October 26, 2021
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to the letter submitted on behalf of ***** (the “Taxpayer”) seeking correction of the assessment issued for the period May 2007 through June 2013. I apologize for the delay in this response.
FACTS
The Taxpayer operates a marine cargo terminal and is in the business of providing marine cargo handling services at a port in Virginia. The Department audited the Taxpayer and assessed use tax on the cost price of ship-to-shore cranes used by the Taxpayer to handle containers at the shipping and receiving port.
On September 20, 2005, ***** (“Corporation A”) entered into a Specific Purchase Contract (the “Contract”) with the manufacturer to purchase the cranes. The Taxpayer is an affiliate of Corporation A. The Contract was amended on February 9, 2007 to allow Corporation A to assign the Contract and title to the cranes subject to the Contract to any of its affiliates or subsidiaries. The amendment also allowed ***** (“Corporation B”), as an assignee, to reassign the Contract and title to the cranes subject to the Contract to an affiliate of Corporation A or a subsidiary of Corporation B. On February 10, 2007, Corporation A assigned “all of its right, title and interest in and to the certain Specific Purchase Contract dated September 20, 2005” to Corporation B. Corporation B then notified the manufacturer on February 10, 2007 that it was taking title to the crane components in international waters. On February 11, 2007, Corporation B transferred title to the crane components to the Taxpayer in international waters. The crane components were delivered by the manufacturer to the Taxpayer at the Virginia port on February 17, 2007.
The Taxpayer contests the Department’s use tax assessment on several grounds. The Taxpayer maintains that the transfer of the cranes constitutes a corporate reorganization that qualifies for the occasional sales exemption in Virginia Code § 58.1-609.1 2. The Taxpayer further claims that it is not liable for the use tax because it did not purchase the cranes. The Taxpayer states that the cranes were received as a gift from Corporation B and no consideration was paid by the Taxpayer for the cranes. The Taxpayer contends that only the party that purchased the cranes, Corporation B, can be assessed the tax. The Taxpayer notes, however, that Corporation B did not exercise a taxable use of the cranes in Virginia and cannot be held liable for the use tax. Finally, the Taxpayer believes that the use tax assessment is erroneous because it is barred by the statute of limitations.
DETERMINATION
While the Taxpayer sets forth a number of reasons in contesting the assessment, the primary issues before me are whether the Taxpayer made a taxable use of the cranes for Virginia retail sales and use tax purposes, and whether the cranes were put into use during the audit period at issue.
Use Tax
Virginia Code § 58.1-604 imposes the use tax on “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 that property in the regular course of business. Use does not include the exercise of any right or power, including use, distribution, or storage, over any tangible personal property sold to a nonresident donor for delivery outside of the Commonwealth to a nonresident recipient pursuant to an order placed by the donor from outside the Commonwealth via mail or telephone. Use does not include any sale determined to be a gift transaction, subject to tax under § 58.1-604.6.
Based upon the terms of the Project Summary and the Specific Purchase Contract and the aforementioned authorities, I find that while the Taxpayer took title to the crane components in international waters, the Taxpayer did not take possession of the cranes until the cranes were erected, tested and commissioned by the seller. Section 1.4 of the Project Summary provides that “Crane transport from manufacturing site to delivery site will be organized, managed, supervised by and will take place under the full responsibility of the manufacturer. Delivery includes full erection and testing on delivery site.” Section 1.15 provides that the “Seller will guarantee and certify the equipment design, its manufacturing, installation and operation under local regulations that may be required and certification of the complete installation.” It further provides that the seller is required to “submit calculations for off-loading the cranes to Virginia local port authorities for review and approval.” Section IV of the Specific Purchase Contract provides that “Pursuant to the receipt of a signed Specific Purchase Contract, the Seller shall construct, deliver to the Site and commission the Crane subject to and in accordance with the terms and conditions of this Contract and the Main Purchase Agreement.”
Although other entities were involved in the procurement of the cranes, the Taxpayer ultimately held title to, possession of, and control over the cranes. While the Taxpayer may not have purchased the cranes, the Taxpayer clearly took possession of the cranes, placed the cranes into service, and began to make a taxable use of the cranes at the Virginia port once the terms of the contracts were completed. This is evidenced in the documentation submitted by the Taxpayer that provides that the cranes were recorded on the Taxpayer’s fixed assets register and placed into service on August 1, 2007.
Statute of Limitations
The Taxpayer maintains that the use tax assessment is incorrect because the assessment was issued outside of the statute of limitations. The Taxpayer contends that the transfer of the cranes occurred on February 10, 2007, outside of the audit period that commenced on May 1, 2007.
As stated above, the terms of the contracts had to be completed before the Taxpayer took possession and control over the cranes. Also as stated above, documentation submitted by the Taxpayer provides that the cranes were recorded on the Taxpayer’s fixed assets register and placed into service on August 1, 2007.
Occasional Sale Exemption/Internal Revenue Code § 351 Transaction
Relying on Virginia Code § 58.1-609.10 2, the Taxpayer maintains that the transfer of the cranes from Corporation B qualifies for the occasional sale exemption. The Taxpayer contends that the transfer of the cranes qualified for non-recognition treatment for federal income tax purposes pursuant to Internal Revenue Code (IRC) § 351, and as such, should be exempt from the Virginia sales and use tax under the occasional sale exemption.
Virginia Code § 58.1-609.10 2 provides that the Virginia retail sales and use tax does not apply to an occasional sale. 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.
In support of its contention that the occasional sale exemption applies to the transfer of the cranes, the Taxpayer provided copies of documents from a Board meeting held by Corporation A. One of the documents recommends that the Board approve a revolving credit facility. The document states that the purpose of the revolving credit facility is to provide financing for the Taxpayer’s project and for general corporate purposes. The Taxpayer maintains that the resolution was intended to finance the contribution of the cranes to the Taxpayer’s capital account. The equity injection and financing document describes how financing will be made to the Taxpayer by Corporation A.
Based upon the information before me, the Taxpayer has not demonstrated that the transfer of the cranes represents a reorganization or liquidation of a business as considered in the definition of occasional sale. Further, the Taxpayer has not demonstrated that the cranes were transferred to the Taxpayer in exchange for stock as provided in IRC § 351. Accordingly, I find that the occasional sale exemption does not apply to the transfer of cranes from Corporation B to the Taxpayer.
In Public Document (P.D.) 95-79 (4/12/1995), cited by the Taxpayer, regarding the application of the sales tax to the transfer of assets from a portion of the taxpayer’s business in exchange for all of the issued and outstanding shares of two newly-formed subsidiaries. Under the occasional sale statutes and regulation, the Tax Commissioner ruled that while the transaction was not for the sale or exchange of all or substantially all of the taxpayer’s assets, the IRC § 351 tax-exempt reorganization of assets for stock in the commencing subsidiaries was a qualifying reorganization for purposes of the occasional sale exemption. The public document reflects the Department’s long-standing policy regarding tax-exempt reorganizations of assets for stock. It is instructive in this instance because it demonstrates that in order for an IRC § 351 tax-exempt reorganization to qualify for the occasional sale exemption, there must be an exchange of assets for stock. The Taxpayer maintains that the occasional sale exemption applies because the transfer of the cranes represents an IRC § 351 tax-exempt reorganization. However, as required by policy set out in P.D. 95-79, the transfer of the cranes must have resulted from an exchange of stock.
Additionally, the ruling in P.D. 98-76 (4/23/1998), cited by the Taxpayer, does not apply in this instance. In this public document, the assets at issue were exchanged for stock as part of a corporate reorganization. As stated above, the transfer of the cranes from Corporation B to the Taxpayer does not constitute a reorganization for Virginia sales and use tax purposes because an exchange of stock did not occur.
Gift Transaction
The Taxpayer further contends that the transfer of the cranes is not subject to the sales tax because the Taxpayer maintains that the transfer of the cranes to the Taxpayer constitutes a gift transaction that occurred outside of Virginia, and that no consideration was transferred from the Taxpayer to Corporation B. Relying on Title 23 of the Virginia Administrative Code (VAC) 10-210-680, the Taxpayer also maintains that no use tax should accrue to Corporation B (the donor) once the cranes entered Virginia.
Virginia Code § 58.1-604.6 A provides that:
For purposes of this section, a gift transaction means a retail sale resulting from an order for tangible personal property placed by any means by any person that is for delivery to a recipient, other than the purchaser, located in another state. A gift transaction does not include a business transaction between the purchaser and recipient or a transaction whereby the purchaser is contractually obligated to provide the tangible personal property to the recipient. [Emphasis added.]
The transfer of the cranes was made pursuant to the Specific Purchase Contract and constitutes a business transaction as considered in Virginia Code § 58.1-604.6 A. Based upon the Specific Purchase Contract and addenda, Corporations A and B are contractually obligated to provide the cranes to the Taxpayer. In accordance with the aforementioned authorities, a gift transaction has not occurred in this instance because the transaction at issue is a business transaction. Further, Corporation B transferred title to the cranes to the Taxpayer outside of Virginia, in international waters. Since Corporation B did not hold title to the cranes when they entered Virginia, a taxable event did not occur in Virginia with respect to Corporation B, and Corporation B is not subject to the Virginia sales or use tax on the transfer of the cranes to the Taxpayer. Notwithstanding, a determination that Corporation B is not subject to the Virginia sales or use tax on the transfer of the cranes does not mean that the Taxpayer is not liable for the sales or use tax with respect to the cranes.
Constructive Delivery Argument
The Taxpayer also maintains that the constructive delivery concept applies in accordance with the above gift transaction regulation, Title 23 VAC 10-210-680. Citing prior rulings of the Tax Commissioner, the Taxpayer assets the Department has historically taken the position that a taxable use occurred in Virginia when an out-of-state purchaser placed an order by telephone or mail with a Virginia dealer for shipment of a gift to an out-of-state recipient. The Taxpayer further contends that where the exercise of that right or power occurs in Virginia, the Department deems the donor to have taken constructive delivery of the goods in Virginia.
The Taxpayer’s constructive delivery argument does not apply in this instance because the transfer of the cranes to the Taxpayer is not a gift transaction as stated above. Further, while the Taxpayer accepted title to the crane parts in international waters, the Taxpayer did not accept possession of the cranes in international waters. In accordance with the contracts, possession of the cranes did not pass to the Taxpayer until the cranes were erected, tested and commissioned by the seller. It was at that point that possession of the cranes transferred to the Taxpayer for its use in the operation of its business at the Virginia port.
The public documents cited by the Taxpayer fail to support the Taxpayer’s contention that it took constructive delivery of the cranes outside of Virginia. The facts in the cited public documents are not similar to the facts in the appeal filed by the Taxpayer. Specifically, in P.D. 85-35 (2/28/1995), P.D. 93-41 (3/4/1993) and P.D. 97-61 (2/10/1997), the sales at issue were for printed advertising that was printed outside of Virginia and delivered to Virginia residents. The taxpayers instructed the printers to mail the printed advertising to residents in Virginia. The Tax Commissioner found that the advertising materials at issue were direct mail products and that the taxpayers did not make a taxable use of the printed materials by instructing that the materials be delivered to Virginia residents. Under such circumstances, the sales were not subject to the Virginia retail sales and use tax.
Additionally, the rulings in P.D. 94-266 (8/26/1994), P.D. 94-278 (9/16/1994) and P.D. 94-294 (9/2/1994) are not applicable. These public documents address the application of the retail sales and use tax to marketing materials shipped by manufacturers to Virginia retailers. It was determined by the Tax Commissioner that the materials were not subject to the Virginia sales tax because the sales occurred in interstate commerce. These rulings do not apply to the transfer of cranes to the Taxpayer because the transfer occurred in Virginia once the cranes were erected, tested and commissioned by the seller.
CONCLUSION
In accordance with Virginia Code § 58.1-604 and the Virginia Code § 58.1-602 definition of use, I find that the Taxpayer made a taxable use of the cranes in its operations at the Virginia port, and thus is subject to the use tax on the cost price of the ship-to-shore cranes. I also find that the Taxpayer placed the cranes into service, and made a taxable use of such cranes during the audit period. Accordingly, the assessment is not barred by the statute of limitations and is correct as issued. Finally, constructive delivery is not a factor in determining whether the assessment is correct because the Taxpayer did not take actual possession of the cranes until the terms of the contracts were completed.
Based upon the decisions stated in this letter, the assessment is correct. A revised bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of this letter.
The Code of Virginia sections, regulation, and public documents cited 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 *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/568P