Tax Type
Retail Sales and Use Tax
Description
Resales; Free samples
Topic
Taxability of Persons and Transactions
Date Issued
03-02-1994
March 2, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This will reply to your letter of April 22, 1993 in which you seek correction of a sales and use tax assessment issued to*************("the Taxpayer"). I regret the delay in responding to your correspondence.
FACTS
The Taxpayer, a manufacturer of coated abrasive products, was audited for the period March 1990 through December 1992. The only issue under protest is the tax assessed on samples withdrawn from the Taxpayer's inventory and distributed free of charge.
The Taxpayer maintains that its products are generally sold to other manufacturers through independent distributors. Thus, the bulk of the Taxpayer's sales are exempt sales for resale. The Taxpayer further maintains that its products constitute exempt supplies which are used by these other manufacturers in exempt manufacturing activities.
The Taxpayer contends that because the samples are given to recipients who ultimately use them directly in manufacturing products for sale or resale, those samples are not subject to the tax.
DETERMINATION
Virginia Regulation (VR) 630-10-63 provides an exemption from the tax for supplies used directly in the manufacturing of products for sale or resale. However, the ultimate use made of the Taxpayer's products is not at issue; rather, the question is whether the Taxpayer made a taxable or exempt use of the samples which were withdrawn from its resale inventory and distributed free of charge.
VR 630-10-32 provides that:
Any person who withdraws an item of tangible personal property for his/her own use from an inventory of property on which no tax has been paid must report tax on the cost price of all property withdrawn for purposes other than sale. (emphasis added)
The only exception to this general rule is provided by Va. Code Sec. §58.1-609.8(5) which allows an exemption from the tax for property withdrawn from inventory and donated to certain nonprofit organizations or to the Commonwealth.
Furthermore, Va. Code §58.1-602 defines "use" to mean:
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. (emphasis added)
The free distribution to another entity of property which is manufactured by the Taxpayer constitutes use of that property as the term is statutorily defined. In making a free distribution, the Taxpayer is clearly exercising a right or power over the property.
I also find that the determination in the instant case is consistent with the Virginia Supreme Court's findings in Commonwealth v. Miller-Morton, 220 Va. 852, 263 S.E.2d 413 (1980). In that case the Court's decision focused entirely on Miller--Morton's taxable use of the property and not on any subsequent use made in the chain of commerce. Thus, the Court concluded that "when the products lost their 'for resale' status, Miller-Morton became the ultimate purchaser."
The analogy between Miller-Morton and the instant case is clear in that a taxable event occurred at the time property was withdrawn from inventory, and the application of the tax is not negated by the ultimate use of the property.
Accordingly, I find that the liability was correctly assessed.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
Rulings of the Tax Commissioner