January 3, 2018
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will reply to your ruling request dated November 15, 2016, in which you asked for clarification regarding the proper sales and use tax treatment of your client's proposed business transactions. I apologize for the delay in responding to your request.
FACTS
Your client (“Company”) is a business headquartered in ***** with no office locations in the United States. Your client owns an ***** headquartered subsidiary (“Subsidiary”) which generally operates as a retailer of industrial machinery with ongoing sales to customers located in many states across the U.S. Subsidiary is registered for sales and use tax collection in Virginia. Company and Subsidiary are contemplating entering into a transaction with a third-party vendor located in Virginia (“Vendor”). Company has no operations or physical presence in Virginia. Company and Subsidiary neither directly nor through an agent or subsidiary maintain an office, warehouse, or place of business in Virginia. Company does not solicit business within the Commonwealth nor does it advertise or make deliveries into Virginia. The holding of temporary title to goods as part of the proposed transaction would be Company's only activity within Virginia.
Company seeks clarification as to whether periodically engaging in the following transactions would constitute sufficient activity to require Company to register for the collection of Virginia sales tax:
- Company plans to enter into a contract to purchase equipment from Vendor, which Company intends to sell to Subsidiary.
- U.S. customers will enter into agreements to purchase equipment from Subsidiary. Upon receipt of an order for equipment, Subsidiary will issue a purchase order for equipment to Company.
- Company will subsequently issue a purchase order to Vendor. Vendor will sell the equipment to Company and Company will immediately resell the equipment to Subsidiary. Subsidiary will immediately resell the equipment to the U.S. customer who placed the initial purchase order.
- Vendor will ship the equipment directly to the U.S. customer via common carrier. Title will transfer to Company at Vendor's location momentarily until title is transferred to Subsidiary prior to shipment to the U.S. customer. Company's title ownership will be instant in duration.
- Subsidiary will collect sales tax from U.S. customer depending on location of the customer, including Virginia sales tax as applicable.
DISCUSSION
Virginia Code § 58.1-613 provides that a vendor who qualifies as a dealer and who has sufficient contact with Virginia must register and collect sales tax on the sale of tangible personal property sold or delivered for storage, use, or consumption in Virginia. Only those dealers with “sufficient activity” within the Commonwealth are required to register as a dealer under Va. Code § 58.1-613. A dealer will have “sufficient activity” if he or she falls within one of the nine subsections of Va. Code § 58.1-612 (C).
Effective June 1, 2017, House Bill 2058 and Senate Bill 962 (2017 Acts of Assembly, Chapters 51 and 808) amend Va. Code § 58.1-612 (C)(9) to provide that a dealer who, "[o]wns tangible personal property that is for sale located in this Commonwealth, or that is rented or leased to a consumer in this Commonwealth, or offers tangible personal property, on approval, to consumers in this Commonwealth” will have sufficient activity to require registration. The statute provides that ownership of tangible personal property in Virginia that is for sale will be sufficient activity by an out-of-state dealer to require registration. See Tax Bulletin 17-3 (May 3, 2017).
The U.S. Constitution also places limitations on a state's ability to assert nexus over an out-of-state dealer. The Supreme Court's decisions interpreting the Dormant Commerce Clause require that an out-of-state dealer have a substantial physical presence within a state seeking to assert taxing authority over that dealer in order to pass Constitutional muster. While the Supreme Court has never defined how substantial the physical presence must be, the Court's opinion in Quill v. North Dakota, 504 U.S. 298 (1992), clarifies that the presence of a few floppy disk drives within a state would not constitute sufficient physical presence to form a foundation for nexus. The Court's jurisprudence on the topic of a state's ability to tax an out-of-state actor has established that a presence greater than de minimis is required. Therefore, while Company's ownership of tangible personal property in Virginia for a brief moment in time may indeed constitute a physical presence within Virginia, the Constitution requires that the physical presence be more than a de minimis presence akin to the floppy drives in Quill.
To determine whether Company's momentary ownership of the tangible personal property is de minimis or sufficiently “substantial”, the duration of the ownership and the quantity or value of goods being owned are relevant. See Quill v. North Dakota, 504 U.S. 298 (1992). It is clear that the duration of the ownership is indeed de minimis because the property is owned only for an instant in time while ownership is transferred from Company to Subsidiary. However, the number of goods owned can reasonably be considered sufficiently “substantial” to rise to a level greater than de minimis ownership since Company will own at least one piece of valuable tangible personal property for each of the proposed sales transactions between Company and Subsidiary. As a result, Company will have brief but repeated ownership of valuable tangible personal property for sale located within Virginia that is distinguishable from the isolated ownership of floppy disks that did not meet the Court's standard for “substantial” in Quill v. North Dakota. Since Company's ownership of the goods will be greater than de minimis, Company has a substantial physical presence within Virginia and must register to collect sales tax when acting as a dealer.
In the proposed transaction, Company would be operating as a vendor selling tangible personal property to Subsidiary specifically for resale. Company would therefore not qualify as a “dealer” pursuant to Va. Code § 58.1-612(A) because section 612(A) identifies a dealer as one that “sells at retail.” The definition of “retail sale” contained in Va. Code § 58.1-602 specifically excludes sales for resale from the definition of “retail sale.” While Company does not qualify as a dealer for the proposed transactions with Subsidiary, if Company takes momentary title to tangible personal property that is sold at retail by Company, then Company would have to register as a dealer.
CONCLUSION
The sales transactions that Company is contemplating would not require Company having to register as a dealer within Virginia and collect Virginia sales tax so long as Company is selling tangible personal property for resale and not for retail purposes. The Company may document this exemption by making a written request to the Department of Taxation for a wholesaler exemption letter. For additional information on that process, please contact ***** in Customer Service at (804)367-8037.
I hope the above information responds to your inquiry. This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result. The Code of Virginia and Virginia Administrative Code sections cited are available on-line at www.Iaw.lis.virginia.gov. If you should have any additional questions about this ruling, you may contact ***** in the Office of Policy Development, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
PD/1-6492496328.vb