Tax Type
Retail Sales and Use Tax
Description
Deferred storage agreement, saleable product in a resale inventory
Topic
Appropriateness of Audit Methodology
Taxable Income
Taxpayers' Remedies
Date Issued
08-23-2004
August 23, 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 Department's retail sales and use tax audit assessment issued to ***** (the "Taxpayer") for the period March 1999 through January 2002. I apologize for the delay in the Department's response.
FACTS
The Taxpayer manufactures printed business communications products for sale to distributors and to end-users. The Department's audit disclosed that for the month sampled, the Taxpayer entered into storage agreements where forms would be temporarily stored in its Virginia warehouse for subsequent delivery to its customers located outside Virginia. There are two storage agreements utilized: "storage" and "deferred storage."
Under the storage agreement, the Taxpayer invoices the customer for the printed materials when they are placed in storage at the Taxpayer's Virginia warehouse. The Taxpayer either correctly charged the tax on these transactions or received properly completed exemption certificates from customers. Under the deferred storage agreement, the Taxpayer places into storage a ninety-day supply of printed forms. The Taxpayer initiates an invoice only when the customer requests a shipment of forms. The deferred storage agreement stipulates that title to the printed forms remains with the Taxpayer until the customer is invoiced. This agreement also provides that in the event of default by the customer that the Taxpayer has reserved the right to sell any remaining forms in an effort to mitigate its damages or to dispose of the forms at a price or manner of its choosing. The single customer utilizing the deferred storage method during the audit sample period is the end-user.P. D. 04-62
The Taxpayer states that, with regard to the deferred storage agreement, the printed materials were being held in a resale inventory for sale in the ordinary course of its business. Accordingly, the Taxpayer contends that the contested items were sold at the time the property was shipped to the customer and that there is no taxable use of the property within the Commonwealth.
DETERMINATION
Virginia Code § 58.1-623 provides that:
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- If a taxpayer ... makes any use of [resale] property other than an exempt use or retention, demonstration, or display while holding property for resale ... such use shall be deemed a taxable sale by the taxpayer as of the time the property ... is first used by him, and the cost of the property to him shall be deemed the sales price of such retail sale. [Emphasis added.]
Further, Va. Code § 58.1-602 defines "use" to mean "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business."
The foregoing is consistent with the Virginia Supreme Court's decision in Commonwealth of Virginia, Department of Taxation v. Miller-Morton Company, 220 Va. 852 (1980). The Court ruled that the exemption for delivery of property outside Virginia for use outside Virginia applies to the act of delivery, not the holding of goods in Virginia for delivery outside of Virginia. The decision further provided that if a taxable event occurs in Virginia, the subsequent out-of-state delivery does not exempt it from the tax.
In this instance, the Taxpayer's placement of the forms in storage under the deferred storage agreement is the placement of a saleable product in a resale inventory. The Taxpayer restocks the inventory when the forms supply is depleted to minimal levels and makes no use of the forms other than to hold the forms in inventory in the ordinary course of its business. Further, the sale of the product, under the deferred storage agreement, does not take place until the Taxpayer's invoice for the product is issued to the customer, which is located out of state. The Taxpayer retains title to the printed forms until the customer is invoiced. The transfer of title and possession of the product occurs outside the Commonwealth; thus, no taxable event occurs in Virginia. The transaction qualifies as an exempt sale in interstate commerce, pursuant to Va. Code § 58.1-609.10(4).
Accordingly, I find cause to abate the balance of the Department's assessment. If you have any questions regarding this response, please contact ***** of the Department's Office of Policy and Administration, Appeals and Rulings, at *****@tax.state.va.us or at *****.
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- Sincerely,
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Kenneth W. Thorson
Tax Commissioner
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AR/41830Q
Rulings of the Tax Commissioner