Document Number
03-88
Tax Type
Retail Sales and Use Tax
Description
Unsupported bad debts and on gift sales involving out-of-state recipients.
Topic
Appropriateness of Audit Methodology
Penalties and Interest
Date Issued
11-13-2003


November 13, 2003




Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") as a result of an audit for the period January 1998 through December 2000. I apologize for the delay in responding to your letter.
FACTS

The Taxpayer is a clothing retailer with one store in Virginia. As a result of the audit, the Taxpayer was assessed tax on unsupported bad debts and on gift sales involving out-of-state recipients. The Taxpayer protests the entire assessment. In addition, the Taxpayer contends that the notice of assessment was not issued timely and requests the removal of the first 16 months of the audit period.
DETERMINATION

Notice of Assessment

The Taxpayer maintains that it received a notice of assessment on or about May 7, 2002, without an official postal mark to indicate the original date of mailing. That notice indicates that the assessment was printed on April 25, 2002, for mailing out by April 30, 2002, which is the stated date of assessment. The waiver of time limitations for assessing taxes for the audit period expired on April 30, 2002.

Virginia Code § 58.1-1820 provides that: "Assessments made by the Department of Taxation shall be deemed to be made when a written notice of assessment is delivered to the taxpayer by an employee of the Department of Taxation, or mailed to the taxpayer at his last known address."

The Department has in place procedures comprising a business routine that it follows regarding the mailing of assessments to taxpayers. Those procedures include postdating the assessment to ensure that normal processing and handling of the printed assessment will allow for the timely mailing of the assessment on or before the date of the assessment. The envelopes containing assessments are run through a standard postage and mailing machine that applies the current date. The Department maintains that these procedures were followed in the instant case. If the envelope you received did not bear such a date stamp, there may have been a machine malfunction. Nonetheless, such envelope was obviously accepted by the United States Postal Service (USPS) for delivery. The fact that the USPS did not overwrite the date on the envelope is a matter beyond the control of the Department, as is the time it may have taken for the USPS to deliver the envelope to the Taxpayer. I assure you that it is not the practice of the Department to issue assessments beyond the expiration of the statute of limitations, including any extensions agreed to by the taxpayer. Accordingly, the conditions set out in Va. Code § 58.1-1820 have been satisfied.

Bad debts

I understand that the Taxpayer used its national totals for bad checks and in-store credit card bad debts and multiplied these totals against a sales factor percentile derived from its Virginia corporate income tax return. Virginia retail sales and use tax law, however, does not allow dealers to estimate bad debt deductions. Virginia Code § 58.1-621 provides that the deduction for bad debts:
    • shall not exceed the amount of the uncollected sales price determined by treating prior payments on each debt as consisting of the same proportion of sales price, sales tax and other nontaxable charges as in the total debt originally owed to the dealer. [Emphasis added.]

Based on the language of this statute and as interpreted by published regulations and other public documents, the deduction for bad debts is computed on each bad debt and not on the aggregate of all bad debts for a particular period. This is consistent with Title 23 of the Virginia Administrative Code ("VAC") 10-210-160 and Public Documents 85-29 (2/22/85), 86-160 (7/31/86), 01-34 (4/09/01), and 03-17 (3/11/03). Accordingly, the Taxpayer's computation is inconsistent with the retail sales and use tax laws and regulations, and I cannot approve of the Taxpayer's computation, notwithstanding that bad debts were not assessed in a prior audit. In the current audit, the Taxpayer's bad debt computation is known to be flawed and, therefore, requires correction.

Pursuant to Va. Code § 58.1-205, the burden of proof is upon the Taxpayer to establish an erroneous assessment. In this case, it is necessary to compare the estimated bad debt deductions taken on sales tax returns against the actual bad debts based on a review of supporting records. I understand, however, that the Taxpayer did not furnish copies to the auditor of customer's bad checks and the detail needed for the store credit card bad debt. Without those records, it is impossible to substantiate the Taxpayer's claimed bad debt deductions. Accordingly, the Taxpayer has failed to meet its burden of proof.

Gifts

Virginia Code § 58.1-602 defines the term "sale" to mean "any transfer of title or possession, or both ... in any manner or by any means whatsoever, of tangible personal property ... for a consideration." [Emphasis added.] In regard to the Department's policy on gifts purchased in Virginia, Title 23 VAC 10-210-680 provides the following:
    • If a resident or nonresident buys a gift in Virginia and requests the seller to ship or mail such gift to another person, the purchaser is deemed to receive title to the gift at the time of purchase and the transaction is therefore taxable in Virginia. The location of the recipient of the gift has no bearing upon the taxability of the transaction; therefore, even if the recipient is located outside Virginia the sale is not a sale in interstate commerce.

Pursuant to 23 VAC 10-210-780, a sale in interstate 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 in Virginia. Thus, a sale in which title or possession transfers to the purchaser in Virginia is subject to taxation in Virginia even though the item is to be delivered out of state to a third party recipient. The Virginia Supreme Court has long held that subsequent delivery outside Virginia does not immunize a taxable event occurring in Virginia. See Commonwealth v. Miller-Morton Co., 220 Va. 852, 263 S.E.2d 413 (1980).

Moreover, the U. S. Supreme Court has long recognized that "[t]he incidence of the sales tax is not the property itself or its presence within the State. Rather it is the transfer of title for consideration, a legal act which can be accomplished without the property ever entering the State." Sullivan v. United States, 395 U.S. 169 (1969). Thus, it does not matter that the merchandise is shipped from a warehouse outside of Virginia to a customer's designee outside Virginia. Rather, in these instances, the key factor is where the transfer of title occurs. If title transfers to the purchaser in Virginia, Virginia taxes the sale. It also does not matter that the purchaser may be a nonresident of Virginia when the gift sale is made in Virginia. Accordingly, the tax applies to the contested transactions in accordance with the Department's stated policy as noted above.

The taxation of gift transactions was amended by the 1995 session of the General Assembly. This amendment to the definition of the term "use" under Va. Code § 58.1-602 removed from taxation "any tangible personal property sold to a nonresident donor for delivery outside the Commonwealth to a nonresident recipient pursuant to an order placed by the donor from outside the Commonwealth via mail or telephone." No evidence has been presented that any of the contested gift sales qualify for this exclusion from the tax.

In regard to your claim that the sales made in the manner described in 23 VAC 10-210-680 violate the Commerce Clause, the Equal Protection Clause or the Due Process Clause, you cite two cases from the U. S. Supreme Court. Those cases, however, have no application here. In Armco Inc. v. Hardesty, 467 U.S. 638 (1984), a state's tax structure erroneously allowed two companies selling tangible personal property to be treated differently depending upon whether they conducted manufacturing in the state or outside of it. Unlike the state tax structure at issue in Armco, Virginia's sales and use tax structure treats all sales in interstate commerce the same, i.e., it does not discriminate between in-state and out-of-state companies. Moreover, a claim of discriminatory treatment cannot be sustained in the instant case because the contested sales do not constitute sales in interstate commerce as explained above.

In Goldberg v. Sweet, 488 U.S. 252 (1989), the court likened an excise tax on interstate calls to a sales tax in some ways. There is an important difference, however. The excise tax at issue in Goldberg is imposed on an intangible electronic signal. This differs from a sales tax that is imposed on the retail transfer of title or possession to tangible personal property. Unlike Sullivan noted above, Goldberg does not address the legal incidence of the sales tax upon transfer of title to tangible personal property.

Notwithstanding the above, the interstate commerce exemption may apply to the contested transaction in which you claim the product was shipped to the purchaser's home in Maryland. You have not, however, identified the particular transaction or furnished any evidence to support this claim. If your claim can be verified, this transaction will be removed from the audit.

In regard to your claim that a contested transaction was voided, you have not identified the particular transaction or provided evidence as to when it was voided. Again, if the Taxpayer can document this issue, it will be removed from the audit sample.

Conclusion

In regard to the bad debt issue and the two contested gift exceptions noted above, an auditor will contact you shortly to arrange a time for the Department to examine the Taxpayer's bad debt records and the records related to the two gift transactions. If you consent to a final review of those records, then payment of the outstanding balance can be postponed until the auditor's work is completed and the audit revised accordingly, as warranted. In the event suitable records are not provided to the auditor, the current assessment will be deemed correct as issued. In any event, interest on the outstanding balance continues to accrue.

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.

Although you requested a conference, this determination is being issued without one because the application of the law is clear. 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


AR/41814R


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46