86-80 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Catalogs distributed free of charge

Topic

Taxability of Persons and Transactions

Date Issued

04-29-1986

April 29, 1986

Re: 58.1-1821 Application/ Sales and Use Tax

Dear ****************

This will reply to your letter of January 27, 1986 requesting a hearing in the above referenced case and reconsideration of my previous determination in this matter, dated January 16, 1986. It is my understanding that a meeting was held with members of my staff on March 19, 1986 at which time taxpayer presented and submitted a detailed analysis of its position.

FACTS

******** (taxpayer), is a North Carolina corporation engaged in the sale of retail merchandise through its stores located in North Carolina, South Carolina and Virginia. To promote the sale of merchandise at its Virginia retail stores, taxpayer provides its customers with catalogs, free of charge, when they enter its stores. Such catalogs are also used by taxpayer to advertise storewide specials and seasonal merchandise of interest to its customers.

Pursuant to department audit, taxpayer was held liable for use tax on all such catalogs distributed to its store customers free of charge. Taxpayer contests such use tax assessment on the grounds that it subjects them to double taxation, inasmuch as taxpayer factors the cost of such catalogs in to the sale price of its merchandise which is sold subject to the sales tax. Taxpayer also contends that to deny it an exemption from the tax, while granting an exemption to other similarly situated retailers who purchase their catalogs for resale, ie. pursuant to resale exemption certificates, results in a case of unlawful discrimination by tax ruling by the department. In essence, taxpayer claims that since the substance of the two methods of distributing catalogs to customers 18 the same, the form of such transactions should not result in taxing one method and exempting the other.

Determination

§58.1-604 of the Code of Virginia imposes a tax

- upon the use or consumption of tangible personal property in this State, or the storage of such property outside the State for use or consumption in this State, in the amount of three percent... [o]f the cost price of each [such] item or article of tangible personal property used or consumed in this State.

"Use" is then defined in §58.1-602.20 of the Code 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.

It is a well settled principle of sales and use tax law that the purpose of the use tax is to complement the sales tax by imposing a tax on the use in one state of property purchased in another state, or on the use, storage or consumption of tangible personal property in a state which is not otherwise subject to such state's sales tax. Therefore, the use tax is intended to distribute the burden of this form of state revenue equally between goods purchased within a state and goods purchase outside such state for the purpose of use, storage or consumption within the state. See, e.g., Morris-Knudson Co. v State Tax Com. 242 Iowa 33, 44 N.W. 2d 449; and Johnston v. Gill, 224 NC 638, 32 S.E. 2d 30.

Consistent with the above, §58.1-611 of the Virginia Code provides that "[a] credit shall be granted against the taxes imposed by this chapter with respect to a person's use in this State of tangible personal property purchased by him in another state," subject to such other states sales or use tax, "not to exceed the amount of the tax imposed by this chapter."

It is another generally accepted principle of the sales and use tax law that no tax is imposed on tangible personal property purchased for resale pursuant to valid certificate of exemption. See e.g., Commonwealth v. Miller-Morton Co., 220 Va. 856, 263 S.E.2d 413 (1980). In Miller-Morton, the Virginia Supreme Court held that a company made a taxable use of certain items originally purchased exempt of the sales and use tax, pursuant to certificate of exemption, when it withdrew such items from inventory for free distribution to its customers. In so holding the Court was compelled to interpret Virginia's use tax law at §58.1-604, (cited in pertinent part above), and in doing so confirmed the department's long standing position that whenever tangible personal property purchased for resale is withdrawn from inventory for any purpose other than resale, it becomes subject to the use tax.

In addition, §58.1-623 of the Virginia Code provides,

- if a taxpayer who gives a certificate [of exemption] makes any use of the property other than an exempt use or retention, demonstration or display while holding property for resale, distribution or lease... such use shall be deemed a taxable sale by the purchaser... as of the time the property... is first used by him, and the cost of the property to him shall be deemed the sales price of such retail sale.

While the catalogs in the present case never became an actual part of taxpayer's inventory of items purchased for resale, as they did in the Miller-Morton case, its act of taking possession and its exercise of complete dominion and control over such catalogs in Virginia, purchased out of state, is inconsistent with anything but a finding of taxable use and consumption by taxpayer of such catalogs within the meaning of Virginia's sales and use tax law.

Furthermore, taxpayer does not qualify for the exemption contained in Virginia's sales and use tax law for catalogs and other printed materials. §58.1-608 (30) of the Code, as written during the period covered by this audit, provided an exemption from the sales and use tax for,

- catalogs and other printed materials used in the advertising of tangible personal property for sale, the envelopes, containers and labels used for packaging and mailing same, and paper furnished to a printer for fabrication into catalogs..., when stored for twelve months or less in the Commonwealth and distributed for use without the Commonwealth. (Emphasis added).

Inasmuch as all exemptions from the sales and use tax are to be strictly construed against the taxpayer, (see e.g., Webster Brick Co. v. Department of Taxation, 219 Va. 81, 245 S.E. 2d 252, 254 (1978)), and since the catalogs in the present case were not stored in Virginia for twelve months or less for distribution outside this state, the exemption in §58.1-608 (30) is not available to exempt taxpayer's catalogs in this case.

Several other states have also addressed the question of the application of their sales and use tax to donations of tangible personal property by dealers to customers.

For example, pursuant to North Carolina's use tax law, the North Carolina Attorney General issued an opinion letter, dated 12-12-53, which provided generally that automobile dealers gave free accessories to purchasers of cars were "using" such accessories and therefore were subject to North Carolina's use tax. In addition the Supreme Court of Florida, pursuant to that state's use tax law, held in the case of U. S. Gypsum Co. v. Green, 110 So. 2d 409 (1959), that miniature samples of a company's products and printed materials, including advertising brochures, distributed free of charge to wholesale and retail dealers, were subject to the use tax, since such items were imported into Florida for use or consumption by the company and not for resale.

Based on the foregoing, and my previous ruling and determination in this ease, taxpayer's contention that it is being subjected to double taxation is without support in fact or in law. Nor has taxpayer provided any substantive new basis to support its contention that the department has engaged in unlawful discrimination by tax ruling in this ease in violation of the equal protection clauses of the U.S. and Virginia Constitutions.

As amply demonstrated by all of the above, the department's taxing posture in this case is mandated by statutory and case law of long standing. Therefore, the department is not engaging in unlawful administrative discrimination by ruling when it merely enforces and effectuates state tax laws and regulations as they are presently written and judicially construed.

In accordance with all of the above, and my previous ruling and determination in this case, I find no basis for correction of the instant assessment which is now due and payable. For taxpayer's future reference and convenience I have enclosed copies of previous determinations of the department on issues similar to those raised in this case. This determination shall be final.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner