05-138 | Virginia Tax

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: Request for Ruling: Retail Sales and Use Tax

Dear *****:

This is in response to your letter requesting a ruling on the application of the retail sales and use tax to certain mail order gift transactions on behalf of an unidentified retailer (the "Retailer"). I apologize for the delay in responding to your letter.

FACTS

You describe the Retailer as a mail order and Internet gift company specializing in sales of food or confection baskets and ensembles, flower baskets, and other gift items. The Retailer sends its products to recipients located throughout the United States. The Retailer also has an affiliated corporate entity that operates retail stores. Because the retail stores support the mail order and Internet business, the Retailer is registered and collects tax in all states where they have affiliated stores.

In a typical transaction, you indicate that a purchaser places an order with the Retailer with instructions to send the gift to a recipient. The Retailer ships the product by mail or common carrier to the recipient from a Retailer or drop-shipper warehouse location. You request a ruling on the Retailer's collection responsibilities with respect to the Virginia retail sales and use tax to transactions in which the purchaser, recipient and warehouse may or may not be located in Virginia.

RULING

Background

Every dealer registered to collect the Virginia retail sales and use tax must collect such tax on all sales subject to taxation in Virginia and remit that tax to the Virginia Department of Taxation. See Va. Code §§ 58.1-612 and 58.1-615. A sale within Virginia occurs when either title or possession to the tangible personal property transfers to the purchaser within Virginia for a consideration. See the definition of sale under Va. Code § 58.1-602.

An exemption from the retail sales and use tax applies to third-party gift transactions in which a nonresident, by mail or telephone purchase order, directs a Virginia business to deliver the personal property as a gift to another nonresident. See Va. Code § 58.1-602, definition of "use." Prior to July 1, 2005, this is the only "gift" transaction specifically exempted under Virginia law and is limited to gifts purchased by out-of-state residents via telephone (including the Internet) or mail order when delivered to out-of-state recipients. Gifts delivered to Virginia residents at the direction of out-ofstate purchasers and gifts purchased by Virginia residents for delivery to out-of-state recipients are taxable, except as noted below.

In addition, the U.S. Supreme Court has long recognized that "[t]he legal incidence of the sales tax is not the property itself or its presence within the State. Rather it is the transfer of property for consideration, a legal act which can be accomplished without the property ever entering the State." Sullivan v. United States, 395 U.S. 169 (1969). Thus, the location of the warehouse is not determinative of the taxability of the transaction. Rather, the key determinant is whether title or possession (actual or constructive) to the property passes to the purchaser within Virginia.

Gift transactions - via retail store in Virginia or mail order and Internet retail center in
Virginia

A gift transaction is subject to the Virginia sales tax if the sale is completed in a Virginia store location, Virginia mail or telephone order location, or Virginia Internet retail center. Upon acceptance of the sales order and receipt of payment from the purchaser, title is deemed to transfer at the store location and the purchaser in effect takes constructive possession of the property in Virginia. Therefore, a sale has occurred and, as a registered dealer, the Retailer 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). The only exception to the foregoing would be for gifts purchased by a nonresident purchaser via mail or telephone order from outside Virginia for delivery to a nonresident recipient outside Virginia.

Gift transactions - via mail order or Internet location outside Virginia

When orders are placed via the Internet from a customer's home or place of work, the transaction would not be considered a Virginia sale if the sales order is accepted and the payment is processed by the Retailer 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. The Retailer 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, the Retailer's mail order and Internet business, as a registered dealer, would be required to apply the Virginia 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 § 58.1-604.6. 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 would collect Virginia sales tax.

The Code of Virginia sections and public document 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 *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/45006R

Rulings of the Tax Commissioner