Tax Type
Retail Sales and Use Tax
Description
Application of sales and use taxes; Cosmetic products
Topic
Taxability of Persons and Transactions
Date Issued
09-16-1994
September 16, 1994
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear****************
This will reply to your letters of August 6, 1993 and March 28, 1994 in which you seek correction of sales and use tax assessed to the***********(the "Taxpayer") for the period April, 1987 through March, 1993.
FACTS
The Taxpayer is comprised of six affiliated corporations engaged in the manufacture, distribution and marketing of cosmetics and is domiciled outside Virginia. The Taxpayer owns no stores and has no offices or other places of business in Virginia. The Taxpayer maintains a sales force throughout the state to develop sales contracts with selected department stores for distribution of its cosmetic products. The Taxpayer does not rent counter space from any of the department stores or maintain a consignment inventory in the state. The Taxpayer provides the department stores with counter items - lamps, mirrors, product and light displays, counter chairs, computers, skin analyzers, transparencies and vases for use in promoting and advertising its products. The Taxpayer also provides testers and demonstrators; samples for distribution to customers upon purchase of other products; and printed items such as catalogs, brochures, and shopping bags, all free of charge. The testers, demonstrators and samples are manufactured by the Taxpayer and are of the same type and size as the cosmetic products offered for sale in the regular course of business. The promotional and advertising materials are all used within the department stores to promote sales of the cosmetics to the general public.
As a result of the department's audit, the Taxpayer was assessed use tax on the aforementioned items shipped directly from the Taxpayer to the department stores.
The Taxpayer concedes that it retains title to the lamps, mirrors and displays and therefore the tax is applicable.
The Taxpayer protests the application of the tax to the other items and asserts that it makes no use of the contested items in Virginia since title passes to the department stores outside Virginia. Alternatively, the Taxpayer argues that certain of the contested items qualify for the resale and advertising exemptions. Finally, the Taxpayer requests removal of the period April, 1987 and April, 1990 from the assessments as tax was assessed outside the statute of limitations.
DETERMINATION
Virginia Regulation (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 ships the cosmetics and contested items by common carrier and contends that title to such items is relinquished and that possession and ownership are transferred to the department stores outside Virginia. To substantiate its argument, the Taxpayer cites P.D. 93-41 (314193) and P.D. 85-35 (2128185) in which catalogs printed in another state and direct mailed by the printer to residents in Virginia free of charge were held exempt as the taxpayers were deemed to exercise no use of the catalogs in Virginia. The Taxpayer asserts that the treatment of the contested items should be comparable to the printed items discussed in the rulings.
The Taxpayer also cites Hoffman-LaRouche, Inc. v. Porterfield. 243 N.E.2d 72 (Ohio 1968) to support its position. In Hoffman-LaRouche. Inc., the Ohio Supreme Court held 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. The Taxpayer argues that like Hoffman-LaRouche, it divests itself of any control over the contested items outside Virginia and as such exercises no use of the items once they are received by the department stores. The Taxpayer also views its position as consistent with the decision rendered in Commonwealth v. Miller-Morton Co.,220 Va. 852 (1980), in which the Virginia Supreme Court ruled that a taxpayer's withdrawal of samples and promotional items from an inventory located in Virginia was taxable regardless of the fact that ultimate delivery occurred outside Virginia. The Taxpayer argues that it maintains no inventories in Virginia and makes no withdrawals from inventory in Virginia.
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 contested items are generally shipped directly to Virginia retailers with the retail product for placement in the stores. The counter chairs, computers, skin analyzers, transparencies and vases become the property of the retailers for use by their salespersons in selling the cosmetic products. The testers and demonstrators are placed on counter tops and used by the general public to sample products before purchase and the catalogs and brochures are also available at the counters for distribution to the general public. The samples and shopping bags are distributed at the point of sale and therefore constitute items marketed with the products sold. As such, no use is demonstrated by the Taxpayer. Of course had employees or representatives of the Taxpayer made use of the contested items in Virginia prior to their transfer to the retailers, the tax would apply.
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 insufficient to impose the use tax. 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 assessments will be abated.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7314J
Rulings of the Tax Commissioner