November 10, 2020
Re: § 58.1-1821 Application: Retail Sales and Use Tax
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessment issued as a result of an audit for the period June 2012 through December 2016. The contested tax is assessed for the period June 2012 through June 2013. The assessments has been paid in full. I apologize for the delay in responding to your letter.
The Taxpayer operates as an oral and maxillofacial practice. Pursuant to an Asset Purchase Agreement (the “Agreement”) with ***** (the “Seller”), the Taxpayer purchased the fixed assets of the oral surgery practice owned by the Seller during the audit period. The fixed assets were purchased by the Taxpayer in conjunction with the purchase of the oral surgery practice from the Seller. The Seller is a division of ***** (the “Health System”). The auditor assessed consumer use tax to the Taxpayer on its purchases of the fixed assets. At issue is the occasional sale exemption. Relying on Virginia Code § 58.1-602, Title 23 of the Virginia Administrative Code (VAC) 10-210-1080, and Public Document (P.D.) 16-58 (4/20/2016), the auditor found that the Seller did not sell all or substantially all of the assets of its business to the Taxpayer. Based on an analysis of the criteria set forth in P.D. 91-290 (11/18/1991), the auditor also found that the Seller did not sell a separate and distinct division of its business to the Taxpayer. Accordingly, the auditor determined that the occasional sale exemption does not apply to the fixed asset purchases at issue.
The Taxpayer maintains that the purchases qualify for the occasional sale exemption because it nor the Seller was engaged in sales on four or more separate occasions within one calendar year, and that it and the Seller are not engaged in sales at fairs, markets, circuses and carnivals. The Taxpayer further maintains that it nor the Seller are peddlers or street vendors. Pursuant to P.D. 85-149 (7/11/1985), the Taxpayer maintains that the oral surgery practice was a separate and distinct division of the Seller’s business and contends that the purchase of the practice constituted the purchase of an entire division of the Seller’s business. The Taxpayer provides documentation to support its contention.
Occasional Sale - Generally
Virginia Code § 58.1-609.10 2 states that the retail sales and use tax does not apply to “an occasional sale as defined in § 58.1-602.”
Virginia Code § 58.1-602 defines occasional sale as:
A sale of tangible personal property not held or used by a seller in the course of an activity for which it is required to hold a certificate of registration, including the sale or exchange of all or substantially all the assets of any business and the reorganization or liquidation of any business, provided that such sale or exchange is not one of a series of sales and exchanges sufficient in number, scope and character to constitute an activity requiring the holding of a certificate of registration.
Title 23 VAC 10-210-1080 B states that the term occasional sale means:
- A sale by a person who is engaged in sales on three or fewer separate occasions within one calendar year, except that sales at fairs, flea markets, circuses and carnivals and sales made by peddlers and street vendors are not occasional sales; or
- A sale of tangible personal property not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration. The words "not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration" mean that a registered dealer is not entitled to an occasional sale exemption solely by virtue of the fact that the article sold may be of a different class from the merchandise he/she regularly sells; or
- The sale or exchange of all or substantially all the assets of any business; or
- The reorganization or liquidation of any business.
I will address the sale of the practice in light of these authorities.
Sales by the Seller or the Taxpayer
The Taxpayer maintains that the occasional sale exemption applies because it nor the Seller was engaged in sales on four or more separate occasions within one calendar year. The Taxpayer also maintains that the occasional sale exemption applies because the Seller is not engaged in sales at fairs or flea markets, and the Seller is not a peddler or street vendor. Neither of these portions of the occasional sale exemption, provided in Title 23 VAC 10-210-1080 B are at issue because they are not a basis for the assessment.
Sale or Exchange of Substantially All Assets
Pursuant to the aforementioned authorities, an occasional sale may occur when a business sells all or substantially all of the assets of its business. According to the Seller and the National Provider Database, the Seller operates multiple practices within the Health System. Further, the Health System is a network of hospitals and medical facilities composed of six core hospitals located within and outside of Virginia. The oral surgery practice was only one of many practices included in a large network of medical facilities, and does not constitute all or substantially all of the Seller or Health System’s businesses. Following the sale of the oral surgery practice and the associated fixed assets to the Taxpayer, the Seller and the Health System continued to operate multiple practices, hospitals and medical facilities. Accordingly, the fixed assets purchased by the Taxpayer as provided in the Agreement, are not all of the assets owned by the Seller, and are not all of the assets owned by the Health System.
Sale of a Division
Prior determinations by the Tax Commissioner are instructive regarding the sale of a division of an on-going business and the application of the occasional sale exemption to sales of tangible personal property. In Public Document (P.D.) 16-58 (4/20/2016), P.D. 91-290 and P.D. 85-149, the Department determined that the disposition of one separate and distinct activity of a multifaceted business can qualify as a sale of all or substantially all of the assets of a business. However, in making the determination that a division is separate and distinct from an on-going business entity, the Department looks to certain criteria to determine if the sale of the assets of a division would qualify as an occasional sale. Such criteria are set forth below:
- Each division must have a completely separate set of books which are separately maintained.
- Separate bank accounts must be maintained.
- Employees must be active in only one division.
- Divisions must be separately housed.
- Each division must have its own fixed assets which are not used interchangeable.
In order to determine if the purchase of the fixed assets qualifies for the occasional sale exemption, the criteria set out above must be analyzed to determine if the sale of the oral surgery practice constitutes the sale of a division as considered in the aforementioned public documents.
Separate Books/Separately Maintained
The Taxpayer states that it understands that the Seller maintains separate books for its various medical practices. The Taxpayer states that during the negotiation of the sales, it was given inventory and asset reports from the Seller that show that the Seller maintained separate books. The Taxpayer provides reports with its appeal to support its contention that the Seller maintained separate books for its practices and that the books were separately maintained. The Taxpayer contends that the reports provided by the Seller were only for items related to the oral surgery practice.
The inventory worksheet provided by the Taxpayer lists a company name of *****. The worksheet includes a division number, asset group designations and a location. The worksheets provided show assets for a specific division number. The worksheets, however, do not support the Taxpayer’s contention that the Seller maintained separate books for each practice. Rather, it appears that the Seller’s books are merely organized by practice. While the Seller has procedures in place to readily identify each practice in its accounting records, this does not amount to having separate records for each practice that are separately maintained as required in P.D. 91-290. Accordingly, this criterion is not met.
Separate Bank Account
The physician on staff for the Taxpayer, was the physician employed by the Seller’s oral surgery practice prior to the sale of the practice to the Taxpayer. The Taxpayer states that when the physician was employed by the Seller, the physician did not have access to the Seller’s bank account information. However, the Taxpayer states that the physician does recall having separate deposit tickets that stated the name of the Seller’s oral surgery practice. The Taxpayer further provides that based upon communication with the Seller, it learned that the Seller does maintain separate checking accounts and that the Seller has the ability to filter income and expenses for each practice for its own reporting and reconciling.
Based upon the information provided in the appeal, I find that the Taxpayer has not demonstrated that the Seller had a separate bank account for the oral surgery practice. Deposit tickets that state the name of the practice are insufficient to prove that the Seller had a separate bank account for the practice. Further, the ability of the Seller to filter income and expenses does not indicate that there are separate bank accounts for the Seller’s practices. Accordingly, this criterion has not been met.
The Taxpayer states that all of the employees that worked for the practice prior to the sale were employed by the Taxpayer after the sale. The Taxpayer states that prior to the sale the employees only worked at the building where the practice was located and that the employees only reported to the physician that worked at the practice. The Taxpayer further provides that upon purchasing the practice, it established a benefits agreement for its employees that gave credit to those employees for their years of service when employed by the Seller.
The information provided with the Taxpayer’s appeal does not support the Taxpayer’s contention that the employees only worked in the Seller’s oral surgery practice prior to the sale of the practice. The clause included in the employees’ benefits granting credit for service while employed by the Seller does not prove that the employees only worked in the Seller’s oral surgery practice. Accordingly, the Taxpayer has not met this criterion.
The Taxpayer states that upon the purchase of the assets of the oral surgery practice, the physician continued to operate in the same location as he had been when employed by the Seller’s oral surgery practice. The Taxpayer also provides that the Agreement requires that the Taxpayer be assigned the lease where the practice is located.
The information provided with the appeal is insufficient to support the Taxpayer’s contention that prior to the sale the Seller’s oral surgery practice was separately housed from its other medical practices. The Agreement provides that the Taxpayer must assume the lease at a certain location; however, the documentation provided by the Taxpayer does not indicate that the Seller’s practice was housed at the location stated in the Agreement. Accordingly, this criterion has not been satisfied.
Separate Fixed Assets
The Taxpayer states that all of the assets purchased from the Seller were located at one location and were not used interchangeably with other practices. The Taxpayer maintains that the equipment used by oral and maxillofacial surgeons is not interchangeable with other medical practice areas and would not be useful to them.
The fixed assets held taxable in the audit include office furniture, as well as equipment used by the Taxpayer to provide oral surgery treatment for its patients. While I agree that the fixed assets used for treatment would only be used by the oral surgery practice, I am unable to find that the other fixed assets held taxable in the audit were only used by the Seller in its oral surgery practice prior to the sale taking place. Accordingly, this criterion has not been met.
Based on the foregoing analysis, the criteria to determine whether the sale of the oral surgery practice constitutes the sale of a division have not been meet. Accordingly, the occasional sale exemption is not applicable to the fixed assets purchased by the Taxpayer.
Based on this determination, the assessments are correct as issued. The Code of Virginia sections, regulation and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions about this response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Craig M. Burns