Tax Type
Retail Sales and Use Tax
Description
Telephones for free distribution; Withdrawals from inventory
Topic
Property Subject to Tax
Date Issued
05-19-2000
May 19, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ***
This is in reply to your letter, in which you seek correction of sales and use tax assessed to (the "Taxpayer"), for the period April 1995 through March 1998. I apologize for the delay in responding to your appeal.
The Taxpayer is a retailer of business and cellular telephones and provides voice mail, long distance services, and digital satellite television services. In addition, the Taxpayer provides telephones free of charge to customers who contract for cellular services. These contracts may be for a one or two year period.
As a result of the department's audit, the Taxpayer was assessed tax on its purchases of telephones provided free of charge in connection with contracts for cellular services. The auditor cites Title 23 of the Virginia Administrative Code (VAC) 10-210-490 and Public Document (P.D.) 96-361 (12/9/96) to support the department's position.
The Taxpayer protests the assessment of the tax and contends that its purchases of the telephones qualify for the resale exemption. The Taxpayer cites 23 VAC 10-210-400 and 23 VAC 10-210-930 to support its position. The Taxpayer also cites House of Lloyd v. Director of Revenue, 884 S.W.2d 271 (Missouri, 1994) and New York Propane Corporation, New York Tax Appeals Tribunal (New York, 1990), to further support its position.
Under Virginia sales tax law, the resale exemption applies to the purchase of tangible personal property or taxable services that will be sold at retail. At the time of the retail sale, the tax will apply to the sales price of the tangible personal property or taxable services. The resale exemption is applicable as long as the tangible personal property is held for resale. Code of Virginia § 58.1-602.
The regulation under 23 VAC 10-210-490 (formerly VR 630-10-32) addresses the application of the sales tax to dealers' withdrawals from inventory and provides that the tax applies to the cost price of property purchased originally for resale and later withdrawn from inventory "for a promotional give-away or other free distribution."
The Taxpayer in this case provides the telephones free of charge in connection with nontaxable cellular services. The telephones are not sold at retail, but instead are withdrawn from inventory for some purpose other than a sale. Therefore, the resale exemption does not apply to the Taxpayer's telephones that are provided in connection with nontaxable services.
In P.D. 96-361, the department addressed the application of the tax to the sale of discounted cellular telephones sold contemporaneously with the execution of a new contract for cellular telephone service. The Tax Commissioner determined that the proper measure of the sales tax was the sales price charged to the customer, which was the discounted charge for the telephones. The ruling also cites 23 VAC 10-210-490 and addresses withdrawals from inventory for free distribution as discussed above. The ruling clearly states:
Accordingly, the assessment is correct as issued. Please remit payment for the assessed tax, penalty, and interest in the amount of $** within 30 days from the date of this letter. If payment is not received within the allotted time, additional interest will accrue to present. The Taxpayer may send payment to *** in the Office of Tax Policy at P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this letter, you may contact *** at ***.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/21270J
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ***
This is in reply to your letter, in which you seek correction of sales and use tax assessed to (the "Taxpayer"), for the period April 1995 through March 1998. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a retailer of business and cellular telephones and provides voice mail, long distance services, and digital satellite television services. In addition, the Taxpayer provides telephones free of charge to customers who contract for cellular services. These contracts may be for a one or two year period.
As a result of the department's audit, the Taxpayer was assessed tax on its purchases of telephones provided free of charge in connection with contracts for cellular services. The auditor cites Title 23 of the Virginia Administrative Code (VAC) 10-210-490 and Public Document (P.D.) 96-361 (12/9/96) to support the department's position.
The Taxpayer protests the assessment of the tax and contends that its purchases of the telephones qualify for the resale exemption. The Taxpayer cites 23 VAC 10-210-400 and 23 VAC 10-210-930 to support its position. The Taxpayer also cites House of Lloyd v. Director of Revenue, 884 S.W.2d 271 (Missouri, 1994) and New York Propane Corporation, New York Tax Appeals Tribunal (New York, 1990), to further support its position.
DETERMINATION
Under Virginia sales tax law, the resale exemption applies to the purchase of tangible personal property or taxable services that will be sold at retail. At the time of the retail sale, the tax will apply to the sales price of the tangible personal property or taxable services. The resale exemption is applicable as long as the tangible personal property is held for resale. Code of Virginia § 58.1-602.
The regulation under 23 VAC 10-210-490 (formerly VR 630-10-32) addresses the application of the sales tax to dealers' withdrawals from inventory and provides that the tax applies to the cost price of property purchased originally for resale and later withdrawn from inventory "for a promotional give-away or other free distribution."
The Taxpayer in this case provides the telephones free of charge in connection with nontaxable cellular services. The telephones are not sold at retail, but instead are withdrawn from inventory for some purpose other than a sale. Therefore, the resale exemption does not apply to the Taxpayer's telephones that are provided in connection with nontaxable services.
In P.D. 96-361, the department addressed the application of the tax to the sale of discounted cellular telephones sold contemporaneously with the execution of a new contract for cellular telephone service. The Tax Commissioner determined that the proper measure of the sales tax was the sales price charged to the customer, which was the discounted charge for the telephones. The ruling also cites 23 VAC 10-210-490 and addresses withdrawals from inventory for free distribution as discussed above. The ruling clearly states:
-
- For example, if a retailer or carrier gives a cellular telephone to a customer when he agrees to enter into a service contract with the carrier, the retailer is required to remit use tax on the cost price of the telephone withdrawn from the resale inventory.
- For example, if a retailer or carrier gives a cellular telephone to a customer when he agrees to enter into a service contract with the carrier, the retailer is required to remit use tax on the cost price of the telephone withdrawn from the resale inventory.
Accordingly, the assessment is correct as issued. Please remit payment for the assessed tax, penalty, and interest in the amount of $** within 30 days from the date of this letter. If payment is not received within the allotted time, additional interest will accrue to present. The Taxpayer may send payment to *** in the Office of Tax Policy at P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this letter, you may contact *** at ***.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/21270J
Rulings of the Tax Commissioner