Tax Type
Retail Sales and Use Tax
Description
Advertising; Interstate transactions; Packaging; Resales; Promotional and advertising materials for marketing cosmetics
Topic
Taxability of Persons and Transactions
Date Issued
08-26-1994
August 26, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*****
This will reply to your letter of June 15, 1993 in which you seek correction of sales and use tax assessed to ******* "the Taxpayer" for the period March, 1987 through February, 1993.
FACTS
The Taxpayer is engaged in the manufacture, distribution and marketing of cosmetics and is domiciled outside Virginia. The Taxpayer maintains a sales force, under a separate affiliate, throughout the state to develop sales contracts with retailers for distribution of its cosmetic products. As a result of the department's audit, the Taxpayer was assessed use tax on certain promotional and advertising items used to market their products in Virginia. Displays, testers, gifts with purchase and certain samples are marketed with the products, while advertising inserts, mailers and other samples are the subject of direct mailing to the general public. The aforementioned items are provided at no charge to the retailers with the exception of the testers. Samples provided to sales representatives are not at issue in this appeal.
The Taxpayer's primary disagreement with the application of the tax is based on the auditor's assertion that the Taxpayer exercises a use over the contested items in Virginia. The Taxpayer asserts that it relinquishes ownership of the contested items once the property is placed in transit via common carrier outside Virginia. As such, the transactions between the Taxpayer and the Virginia retailers are sales occurring in interstate commerce.
Alternatively, the Taxpayer contends that the displays qualify for the packaging exemption provided under Va. Code §58.1-609.3(2)(iv) while the gifts with purchase qualify for the resale exemption as items marketed with the sale of the regular cosmetic products. Additionally, a portion of the assessed tax constitutes labor and overhead associated with in-house advertising and thus exempt under Virginia Regulation (VR) 630-10-3.
DETERMINATION
VR 630-10-51 describes the interstate commerce exemption, stating that "[t]he tax does not apply to sales of tangible personal property in interstate or foreign commerce. A sale in interstate or foreign commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia." Va. Code § 58.1-602 defines use as "the exercise of any right or power over tangible personal property incident to the ownership thereof."
The Taxpayer contends that its position is consistent with the above and supported by the U.S. Supreme Court's opinion in Quill Corporation v North Dakota, 112 S. Ct. 1904 (1992) and Complete Auto Transit. Inc. v. Brady, 430 U.S. 274 (1977), both of which held that business must have substantial nexus within the state in order for such state to impose its use tax.
The Taxpayer further asserts that its situation is similar to that addressed in Hoffman-LaRouche, Inc. v. Porterfield, 243 N.E.2d 72 (Ohio 1968). In that case, the Ohio Supreme Court decided that the taxpayer exercised no use over free samples of pharmaceutical products and other promotional items mailed from outside Ohio to doctors and hospitals in Ohio.
Based on the above and a review of additional information received from the Taxpayer, I agree that the Taxpayer has made no taxable use of the contested items in Virginia and that the sales constitute transactions which occur in interstate commerce.
The displays and testers are generally shipped directly to Virginia retailers with the retail product for placement in stores. The displays serve to stock and present the product for sale to the general public while the testers are part of the display and are used by the general public to sample the product before purchase. The Taxpayer does not require the return of the displays or testers and as such, no use is demonstrated by the Taxpayer. Of course, had employees or representatives of the Taxpayer made use of the items in Virginia prior to their transfer to the retailers, the tax would apply.
The samples attached to advertising inserts, the advertising inserts themselves, and the mailers, when the subject of direct mail to Virginia residents, are exempt of the use tax consistent with the policy set forth in P.D. 93-41 (3/4/93) and P.D. 85-35 (2/28/85), copies enclosed. In both cases, catalogs were printed in another state and direct mailed by the printer to residents in Virginia free of charge. The Tax Commissioner held that the taxpayers exercised no use of the catalogs in Virginia and therefore the use tax did not apply to such transactions.
The gifts with purchase and the portion of the samples packaged with the product for ultimate sale to customers both constitute items marketed with the product being sold and as such, qualify under the resale exemption provided in Va. Code §58.1-602.
While the Taxpayer is involved in the promotion of its cosmetics in Virginia by means of its sales force and by placement of certain promotional and advertising items in Virginia, such activities are deemed insufficient to impose the use tax as intended under Virginia Code §58.1-604 and the cited caselaw. This is because the sales force does not make any use of the items in Virginia prior to their transfer to the retailers. Therefore, in accordance with my findings the assessment will be abated.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7074J
Rulings of the Tax Commissioner