Tax Type
Retail Sales and Use Tax
Description
Gift transactions to out-of-state recipients
Topic
Basis of Tax
Taxable Transactions
Date Issued
08-22-2005
August 22, 2005
Re: Ruling Request: Retail Sales and Use Tax
Dear *********************:
This responds to your letter of December 21, 2004, requesting a ruling on the application of the retail sales and use tax primarily to gift transactions involving Virginia purchasers and members of the *****.
FACTS
***** members are multistate or national retailers that typically set up gift registry centers in each store. All orders placed in the stores (including online, telephone or mail orders) are fulfilled from one or more central locations that fulfill orders from all of the stores wherever they may be located. You outline a number of gift scenarios that you believe are not taxable and seek confirmation of your conclusion. To that end, you propose that the Department adopt a "destination-based" policy in applying the sales tax to gift transactions.
RULING
Virginia Code § 58.1-602 defines a "sale" to mean "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property." The same statute defines "use" to mean, "the exercise of any right or power over tangible personal property incident to the ownership thereof, except it does not include the sale at retail of that property in the regular course of business." The 1995 law change amended this definition to provide an exclusion for tangible personal property sold to nonresident donors who purchase gifts via mail or telephone from outside Virginia for delivery to nonresident recipients outside Virginia. This nonresident exclusion from the tax is not applicable when a nonresident purchaser visits a Virginia store to buy the gift and has the store deliver the gift to an out-of-state recipient.
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. 176 (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, for application of the Virginia sales tax, the key factor is where the transfer of title occurs or where the transfer of possession (actual or constructive) occurs. If title or possession to the property transfers in Virginia, Virginia taxes the sale.
Although you propose that the Department use a destination-based policy for application of the sales tax to gift transactions, the Department cannot ignore the longestablished policy applicable to gift sales that is based on the laws in effect.
Further, any dealer with sufficient activity within Virginia, as defined by Va. Code § 58.1-612 C, must register to collect the Virginia retail sales and use tax. Clearly, nexus creates the jurisdiction by which a dealer is required to register to collect the tax. This same jurisdictional authority applies to any dealer lacking sufficient nexus but that voluntarily registers to collect the Virginia use tax. Thus, any registered dealer must collect and remit to the Department the sales or use tax on all sales in which title or possession to the property transfers in Virginia.
Scenarios Under Consideration
You represent that in each scenario presented, the ultimate recipient is located outside of Virginia, and in all but two scenarios the tangible personal property sold is also located outside Virginia. Additionally, the facts provided suggest that the retailer in each scenario is a dealer registered to collect the Virginia sales or use tax.
Scenario 1: Central Gift Registry - Virginia Customer, But Out-of-State Fulfillment
Facts: Company A owns various national and regional department store chains and operates wedding gift registries in each store in each chain. Customers order gifts from the registry, but all orders from all stores and all chains are fulfilled from a central location outside of Virginia. The recipient is also located outside of Virginia.
Response: The gift transaction would be subject to the Virginia sales tax if the sale is completed in a Virginia store location. Upon acceptance of the sales order and receipt of payment from the purchaser, title is deemed to have transferred at the store location and the purchaser would in effect take constructive possession of the property in Virginia. Therefore, a sale has occurred and as a registered dealer, Company A would be required to collect the tax on such gift transactions. This is consistent with the third-party transaction policy set out in Public Document (P.D.) 04-213 (12/8/04).
Scenario 2: Internet Orders - Virginia Customer, But Out-of-State Fulfillment
Facts: Company B is a multistate retailer with store locations in Virginia and around the country. Company B also offers customers the opportunity to purchase goods by means of its Internet web site. Company B employs a separate subsidiary (CompanyB.com) for the acceptance and fulfillment of Internet sales, but this subsidiary is registered for collection of sales and use tax in all jurisdictions in which Company B has nexus. A customer who is a Virginia resident may place an Internet order from their home, their place of work, from a kiosk in one of Company B's stores inside or outside of Virginia, or while traveling anywhere in the world. Internet orders are accepted exclusively at a location outside of Virginia and CompanyB.com's distribution centers for the fulfillment of Internet orders are also located outside of Virginia. Moreover, the recipient is located outside of Virginia.
Response: In regard to orders that are placed via the Internet from home, work or from a kiosk in one of Company B's stores, the transaction would not be considered a Virginia sale if the sales order is accepted and the payment is processed by CompanyB.com at a location outside Virginia. Title would transfer to the purchaser in another state in this instance and there would be no constructive possession in Virginia. CompanyB.com would not be required to collect Virginia tax on this gift transaction. On the other hand, if the sales order is accepted and payment processed in Virginia, CompanyB.com, as a registered dealer, would be required to apply the Virginia tax to the gift transaction. Regarding sales that may be made at a kiosk in one of Company B's stores in Virginia in which the sale is completed (accepted and payment processed) in the store, title is deemed to transfer at the store and the purchaser takes constructive possession of the property in Virginia. As a registered dealer, Company B must collect Virginia tax on the gift transactions in this instance.
Scenario 3: Telephone Orders - Virginia Customer, But Out-of-State Fulfillment
Facts: Company C is a multistate retailer with store locations in Virginia and around the country. Company C offers customers the ability to place orders by telephone. A customer who is a Virginia resident may place an order from their home, their place of work, from a special telephone hotline located in Company C's stores inside or outside of Virginia, or while traveling anywhere in the world. Company C's call center is located outside of Virginia, as is its distribution center for all telephone orders. The recipient is also located outside of Virginia.
Response: If the telephone orders are received at the call center outside of Virginia, and the orders are accepted and payment is processed at the call center, then a sale has not occurred in Virginia for purposes of applying the Virginia sales and use tax. However, any orders placed in a Virginia store using the special telephone hotline whereby the sales are completed at the store would be taxable. See P.D. 04-213.
Scenario 4: Catalog Orders - Virginia Customer, But Out-of-State Fulfillment
Facts: Company D is a multistate retailer with store locations in Virginia and around the country. Company D also publishes a catalog from which customers may place orders. Company D accepts all catalog orders at a location outside of Virginia and its catalog distribution centers are also located outside of Virginia. The recipient is also located outside of Virginia.
Response: The same response given in Scenario #3 above applies to the catalog sales at issue in this scenario.
Scenario 5: Drop Shipments - Supplier Location Unknown
Facts: Company E is a multistate retailer with store locations in Virginia and around the country. In addition to its physical sales locations, Company E operates an Internet sales site, CompanyE.com, which is registered for collection of sales and use tax in all jurisdictions in which Company E has nexus. Neither Company E nor CompanyE.com, has any physical warehouses or shipping facilities in Virginia. For almost all the merchandise it sells on the Internet, CompanyE.com, does not have possession of the merchandise it sells. In fact, CompanyE.com, does not place an order with its suppliers until it has received an actual sales order from a customer. Customer places his or her order with CompanyE.com, and CompanyE.com, places the order with the manufacturer or distributor, which in turn drop ships the merchandise directly to the recipient designated by the purchaser. The manufacturer or distributor may fill orders from any number of locations. CompanyE.com, generally has no knowledge of the location from which merchandise will actually be shipped. The recipient is located outside of Virginia.
Response: The same response given in Scenario #2 above applies to the Internet sales at issue in this scenario.
Scenario 6: Out-of-State Release of Item Ordered In A Virginia Store
Facts: This scenario does not involve the purchase of a gift. Instead, an individual goes into a Virginia retail store, orders an item, but asks the retailer to "release" the item at one of its stores located outside Virginia. For example, a Virginia resident with a vacation home in Myrtle Beach, South Carolina could elect to take delivery of a refrigerator at a store location near their vacation home to save the trouble of transporting the property over a longer distance. The merchandise would typically not be transferred from one store to another -- instead, it would be fulfilled out of the inventory of the store where the physical delivery takes place (outside Virginia) and that jurisdiction's sales tax would be collected.
Response: It is my understanding that a retailer involved in a transaction of this nature would likely require the customer to pay for the item at the out-of-state store, not at the Virginia store. This seems to be the case because the South Carolina sales tax is collected. Based on the definition of "sale" set out in Va. Code § 58.1-602, a sale of tangible personal property is not completed until a consideration is paid. Although the order is placed in Virginia, the order does not constitute a "sale" in Virginia. Thus, no sales transaction is deemed to occur in Virginia.
Scenario 7: In-Store Gift Transaction Predicated Upon Shipment Outside Virginia
Facts: A customer goes to a Virginia retailer to purchase a gift that is in the store's inventory. Customer offers to purchase the gift only on the condition that the retailer ships the merchandise to a family member in another state. Customer asks that the retailer bear the risk of loss until the family member receives the gift. Title transfers from the retailer upon receipt by the family member. Retailer agrees to ship the gift as requested as a condition to the sale, and the invoice or other records clearly indicate a ship-to address outside Virginia. Customer pays for the purchase, including any shipping charge, and leaves the store never physically taking possession of the purchase. The retailer fulfills the shipping obligation and ships the gift to the family member outside of Virginia.
Response: For purposes of the Virginia retail sales and use tax, shipping terms do not affect the application of the tax to a sales transaction, unless those terms satisfy one of the four interstate commerce exceptions set out in Title 23 of the Virginia Administrative Code 10-210-780. The sale in this scenario, however, is not one in interstate commerce. Title to the property purchased is deemed to transfer when payment (consideration) for the property occurs in Virginia. Thus, a "sale" occurs and the gift transaction is taxable.
Scenario 8: In-Store Gift Transaction, But Fulfillment Location Uncertain
Facts: A customer goes to a Virginia retailer to purchase a gift. Customer offers to purchase the gift only on the condition that the retailer ships the merchandise to a family member in another state. Retailer agrees to ship the gift as requested as a condition to the sale and prepares an invoice. The desired item is not available at the physical location where the customer and retailer entered into negotiations. The retailer does have a Virginia distribution center from which the order could be shipped. Alternatively, the retailer has distribution centers in other states that may fulfill the order based on product availability and the location of the receiving family member. Customer pays for the purchase, including any shipping charge, and leaves the store never physically seeing or handling the item that will be shipped. At the time and place of sale, neither the customer nor the retailer knows from where the gift will be shipped.
Response: In this instance, the sales transaction is completed at the Virginia store and title transfers to the customer. A "sale" occurs in Virginia and the retailer, as a registered dealer, must apply the tax to the gift transaction.
Gift transactions - New law effective July 1, 2005
Chapter 355 of the 2005 Acts of Assembly amends the definition of the term "use" to exclude any sale determined to be a gift transaction, subject to tax under Va. Code § 58.1604.6. That Code section defines a gift transaction as "a retail sale resulting from an order for tangible personal property placed by any means by any person that is for delivery to a recipient, other than the purchaser, located in another state." Business transactions between a purchaser and a recipient or transactions whereby the purchaser is contractually obligated to provide the tangible personal property to the recipient are excluded from the definition of "gift transaction."
For a transaction that meets the definition of "gift transaction" under Va. Code § 58.1-604.6, a Virginia registered dealer will have the option of collecting the sales or use tax imposed in the state of the recipient (if registered in the recipient's state) or collecting the Virginia sales tax. For these gift transactions, a dealer must obtain approval from the Tax Commissioner before collecting the tax of the state in which the recipient is located. If the Virginia registered dealer is not registered to collect the sales tax in the state of the recipient, the dealer must collect Virginia sales tax.
CONCLUSION
This ruling applies to the gift and other transactions identified in the above scenarios and to no other types of transactions. Furthermore, this ruling is based on the specific facts set forth in your correspondence. Any change in facts or the introduction of new facts may lead to a different result.
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.policylibrary.tax.virginia.gov. If you have any questions about this ruling, 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/53863R
Rulings of the Tax Commissioner