Tax Type
Retail Sales and Use Tax
Description
Application of sales and use tax; Even trades
Topic
Taxability of Persons and Transactions
Date Issued
10-09-1996
October 9, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****
In your letter, you request correction of the retail sales and use tax assessment issued to *********(the Taxpayer). Copies of all references are enclosed.
FACTS
The Taxpayer is in the business of providing computer software training through its district offices which operate in several states. These offices are part of the Taxpayer's company and thus are not separate subsidiaries. An audit of its Virginia district office for the period May 1993 through August 1995 resulted in an assessment of use tax on certain untaxed purchases and exchanges.
The Taxpayer entered into an arrangement with a vendor to exchange some of its used personal computers for an equal number of new personal computers (PCs) of a different model series. Since the agreement did not contain any cost information, the auditor assessed use tax based on the estimated cost of the new PCs.
The vendor shipped the PCs to the Taxpayer in California where they were initially stored and distributed by the Taxpayer to its district offices across the country. Some were shipped to and stored at the Taxpayer's district office in Virginia for a week, before being re-shipped to the Taxpayer's Maryland office for use in classroom training. The Taxpayer maintains that this exchange was an even trade and there is no cost price to subject the transaction to the use tax. The Taxpayer also maintains that these PCs are not subject to the Virginia use tax because they were not used in Virginia but only temporarily stored here. Even if it is determined that these PCs are subject to the Virginia use tax, the Taxpayer maintains that the tax should only apply to the proportion of the PCs current market value as the one-week period of use within Virginia bears to the total useful life of such property.
The Taxpayer also buys and distributes course books to its district offices. For books distributed to its office in Virginia, the Taxpayer paid the Virginia use tax based on the actual cost price of $4.05 per book but invoiced its district offices $6.00 per book. The auditor assessed use tax on the difference between the invoice price and the cost price. According to the Taxpayer, the higher charge to its district offices is used only for internal accounting of intra-company transfers, and the net difference between the amount invoiced and cost price is zeroed out by journal entry. Accordingly, the Taxpayer maintains that it has paid the proper amount of tax owed on these course books.
DETERMINATION
Exchange Agreement
Code of Virginia § 58.1-602 defines a "sale" as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property...." [Emphasis added.] Accordingly, any type of exchange can be deemed a sale for Virginia retail sales and use tax purposes.
The definition of "sales price" is also set out by Code of Virginia § 58.1-602 and provides, in part, the following:
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- Where used articles are taken in trade, or in a series of trades as a credit or part payment on the sale of new or used articles, the tax levied...shall be paid on the net difference between the sales price of the new or used articles and the credit for the used articles.
In this case, the Taxpayer made an even trade for PCs. That is, the credit for the Taxpayer's used PCs equaled the sales price of the new PCs furnished by the vendor. This fact is clearly made known from a reading of the exchange agreement. In this instance, the basis upon which to apply the sales or use tax is zero. As there is no basis upon which to apply the tax, I find justification for removing the tax and associated interest assessed on these PCs from the audit assessment.
Nonetheless, it is important to explain the application of Virginia tax law to the other contentions raised by the Taxpayer. For instance, had the transaction in question not been an even trade, and had the Taxpayer paid an additional consideration for the new PCs, the net difference between the sales price and trade-in value of the PCs transferred to the Taxpayer's Virginia office would be taxable.
Code of Virginia § 58.1-604 imposes the use tax upon the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax has not been paid at the time the property is purchased. "Use" and "storage" are defined in Code of Virginia § 58.1-602. Based on the "use" definition, the Taxpayer is considered to have used the property in Virginia when it exercised its rights of ownership over the property while the property was in Virginia. Based on the "storage" definition, the Taxpayer is considered to have stored the property in Virginia. In the absence of a temporary storage exemption for the property in question, the transaction would have been subject to the use tax had there been a basis upon which to apply the tax.
Furthermore, when property is purchased for use in Virginia and is imported into Virginia within six months of acquisition, the tax applies to the "cost price" or "net difference" between the cost price and trade-in value. If the property is imported into Virginia six months or more after acquisition, fair market value may be used if a taxpayer can convincingly establish the useful life of the property and that the property would never be used in Virginia again. See Code of Virginia § 58.1-604(1).
Intra-company Transfers
As the transactions at issue are intra-company transfers, the books at issue are not considered resold in the true sense of a resale transaction to another person. The Taxpayer does not resell the property to itself. Rather, since these books are for the Taxpayer's use or consumption, we need only look at the purchase transaction to determine the cost price of the property. As the Taxpayer has paid the use tax on the cost price of the items at issue, I find basis for removing these transfers from the audit.
The auditor will revise the assessments in accordance with this determination. The auditor will also verify whether the Taxpayer has paid all of the noncontested liabilities and notify the Taxpayer if payment is insufficient. If you have any questions regarding the revision of this audit, please contact **********at**************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10815R
Rulings of the Tax Commissioner