Tax Type
Retail Sales and Use Tax
Description
Internet and telephone sales transactions, some products delivered to Virginia locations
Topic
Collection of Tax
Nexus
Date Issued
10-17-2007
October 17, 2007
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request a ruling on the application of the retail sales and use tax to out-of-state retail sales made by your client, ***** (the "Taxpayer"). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is a Virginia corporation that makes retail sales of flowers, plants and assorted food and gift products. The Taxpayer takes customer orders over the Internet and by telephone. The Taxpayer operates a call center in Virginia and has its own website. Orders and payments are processed in a Virginia location. The Taxpayer uses a network of participating retailers and distributors to fill the sales orders and arrange for delivery of the products. The Taxpayer receives a commission on the gross sales price of the products sold. The Taxpayer does not normally maintain an inventory of products and does not sell products through any retail stores. However, in limited cases, the Taxpayer will purchase products for direct sale and delivery to customers.
The Taxpayer agrees that it is a dealer under the provisions of Va. Code § 58.1-612. The Taxpayer also agrees it has sufficient nexus in Virginia to require the collection of retail sales tax. The Taxpayer, however, contends that the Department's policy with respect to the application of the Virginia sales tax to third-party gift transactions is incorrect. The Taxpayer maintains that sales transactions should be taxed based on the final destination of the product. Thus, the Taxpayer suggests it should be required to collect Virginia sales tax only on those Internet and telephone orders in which the product is delivered to Virginia locations, regardless of the customer's location.
Consistent with its position, the Taxpayer disagrees with the Department's ruling in Public Document ("P.D.") 05-138 (8/22/05). This ruling states that sales to Virginia residents that are delivered outside the state are subject to Virginia sales tax if the sale is completed in a Virginia mail or telephone order location or in a Virginia Internet retail center. The Taxpayer requests a ruling from the Department that Virginia sales tax should be charged on Internet and telephone sales transactions only when the product is delivered to a Virginia location.
RULING
Virginia Code § 58.1-602 defines "sale" as "any transfer of title or possession, or both . . . in any manner or by any means whatsoever, of tangible personal property . . . ." The Department's longstanding policy for third-party gift transactions is based on the statutory definition of a sale. P.D. 05-138 accurately states, in part, "the key determinant is whether title or possession (actual or constructive) to the property passes to the purchaser within Virginia." Thus, Virginia sales tax applies to third-party gift transactions based on where title or possession of the tangible personal property is taken, not on the final destination of the property. In Sullivan v. United States, 395 U.S. 169 (1969), the U.S. Supreme Court recognized that the legal incidence of the sales tax is based on the transfer of property for a consideration, not on the property itself or the location of the property within the state.
Based on the facts presented, the Taxpayer's customers take constructive possession of tangible personal property for a consideration in Virginia. Constructive possession occurs when the customers instruct the Taxpayer to deliver the property to a third-party. These transactions clearly meet the statutory definition of "sale" under Va. Code § 58.1-602 and are consistent with the types of transactions discussed in P.D. 05-138.
The Department's position is further supported by the fact that the 1995 Virginia General Assembly enacted legislation that changed the definition of "use" to exempt those third-party gift transactions in which out-of-state residents purchase gifts over the telephone, by mail order or over the Internet and direct the seller to deliver the gift to out-of-state recipients. Prior to this legislative change, this type of transaction was also considered taxable in Virginia. This legislative change was necessary because there was no existing statute that exempted any type of third-party gift transactions.
The 2005 General Assembly has since enacted another exception to the Department's policy on third-party gift transactions. The 2005 legislation amended the definition of use to exclude any sale determined to be a gift transaction and subject to tax under Va. Code § 58.1-604.6. Virginia Code § 58.1-604.6 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 in which the purchaser is contractually obligated to provide the tangible personal property to the recipient are excluded from the definition of gift transaction.
This law change gives Virginia registered dealers the option of collecting the sales or use tax imposed in the state of the recipient (if the seller is registered in the recipient's state) or collecting the Virginia sales tax. Qualifying dealers must obtain approval from the Tax Commissioner before opting to collect the tax of those states in which gift recipients are located. The Virginia registered dealer must collect Virginia sales tax if it is not registered to collect the sales tax in the state of the recipient.
You should note that the Circuit Court of the City of Richmond recently ruled in Bloomingdale's Inc. v. Department of Taxation, Case No. LT-891-1 (July 12, 2007) that under the Uniform Commercial Code (specifically Va. Code § 8.2-401 (2)), title to goods sold through "a destination or delivery contract does not pass until the goods are delivered." Bloomingdale's retained title and risk of loss until delivery occurred outside Virginia. The court held that in such instances, the exemption in Va. Code § 58.1-609.10 4 related to the delivery of tangible personal property outside Virginia for use or consumption outside Virginia would apply and such transactions would not be taxable in Virginia. The court also found that the Department's regulations addressing Gifts Purchased in Virginia (Title 23 of the Virginia Administrative Code 10-210-680) and Interstate and Foreign Commerce (Title 23 of the Virginia Administrative Code 10-210-790) do not conform to the related statutes. The Department may appeal this decision to the Virginia Supreme Court. The Taxpayer may preserve its judicial remedies by collecting the tax on gift transactions as outlined above and filing a protective claim pursuant to Va. Code § 58.1-1824. The protective claim would be held without action pending a final decision in the Bloomingdale's case.
CONCLUSION
Based on the above, the Department's policy on third-party gift transactions is correctly set out in P.D. 05-138. The Taxpayer should continue to collect Virginia sales tax on third-party gift transactions unless the Taxpayer is granted permission to collect the tax in accordance with Va. Code § 58.1-604.6, or the transaction is exempt under the definition of "use" in Va. Code § 58.1-602.
The Code of Virginia sections and the public document 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 concerning this ruling, please 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
AR/1-915737892S
Rulings of the Tax Commissioner