Tax Type
Retail Sales and Use Tax
Description
Resale exemption applies to the wholesale purchases of property.
Topic
Exemptions
Sale for Resale
Tangible Personal Property
Date Issued
08-07-2009
August 7, 2009
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 assessments issued to ***** (the Taxpayers) as a result of an audit for the periods September 2002 through February 2006 and November 2004 through February 2006, respectively.
FACTS
The Taxpayers are apparel retailers. An audit resulted in the assessment of consumer use tax on untaxed purchases of tangible personal property. The auditor also assessed tax on freight-in charges related to retail property sold by the Taxpayers.
At issue is the tax assessed on freight-in charges. The auditor taxed these charges because no evidence was provided to indicate the computation of sales prices and whether freight-in costs were included in such computation. The Taxpayer maintains that it previously explained to the Department's audit staff how the freight-in costs are built into its overall pricing structure. For instance, a quarterly analysis is performed to calculate a rolling average of freight costs to stores. Freight costs are capitalized in the general ledger by recording journal entries to the merchandise inventory account and the freight-in cost of goods sold account by brand and division. These costs along with handling costs and others are included in determining markups on the property held for sale. Furthermore, the Taxpayer indicates that freight-in charges were not separately stated on sales invoices and that sales tax was charged and collected on the full sales price of the property sold. For all of these reasons, the Taxpayer contends that the tax assessed on the freight-in charges is erroneous and should be abated.
DETERMINATION
Based on Title 23 of the Virginia Administrative Code 10-210-6000, transportation-in charges (or freight-in charges) do not constitute exempt transportation charges pursuant to Va. Code § 58.1-609.5 3. As such, freight-in charges are considered part of the cost of the property and includible in the sales price of the property subject to the sales tax.
The assessment of use tax on the contested freight-in charges ignores the resale exemption. I understand that the freight-in charges are billed in connection with property purchased for resale purposes only. As such, the resale exemption applies to the wholesale purchases of property. When property is purchased for resale and no use is made of it by the Taxpayer, no use tax can be assessed on the property or on freight-in charges associated with such resale property.
Furthermore, the facts presented establish that the freight-in charges were not separately stated on the sales invoice to retail customers, and thus were not exempted from imposition of the sales tax. As such, the sales tax was ultimately collected on the cost associated with the freight-in charges. While freight-in costs become part of the property for sale at retail, such costs are taxable as part of the retail sales price of property. Accordingly, I find that use tax was erroneously assessed on the contested freight-in charges.
CONCLUSION
The audit reports will be revised in accordance with this determination. The noncontested amounts have been paid in full therefore, the remaining unpaid balances of the assessments will be abated.
The Code of Virginia and regulation sections 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 Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Janie E. Bowen
Tax Commissioner
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AR/1-3167246827.R
Rulings of the Tax Commissioner