Tax Type
Retail Sales and Use Tax
Description
Reorganization of call center operations, transferred certain assets to Parent Co
Topic
Assessment
Corporate Distributions and Adjustments
Date Issued
09-16-2004
September 16, 2004
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *********
This is in reply to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer"), for the period January 2001 through October 2001. I apologize for the delay in the Department's response.
FACTS
The Taxpayer is one of a group of separately incorporated subsidiaries owned by a parent company that is a national catalog retailer. As part of a reorganization of call center operations, four call centers operated by the separate subsidiaries, including one operated by the Taxpayer, were combined to form one centralized call center operation owned and managed by the Taxpayer. To complete the reorganization, each subsidiary transferred certain assets related to its call center operation to the Taxpayer.
As a result of the Department's audit, the auditor concluded that the transfer of assets to the Taxpayer from a Virginia subsidiary constitutes the sale of tangible personal property and assessed tax on the transaction. The Taxpayer contends that the tax does not apply for one of the following reasons. First, there is no consideration paid for the assets and the transaction does not meet the definition of "sale" as set out in Va. Code § 58.1-602. Second, the transfer of assets qualifies for the occasional sale exemption in Va. Code § 58.1-609.10(2) as a reorganization. Third, the transaction qualifies for the occasional sale exemption as the sale of a separate and distinct division.
DETERMINATION
Definition of Sale
You contend that the transfer of assets does not meet the definition of sale because the Taxpayer did not pay any consideration for the assets transferred. Further, you assert that the transaction was accounted for by an adjustment of intercompany balances and there were no direct payments of cash, lines of credit issued or stock exchanged between the Virginia subsidiary and the Taxpayer.
Virginia Code § 58.1-602 defines "retail sale" to mean "a sale to any person for any purpose other than for resale ...and shall include any such transaction as the Tax Commissioner upon investigation finds to be in lieu of a sale." In addition, the same Code section defines "sale" to mean "any transfer of title or conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property . . . for a consideration."
The Taxpayer's position is unsupported. The auditor assessed the tax on the assets based on the transfer amounts listed in the Taxpayer's general ledger. This is further supported by the additional documents provided by the Taxpayer that list amounts at which the assets transferred to the Taxpayer from the Virginia subsidiary. Based on this information, the assets transferred to the Taxpayer for a consideration and a sale occurred as defined above.
The Tax Commissioner has previously determined in a ruling dated July 31, 1986 that, based on the above definitions, the imposition of the tax is contemplated in virtually any transaction where tangible personal property changes hands for a consideration, including "paper" transfers between affiliated businesses. The intercompany transfers in this instance represent a sale of tangible personal property between the Taxpayer and the Virginia subsidiary and the tax is properly assessed in the audit.
Occasional Sale Exemption
Virginia Code § 58.1-609.10(2) provides an exemption for an occasional sale, which is defined in § 58.1-602 as "a sale of tangible personal property not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration, including the sale or exchange of all or substantially all the assets of any business and the reorganization or liquidation of any business, provided such sale or exchange is not one of a series of sales and exchanges sufficient in number, scope and character to constitute an activity requiring the holding of a certificate or registration."
Reorganization: The Tax Commissioner has previously determined that the transfer of assets in exchange for stock, which qualifies for nonrecognition of income under § 351 of the Internal Revenue Code (I.R.C.), qualifies as a "reorganization" for purposes of the occasional sale exemption.
In two separate places in the Taxpayer's letter, it is stated that there was no stock exchanged in the transaction between the Taxpayer and the Virginia subsidiary. In addition, the Taxpayer submitted copies of a statement of property transferred under I.R.C. § 351. One statement indicates that there is a transfer of property between the subsidiary and the Taxpayer and there is no stock transferred. The other statement indicates that the property is transferred to the parent from the Virginia subsidiary as a dividend and then transferred from the parent to the Taxpayer and no stock is transferred. In light of the Taxpayer's own admissions and the conflicting and inconclusive information provided, I am unable to determine if a tax-exempt asset for stock exchange occurred between the Taxpayer and the Virginia subsidiary. As such, I cannot apply the occasional sale exemption in this instance.
Further, the ruling in Public Document (P.D.) 95-79 (4/12/95) cited by the Taxpayer does not apply in this instance. In that case, the taxpayer transferred thirty-five percent of its total assets to two newly formed subsidiaries in exchange for stock in those subsidiaries. The Tax Commissioner determined that the I.R.C. § 351 tax-exempt reorganization of assets for stock in the new subsidiaries was a qualifying reorganization for purposes of the occasional sale exemption.
In addition, the Tax Commissioner has made similar determinations in P.D. 97-332 (8/27/97) and P.D. 97-453 (11/14/97). In each instance, the taxpayers transferred assets for stock that qualified as exempt reorganizations under the federal statute and, therefore, qualified as reorganizations for purposes of the occasional sale exemption.
Sale of a Division: The Tax Commissioner has previously determined that the sale of all or substantially all of the assets of a division may qualify as an exempt occasional sale. In order to do so, the division must be engaged in totally separate and distinct activities based on such considerations as separate books that are separately maintained, separate bank accounts, separation of fixed assets, and the separation of employees.
The Taxpayer contends that it purchased the entire call center division from the Virginia subsidiary, including its assets, personnel, and intangibles. However, the Taxpayer presents no documentation or other evidence to support this. Furthermore, the federal income tax return of the Virginia subsidiary does not support the Taxpayer's contention. In fact, Schedule L attached to the return indicates very little change in the total assets of the Virginia subsidiary during the taxable year in which the assets were transferred to the Taxpayer.
The Taxpayer's circumstances are quite different from those in P.D. 99-24 (3/11/99) cited by the Taxpayer. In that case, the taxpayer purchased a division from a seller that was a multifaceted business. The transaction included the sale of all of the division's furniture and fixtures, machinery, vehicles, equipment, including research and development equipment. In addition, the transaction included the sale of all of the division's intangible assets and intellectual property, including trade marks, goodwill, and patents. Applying the above criteria, the Tax Commissioner determined that the transaction constituted the sale of substantially all the assets of a division and qualified as an occasional sale.
The Taxpayer has failed to prove that the transfer of the assets from the Virginia subsidiary represents the sale of all or substantially all of the assets of a division. As such, the occasional sale exemption does not apply in this instance.
Conclusion
Based on the foregoing analysis, the Taxpayer has not proven that the assessment at issue is erroneous. Accordingly, the assessment of the tax is upheld. The Department's records indicate that the Taxpayer has filed a bankruptcy petition that includes the assessment at issue. I am notifying the Department's Legal Unit of the decision in this case.
The Code of Virginia sections 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. If you have questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/41202J
Rulings of the Tax Commissioner