Tax Type
Retail Sales and Use Tax
Description
Pollution Control, Occasional Sale; Income Tax Apportionment
Topic
Allocation and Apportionment
Exemptions
Date Issued
09-29-2006
September 29, 2006
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period March 2000 through February 2003. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a distributor of construction and repair products based outside of Virginia. The Taxpayer maintains a number of business locations nationally and in Virginia. The Department conducted an audit and assessed tax on various untaxed sales and purchases made by the Taxpayer.
The Taxpayer maintains that items of tangible personal property sold to one of its customers qualify for exemption from the retail sales and use tax pursuant to the pollution control exemption found in Va. Code § 58.1-609.3 9. The Taxpayer also contests the calculation of the taxable measure for Miscellaneous Sales used in the audit. The Taxpayer maintains that the measure is incorrect because the occasional sale exemption applies to assets included in the measure. The Taxpayer also maintains that the measure is incorrect because income tax apportionment was used to calculate the tax base.
DETERMINATION
Pollution Control Exemption
Pursuant to Va. Code § 58.1-623, all sales, leases or rentals of tangible personal property are subject to the retail sales and use tax until the contrary is established. The burden of proving that the tax does not apply is on the dealer unless he takes, in good faith from the purchaser or lessee, a certificate of exemption indicating that the property is exempt under the law.
Virginia Code § 58.1-609.3 9 provides, in pertinent part, that the retail sales and use tax does not apply to "certified pollution control equipment and facilities as defined in § 58.1-3660, except for any equipment that has not been certified to the Department of Taxation by a state certifying authority pursuant to such section." Title 23 of the Virginia Administrative Code (VAC) 10-210-2090 B states that "pollution control equipment and facilities" means any real or tangible personal property, equipment, facilities or devices used primarily for the purpose of abating or preventing air or water pollution in Virginia. Any property that is certified as used for these purposes qualifies for exemption.
The Taxpayer sold tangible personal property to its customer exempt of the tax after accepting a certificate of exemption (Form ST-11 A) from the customer. The Taxpayer represents that, along with Form ST-11 A, it received a letter that was issued to the customer by the Department of Taxation. The Department's letter to the customer states that the Department of Environmental Quality certifies the facilities at issue as pollution control facilities "used primarily for the purpose of abating or preventing pollution." The letter goes on to state that the facilities qualify for exemption from the sales and use tax under Va. Code § 58.1-609.3 9.
Based on the information provided, I find that the Taxpayer acted in good faith in accordance with Va. Code § 58.1-623 by accepting the letter and Form ST-11A from the customer for the tangible personal property at issue. The property will be removed from the audit, and the assessment adjusted accordingly.
Taxable Measure
Occasional Sale
Virginia Code § 58.1-609.10 2 provides that the tax is not imposed on an occasional sale, as defined in § 58.1-602. Virginia Code § 58.1-602 defines 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 significant in number, scope and character to constitute an activity requiring the holding of a certificate of registration.
The Taxpayer contends that the occasional sale exemption applies to assets transferred when it consolidated its Virginia locations under a single subsidiary company. The Taxpayer maintains that the transfer represents the sale or exchange of all or substantially all of its assets.
The sale was effective December 21, 2002. A review of the Taxpayer's corporation income tax return, Schedule L, for fiscal year 2002 (January 26, 2002 through January 31, 2003) indicates that the Taxpayer's assets increased during the year. This document should show a significant decrease in assets if the Taxpayer sold all or substantially all of its assets as of the sale date. In addition, the Taxpayer's website indicates that, for fiscal year 2002, the Taxpayer had nearly 500 branch locations in 38 states, $3 billion in sales, 8,900 employees and $1.29 billion in assets. Following the asset transfer, the Taxpayer continued to operate as a wholesale distributor. The income tax documents and the website information do not support the Taxpayer's position that it sold all or substantially all of its assets when it transferred the assets.
The Taxpayer also contends that the occasional sale exemption applies to the transfer because the transaction represents a reorganization pursuant to Internal Revenue Code (I.R.C.) § 351. The Taxpayer relies on Public Document (P.D.) 97-332 (8/27/97) to support its argument.
In order for I.R.C. § 351 to apply to the transfer of assets from one corporation to another, a stock exchange must exist. In P.D. 97-332, the transfer of assets was in exchange for shares of stock. In this instance, however, the bill of sale provided by the Taxpayer does not reflect an exchange of stock in connection with the transfer of assets. The document submitted by the Taxpayer, and attached to its federal income tax return, entitled "Transferor's Statement under Regs. Section 1.351-3(a)" indicates that stock was not issued when the property at issue was transferred.
Additionally, the Taxpayer's letter represents that the "Bill of Sale was used solely to document the transfer of assets as no consideration was exchanged." This scenario is similar to that in P.D. 04-134 (9/16/04). In that case, the taxpayer maintained that the occasional sale exemption applied to a transfer of assets made pursuant to a reorganization. As in this case, the taxpayer in P.D. 04-134 provided documents that stated no stock was exchanged for the property at issue. The Tax Commissioner determined that the occasional sale did not apply based on the documents and other information provided.
Based on the facts presented and the determination rendered in P.D. 04-134, I find that the occasional sale exemption does not apply to the transfer of assets at issue in this appeal.
Income Tax Apportionment
The Taxpayer contests the calculation of the tax base in the audit for Miscellaneous Sales. The Taxpayer contends that the calculation is based on income tax apportionment that includes asset information for the subsidiary under which the Virginia locations were consolidated. The audit will be returned to the auditor to remove the asset data for the subsidiary and to recalculate the measure.
CONCLUSION
The audit will be returned to the audit staff to make adjustments consistent with the findings in this letter. Once the necessary adjustments have been made, a consolidated bill, with interest accrued to date, will be mailed to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the consolidated bill. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The audit will be returned to the audit staff to make adjustments consistent with the findings in this letter. Once the necessary adjustments have been made, a consolidated bill, with interest accrued to date, will be mailed to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the consolidated bill. The Taxpayer should remit its payment to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia sections, regulations 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 about this determination, you may contact ***** in the 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/52654P
Rulings of the Tax Commissioner