Tax Type
Retail Sales and Use Tax
Description
Resales; Demonstration units
Topic
Taxability of Persons and Transactions
Date Issued
03-09-1994
March 9, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear**********
This will reply to your correspondence in which you seek correction of a sales and use tax assessment issued to *************** ("the Taxpayer").
FACTS
The Taxpayer, a manufacturer and distributor of pressure sensing equipment, was audited for the period October 1988 through September 1991. The only unresolved issue concerns items manufactured by the Taxpayer and used as demonstration units.
These demonstration units are treated as depreciable assets for financial statement and income tax purposes. You maintain, however, that at no time are they removed from resale inventory. You further maintain that when the demonstration units cease to be used for demonstration purposes, they are either sold to a customer, turned over to manufacturing personnel to be used in the manufacturing of products, or disassembled and the parts returned to inventory.
DETERMINATION
Va. Code §58.1-623 provides that:
-
- If a taxpayer ... makes any use of [resale] property other than an exempt use or retention, demonstration, or display while holding property for resale ..., such use shall be deemed a taxable sale by the taxpayer as of the time the property ... is first used by him, and the cost of the property to him shall be deemed the sales price of such retail sale. (emphasis added)
Further, 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."
Accordingly, property held for resale does not lose exempt status merely because it is used for demonstration purposes; however, this exemption does not extend to property which has been withdrawn from a resale inventory.
The Taxpayer contends that the demonstration units were at no time removed from resale inventory. I cannot agree to this, however, as the units were depreciated for federal income tax purposes. Pursuant to 1221 of the Internal Revenue Code, a capital asset may not include "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." Further, U. S. Treasury Regulation 1.167(a)-2 provides that the depreciation allowance "does not apply to inventories or stock in trade...." I must therefore conclude that the Taxpayer's treatment of the demonstration units as depreciable assets illustrates that those units were not part of the Taxpayer's resale inventory.
The Taxpayer's choice to treat the demonstration units as depreciable assets was presumably made in order to obtain federal tax benefits. In this regard, it is well established that federal tax planning opportunities may produce other results at the state and federal level.
Furthermore, this determination is entirely consistent with Virginia Regulation (VR) 630-10-63(C)(3). The regulation, which addresses the application of the tax to industrial manufacturers, specifically provides that all tangible personal property used to market or display finished products is taxable, including "salesmen's samples withdrawn from a manufacturer's inventory."
Moreover, your contention that the demonstration units may subsequently be sold or used in an exempt manufacturing activity is not persuasive since Va. Code §58.1-623 stipulates that a taxable use of property is deemed to be taxable at the time of such use. The Taxpayer made a taxable use of the demonstration units at the time they were removed from resale inventory, and any subsequent sale of the units is deemed a separate and distinct taxable transaction.
Accordingly, I find that the audit liability is correct as assessed, and a bill for the outstanding balance will shortly be mailed to the Taxpayer.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/5813I
Rulings of the Tax Commissioner