Tax Type
Retail Sales and Use Tax
Description
Nexus requirements; Out-of-state seller
Topic
Taxability of Persons and Transactions
Date Issued
06-30-1994
June 30, 1994
Re: Request for Ruling: Retail Sales and Use Tax
Dear*************
This will reply to your letter of June 18, 1993 in which you request a ruling on the obligations of an out-of-state manufacturer/dealer to collect sales tax on items sold to Virginia residents.
Transaction #1: A national organization headquartered in State A asks its members to purchase a commemorative product which is produced in State B. Some of the organization's members who purchase the product are residents of Virginia. The purchasers place their orders with the national organization; the national organization forwards the orders to the manufacturer in State B, who ships the products to the Virginia residents through a dealer located in Virginia. The Virginia dealer collects no money for the sale but does receive a nominal handling charge. You ask who is responsible for collecting sales tax on the transaction.
A sales or use tax is clearly applicable to all of the goods shipped to Virginia purchasers. Under Va. Code §58.1-612 (copy enclosed), the sales tax is collectible from all persons who are dealers and who have sufficient contact with Virginia to require registration under Va. Code §58.1-613. The determination of tax collection responsibility in this case will hinge on which entity actually sells the products and the extent of that entity's connections with Virginia.
Based on the facts presented, the manufacturer potentially qualifies as a "dealer" under Va. Code §58.1-612 for purposes of this transaction. That section defines "dealer" to include every person who "manufactures or produces tangible personal property for sale at retail, for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth..."
Va. Code §58.1-612 also sets forth the "nexus" requirements which give the Commonwealth the authority to require dealers to register for collection and remittance of the sales tax. The statute provides in part that a dealer shall be deemed to have sufficient activity within the state to require registration if he (1) maintains or has within Virginia, directly or through an agent or subsidiary, an office, warehouse, or place of business of any nature; or (2) makes regular deliveries of tangible personal property within this Commonwealth by means other than common carrier. A person is deemed to be making regular deliveries if vehicles other than those operated by a common carrier enter this Commonwealth more than twelve times during a calendar year.
Your letter does not indicate the manner in which the tangible personal property is delivered to the Virginia residents through the Virginia dealer. If the manufacturer makes deliveries of its goods into Virginia more than twelve times per year by means other than common carrier, it is required to register to collect the Virginia sales tax. If the manufacturer does not make deliveries sufficient in number and scope to require registration, and if it does not meet any of the other nexus requirements in Va. Code § 58.1-612, it may voluntarily register with the department for the collection of the tax as a service to its customers.
You also ask what the result would be if the manufacturer maintains a retail sales store in Virginia that is not involved in the transaction at issue. Under Va. Code §58.1-612(C)(1), as long as a place of business of any nature is maintained in Virginia by the manufacturer, it is deemed to have sufficient activity in Virginia to require registration and collection of the tax on its sales to Virginia residents. This position is consistent with the U.S. Supreme Court's decision in National v. California Bd. of Equalization, 430 U.S. 551 (1977), in which it was ruled that the seller was required to collect California's use tax even though its physical presence in California was limited to two small offices, unrelated to the taxable sales.
However, it appears that the actual "sale" is between the national organization and its members. Your letter states that orders are first received by the national organization and that the price of the product to members of the national organization is the cost of the product plus a markup added by the national organization. This markup added by the national organization indicates that there is a sale for resale made by the manufacturer to the national organization. In such a case, the manufacturer would be drop shipping goods in Virginia, and the national organization would be deemed the dealer under Va. Code §58.1-612 and required to collect the tax if it has sufficient nexus with Virginia.
Transaction #2: A Virginia resident purchases a product from a manufacturer in State B, with delivery made through a dealer in Virginia. The dealer does not collect the purchase price for the product, but may add a small handling fee to the transaction. You ask who would be responsible for collecting the tax for this transaction and would the result differ if the manufacturer also has a retail store in Virginia which plays no role in the sale in question?
Based on the facts presented, it appears that the Virginia dealer is the agent of the manufacturer. Furthermore, delivery to the customer is made by means other than by common carrier. Under Va. Code §58.1-612, the manufacturer has sufficient presence in Virginia and would be required to collect the tax on its sales to Virginia residents.
The fact that the manufacturer has a retail store in Virginia does not change the result, but rather is another indication that the manufacturer has sufficient activity in Virginia to require it to register and collect tax on sales to Virginia residents. This is true even if the retail store plays no role in the sales in question.
I would note that in both transactions, the sales tax may be collectible from the Virginia dealer, as it satisfies the definition of "dealer" by possessing tangible personal property for distribution in Virginia. See Va. Code §58.1-612(B)(3).
If you have any other questions regarding this matter, please contact the department.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7087F
Rulings of the Tax Commissioner