06-86 | Virginia Tax

Tax Type

Corporation Income Tax

Description

Manufacturer of perishable food products in a Virginia facility

Topic

Manufacturing

Property Subject to Tax

Taxability of Persons and Transactions

Date Issued

08-30-2006

August 30, 2006

Re: Request for Ruling: Corporate Income Tax

Dear **********:

This will reply to your letter in which you request a ruling concerning the calculation of the sales factor on behalf of your client, (the "Taxpayer") for corporate income tax purposes.

FACTS

The Taxpayer manufactures perishable food products in a facility located in Virginia. Once the manufacturing process is complete, the food is sold to a wholesaler (the "Wholesaler"). Title to the product passes to the Wholesaler at the manufacturing site at the point the goods are weighed and labeled. The Taxpayer's employees immediately place the food on a small, refrigerated loading area that is near the manufacturing plant, or they move the food directly into refrigerated trailers on the loading dock. The Wholesaler pays the Taxpayer rent for the utilization of the loading area and the loading dock.

The food sits at the loading area from between 2 hours and 3 days until a sufficient amount of food is available to fill a truck. The Taxpayer's employees load the food onto refrigerated common carriers vehicles, and the food is shipped to the Wholesaler's distribution hubs located both within and outside Virginia, or to independent distributors located both within and outside Virginia. You state that both the Taxpayer and the Wholesaler know the ultimate destination of the food at the time of the sale. The Taxpayer requests a ruling as to whether the sales of the food must be reported in the numerator of its sales factor for Virginia corporate income tax purposes.

RULING

Under Va. Code § 58.1-415, tangible personal property (TPP) received in Virginia as a result of a sales transaction is considered a Virginia sale. The Department has held that the sale of TPP is not included in the Virginia sales factor numerator as a Virginia sale when an initial delivery of TPP within Virginia is for transportation purposes and the seller of the TPP knows the ultimate recipient of the TPP is located outside of Virginia. See Public Document (P.D.) 91-248 (10/8/1991) and P.D. 95-24 (2/13/1995).

These rulings state that the determinative factor is not the mode of transportation because the standard imposed by the statute merely stipulates that the good be subject to some form of transportation. Instead, the Department weighs more heavily the fact that the original seller of TPP had knowledge that the ultimate destination of the TPP was outside Virginia once goods enter the delivery function.

According to the Taxpayer, the short period that the food is kept in storage constitutes part of the transportation process and both the Taxpayer and Wholesaler know the destination of the food before it is loaded onto the refrigerated common carriers. The Taxpayer avers that the food is ultimately shipped to Wholesaler distribution hubs or unrelated distribution centers outside Virginia and, therefore, should not be included in the numerator of the Taxpayer's sales factor.

I do not agree with your analysis that the food kept in storage is part of the transportation process. The Wholesaler receives the food at the loading area located in Virginia that it rents from the Taxpayer. Because it is a facility of the Wholesaler, the loading area is considered to be the destination of the food. This is consistent with Example 2 under Title 23 of the Virginia Administrative Code (VAC) 10-120-220 B. In this example, sales of goods were included in a taxpayer's sales factor when the sales were shipped to a purchaser's warehouse located in Virginia. While the Wholesaler in this case does not maintain a warehouse in Virginia, it does maintain a facility (the loading area) in Virginia to which the goods are delivered. Therefore, sales to the Wholesaler that pass through the Wholesaler's loading area must be included in the numerator of the Taxpayer's sales factor.

The Taxpayer's scenario is clearly distinguishable from the Department's prior rulings cited above. In the previous rulings, the taxpayer delivered goods to an independent carrier or to the customer for the purposes of transportation in connection with a single sales transaction. In this case, the Taxpayer sells its products to the Wholesaler and delivers the product to the Wholesaler's facility pursuant to a sales transaction.

This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia section, regulation and public documents cited 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 regarding this ruling, please contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-343762212B

Rulings of the Tax Commissioner