Tax Type
Retail Sales and Use Tax
Description
Taxpayer is liable for the use tax on demonstration equipment
Topic
Manufacturing
Property Subject to Tax
Date Issued
10-17-2007
October 17, 2007
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 *****, for the period March 2003 through August 2005. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a wireless equipment provider. As a result of the Department's audit, the Taxpayer was assessed use tax on fixed assets listed as demonstration equipment. The Taxpayer represents that the equipment is manufactured by the Taxpayer and is used to demonstrate to potential and existing customers how the products operate. The auditor concluded that the Taxpayer makes a taxable use of the demonstration equipment when removed from inventory and depreciated as assets. The Taxpayer disputes the tax and contends that it should not have to pay the tax on internally manufactured equipment. The Taxpayer has paid the assessment and requests a refund of tax and interest paid on the contested assets.
DETERMINATION
Virginia Code § 58.1-604 imposes the use tax "upon the use or consumption of tangible personal property in this Commonwealth . . . ." Virginia Code § 58.1-602 defines "use" as "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of the property in the regular course of business."
The Tax Commissioner has addressed the application of the tax to demonstration items in a number of prior rulings. In Public Document (P.D.) 96-260 (9/27/96), a manufacturer sold vital sign monitors and provided demonstration monitors to its sales personnel for a period of one year. At the expiration of one year, the sales personnel were issued new replacement monitors and the prior monitors were refurbished and sold to price-sensitive customers. The monitors were considered exempt resale inventory because they were not transferred to a fixed asset account for depreciation purposes, but continued to be held in an inventory account while in the possession of the sales personnel.
In P.D. 04-163 (10/1/04), the Taxpayer withdrew computer units from its resale inventory and maintained them in a demonstration pool for use in product demonstrations. The demonstration units were issued to the Taxpayer's sales personnel and its customers. The units issued to the sales personnel were returned after a two-year period and a new computer was issued. The units issued to the customers were provided on a trial basis. At the end of the trial period, the customer could opt to purchase the unit, purchase a new unit or make no purchase at all. The units that were returned by the sales personnel and the customers were refurbished and sold to price-sensitive customers. The taxpayer indicated that the property had been inadvertently classified as fixed assets. The Tax Commissioner held that the units would be deemed exempt resale inventory so long as the taxpayer could provide documentation showing the units at issue were reclassified as inventory when held by the sales personnel and the taxpayer's customers.
In P.D. 94-45 (3/9/94), the Taxpayer was a manufacturer of pressure sensing equipment. The taxpayer treated demonstration units as depreciable assets for federal income tax purposes. Relying on the definition of "use" found at Va. Code § 58.1-602, the Tax Commissioner ruled that "property held for resale does not lose exempt status merely because it is used for demonstration purposes; however, this exemption does not extend to property which has been withdrawn from a resale inventory." The Tax Commissioner concluded that the manufacturer's treatment of the demonstration units as depreciable assets constituted removal of such units from a resale inventory, and therefore, the units lost their exempt status.
Based on information you provided during a conversation with a member of my staff, it is my understanding that the equipment at issue is the same type of equipment sold to the Taxpayer's customers. The equipment at issue is used by the Taxpayer in its lab, at tradeshows, and at its customers' labs to demonstrate the use of the product to customers and potential customers. Equipment used for demonstration purposes is taken from the Taxpayer's inventory and is used for marketing by the Taxpayer. Equipment used for demonstration purposes is never sold to the Taxpayer's customers. Additionally, the demonstration equipment is amortized over 12 months and is listed as fixed assets in the Taxpayer's financial records.
In this instance, P.D. 94-45 is on point. The Taxpayer made use of the property as contemplated in Va. Code § 58.1-602 when the equipment was removed from inventory and used for demonstration purposes, and depreciated as fixed assets in the Taxpayer's financial records. In accordance with the aforementioned authorities, the Taxpayer is liable for the use tax on the demonstration equipment, and the tax assessed in the audit is correct. Accordingly, the Taxpayer's request for a refund of tax and interest paid with respect to such equipment cannot be granted.
The Code of Virginia sections cited, along with the public 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 *****.
-
-
-
-
-
-
-
- Sincerely,
-
-
-
-
-
-
-
-
-
-
-
-
-
- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
-
-
-
-
-
-
AR/1-886360665P
Rulings of the Tax Commissioner