

58.1-609.3(3)
Acts of the Assembly

1995 Session, Chapters 744 & 803
2001 Session, Chapter 596
2004 Special Session 1, Chapter 3
Virginia Administrative Code

23 VAC 10-210-370
Tax Commissioner Ruling

PD 05-31
Page 2
Discussion:
The original rationale behind exempting public service corporations (including

common carriers) is that they perform a necessary service for the public good.
Historically, the rates the public service corporations could charge were regulated
by the SCC to provide the citizens of Virginia the needed services at a fair price.
The public service corporation exemption reduces the final cost of the service,
thereby assuring that the necessary level of services are available while allowing
the providers a reasonable return on investment.
Deregulation of various industries, including the trucking industry, has led to the
situation where rates are not controlled or set by government agencies. Carriers
of property by motor vehicle that are not subject to rate regulations are free to
charge what the market will bear in a fully competitive environment, and the
original rationale for the exemption no longer exists.
Prior to September 1, 2004, § 58.1-609.3(3) exempted "…tangible personal

property sold or leased to a public service corporation engaged in business as a
common carrier of property or passengers by motor vehicle or railway, for use or
consumption by such common carrier directly in rendition of its public service.
Effective September 1, 2004, the words "motor vehicle or" were stuck from this
portion of the code. Effective that date, no exemption is available to a public
service corporation engaged in business as a common carrier of property or
passengers by motor vehicle.
Before September 1, 2004 a limited exemption existed for Motor Vehicle

Common Carriers of property. Whether a Taxpayer is a common carrier of
property for purposes of the exemption is determined by the provisions of Va.
Code § 58.1-609.3 3, as it existed prior to September 1, 2004. In interpreting this
statute, Title 23 of the Virginia Administrative Code 10-210-370 A states, "A
common carrier must be authorized to operate under a certificate of convenience
and necessity issued by the State Corporation Commission [SCC] or the
Interstate Commerce Commission [ICC] in order to qualify for this exemption."
Because of deregulation of the trucking industry, there is no longer any SCC or
ICC authorization available for determining whether a carrier of property by motor
vehicle is a common carrier. The terminology of the Department's regulation is no
longer applicable therefore the wording of the statute must be analyzed to
determine if the exemption is available.
To qualify for the exemption in Va. Code § 58.1-609.3 3, an entity must be a

public service corporation. Virginia Code § 56-1 defines the term "public service
corporation" to include:
gas, pipeline, electric light, heat, power and water supply companies,
sewer companies, telephone companies, telegraph companies, and all
Page 3
persons authorized to transport passengers or property as a
common carrier. [Emphasis added.]
This definition incorporates a requirement for a Taxpayer to be "authorized" to

provide the service (transport property as a common carrier) in order to be
deemed a public service corporation.
In PD 05-31, the Commissioner discusses at length the necessity for

“authorization” to transport property as a common carrier. In that ruling the
Commissioner takes the position that a taxpayer who did not previously hold a
Certificate as a common carrier with the ICC (Interstate Commerce Commission)
or the SCC (State Corporation Commission) as required in the original language
of the exemption does not qualify for the exemption. The Commissioner stated,
“Without such authorization, the Taxpayer is not considered a public service
corporation and, therefore, does not qualify for the exemption under Va. Code §
58.1-609.3 3.” In short, unless a common carrier had the ICC or SCC
authorization, it does not have the operational authority to qualify for the
exemption.
PD 05-31 goes on to discuss subsequent “registration” authorizations issued by

the United States Department of Transportation's Federal Motor Carrier Safety
Administration (FMCSA) and concludes that the authorization" and "regulation"
under the FMCSA do not rise to the levels associated with the rationale behind
the original public service corporation exemption.
Conclusion:
In PD 05-31 the Tax Commissioner takes the position that in order for a motor
vehicle common carrier of property to qualify for the exemption available prior to
September 1, 2004, it must be a public service corporation “authorized to
transport passengers or property as a common carrier.” The Commissioner does
not accept the new registration requirements of FMCSA as a replacement for the
former ICC certification. Any common carriers who were not public service
corporations possessing ICC or SCC authorizations to transport passengers or
property are not entitled to the former exemption for motor vehicles of property
under Va. Code 58.1-609.3 (3).
Procedure:
Motor vehicle carriers of property, whether they claim to a "common carrier" or a

"contract carrier" should be audited in the same manner after September 1,
2004. If a carrier claims to be an exempt common carrier prior to September 1,
2004 they must produce copies of the ICC or SCC certificates naming them as
Page 4
public service corporations authorized to transport passengers or property as a
common carrier. They must have this ICC or SCC certification in order to qualify
for the exemption. Subsequent authorizations or certifications by the FMSCA or
similar bodies are of no effect.
If the carrier is registered for consumer use or sale/use tax and filing returns for
periods in which there was a liability throughout the 36 months immediately prior
to the beginning of the audit then the audit period will be three years. If the
carrier is not registered or fails to file a return for a period in which a liability
exists in the 36 months immediately prior to the beginning of the audit then the
audit period may be extended to six years
The bulk of the tangible personal property used by a motor vehicle carrier of
property can be grouped into four general areas of usage: administrative;
maintenance and repair; transport of property; and, storage and temporary
deposit. Following is a description of each type of activity.
Administration: Administration functions include billing, collecting, soliciting,

purchasing, record keeping and employee comfort, convenience or pleasure. All
tangible personal property used in administrative functions is subject to the tax.
Repair and maintenance: Tangible personal property used in the repair or

maintenance of vehicles, equipment and real property (including the shop,
terminal and parking lot) is included in this category. Machinery and tools and
repair parts used to repair and maintain revenue producing vehicles and trucks
used to service these vehicles (e.g. tow trucks) for common carriers possessing
either the ICC or SCC certifications are not subject to the tax prior to September
1, 2004. Machinery and tools and repair parts for other vehicles (such as
supervisor's cars) as well as for the parking lot or other real or tangible personal
property are subject to the tax.
Transport: The transport function encompasses the actual performance of

carrier duties, i.e., the receipt, pickup, over-the-road transport, delivery and
protection of property, and similar functions essential in the transport of property.
This includes property used on the transport vehicles as well as property used in
loading, unloading and safeguarding cargo. Tangible personal property used in
the transport function by public service corporations possessing either the ICC or
SCC certifications as common carriers is used directly in the rendition of the
public service and is not subject to the tax prior to September 1, 2004.
Storage and temporary deposit: The functions of storage and temporary

deposit of tangible personal property are included in this category. Storage is the
holding for safekeeping of tangible personal property. Temporary deposit is the
temporary holding of tangible personal property prior to its subsequent transport
by the carrier. Tangible personal property used in the storage function is subject
to the tax regardless of the status of the carrier. Tangible personal property used
Page 5
in the temporary deposit function in conjunction with the common carrier function
by public service corporations possessing either the ICC or SCC certifications as
common carriers is not subject to the tax prior to September 1, 2004.
Because of the change in the law effective on September 1, 2004, particular

attention should be directed to purchases in areas that were previously exempt
by public service corporations who had authorization by the ICC or the SCC to
transport passengers or property as a common carrier.
In the area of repair and maintenance activity, close attention should be paid to
the following types of previously exempt purchases after September 1, 2004:
Repair parts for transport and service vehicles

Machinery and tools used in repairing transport and service vehicles
Tires, tubes, batteries used in transport and service vehicles
Motor oil, grease, gear oil, lubricants, brake fluid, transmission fluid used
in transport and service vehicles
Repair manuals for transport and service vehicles
Cleaning supplies, including soaps, detergents and waxes, used on
transport or service vehicles
Testing equipment for transport and service vehicles
In the area of transport activity the following types of purchases should be closely
scrutinized after September 1, 2004
Forklifts, conveyor systems, racks, hand trucks, coasters and similar

equipment used in receiving, sorting and loading and unloading transport
producing vehicles
Equipment used on transport vehicles to maintain commodities at a
constant temperature
Equipment for communication between offices and common carrier
equipment
Indoor and outdoor scales for weighing cargo
Newsprint, sealing tape, cartons, barrels, wardrobes, straps, pallets,
chains, ratchets, coupling and tieing down equipment, chock, seals and
dock levelers.
Waybills, freight bills, and bills of lading carried with the freight being
transported
Driver log books
Reflectors, fire extinguishers, flares used on transport and service vehicles
Decals and Lettering
In the areas of storage and temporary deposit activity close attention should be
paid the following types of purchases that are associated with the function of
temporary deposit before September 1, 2004
Page 6
Forklifts
Hand trucks
Packing materials
Crates
Dollies
Heating and cooling equipment used to maintain commodity at a constant
temperature
Of course purchases in these areas for carriers who lack the necessary ICC and
SCC authorization and therefore do not qualify for the exemption will be taxable
before and after September 1, 2004
Page - 1

Vending Machine Sales
Objective: Discuss the application of sales and use tax as it applies to VENDING MACHINE
SALES; GENERALLY, DEALERS; REPORTING PROCEDURES,,
I. History
Effective July 1,1982 ,dealers engaged in the business of placing personal property
through vending machines were required to report under a new method. Vending
machine dealers were required to file on the cost price or manufactured cost of tangible
personal property sold at 1% more than the regular sales tax rate in effect. The dealers
were now required to report on personal property sold using Form VM-2. New dealers
should complete an application, Form VM 1 for each city or county in which machines
are placed.
Prior to July 1, 1982 dealers engaged in the business of placing vending machines
were taxed at the regular sales tax rate on the gross taxable sales (total selling
price of the items dispensed) using Form ST-9. Dealers were required to have a sales
tax registration for each city or county in which machines are placed.
II. References
B. Virginia Regulation Old VR 630-10-110 § 1

VR 630-10-110 § 2
VR 630-10-110 § 3
VR 630-10-110 § 4.
VM Sales ; generally NEW 23 VAC 10-210-6040

dealers defined 23 VAC 10-210-6041
contract w/nonprofit organizations 23 VAC 10-210-6042
sales by other dealers 23 VAC 10-210-6043
C. Ruling Letters - P.D. 86-122 Coin operated amusement games (7/11/86)

P.D. 87-199 Alternative reporting method approved (8/21/87)
P.D. 89-286 Vending machines - leases or rentals subject to sales tax
(10/27/89)
Page - 2
P.D 89-300 Adjustments to cost of goods sold/shortages allowed,

11/01/89
P.D. 97-302 Sale of individually packaged food items from cardboard
displays/honor boxes allowed to report 5.5% on whole-
sale purchases. (7/11/97)
D. Virginia Tax Bulletin Sales and Use Tax Policy Statement 82-1, (June 1, 1982)
Sales and Use Tax Policy Statement 82-6, (June 1, 1982)
E. Applicable Exemption Certificate - Tangible personal property purchased for resale

through vending machines may be purchased
exempt using (Form ST-10).
III. General A. Dealers engaged in the business of placing vending machines and selling
tangible personal property through them are required to compute tax at
5.5% on the cost price of items purchased for sale through the vending
machines. 58.1-614 (A) & (B) Vending machine dealers file a special
return to report sales tax (Form VM-2)
B. Dealers who manufacture tangible personal property to be sold through

vending machines must compute tax at 5.5% on the manufactured cost,
(raw material cost plus labor and overhead).
C. Dealers who are unable to maintain satisfactory records to determine the cost
price of goods purchased or manufactured, may submit a written request to the
Commissioner for authorization to remit upon gross receipts which takes
into account the inclusion of the 4.5% sales tax. 58.1-614 (D)
Dealers who are authorized for this method must file the standard return
(Form ST-9).
D. Dealers who are engaged in the business of placing vending machines, all of
which are under contract to nonprofit organizations, may deduct sales of
10 cents or less from gross receipts and divide the remaining balance by
1.045 to determine the amount of taxable sales upon which the tax is due and
payable. 58.1-614 (C) Dealers who qualify for this method must file the
standard sales tax return (Form ST-9)
E. Dealers are required to file seperate returns for each locality which vending
machines are placed unless the dealer has permission to file a consolidated
return.
F. Dealers who are not engaged in the business of placing vending machines, but
who use vending machines in their places of business must report tax on
gross taxable sales.
Page - 3
IV. Procedures
1. The first step in conducting an audit of a vending machine dealer is to

determine which method is being used in reporting sales.tax. A pre-audit
conference is helpful in gaining knowledge of the dealers overall operation.
2. It is clear that true Vending Machine businesses who place their goods for sale,
should operate under the guidlelines provided under VAC 10-210-6040, 41, 42,
in regards to reporting sales.taxes. An in depth analysis is often necessary as
these dealers may have trouble determining just how to compute tax based on
the true cost price of items purchased for sale. Dealers may take unauthorized
deductions from their cost of goods(e.g.,premium brand income).
Credits allowed include inventory shortages, trade or other discounts which
are netted against the invoice price.
3. Dealers who use vending machines in their business to sell merchandise

(e.g., service station operators, grocery stores, ) must report tax on the
standard return (Form ST-9) This type of dealer is not a placing dealer and
therefore subject to sales tax at the rate of 4.5%. VAC 10-210-6043
Carefully reviewing this area to insure that these sale are being included in the
taxable sales calculations is suggested, as they are often overlooked.
Sales tax is calculated at the gross taxable sales(total selling price of items
despensed). This means tax is not included in gross proceeds/sales amount.
4. Purchases or leases of vending machines and repair parts are subject to the
use tax at 4.5% and are considered tangible personal property consumed and
not for resale. A careful review of this area should be completed to assure
that compliance is being met.
5. Vending machine audits can be completed by using the STAUDN program to

compute the local 1% tax by entering the monthly purchases broken down by
locality codes to give accurate tax, penalty and interest on the ST-49.
A manual ST-48 VM can be easily completed by adding both the 3.5% state
TPI & local 1% TPI totals from the automated ST-48 to arrive at the Vending
Machine figures 4.5% state TPI and 1% LOCAL TPI.
Veterinarians

veterinarians
I. History
Prior to July 1,1987 The Department deemed veterinarians to be engaged
in professional services. The veterinarian was to be the taxable consumer of all
tangible personal property used in providing their service. If a veterinarian went
beyond the rendition of their professional service and sold goods at retail he had
to register for the sales tax and collect the tax from his/her customer if an
inventory of tangible personal property was maintained to sell certain items
independent of an office visit. The sale of identical products would be treated
differently depending if an office visit or examination was part of the transaction
(SEE BULLETIN 86-4). The logistic of the above procedure as well as the
auditing of such a business proved to be quite difficult. After July 1, 1987 House
Bill 1594 of the 1987 General Assembly stated that the tax should be paid on the
cost price of controlled drugs as well as medicines, which are required to be
dispensed on the prescription of a licensed veterinarian. These items may in turn
be sold at retail exclusive of the tax regardless of whether the sale of such items
is in conjunction with an office visit or examination. The only requirement is that
the tax be paid on the cost price of the controlled drugs or prescribed medicines.
Also, prescription diets fall into the same category as controlled drugs or
prescribed medicines. The veterinarian would of course continue to pay the tax
on consumable supplies and all capital purchases
The above changes made by House Bill 1594 had no effect on the sale of
soaps, flea powders, leashes, collars, pet foods, and similar products. Such
items should be purchased tax exempt and the tax collected at the full retail
amount whether or not such sale is in conjunction with an office visit or
examination.
All medicines, drugs, supplies, and equipment will be treated the same from
one veterinarian to the other, in that the nature of the product determines how it
is treated for tax purposes. Any withdrawal from an exempt retail inventory for
kennel services or grooming services should be taxed at cost and the tax
reported on line two of the ST-9.
II. References
A. Code of Virginia 58.1-609.7 (1)

C. Virginia Tax Bulletin 86-4
Virginia Tax Bulletin 87-9
D. Ruling Letter P.D. 87-251
E. Exemption Certificate ST10 for resale items only.
III. Definitions
CONTROLLED DRUGS – DRUGS WHICH ARE KEPT UNDER LOCK AND KEY
SUCH AS NARCOTICS AND /OR AMPHETIMINES
PRESCRIBED MEDICINES –PRODUCTS WHICH CAN ONLY BE DISPENSED

ON THE WRITTEN PRESCRIPTION OF A LICENSED VETERINARIAN
PRESCRIPTION DIETS-PET FOOD WHICH IS PRESCRIBED TO TREAT A

SPECIFIC MEDICAL CONDITION
SUPPLY ITEMS-SUTCHURES, SPLINTS, OFFICE SUPPLIES, ETC.
OTHER RESALE PRODUCTS-SOAPS, POWDERS, VITAMINS, LEASES,

COLLARS, AND PRODUCTS WHICH MAY BE LABELED “ONLY AVAILABLE
THROUGH VETERINARIANS” BUT ARE RESALE ITEMS, AND REGULAR PET
FOOD.
Procedure
If the veterinarian keeps an inventory of resale items such as soaps, flea

treatments, etc, the veterinarian needs to be registered for the collection of the
sales tax and the tax should be collected and reported on the retail sales value of
the items. These items are treated as retail items regardless of whether the sale
of such items is in conjunction with an office visit or examination. A complete
understanding of the taxpayer’s products is necessary to conduct an audit. A
vendor may supply both items for resale and consumption. Purchases must be
analyzed in detail for a complete understanding of the product line. The sale of
specific products such as leashes, soaps, etc. should be taxed at the retail value.
Sales journals, bank deposits, and customer’s receipts should be analyzed to
verify the tax collected was reported on the retail items. Capital acquisitions
should be analyzed for the audit period. All equipment used in the practice is
subject to the sales tax at cost. Purchases, sales, and assets, should be
analyzed with a complete understanding of the nature of the products and their
specific uses.
Watercraft Tax vs. Sales Tax (Rev. 10/97)
Page - 1

Watercraft Tax vs. Sales Tax
Objective: Discuss the application of the 2% Virginia Watercraft Sales and Use Tax
(Watercraft Tax) and the 4.5% Virginia Retail Sales and Use Tax (Retail Tax).
I. History
Prior to 1/1/82. Watercraft were subject to the 4.5% retail tax.
1/1/82 to 7/1/87. Watercraft were exempted from the retail tax by Code of
Virginia § 58.1-609(9) and became subject to the 2% watercraft tax. There
was no maximum tax.
7/1/87 to 7/1/90. A $1,000 maximum watercraft tax cap was in effect.
7/1/90 and after. The watercraft tax cap is increased to $2,000. Based on
the maximum tax limitation, all watercraft with a sales price of $100,000 or
more are subject to a maximum tax of $2,000.
7/1/94 and after. The definition of "watercraft" is expanded to include any

motor sold separately that is used to power a watercraft.
1/1/98 and after. The definition of "watercraft" is expanded to include any

vessel on the water propelled by machinery whether or not the machinery is
the principal source of propulsion. It also eliminates the size and horsepower
requirements. Small motorboats, jet skis and small sailboats equipped with
auxiliary motors are now watercraft under the statute. The definition of
"dealer" was broadened to include any person who sells or offers to sell two
or more watercraft within any twelve consecutive months. Previously a dealer
was a person who held five or more watercraft for resale during a calendar
year.
II. References
58.1-609.1(6) Retail tax exemption for motor fuels, diesel fuel, and
clean special fuels for use in a boat or ship, upon which
a fuel tax is refunded.
58.1-609.1(9) Exempts watercraft as defined in § 58.1-1401 from the
retail tax.
58.1-609.2(4) Commercial waterman exemption from the retail tax.
Page - 2
58.1-609.3(4) Retail tax exemption for ships and vessels used or to be

used principally in interstate or foreign commerce.
58.1-1400 through 58.1-1410 - Virginia Watercraft Sales and Use Tax.
58.1-1400 Title.
58.1-1401 Definitions.
58.1-1401.1 When motor deemed a watercraft.
58.1-1402 Tax levied.
58.1-1403 Basis of tax; estimate of tax; penalty for
misrepresentation.
58.1-1404 Exemptions
58.1-1405 Time for payment of tax.
58.1-1406 Dealers' certificates of registration.
58.1-1407 Retention of documents.
58.1-1408 Civil penalties and interest.
58.1-1409 Credit against tax.
58.1-1410 Disposition of funds.
B. Virginia Administrative Code (VAC)
23 VAC 10-210-351 Commercial waterman.

23 VAC 10-210-4050 Ships and vessels used or to be used principally in
inter-state or foreign commerce.
23 VAC 10-210-6060 Watercraft sales, leases, and rentals; repair and
replacement parts, and maintenance materials.
*
Note: This regulation was amended in 1994 and was not updated in the
regulation booklets prior to the publication of the Virginia Administrative
Code, Title 23 (23 VAC).
23 VAC 10-230-10 VR12.3.58-26.1 Virginia Watercraft Sales

through through and Use Tax Regulations
23 VAC 10-230-130** VR12.3.58-685.50**
**
Note: The watercraft tax regulations have not been updated since issued
in 1982 (including those published in 23 VAC) and generally are not
reflective of the current law. Nevertheless, they contain helpful examples
of many transactions as well as definitions and descriptions not found
elsewhere. The following are some facts which must be kept in mind
when referring to the watercraft regulations:
1. The tax code was recodified in 1984 as Title 58.1.

2. The definition of "watercraft" has changed substantially. (Originally,
the definition included references only to length and weight.)
3. The definition of "dealer" has changed.
Page - 3
4. There was no maximum tax cap when the watercraft tax was
enacted. Later a $1,000 cap was imposed and now the maximum
tax limitation is $2,000.
5. Motors used to power a watercraft and sold separately are now
taxed as watercraft.
6. The late payment penalty has been increased to 6% per month.
23 VAC 10-230-10 (VR12.3.58-26.1) Bad checks.

23 VAC 10-230-20 (VR12.3.58-441.6(kk)) Watercraft exclusion.
23 VAC 10-230-30 (VR12.3.58-685.40) Definitions.
23 VAC 10-230-40 (VR12.3.58-685.41) Tax levied.
23 VAC 10-230-50 (VR12.3.58-685.42) Civil Penalties.
23 VAC 10-230-60 (VR12.3.58-685.43) Dealer certificate of
registration.
23 VAC 10-230-70 (VR12.3.58-685.44) Dealer exclusion.
23 VAC 10-230-80 (VR12.3.58-685.45) Other exemptions.
23 VAC 10-230-90 (VR12.3.58-685.46) Payment of tax required
for title.
23 VAC10-230-100 (VR12.3.58-685.47) Value of watercraft and
penalty for misrepresen-
tation.
23 VAC 10-230-110 (VR12.3.58-685.48) Retention of Documents.
23 VAC 10-230-120 (VR12.3.58-685.49) Credit for payment of tax.
23 VAC 10-230-130 (VR12.3.58-685.50) Allocation of funds.
C. Ruling Letters
P. D. 00-196 Undocumented vessels sold in Virginia
P.D. 95-75 Barge has no motor so it is not a watercraft-retail tax

applies.
P.D. 93-155 Rentals of watercraft are taxed at 2%. Rentals of canoes
and kayaks are taxed at 4.5%.
P.D. 91-120 **Prior to 7/1/94** The purchase of a motor (watercraft
purchased from one dealer and the motor from another)
by a commercial waterman was exempt from both taxes.
P.D. 90-213 Fishing vessels used by commercial watermen are exempt
from the retail tax, but only watercraft constructed by a
commercial waterman for his own use are specifically
excluded from the watercraft tax.
P.D. 88-176 Sales of interval ownership interests in watercraft are not
subject to either tax, however the watercraft tax is due on
the initial purchase of the watercraft.
P.D. 86-187 A taxpayer who purchases a vessel without an engine
need only remit 2% watercraft tax, provided he installs a
motor of over 25 HP prior to initial titling. A dealer who
Page - 4
sells a boat that would be a watercraft if powered by a

motor of over 25 HP is not required to collect the retail tax
if he takes from the purchaser a written statement that
such an engine will be installed upon the boat prior to
obtaining a title.
P.D. 86-151 An association which chartered and maintained vessels
for their owners and received a monthly fee as well as a
percentage of the charter was not considered a watercraft
dealer.
D. Virginia Tax Bulletin 97-5 Definition of Watercraft and Watercraft

Dealer
Virginia Tax Bulletin 94-9 Application of the Watercraft Sales and Use
Tax to the Sale of Boat Motors
E. 1997 Legislative Summary Definition of Watercraft-Expanded, Amended

Clarified
F. Applicable exemption certificates: ST-10 Resale Certificate

ST-16 Waterman Certificate
III. General
A. Watercraft Tax is Imposed on the Purchaser
A 2% watercraft tax is imposed upon the purchaser of any watercraft sold

in Virginia and upon the user of any watercraft not sold in Virginia, if
required to be titled with the Department of Game and Inland Fisheries for
use in Virginia.
B. General Description of a Watercraft subject to the Watercraft Tax
Prior to 1/1/98: A watercraft means any motor-powered boat 15 feet or

more in length if powered by a motor in excess of 25 horsepower or any
sail-powered boat in excess of 18 feet in length, but not boats that have
valid marine titling documents issued by the U.S. Coast Guard. Effective
7/1/94 any motor purchased separately to be used to power a watercraft
is subject to the watercraft tax.
1/1/98 and after: The motor-powered boat length and horsepower

requirements were removed. A vessel need only be propelled by
machinery. This machinery does not have to be the principal source of
propulsion. The provision for a sail-powered boat remains unchanged.
Page - 5
C. Watercraft Tax vs. Retail Tax
All transactions subject to watercraft tax are exempt from the retail tax;
however, all watercraft not subject to the watercraft tax are subject to the
retail tax. It is the intent of the sales and use tax laws to tax all marine
vessels (unless otherwise exempt) according to one or the other tax rate
(2% or 4.5%) but not both.
D. Watercraft Dealers
Watercraft dealers are exempt from both the retail and watercraft taxes
on purchases of watercraft for resale and also on purchases of watercraft
for lease, charter or other use for compensation, but are subject to the
watercraft tax on the gross receipts from lease, charter or other use.
Gross receipts tax on the lease, charter or rental of watercraft is not
separately stated.
IV. Scope of Training
This training section deals with the application of the watercraft sales and use
tax (referred to as watercraft tax) and the retail sales and use tax (referred to
as retail tax). It is not the intention that auditors become familiar with all
aspects of the watercraft tax. Instead, it is more important that the auditor
know which tax applies and where to locate information needed to make the
correct determination. For watercraft tax, the primary data source is the
Chapter 14 of the Code of Virginia. Chapter 14 is relatively short and easier
to read than most statutes. The list of code sections is included to make
subjects easier to locate. Even though the watercraft tax regulations are
seriously out of date (refer to footnote ** above), they are still a valuable
source of information. A list of regulation titles is also included. Likewise, the
older ruling letters must be read with the realization that significant changes
have occurred in the years since 1982. While a few retail tax issues will be
addressed, watercraft tax will be the main focus of this training section.
V. Watercraft Tax Definitions
The following definitions are taken from the Code of Virginia § 58.1-1401
unless otherwise identified and are expanded upon by additional information
contained in the regulation definitions or other sources.
Prior to 1/1/98 - "Dealer" means "any person who is in the regular business
of selling watercraft. Any person who has held five or more watercraft for
resale during the calendar year shall be deemed, for purposes of this chapter,
a 'dealer.'"
Page - 6
1/1/98 and after - "Dealer" means "any watercraft dealer as defined in §

29.1-801." This definition includes any person who sells or offers to sell two
or more watercraft within any twelve consecutive months.
The regulation definition of dealer is more general and adds that "the
Commissioner may find such person to be a dealer." For the most part, a
watercraft dealer is governed by the laws pertaining to the Dept. of Game and
Inland Fisheries (DGIF). The decision to register with DGIF as a watercraft
dealer is generally not voluntary. That is, if a person meets the definition of a
“watercraft dealer” in Code of Virginia 29.1-801 (the Watercraft Dealer
Licensing Act), that person must register with DGIF.
However, a watercraft dealer is not required to register with the Dept. of

Taxation to collect and remit the Watercraft Sales and Use Tax on the sale of
watercraft. Such registration (and the collection and remittance of the
Watercraft Sales and Use Tax) is voluntary. If a watercraft dealer elects not
to collect the Watercraft Sales and Use Tax, the tax is imposed on the
purchaser.
"Gross receipts" means "the amount received for the lease, charter, or other
use of any watercraft. The term shall include hourly rental, maintenance, and
all other charges for use of any watercraft and charges for pilots crew, or
other services, unless separately stated on the invoice. The term shall also
include the amount by which the price estimated under § 58.1-1403 exceeds
the charge actually made."
"Sale" means "any transfer of ownership or possession of a watercraft by

exchange or barter, conditional or otherwise, in any manner. The term shall
also include (i) a transaction whereby possession is transferred but title is
retained by the seller as security, (ii) any lease or rental for a period of time
substantially equal to the remaining life of the watercraft, and (iii) any lease or
rental requiring total payments by the lessee during the lease or rental period
which substantially equals the value of the watercraft. The term shall not
include a transfer of ownership or possession made to secure the payment of
an obligation." The regulation definition goes into detail about determining the
remaining life and valuation of watercraft. It defines "substantially equal" to
mean 80% or more. The regulation states that "[t]he same sale will not be
subject to the tax more than once. However, unless it is an exempt transfer,
each time a transfer of ownership or possession takes place, the new owner
will be subject to the tax on the transfer." In addition, the regulation cites six
types of transfers that the term sale does not include and provides three
examples. Finally the regulation excludes from the term sale the "[t]ransfer of
watercraft repair parts, accessories, attachments, and lubricants, not included
in the same transaction with the transfer of the watercraft." Sales of all such
tpp (except motors to power watercraft) are subject to the retail tax.
Page - 7
"Sale price" means "the total price paid for a watercraft and all attachments
thereon and accessories thereto, exclusive of any federal manufacturer's
excise tax, without any allowance or deduction for trade-ins or unpaid liens or
encumbrances." The regulation definition of sale price includes additional
information. "The terms 'attachments thereon' and 'accessories thereto' as
used herein mean all [tpp] that is physically attached to watercraft, including
installation charges, or property that is customarily used in watercraft,
whether or not affixed to the structure of the watercraft, and which was
transferred in the same transaction as the watercraft as a part of the
watercraft sale. Such [tpp] transferred other than in the same transaction with
the watercraft will be subject to the . . ." retail tax. In addition, "[c]harges for
lettering and get-ready charges (cleaning, washing and preparing) are also
included in the sale price when made in the same transaction with the
watercraft transfer. However, excluded from the sale price are charges for
federal manufacturer's excise tax, registration and titling fees, insurance, and
gasoline, when separately stated on the invoice." Note that the base for
computing the watercraft tax excludes manufacturer's excise taxes, but not
retailer's excise taxes. Thus any federal "luxury tax" on a watercraft is
included in the base for computing the watercraft tax since it is classified as a
retailer's tax.
Prior to 1/1/98 - "Watercraft" means "any contrivance (i) used or which is

capable of being used as a means of transportation on water, (ii) which is
fifteen feet or more in overall length measured along the centerline and (iii)
which is powered by a motor in excess of twenty-five horsepower. The term
shall also include any sail-powered vessel (i) used or which is capable of
being used as a means of transportation on water and (ii) which is in excess
of eighteen feet in length measured along the centerline. The term shall not
include a seaplane on the water or a watercraft which has a valid marine
titling document issued by the United States Coast Guard."
1/1/98 and after - "Watercraft" means any vessel propelled by machinery

whether or not the machinery is the principal source of propulsion. The term
shall also include any sail-powered vessel, which is in excess of eighteen feet
in length measured along the centerline. The term shall not include a
seaplane on the water or a watercraft which has a valid marine titling
document issued by the United States Coast Guard."
The first paragraph of the regulation definition contains the superseded

definition of "watercraft" and should be ignored; however, the second and
third paragraphs contain information about documented vessels. Code of
Virginia § 58.1-1401.1, in effect, adds to the definition of watercraft and is
entitled "When motor deemed a watercraft." It became effective on 7/1/94
and states that "[a]ny motor used to power a watercraft as defined in § 58.1-
Page - 8
1401 and sold separately from such watercraft shall be deemed a watercraft
for purposes of this chapter."
"Person" as defined by the regulation "[m]eans every natural person, firm,

partnership, association, corporation, or other entity."
VI. Procedures
A. Application of the Watercraft Tax to the Sale of Boat Motors
Virginia Tax Bulletin 94-9 deals with the 1994 statute in which any motor
that powers a watercraft and sold separately from the watercraft, is itself
deemed a watercraft. The explanation is very good and the examples
clarify the intent of the statute. The auditor should read and understand
this bulletin because it has far reaching implications. A registered
watercraft dealer will only collect the 2% watercraft tax on such a motor.
A retail dealer still collects the 4.5% tax but the customer who purchased
the motor for a watercraft can obtain a partial refund from the Department
of Taxation by completing the "WCT Refund" request.
B. Watercraft Tax Levied - Code of Virginia § 58.1-1402
This statute describes how the amount of tax to be collected is

determined:
1. 2% of the sale price of each watercraft sold in Virginia.
2. 2% of the sale price of each watercraft not sold in Virginia but

required to be titled in Virginia. However, if the watercraft is first
required to be titled in Virginia six months or more after its acquisition,
the tax shall be 2% of the market value of such watercraft at the time
it is titled.
3. 2% of the gross receipts from the lease, charter or other use of any
watercraft by a registered dealer. Note: effective January 1, 1998
watercraft includes small motorboats and jet skis.
This code section also contains the $2,000 maximum tax limitation. The
regulation corresponding to the statute states that the current market
value includes "the cost of any modifications, improvements or additions
subsequent to initial acquisition." The regulation has paragraphs titled
"Each Transaction Taxable," "Requirement to be Titled," and "Current
Market Value." The regulation also contains a paragraph titled
"Occasional Sale" which states that the watercraft tax applies to an
occasional sale. "Occasional sale means a sale of a watercraft by
anyone not a dealer in watercraft."
Page - 9
C. Watercraft Tax Exemptions - Code of Virginia § 58.1-1404
Prior to 1/1/98, the statute contained six exemptions. Beginning 1/1/98

and after there are five. (Refer to the code section for more details.)
1. Sales to federal, state and local governments and sales to insurance

companies for the sole purpose of settling a claim.
2. Before 1/1/98: Any person who owned a watercraft prior to 1/1/82.
1/1/98 and after: Any person who was the owner of a watercraft
which was not required to be titled prior to 1/1/98 can apply for a title
without incurring the watercraft tax.
3. Any watercraft constructed by a commercial waterman for his own

use. (Note: The exemption, as it pertains to commercial watermen,
is only applicable when the actual vessel is constructed by the
waterman for his own use. There is no exemption from the watercraft
tax for watercraft purchased by or constructed by a boat yard on
behalf of a commercial waterman.)
4. Any registered dealer in watercraft is exempt from the tax imposed in

paragraphs 1 and 2 of § 58.1-1402. A registered dealer is also
exempt from the titling requirement in § 62.1-186.2 (prior to 1/1/98) or
§ 29.1-713 (beginning 1/1/98 and after).
5. Before 1/1/98: Any watercraft sold or used for which no title is

required, unless the owner of such watercraft chooses to apply for a
title. This exemption was removed effective 1/1/98.
1/1/98: This exemption was removed from the statute.
6. Any watercraft purchased by and for the use of a volunteer sea

rescue squad, volunteer fire department or a volunteer rescue squad.
(All are required to be nonprofit.)
The following statement is found at the end of the exemption regulation:

"Note: The exemptions of this section do not apply with respect to
rentals, leases or charters in the case of a dealer who pays a gross
receipts tax under the dealer exclusion, as the gross receipts tax is levied
on the dealer and not upon the renter, lessee, or other user."
D. Watercraft Dealers - Code of Virginia § 58.1-1406
Paragraph A of the statute states that "[e]very person who qualifies as a

Page - 10
dealer. . . and desires to transfer ownership without obtaining a certificate

of title, shall file with the Tax Commissioner an application for a certificate
of registration for each place of business in the Commonwealth." This
statute implies the voluntary nature of a dealer's decision to register for
the watercraft tax. Once registered, however, the watercraft dealer must
act in strict compliance with all of the statutes, especially concerning
leasing or renting of watercraft. Because a watercraft dealer is subject to
tax on his gross receipts, the watercraft tax is imposed on the dealer
instead of the renter or lessee. Therefore, the exemptions found in Code
of Virginia § 58.1-1404 are not applicable. For example, gross receipts
from rentals, leases or charters to the federal, state or local governments
must be included in the dealer's gross receipts and are subject to the
watercraft tax. Most active dealers of watercraft agree to register for
watercraft tax because as paragraph E states: "Only those dealers who
hold a current certificate of registration hereunder shall be authorized to
transfer ownership of a watercraft without obtaining a certificate of title
therein, and paying the tax imposed by this chapter." The dealer
exclusion regulation contains useful information regarding watercraft
dealers not found in the statutes and is generally accurate. A watercraft
dealer may purchase watercraft for subsequent lease, rental or sale
exempt of the tax. Also, paragraph C of 23 VAC 10-210-6060 states that
"[r]epair and replacement parts and accessories installed on a watercraft
at the time of sale, or on leased or rented watercraft, that are included in
the sales price for computing the [watercraft tax] or in gross receipts from
a lease or rental are exempt from the [retail tax]. Such items may be
purchased by a dealer, as defined in § 58.1-1401 of the Code of Virginia
and the accompanying regulations, exclusive of the [retail tax] when a
resale exemption certificate, Form ST-10, is presented at the time of sale.
Repair parts purchased by nondealers for installation on watercraft are
not exempted from the tax."
E. Coast Guard Documented Vessels
The statute specifically exempts from the watercraft definition any

watercraft which has a valid marine document issued by the United
States Coast Guard. The regulation definition discusses this topic in
more detail. "Marine documentation is issued by the United States Coast
Guard to the owner(s) of vessels or watercraft as evidence of ownership
in such vessels or watercraft. Valid documentation becomes void upon
sale and must be reinstated in the name(s) of the purchaser(s).
Therefore, for purposes of this chapter, no watercraft will be considered to
have a valid marine document when purchased . . ." in Virginia.
Conversely, vessels which are purchased and documented outside
Virginia, but brought into this state for use with valid documentation are
exempt from the 2% watercraft tax, but subject to the 4.5% retail tax.
However, Virginia will give credit for valid sales type taxes paid to another
Page - 11
state. (Refer to Code of Virginia § 58.1-1409.) Note that there is no

maximum tax limitation for the retail tax.
F. Commercial Watermen are Usually Liable for Watercraft Tax
A commercial waterman enjoys an extensive (but not complete)

exemption from the retail tax. 23 VAC 10-210-351 was broadened in
1994. Items such as boats, boat motors, parts, machinery, tools,
equipment, etc. are exempt from the retail tax when purchased by a
commercial waterman who can present a valid ST-16. There is a
provision for proration of the retail tax if a commercial waterman's use of
an item is not entirely exempt. There is no exemption from watercraft tax
for commercial waterman except when a commercial waterman actually
constructs a watercraft for his own use. Prior to 1/1/98 a commercial
fishing vessel under fifteen feet in length or a longer vessel which is
powered by a motor of 25 HP or less, does not meet the watercraft
definition and is not subject to the watercraft tax. Such boats would also
be exempt from the retail tax. Beginning 1/1/98 and after, however, any
machine powered vessel (regardless of length or amount of horsepower)
is defined as a watercraft. Accordingly, a purchase of any powered boat
by a commercial waterman is subject to the 2% watercraft tax. Since
7/1/94, a commercial waterman is taxed on a motor that powers a
watercraft. This was probably an unintended result of the enactment of
Code of Virginia § 58.1-1401.1.
G. Watercraft Records
Code of Virginia § 58.1-1403 requires every watercraft buyer be provided

with an invoice signed by the seller or his representative, which states the
sales price. Paragraph C of this section sets out the department's
remedies when an invoice does not exist or a misrepresentation occurs.
Code of Virginia § 58.1-1407 requires that any invoice(s) be kept by the
seller for three years following the sale.
H. Ships or Vessels Used or to be Used Exclusively or Principally in

Interstate or Foreign Commerce are Exempt from the Retail Tax
Such vessels are exempt by Code of Virginia § 58.1-609.3(4) from the

retail tax. They are described in 23 VAC 10-210-4050. These vessels are
usually exempt from the watercraft tax because they have valid Coast
Guard documentation or are not required to be titled in Virginia. (Refer to
the regulation)
Page - 12
I. Retail Tax Exemption for Boat or Ship Fuels
Code of Virginia § 58.1-609.1(6) exempts "[m]otor fuels, diesel fuel,

and clean special fuels for use in a boat or ship, upon which a fuel tax
is refunded. . . ."
Page - 1

Seata
Objective: Discuss the application of sales and use tax as it applies to SEATA.
I. History
The Southeastern Association of Tax Administrators (SEATA) was

established in 1951. In 1987 a number of SEATA members entered into
an agreement for the reciprocal exchange of sales and use tax
information. The agreement was designed to provide for and facilitate the
exchange of information between SEATA states, in order to increase
compliance with each state's sales and use tax laws.
II. General
A. The following states are members of SEATA:
Arkansas Kentucky South Carolina

Alabama Louisiana Tennessee
Florida Mississippi Virginia
Georgia North Carolina West Virginia
B. Representatives from the different states meet periodically to analyze

exchanged information. Information is provided by member states on a
quarterly basis :
1. A report of sales tax cases closed within the quarter exceeding

$100,000.
2. A report of corporate income tax cases with changes in adjustment

factors.
3. Hard copy of information reports that are completed by the taxpayer

and the auditor.
4. Schedule of untaxed sales transactions.
III. Procedures
Page - 2
A. SEATA information should be gathered on all sales and use tax and
corporate income tax audits whenever the taxpayer conducts business in
any of the SEATA states.
B. Attached is a copy of the SEATA Nexus Questionnaire. The taxpayer is to

complete the front page of the form. It asks the taxpayer to to list
information such as identifying registration numbers, business activity
descriptions and questions relating to the establishment of nexus with
SEATA states.
If the taxpayer refuses to complete the form, the auditor should complete
the front as best as possible.
C. The back of the form is to be completed by the auditor. The block

requiring registration information for other SEATA states is very
important, particularly if use tax is being accrued for other states and
registration with those states is questionable.
The bottom part of the back of the form contains a block for collecting
data related to specific transactions and should be completed if the
taxpayer conducts business in any SEATA state exceeding $250,000.
NOTE: The sales and use tax audit program allows the auditor to enter
transactions, and print a list of the transactions and an information
exchange form. Utilizing the audit program eliminates the need to
complete the blocks on the back of the Nexus Questionnaire.

VA Field Audit Guidelines

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Advertising

Sales and Use Tax Audit Procedure

1977. Virginia Supreme Court case (WTAR Radio-TV Corporation v.

7/1/86. Major change. Code of Virginia 58.1-602 and 58.1-608(6)(e)

7/1/94. Code of Virginia 58.1-609.6(4) amended to allow out-of-state

A. Code of Virginia Section - 58.1-602, 58.1-609.6

P.D. 88-309 11/7/88 - additional examples of media and nonmedia

D. Virginia Tax Bulletin 86-12, 93-7, 94-7

Advertisement means a communication that is intended to promote or

Advertising means the planning, creating, and placing of advertisements

Advertising business means any person or group of persons providing

Advertising campaign means the plan or activities conducted by an

Direct mail means mail consisting of advertising materials, appeals for

De minimus usage rule means a sale of nonadvertising materials in

General public means a broad segment of people, businesses, or other

In-house advertising means advertising produced by an entity to

Media means any instrument or medium of mass communication directed

Whether the company under audit has purchased advertising or created

If the advertising is both promotional in nature and widely disseminated to

Important Note: Advertising agencies are generally audited in

Advertising agencies divide their work into "jobs". What makes a

Exempt sales by an advertising business

According to the sales tax regulations:

The tax does not apply to charges by an advertising business for

The "advertising" referred to here is media advertising. Some examples

• Ads that will be placed in newspapers and magazines

Taxable sales by an advertising business

Some examples of taxable nonmedia sales are:

• Administrative supplies (stationery, envelopes, business cards, etc.)

Nonmedia items developed in connection with a media campaign

If, in conjunction with a media advertising campaign, an agency includes

Additional notes on sales

• Who are "advertising businesses"?

"Advertising business" means any person or group of people providing

magazines, billboards, broadcasting or other media, including without

There are companies called "specialty advertisers" whose business it is

Audio/video production companies are businesses that produce radio

• What is "promotional in nature?"

When reviewing sales or purchases of advertising items such as

Bear in mind, though, that a promotional piece targeted to nuclear

Sometimes it just comes down to the auditor's best judgment.

• What is "the public generally"?

However, a narrower audience may be considered "the general public" if

Finally, a campaign targeted to a list of current customers (members,

• Look at job folders; key in job numbers.

Advertising agencies usually give each job a special designation, often a

• Remember, gray is a prominent color when dealing with advertising

Taxable purchases for use in advertising

Because advertising businesses are considered to be providing

• Administrative items: paper, ink, pencils, layout boards, blank

• Promotional items: pens, pencils, ash trays, calendars, balloons,

• Printing: before 7/1/95, all printing for use in an advertising

• Stock Photographs: when an advertiser purchases the right to use

• Audio/visual production: duplicates (dubs) of previously created

• Mailing lists: advertising businesses often purchase mailing lists,

Exempt purchases for use in advertising

Purchases by an advertising business of concepts, writing, graphic

For example, an advertising agency goes to an audio/visual production

Lettershop services: services provided by a mailing service business

Purchases for resale

Tangible personal property purchased for sale to clients in connection

When auditing an advertising business and sampling is used, purchases

A nonadvertising business such as a manufacturer or a large retailer may