Tax Type
Retail Sales and Use Tax
Description
Manufacturer/distributor third-party transactions; interstate commerce
Topic
Appropriateness of Audit Methodology
Exemptions
Date Issued
12-08-2004
December 8, 2004
RE: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the "Taxpayer") in which you seek correction of the retail sales and use tax assessment issued by the Department for the period of April 2001 through March 2004.
FACTS
The Taxpayer is a manufacturer and distributor of consumer food products. The Taxpayer produces and distributes a broad line of chocolate, confectionary, grocery, pasta products, as well as other consumer food products. As a result of the Department's audit, the Taxpayer was assessed tax on "third-party transactions." You indicate that the transactions in question involve the Taxpayer's customers located in Virginia and direct the Taxpayer to ship products from a resale inventory outside Virginia to a third party located outside Virginia.
The Taxpayer contends these transactions should be exempt from the retail sales and use tax pursuant to the interstate commerce exemption found in Va. Code § 58.1-609.10(4) because the purchaser takes constructive possession and makes use of the property outside of Virginia and the tangible personal property is shipped to a final destination located outside Virginia.
DETERMINATION
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." In regard to the Department's policy on gifts purchased in Virginia, Title 23 Virginia Administrative Code (VAC) 10-210-680 provides the following:
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- 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 Title 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 in Virginia to the purchaser 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, 269 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. 195 (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.
Based on a review of the audit report and the information provided in your letter, the tax applies to the contested transactions in accordance with the Department's stated policy as noted above. While the property sold may have been stored outside Virginia, the sale occurred and title transferred to the purchaser in Virginia.
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 removes 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.
Based on this determination, the assessment is correct. A revised bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within thirty days from the date of this letter.
The Code of Virginia and regulation sections cited, along with other reference documents, are available on-line in the Department's Tax Policy Library, located at www.policylibrary.tax.virginia.gov. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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Kenneth W. Thorson-
- Tax Commissioner
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AR/52533i
Rulings of the Tax Commissioner