Tax Type
Retail Sales and Use Tax
Description
Three party transactions
Topic
Taxability of Persons and Transactions
Date Issued
05-12-1986
May 12, 1986
Re: Request for Ruling/Sales and Use Tax
Dear *****************
This will reply to your letter of March 14, 1986, in which you request a ruling on the application of the sales tax to certain three-party transactions.
FACTS
************** (Vendor) is engaged in the sale and leasing of communications and data processing equipment. When the vendor sells equipment, the sale contract specifies that title to the equipment passes to the purchaser when installation of the equipment is completed.
In some instances, the person placing the equipment order (customer) may notify the vendor prior to the passage of title that a third party will actually purchase the equipment and lease it to the customer. In such an event, title to the equipment passes to the third party. In other instances, however, a customer may notify the vendor of its intent to involve a third party after title has been transferred. The vendor requests a ruling on the application of the sales tax when such notification is received after the passage of title. Specifically, the vendor inquires whether it will be relieved of the duty to collect the tax from a customer in such circumstances by receiving from the customer a resale exemption certificate or an executed sale contract with a provision in the assignment stating that the assignment is retroactive to the date on which title passed.
RULING
Section 58.1-603 of the Code of Virginia imposes the sales tax with respect to-"each item or article of tangible personal property when sold at retail." As defined in Virginia Code Section 58.1-602.16, the term "sale" means "any transfer of title or possession, or both...in any manner or by any means whatsoever, of tangible personal property...for a consideration."
Based upon the above statute, all sales are taxable at the time of purchase unless specifically exempted from the tax. Therefore, the
vendor should collect the sales tax on all sales of equipment unless a customer furnishes a valid certificate of exemption. As noted in Virginia Code Section 58.1-623, such a certificate "shall relieve the person who takes...(it) from any liability for the payment or collection of the tax, except upon notice from the Tax Commissioner that such certificate is no longer acceptable."
In this case, the vendor has properly charged the sales tax to its customers when notification of intent to involve a third party purchaser is not made until after the passage of title and when the customer does not have an exemption certificate on file. The only manner in which the vendor would be relieved of the responsibility for the collection of tax in such an event would be for the customer to furnish a valid certificate of exemption after the passage of title.
A customer in such cases may furnish the vendor with a resale certificate of exemption inasmuch as it will resell the equipment to a third party. However, pursuant to Virginia Code Section 58.1-623.C, the provision of such a certificate would be improper if the customer makes any taxable use whatsoever of the equipment prior to transferring title to a third party. That statute provides that "[i]f 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 in the regular course of business, such use shall be deemed a taxable sale by the taxpayer as of the time the property...is first used by him." Therefore, the testing, programming, input of information, or any other use of equipment by a customer prior to the actual transfer of title to a third party would negate the resale exemption.
In determining whether a taxable use of equipment has been made prior to the transfer of title to a third party pursuant to Virginia Code Section 58.1-602.16, a customer must look to the time that the sale to the third party actually takes place. Therefore, a contract clause stating that the sale to the third party is retroactive to the date on which title originally passed from the vendor to the customer would have no bearing whatsoever on such a determination.
When a customer determines that a taxable use has not been made before reselling equipment and furnishes the vendor with a valid resale exemption certificate, the vendor will be relieved of the duty to collect and remit the tax on the sale.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner