04-14 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Occasional Sale Exemption, Liability for Assessment

Topic

Accounting Periods and Methods

Exemptions

Property Subject to Tax

Date Issued

05-03-2004

May 3, 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 sales and use tax assessment issued to *************** (the "Taxpayer"), for the period January 1999 through September 2001. I apologize for the Department's delay in responding to your letter.

FACTS

The Taxpayer owned and operated a multi-specialty medical clinic (the "clinic"). In 1996, the Taxpayer decided to enter into an arrangement with an out-of-state management company (the "Parent") for the provision of management and administrative services regarding the operation of the clinic. To facilitate this, both the Taxpayer and the Parent restructured their operations. The Taxpayer established a successor entity (Taxpayer B) to assume ownership and operation of the clinic. The Parent established a wholly-owned subsidiary (the "Subsidiary") to perform the management services. As part of this arrangement, the Taxpayer sold the assets used in operating the clinic to the Parent. The Parent then transferred the assets to the Subsidiary for its use in providing the management services to Taxpayer B. Taxpayer B and the Subsidiary then entered into a management services agreement.

In 2000, Taxpayer B and the Subsidiary decided to terminate the management services agreement. The Subsidiary sold the assets used in managing the clinic operations, and the accounts receivable to Taxpayer B. After the sale, Taxpayer B maintained ownership and management of the clinic.

As a result of the Department's audit, the auditor assessed the Taxpayer for the untaxed sale of the assets from the Subsidiary to Taxpayer B in 2000. The Taxpayer contends that the assessment is erroneous and any tax liability from the sale by the Subsidiary in 2000 should be assessed to Taxpayer B. The Taxpayer further contends that the sale of the assets from the Subsidiary to Taxpayer B qualifies as an occasional sale because (1) it represents the sale of substantially all the assets of the Subsidiary, or (2) it is the only sale that the Subsidiary made in the calendar year 2000.

DETERMINATION

Liability for Assessment

The Taxpayer is correct in its assertion that any tax liability resulting from the sale of assets by the Subsidiary in 2000 should be assessed to Taxpayer B and not to the Taxpayer. According to the Asset Purchase Agreement dated March 31, 2000, the assets were sold from the Subsidiary to Taxpayer B. In addition, the Asset Acquisition Statement included with the Subsidiary's 2000 federal income tax return specifies that Taxpayer B is the party to which the assets were sold. Based on these documents, Taxpayer B is the purchaser of the assets and would be liable for any tax due.

Occasional Sale Exemption

Virginia Code § 58.1-609.10(2) provides an exemption from the sales and use tax for an occasional sale, which is defined in Va. Code § 58.1-602 to mean:

- 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. [Emphasis added.]

The Asset Purchase Agreement provides that the Subsidiary sold to Taxpayer B certain tangible and intangible assets used in managing the clinic operations. These assets include medical and office equipment, furnishings and fixtures, and phone and computer equipment. In addition, the Subsidiary sold to Taxpayer B the accounts receivable. The Subsidiary retained property pertaining to its trade name and the trade name of the Parent and cash. According to Schedule L included with the Subsidiary's 2000 federal income tax return, Subsidiary B sold more than 80% of its total assets to Taxpayer B. Based on the documents presented, the sale of the assets constitutes substantially all of the assets of the Subsidiary and the transaction qualifies as an exempt occasional sale.

Conclusion

Based on the foregoing, the assessment issued to Taxpayer A will be abated. No tax will be assessed to Taxpayer B because the occasional sale exemption applies to the transaction at issue.

- The Code of Virginia sections and the regulation 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 any questions regarding this determination, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/40596J

Rulings of the Tax Commissioner