Tax Type
Corporation Income Tax
Description
Sales factor/Taxpayer design/builds equipment to be installed on U. S. Naval vessel.
Topic
Tangible Personal Property
Taxability of Persons and Transactions
Date Issued
09-02-2014
September 2, 2014
Re: Request for Ruling: Corporate Income Tax
Dear *****:
This is in response to your letter submitted on behalf of your client (the "Taxpayer"), in which you request a ruling regarding the Virginia sales factor.
FACTS
The Taxpayer designs and builds equipment that will be installed on a United States Government naval vessel. The vessel is being built at a shipyard in Virginia. The Taxpayer manufactures all of the components at a facility outside of Virginia. The equipment is also initially inspected and tested outside of Virginia. The federal government takes title to the equipment when the initial testing is complete. The equipment is then stored at the Taxpayer's facility outside of Virginia prior to shipment.
The Taxpayer arranges with a common carrier to transport the equipment to a warehouse located in Virginia next to the shipyard. The warehouse is either provided by the federal government or another contractor. The equipment is stored in the warehouse until it is taken to the vessel to be installed. When the vessel is finished, the equipment will undergo further testing on waters outside of Virginia. If the federal government is satisfied with the equipment's performance, it indicates final acceptance by completing a Material Inspection and Receiving Report (Form DD-250).
The Taxpayer requests a ruling as to whether the sales of the equipment must be reported in the numerator of the sales factor for Virginia corporate income tax purposes. The Taxpayer asserts that the sales should be attributed to the location where the equipment is initially inspected and tested. Alternatively, the Taxpayer asserts that the sales should be attributed to the location where the final testing takes place.
RULING
Virginia Code § 58.1-415 provides that tangible property received in Virginia as a result of a sales transaction is considered a Virginia sale unless the delivery was for transportation purposes. Specifically, Va. Code § 58.1-415 states:
-
- In the case of delivery by common carrier or other means of transportation, the place at which such property is ultimately received after all transportation has been completed shall be considered as the place at which such property is received by the purchaser [Emphasis added.]
As such, Virginia attributes sales of tangible personal property on a destination basis. The Department has held that a sale of tangible property is not included in the numerator of the Virginia sales factor when the initial delivery within Virginia is for transportation purposes and the seller knows that the ultimate recipient 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 goods be subject to some form of transportation. Instead, the Department weighs more heavily the fact that the original seller of tangible property had knowledge that the ultimate destination of the tangible property was outside Virginia once goods enter the delivery function.
In example 5 of Title 23 of the Virginia Administrative Code (VAC) 10-120-220, the purchaser is considered to have received the tangible property at the Virginia manufacturing facility because the purchaser directs shipping to its customers and the shipping destination is unknown to the manufacturer. In essence two transactions occur. In the first, the manufacturer sells to the purchaser with the inventory held at the manufacturer's storage facility in Virginia. A second transaction occurs when the purchaser makes a sale to its customer and directs the manufacturer to ship the property to the customer. See P.D. 99-149 (6/21/1999).
Initial Inspection and Testing
The Taxpayer asserts that the equipment should be deemed to be delivered or received in the location outside of Virginia where the equipment is initially inspected and tested. The Taxpayer reasons that the federal government first "accepts" the equipment at that location because that is where the federal government first takes constructive possession and control over it, bears the risk of loss and enjoys the rights incident to ownership.
Virginia, however, attributes sales on a destination basis. Although constructive possession, risk of loss and legal title may be important factors to consider in some contexts, it is the Department's opinion that they have little, if any, bearing on determining the destination of tangible property for purposes of the Virginia sales factor. In fact, Title 23 VAC 10-120-220 A 3 expressly provides that the state in which title passes has no bearing on the state to which a sale is attributed.
As explained above, one factor the Department weighs heavily is a taxpayers knowledge of the tangible property's ultimate destination once it enters the delivery function. For example, in P.D. 12-142 (8/29/2012), the purchaser took title to the equipment at the taxpayer's Virginia production facility. The equipment was held at the facility for one to 30 days prior to shipment and then shipped to the taxpayer's overseas installations. In addition, the taxpayer always knew the final destination of the equipment. In holding that the taxpayer's sales would be attributed to the location where the equipment was shipped and not the production facility, the Department reasoned that, unlike example 5 of Title 23 VAC 10-120-220, the taxpayer knew the destination of the sold equipment.
In this case, the Taxpayer arranges for the shipment of the equipment. Unlike example 5, the Taxpayer has knowledge of the destination of the sold equipment. As such, the Taxpayer's sales would be attributed to the location where the equipment is shipped.
Delivery
The Taxpayer initially ships the equipment to a warehouse provided by the federal government or another contractor. The equipment remains in the warehouse until it is taken to the vessel to be installed. Afterwards, the equipment undergoes a series of sea trials outside of Virginia. The Taxpayer asserts that, if the equipment is not deemed to be delivered or received at the location of initial inspection and testing, it should be deemed to be delivered or received where the final testing occurs. Each of the possible destinations (i.e., the warehouses, the vessel and the waters outside of Virginia) will be addressed in turn.
Warehouses Provided by the Federal Government
In P.D. 06-86 (8/30/2006), the purchaser, a food wholesaler, received food at a loading area it rented outside the taxpayer's manufacturing facility in Virginia. Although both the taxpayer and the purchaser knew that the food was destined for distribution centers outside Virginia, the Department considered the loading area to be the destination of the food because it was a facility of the purchaser. This outcome was consistent with example 2 of Title 23 VAC 10-120-220. In that example, sales of goods were included in the taxpayer's sales factor when the sales were shipped to the purchaser's warehouse located in Virginia, even though the purchaser reshipped the goods to its branch stores in other states for resale. The sales were Virginia sales because the goods were "received by a purchaser within this Commonwealth."
In this case, the Taxpayer ships the equipment by common carrier to warehouses in Virginia that are adjacent to the shipyard where the vessel is being built. Sometimes, the warehouse is provided by the purchaser, the federal government. Like the purchaser's docking facility in P.D. 06-86 and the purchaser's warehouse in example 2 of Title 23 VAC 10-120-220, any such warehouse would be the location where the equipment was received by the federal government within Virginia. As such, those sales would be included in the numerator of the Taxpayer's Virginia sales factor.
Warehouses Provided by Contractors
The Taxpayer also ships the equipment by common carrier to warehouses in Virginia provided by contractors. In the case of a direct delivery to a person designated by the purchaser, the sale is attributed to Virginia if it is ultimately received in Virginia by the designated person. See Title 23 VAC 10-120-220 A 1. Receipts and transfers by parties other than the purchaser or the designated ultimate recipient, however, are considered part of the transportation process. See Title 23 VAC 10-120-220 A 2. In addition, a direct delivery does not occur, however, if another person is known to be the ultimate recipient at or before the time of shipment. See id.
In this case, the equipment is sometimes delivered to warehouses provided by contractors. These deliveries would not be considered direct deliveries because the Taxpayer knows before the time of shipment that another party is the ultimate recipient (i.e., the vessel's owner). As such, receipts and transfers of the equipment by these contractors are considered part of the transportation process. The question, therefore, becomes whether the federal government or a designated ultimate recipient receives the property in Virginia after it leaves the contractor's warehouse. See Title 23 VAC 10-120-220 A 1.
The Vessel
The federal government owns the vessel at all times during its construction. After the property leaves the contractor's warehouse, it is taken to the vessel at the Virginia shipyard. At that point, transportation to the federal government is complete, and the federal government has received the property in Virginia. Even if the federal government does not own the vessel at that time, the party that owns the vessel would be the federal government's designated ultimate recipient in Virginia. As such, the sales of equipment that pass through a contractor's warehouse must also be included in the numerator of the Taxpayer's Virginia sales factor.
Waters Outside of Virginia
The Taxpayer asserts that the equipment's ultimate destination is the sea outside of Virginia. The Taxpayer reasons that the property should be considered to be in transport until it is tested and accepted at sea. The Taxpayer argues that because it knows that the property's ultimate destination is outside Virginia, the sales should be excluded from the numerator of the Virginia sales factor consistent with P.D. 12-142 and example 5 of Title 23 VAC 10-120-220.
I do not agree that the property's ultimate destination is outside of Virginia. Sometimes, the federal government receives the property at a warehouse it provides. In the case of property passing through a contractor's warehouse, the ultimate recipient is the vessel's owner, which appears to be the federal government. If the vessel is not owned by the federal government at the time of delivery, however, whoever owns the vessel would be the designated ultimate recipient. Both the federal government's warehouse and the vessel are in Virginia when the equipment is received at one of those locations.
As example 2 of Title 23 VAC 10-120-220 demonstrates, when a purchaser receives property at its facility pursuant to a sales transaction, where the purchaser subsequently takes the property is immaterial. Unlike the purchaser's trucks in P.D. 95-24 which were used to pick up goods in Virginia and transport them to the purchaser's out-of-state facility, the vessel in this case is not part of the delivery function. The waters outside of Virginia, therefore, cannot be considered to be the destination where the Taxpayer receives the property.
CONCLUSION
The federal government receives the equipment either at a warehouse it provides or at a vessel it owns. Even if the federal government does not yet own the vessel, the party that does would be considered the designated ultimate recipient. In any event, the sales of the equipment must be included in the numerator of the Taxpayer's Virginia sales factor because each of these destinations is in Virginia.
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 sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
-
-
-
-
-
-
-
- Sincerely,
-
-
-
-
-
-
Craig M. Burns
Tax Commissioner
AR/1-5588318086.M
Rulings of the Tax Commissioner