Tax Type
Retail Sales and Use Tax
Description
Out-of-State Computer Sales
Topic
Taxability of Persons and Transactions
Date Issued
10-30-1987
[Opinion - Virginia Attorney General: 1987 at 550]
REQUEST BY: Honorable Kenneth B. Rollins Member, House of Delegates P.O. Box 803 Leesburg, Virginia 22075
OPINION BY: Mary Sue Terry, Attorney General
OPINION:
You ask certain questions concerning the application of the Virginia Retail Sales and Use Tax Act, § 58.1-600 et seq. of the Code of Virginia (the "Act"), to certain purchases of computer hardware and software (the "property") sold to customers located outside of Virginia ("Nonresident Customers" or "Customer").
I. Facts
As a preface to your questions, you state the following facts:
1. A Virginia corporation (the "Company") engages in the business of selling computer systems, including software and hardware.
2. Upon receipt of a sales order from the Nonresident Customer, the Company orders that Customer's property from its manufacturers. The Company gives the manufacturers a resale exemption certificate and pays no sales tax on these purchases.
3. The Nonresident Customer's employees come to Virginia for a "hands-on" training session using, at least in part, the actual property ordered for it. The training sessions are closely supervised by the Company and typically last one week. The employees of the Nonresident Customer must follow the instructional regimen offered by the Company and are not free to use the property for purposes other than training.
4. The purchase contract calls for ultimate delivery of the property to the Nonresident Customer at a designated location outside the Commonwealth. After training is completed, the Company repackages the property and ships it by common carrier to the Customer at this designated location.
5. After shipping, the Company sends an invoice to the Nonresident Customer which reflects a separate line entry for the hardware and software and no separate charge for the training.
II. Questions Raised
Given these facts, you ask:
1) whether the Nonresident Customer training given on the property in Virginia constitutes a transfer of title or possession to the Customer so as to require that Virginia sales taxes be paid;
2) whether the Nonresident Customer training on the property in Virginia requires payment of Virginia use taxes by the Nonresident Customer; and
3) whether the Company's use of the property for training of its Nonresident Customer's employees requires payment of Virginia use taxes by the Company.
III. Applicable Statutes
Sales and use taxes are complementary components of one levy. That levy is an excise tax on retail sales of tangible personal property and certain services, subject to certain exemptions.
Section 58.1-603 imposes the sales tax upon persons who (1) engage in the business of selling at retail or distributing tangible personal property in Virginia, (2) rent or furnish any of the things or services taxable under the Act, (3) store any items of tangible personal property as that term is defined in the Act, or (4) lease or rent such property in Virginia. The tax is levied as a percentage of the consideration for the taxable goods or services. A sale is a prerequisite to imposition of the tax because the tax is based on a percentage of the consideration given (sales price or cost price). See § 58.1-603; United States v. Forst, 442 F.Supp. 920, 924 (W.D. Va. 1977), aff'd 569 F.2d 811 (4th Cir. 1978).
Under the Act, a "sale" is defined as "any transfer of title or possession . . . in any manner or by any means whatsoever, of tangible personal property . . . for a consideration . . . ." § 58.1-602(16). A transfer of title or possession for purposes of a sale in interstate commerce is defined by regulation. Virginia Sales and Use Tax Regulation § 630-10-51(A)(3) (1985) (" Regulation") states that the tax does not apply to "[t]he sale of tangible personal property delivered by the seller to a common carrier . . . for delivery to the purchaser outside of the state."
The use tax applies (1) to tangible personal property purchased outside Virginia for use or consumption in Virginia1 and (2) to purchases made in Virginia where the sales tax was not paid at the time the property was purchased. § 58.1-604; Regulation § 630-10-109. "Use," for purposes of the Act, is defined as
the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business. § 58.1-602(20).
Every transaction constituting a sale under the Act is not subject to the tax. The exemptions relevant to your inquiry are the exemptions for purchases for resale [§ 58.1-602(14)] and for tangible personal property delivered outside the Commonwealth for use or consumption outside the Commonwealth [§ 58.1-608(20)]. The latter exemption is designed to prevent the Act from interfering with interstate commerce. With respect to the resale exemption, a purchaser who converts property originally intended for resale to his own nonexempt use is recognized as the ultimate purchaser, and the sales tax applies at the time the property is first used by him in Virginia. See § 58.1-623(C); Regulation § 630-10-20(D).
IV. No Sales or Use Taxes Are Due From Nonresident Customer; Sale Takes Place Out of State
A sale in Virginia is a prerequisite to the imposition of the sales tax. Because "sale" is defined as a transfer of title or possession of tangible personal property [§ 58.1-602(16)], the answer to your first question is governed by whether title or possession of the property is transferred to the Customer in this State.
When the contract of sale requires delivery by common carrier to a destination outside the Commonwealth, title passes when the property reaches its ultimate destination. See Regulation 630-10-51(A)(3). The contract here requires delivery by common carrier to a destination outside Virginia. It is my opinion, therefore, that title is not transferred in Virginia but occurs upon delivery at the out-of-state location.
The word "possession" is not defined in the Act. The term is defined elsewhere, however, as "[t]hat condition of facts under which one can exercise his power over a corporeal thing at his pleasure to the exclusion of all other persons." Black's Law Dictionary 1047 (5th ed. 1979). Applying this definition to the facts you present, it is my opinion that the use of the property by employees of the Nonresident Customer at the Virginia training site does not constitute a transfer of possession. This conclusion rests on the particular facts of this case, including retention of the property at the premises of the Company during and after the training session, as well as the limitation on use of the property by the Customer during the sessions to a training regimen offered by the Company. Under the facts you present, there is no unrestricted use of the property by the Customer's employees.
Since no possession or title to the property has been transferred in Virginia, no sale takes place in this State. The sales tax, therefore, is not applicable to the Nonresident Customer's purchase of the property.
The use tax is imposed on the use or consumption of tangible personal property in Virginia when the property is purchased outside of Virginia. It also applies to purchases in Virginia where the sales tax was not paid. See Regulation § 630-10-109; Commonwealth v. Miller-Morton, 220 Va. 852, 856, 263 S.E.2d 413, 416 (1980). As with the sales tax, a sale (purchase) is a prerequisite to the imposition of the use tax. Since the sale to the Nonresident Customer has not been consummated either in or outside Virginia at the time of the training sessions, it is my opinion that the Nonresident Customer is not subject to Virginia's use tax.
V. Company's Use of Property to Train Nonresident Customer's Employees as Integral Part of Resale Not Taxable
The Company purchased the property for resale exempt from taxation under § 58.1-602(14). A resale exemption certificate was given for the purchases in question. Taxable use of the property after a tax-exempt purchase for resale, however, makes the property subject to the sales tax, rather than the use tax referred to in your third question. See § 58.1-623(C)2; Regulation § 630-10-20(D). The cost of the property to the purchaser is the sales price. The answer to your third question then is governed by whether the use of the property by the Company during the training session destroys the "for resale" status of the property.
"Use" for purposes of the Act does not include the sale at retail of that property in the regular course of business. § 58.1-602(20). In the facts you present, the training session is typically only one week in duration and no separate charge is made for the training. The training furnished is for the sole benefit of the employees of the Nonresident Customer. If not an essential element of the sales transaction, this training is certainly an inducement for the sale. Under these circumstances, it is my opinion that the Company's use of the property in the training sessions is an integral part of a retail sale to the customer. It is my opinion, therefore, that the property's "for resale" status is maintained and that the Company is not subject to taxation under the Act for use of the property in training sessions.3
VI. Conclusion: Neither Sales nor Use TAx Applies to Sale of Computer Software and Hardware to Nonresident Customer when Training Using Equipment Occurs in Virginia Prior to Delivery Outside Commonwealth
Based on the above, it is my opinion that the training sessions in Virginia do not constitute a transfer of title or possession of the property to the Nonresident Customer. No sale, therefore, has been completed in Virginia and the Nonresident Customer is not subject to either Virginia and the Nonresident Customer is not subject to either Virginia sales or use taxes. Moreover, the training session in Virginia is an integral part of the Company's sale of the property to the customer. It is further my opinion, therefore, that the property retains its "for resale" status during the training period at issue and no taxable use of the property by the Company occurs.
1 A credit against the use tax is granted for similar taxes paid in another state. See § 58.1-611.
3 This conclusion also is limited to the facts presented. The absence of a purchase order prior to training, the right of the customer to cancel the order subject to its satisfaction with the property during training, or a more extended training period may cause the transaction to be deemed a taxable use by the vendor under § 58.1-623(C).
2 A nonexempt use under § 58.1-623(C) is use other than an exempt use or retention, demonstration or display.
Attorney General's Opinion