Tax Type
Retail Sales and Use Tax
Description
Exemption certificates; Subsequent taxable use
Topic
Exemptions
Date Issued
09-27-1996
September 27, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This is in reply to your letter in which you seek correction of sales and use tax assessed to ********(the "Taxpayer"), for the period July 1992 through May 1995. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer, located outside Virginia, manufactures and sells vital sign monitors to hospitals and clinics via salespersons located in Virginia. The auditor assessed tax on monitors provided to salespersons based on the determination rendered in P.D. 94-45 (3/9/94). The Taxpayer protests the tax and believes that the usage of the monitors by sales personnel constitutes exempt demonstration within the meaning of Code of Virginia § 58.1-623(C).
DETERMINATION
Code of Virginia § 58.1-623(C) provides that "[i]f 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...."
P.D. 94-45 dealt with a taxpayer who treated demonstration units as depreciable assets for federal income tax purposes. The Tax Commissioner concluded that the taxpayer's depreciation of the demonstration units constituted removal of such units from a resale inventory, and therefore the units lost their exempt status.
In this case, the Taxpayer's demonstration monitors are carried on its books in a separate demonstration inventory account but are not depreciated or otherwise subject to a periodic cost recovery prior to sale. According to the Taxpayer, demonstration monitors are generally provided to sales personnel for a period of one year. At such time, salespersons are issued new replacement monitors and the prior monitors are refurbished and sold to price sensitive customers. The refurbished monitors are sold at discounted sales prices that provide a reasonable profit margin for the Taxpayer and are not used for parts or scrapped as unusable.
The monitors are considered inventory because they are held for resale at the time they are issued to sales personnel. The monitors are used for demonstration purposes only. The Taxpayer here differs from the taxpayer in the P.D. 94-45 in that the monitors in this case were not transferred to a fixed asset account for depreciation purposes but rather continued to be held in an inventory account while in the possession of the sales personnel.
This case is similar to the situation in P.D. 88-70 (5/2/88), copy enclosed. In that ruling, the taxpayer, also a manufacturer, consigned products from a resale inventory to its sales personnel for demonstration to prospective customers. The products were either sold to customers at new or discounted sales prices or returned to inventory. It was determined that the consigned products were intended for resale at the time they were shipped to salesmen. In that case, had the consigned products been used in Virginia for other than product demonstration purposes, the tax would have applied. The same rationale applies in this instance.
Accordingly, the department will abate the assessment. If you have questions concerning the determination in this letter, please contact **********at**************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10301J
Rulings of the Tax Commissioner