Tax Type
Retail Sales and Use Tax
Description
Wholesale division does not qualify for the occasional sale exemption
Topic
Exemptions
Date Issued
08-16-2006
August 16, 2006
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 for the audit period June 1998 through December 2001. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a retailer of tires and automotive accessories. The Taxpayer also performs automotive repair and maintenance services. During the audit period, the Taxpayer's corporate offices were located in Virginia, and the Taxpayer owned and operated locations in Virginia and five other states. At that time, the Taxpayer's organization consisted of four operating divisions and two support divisions. Also during the audit period, the Taxpayer owned a wholesale division that sold tires and other automotive accessories to third party retailers. The Taxpayer sold its wholesale division and ten of its eleven warehouse division locations to a third party.
The auditor assessed tax on all tangible personal property transferred in connection with the sale of the wholesale division. Relying on Public Document (P.D.) 01-75 (06/06/01), the Taxpayer maintains that the sale of its wholesale division constitutes the sale of a separate and distinct division. As such, the Taxpayer contends that the occasional sale exemption applies to the tangible personal property sold in connection with the sale of the wholesale division, and the items held taxable should be removed from the audit.
DETERMINATION
Virginia Code § 58.1-609.10 2 provides that the retail sales and use tax shall not apply to an occasional sale, as defined in § 58.1-602. Virginia Code § 58.1-602 defines an occasional sale as:
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- 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 of registration.
In P.D. 91-290 (11/18/91), the Department sets out the criteria to determine if the sale of a division of a corporation qualifies as the sale of all or substantially all of the assets of the business. The final determination must be based on an analysis of all the criteria set forth below.
1. Each division must have a completely separate set of books, which are separately maintained.
2. Separate bank accounts must be maintained.
3. Employees must be active in only one division.
4. Divisions must be separately housed.
5. Each division must have its own fixed assets, which are not used interchangeably.
In P.D. 01-75, the seller owned and operated five convenience stores. Additionally, the seller operated a wholesale home heating fuel business and a propane home delivery business. The seller sold four of the convenience store locations to the taxpayer. The seller sold to the taxpayer tangible assets, intangible assets and inventory associated with the four locations. The seller continued to operate its existing petroleum businesses. Relying upon factors consistent with those set out in P.D. 91-290, the Tax Commissioner determined that the convenience stores were separate and distinct operations from the petroleum business. The Tax Commissioner concluded that the sale of the convenience stores was the sale of all or substantially all of the seller's convenience store business. Thus, the occasional sale exemption applied to the tangible personal property sold with the convenience stores.
In order to determine if the occasional sale exemption applies in this instance, the criteria established in P.D. 91-290 must be analyzed based on the facts relating to the Taxpayer's sale.
Separate Accounting
The Taxpayer's Support Center Division provides accounting, human resources, payroll, information technology, marketing and advertising support to all of the Taxpayer's divisions. While the Taxpayer has measures in place to readily identify each division in its accounting records, this does not amount to separate records that are separately maintained as required in P.D. 91-290.
Separate Bank Accounts
The Taxpayer maintains multiple bank accounts based on geographic areas. Use of a bank is determined by accessibility of bank branches to operating locations. During the audit period, three of the wholesale locations deposited their receipts into separately maintained bank accounts. During that same time, eight of the wholesale locations deposited their receipts into bank accounts used by other operating units in order to reduce banking fees and charges. In its letter, the Taxpayer states, "Wholesale activity is, while for the most part not in separate accounts, readily identifiable and tracked on a daily basis." This arrangement, however, does not amount to maintaining separate bank accounts for its divisions as required in P.D. 91-290.
Separately Housed Divisions
Based on the information provided in the Taxpayer's letter, each wholesale location was located in the same facility occupied by a warehouse location. The criterion in P.D. 91-290 requires that the divisions of an organization be separately housed in order for them to be considered separate and distinct from one another. In this instance, the Taxpayer has not met this requirement.
The Taxpayer does not provide sufficient information in order to determine whether employees are active in only one division, and whether each division maintains its own fixed assets.
Based on the above, the Taxpayer's wholesale division is not considered a separate and distinct division sufficient to qualify as an occasional sale. This decision is supported by the facts of P.D. 99-120 (5/19/99), which are more closely related to the Taxpayer's situation than those in P.D. 01-75, upon which the Taxpayer relies.
In P. D. 99-120, the taxpayer operated a business that included a retail hardware store and a propane distribution operation. All the assets of the propane division were sold at one time to a single buyer. Following the sale, the taxpayer continued to operate the hardware division. The taxpayer maintained that the occasional sale exemption applied to the sale of the propane division because the propane division and the hardware division were separate and distinct divisions. Based on the information reviewed by the Department, the Tax Commissioner determined that no evidence had been provided to support the taxpayer's contention that the propane division was separate and distinct from the taxpayer's hardware division. Both of the divisions shared accounting records and a bank account. Additionally, both divisions, at least in part, shared a physical location.
Like the taxpayer in P. D. 99-120, the Taxpayer has not maintained a completely separate set of books, or separate bank accounts for its divisions. Additionally, the wholesale division is not separately housed, but instead shares a location with the warehouse division.
CONCLUSION
Based on the cited authorities and the foregoing analysis, the sale of the Taxpayer's wholesale division does not qualify for the occasional sale exemption. Accordingly, the assessment of tax is correct as issued, and the Taxpayer is not entitled to a refund of tax, interest and penalty previously remitted.
The Code of Virginia sections, regulations and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. 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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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/42815P
Rulings of the Tax Commissioner