Tax Type
Retail Sales and Use Tax
Description
Application of sales and use taxes; Cosmetic products
Topic
Taxability of Persons and Transactions
Date Issued
09-27-1994
September 27, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear***************
This will reply to your letter of August 30, 1993 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 engaged in the manufacture, distribution and marketing of cosmetics and skin treatments and is domiciled outside Virginia. The Taxpayer maintains a sales force throughout the state to develop sales contracts with department stores and distributors (who resell to beauty salons and other retailers) to merchandise its cosmetic and skin treatment products. The Taxpayer does not rent counter space from any of the retailers nor maintain a consignment inventory in the state. The Taxpayer provides to the retailers counter items which include lamps, mirrors, display racks, counter chairs, transparencies, and tablecloths for use in promoting and advertising its products. The Taxpayer also provides testers; samples for distribution to customers upon purchase of other products; printed items such as booklets, newsletters, postcards, shopping bags, brochures, direct mailers, and statement enclosures; merchandising materials such as banners, posters, and shelf paper. The aforementioned items are provided at no charge to the retailers and are used to promote sales of the cosmetics and skin treatments in Virginia.
As a result of the audit, the Taxpayer was assessed tax on the above items, as well as, individual purchases by its sales force of flowers, balloons, candlesticks and candy for use as store decorations. Additionally, the Taxpayer was assessed tax on the redemption amounts attributable to manufacturer's coupons.
The Taxpayer disagrees with the application of the tax to the above items and asserts that it relinquishes ownership of the contested items once the property is placed in transit via common carrier outside Virginia and does not exercise a use over the items in Virginia. As such, the transactions between the Taxpayer and the Virginia retailers and distributors are sales occurring in interstate commerce. Alternatively, the Taxpayer argues that certain contested items either qualify as items on which Virginia sales tax has previously been paid; intangible expense items; exempt purchases for resale; or exempt advertising. The Taxpayer concedes that the tax is due on items provided to its sales force.
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, skin treatments, and contested items by common carrier (except certain printed items which are direct mailed from an out-of-state printer) 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 (3/4/93) and P.D. 85-35 (2/28/85) 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, particularly those printed items mailed into the state by an out-of-state printer, should be comparable to the printed items discussed in the rulings.
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 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 and retailers. 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.
The Taxpayer cites additional caselaw to support its position - Bennett Brothers. Inc. v. State Tax Commission. 405 N.Y.S.2d 803 (App. Div. 1978) and District of Columbia v. W. Bell & Co.), 420 A.2d 1208, 1210 (D.C. 1980). In Bennett, the taxpayer operated as a mail order merchandiser with facilities located in New York. The taxpayer contracted to have catalogs printed and bound outside the state and returned to post offices in the various states for mailing to recipients, including New York. The facts were basically the same in Bell involving the District of Columbia. In both cases, the courts opined that neither taxpayer exercised a sufficient degree of control over the catalogs to impose the use tax even though they had the right to recall the catalogs once they were deposited with the post offices. The Taxpayer asserts that it exercises less control than the taxpayers in Bennett and Bell since its last exercise of control occurs when the property is deposited with a common carrier outside Virginia.
Based on the above, l agree that the Taxpayer has made no taxable use of the counter items, testers, samples for distribution to customers, printed items, and the merchandising materials in Virginia and that the sales constitute transactions which occur in interstate commerce.
The items are generally shipped directly to Virginia retailers and distributors with the retail product for placement in the stores. The counter and merchandising items become the property of the retailers for use by their salespersons in promoting and selling the cosmetic and skin treatment products. The testers are placed on counter tops and used by the general public to sample products before purchase. Samples and shopping bags are distributed at the point of sale and therefore constitute items marketed with the products sold. The printed booklets and brochures are available at the counters for distribution to the general public. The remainder of the printed items -newsletters, postcards, direct mailers and statement enclosures are direct mailed from a printer outside Virginia to residents in the state or the retailers' billing offices and are therefore exempt based on P.D. 93-41 and P.D. 85-35. As such, no use is demonstrated by the Taxpayer. Of course had employees or representatives of the Taxpayer made use of any of these items in Virginia prior to their transfer to the retailers, the tax would apply.
Moreover, the Taxpayer is not liable for the tax on purchases of store decorations by its salespersons. This portion of the assessment relates to reimbursements the Taxpayer makes to its salespersons for store decorations. The purchases by salespersons constitute retail sales and all applicable sales tax is paid by the salespersons at the time of purchase. Thus, no tax is due from the Taxpayer.
Lastly, the value of a manufacturer's coupon is included in the sales price of advertised merchandise for purposes of computing the sales tax. In the case of the Taxpayer's advertised promotional program, the tax would have been collected by the retailer based on the sales price of the cosmetics, including the value of the manufacturer's coupon. As such, the Taxpayer's redemption of the coupons to the retailers constitutes a reimbursement of the cost of the coupon to the retailer, upon which tax has previously been collected.
While the Taxpayer is involved in the promotion of its cosmetics and skin treatments 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 contested portion of the assessment will be abated.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7329J
Rulings of the Tax Commissioner