Tax Type
Retail Sales and Use Tax
Description
Intercompany transfers and sales; Application of sales and income taxes
Topic
Taxability of Persons and Transactions
Date Issued
05-29-1991
May 29, 1991
Re: § 58.1-1821 Application: Sales and Use Tax
Dear ****
This will reply to your letter in which you seek correction of a sales and use tax assessment for your clients, ******************** ("the Taxpayers").
FACTS
The Taxpayers are three separate and distinct S corporations owned in identical percentage interests by the same individuals and are engaged in the fabrication of precast concrete products for use in real property construction contracts. For convenience, the contracts are entered into by one of the sister corporations and products produced by the other corporations are then transferred to the corporation performing the contract. The company with the contract is billed by its sister companies based on the fabricated cost of the products and is not charged the sales tax. However, the company with the contract later remits the use tax based on the cost price of the raw materials which formed the products it purchased.
Pursuant to an audit of the corporations for the periods August, 1986 through June, 1989; August, 1988 through June, 1989; and November, 1988 through June, 1989, respectively, the intercompany transfers were held taxable as sales of tangible personal property and the Taxpayers assessed for failure to collect the tax on the intercompany transfers. However, the Taxpayers were allowed a credit for the use tax paid on the property by its sister company. The Taxpayers contest the assessment, contending that the intercompany transfers are not taxable sales and that although the corporations had not formed a joint venture, they were performing as one unit. In addition, the Taxpayers request clarification of the application of the sales and use tax and the income tax if the names of all of the corporations were placed on a contract or if a portion or all of a contract is assigned to an affiliated corporation.
DETERMINATION
Sales Tax
Va. Code § 58.1-603 imposes the sales tax on "the gross sales price of each item . . . of tangible personal property when sold at retail or distributed in this Commonwealth." Va. Code § 58.1-602 defines the term "sales price" as "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale . . ." and defines "sale" to mean "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property . . . for a consideration."
Based on the above statutes, transfers of tangible personal property for consideration between separate taxable entities are generally deemed "sales" and are subject to the sales and use tax. Although the three corporations in this case are owned in identical percentage interests by the same individuals, the sale of items between the three S corporations cannot be viewed the same as intracompany charges for the use of tangible personal property, since in this case there are separate and distinct taxable corporate entities, while in the latter there is only one such entity. Therefore, I find that the intercompany transfers at issue were correctly held taxable in the department's audit.
Further, the mere addition of the names of all of the corporations to a contract or the addition of a provision to the contract which allows assignment of a portion or all of the contract would generally not alter the taxability of the transfers as the Taxpayers would continue to be separate taxable entities. However, if the three corporations jointly entered into a contract to share the risks, profits and losses, instead of receiving the normal price for goods and services, the transfers at issue would not be subject to the tax.
In addition, I would note that in general a real estate construction contractor, whether he be a general contractor or a subcontractor, stands alone for sales and use tax purposes. As such, if a subcontractor will also affix the tangible personal property to real estate for the general contractor, then the subcontractor will generally not be deemed to be making a taxable sale to the general contractor, but will instead be deemed the taxable user or consumer of such property and will assume the sales and use tax liability for the property furnished. (See Virginia Regulation (VR) 630-10-27, copy enclosed.)
Income Tax
Virginia generally conforms to the federal treatment of S corporations. The addition of the names of all of the corporations to the contracts would not generally change the application of the Virginia income tax to the intercompany transfers. The manner of execution of the transactions, rather than the form of the contract provisions, would determine the income tax applications. As the Taxpayers in this case would apparently have income from both within and without Virginia, I have enclosed a copy of a prior department ruling, P.D. 88-165 (6/29/88), which explains the application of the Virginia income tax to S corporations in general.
Please contact the department if you have additional questions. An updated assessment will be sent to the Taxpayers as soon as practicable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner