Tax Type
Retail Sales and Use Tax
Description
Shipping and handling charges, Merchandise samples; Retail and catalog sales
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
03-03-1994
March 3, 1994
Re: §58.1-1821 Application: Retail Sales & Use Tax
Dear*************
This will reply to your letter of May 24, 1993 in which you contest a sales and use tax assessment to your company,*********(the "Taxpayer"), for the period January 1990 through December 1992.
FACTS
The Taxpayer operates a retail store in Virginia and is also a catalog merchandiser. The vast majority of its sales are to out- of-state purchasers. The Taxpayer contests the tax assessed in the recent audit with respect to the following issues: combined shipping and handling charges, merchandise samples, and gifts shipped to third parties.
DETERMINATION
I will address each of the above issues individually below:
Shipping and Handling Charges
Subdivision 3 of Va. Code §58.1-609.5 exempts from the sales tax transportation charges separately stated. Virginia Regulation (VR) 630-10-107 defines transportation and delivery charges as "charges for delivery from the seller to the purchaser...and includes postage or common carrier charges." Handling charges are not transportation charges and thus are taxable. Furthermore, if transportation charges are not separately stated or are combined with handling charges they become taxable. In the instant case, sales tax was not collected from customers on combined shipping and handling charges.
Since this is the first audit of the Taxpayer, I will accept the Taxpayer's offer to pay the tax on 50% of the amount assessed as a reasonable compromise. In the future, however, the Taxpayer must collect the tax on the combined charges.
Merchandise Samples
The Taxpayer buys various items for evaluation to determine if they are suitable for inclusion in its catalogs. The products are either returned to a vendor for credit, retained for use in developing catalogs featuring the items, or shipped to the retail store for sale to local customers.
Items that were returned to a vendor for credit were not included in the assessment. The Taxpayer contests the assessment on the samples that were evaluated but not used in its catalog.
Va. Code §58.10-623 C provides that
-
- if a taxpayer who gives a certificate (of exemption)...makes any use of the property other than an exempt use or retention, demonstration, or display while holding property for resale...in the regular course of business, such use shall be deemed a taxable sale to the taxpayer...
Accordingly, notwithstanding the final disposition of the product samples, the Taxpayer's use of samples in its evaluation process subjected such to the tax under the above Code section. While the assessment with respect to this issue is correct, I will agree to remove the tax assessed on items originally purchased as samples but which were later sent to the Taxpayer's retail store for resale.
Gifts Shipped to Third Parties
The Taxpayer contests the tax assessed on items shipped at purchasers' requests to third parties. As explained in P.D. 90-38 (3/20/90), copy enclosed, the department has traditionally held that in a three-party gift transaction where an out-of-state purchaser phones an order to an instate vendor for delivery to an out-of-state recipient, the out-of-state purchaser takes constructive possession of the gift at the time of order, and thus the transaction is subject to Virginia tax. Therefore, the assessment with respect to this issue is correct.
You should note, however, that the mail-order gift issue is presently in litigation, The Smithfield Ham and Products Company. Inc. v. Commonwealth of Virginia, Department of Taxation, (Cir. Ct. Isle of Wight County (Law No. 5127, January 29, 1992)). To protect any rights you may have pending the outcome of the litigation you may wish to pay the outstanding assessment and file a protective claim for refund pursuant to Va. Code §58.1-1824.
Accordingly, the assessment will be revised as set forth above. A revised Notice of Assessment will be mailed to the Taxpayer as soon as practicable and should be paid within 30 days in order to avoid the accrual of additional interest or collection activities.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
Rulings of the Tax Commissioner