Tax Type
Retail Sales and Use Tax
Description
Nonprofit organizations, private schools, and churches; Donations of items withdrawn from inventory
Topic
Taxability of Persons and Transactions
Date Issued
11-08-1996
November 8, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear**********
This will reply to your letter of September 23, 1996, in which you seek correction of a sales and use tax assessment issued to ****************(the Taxpayer) for the period February 1993 through February 1996.
FACTS
The Taxpayer, located outside Virginia, is a manufacturer/retailer of spices and sauces. The Taxpayer entered into an agreement for the exclusive right to sell its products in Virginia under the name and logo of a Virginia nonprofit organization exempt from taxation under § 501(c)(3) of the Internal Revenue Code. Under the terms of the agreement, the Taxpayer pays the nonprofit organization a royalty based on its Virginia sales. In addition, the nonprofit organization receives a certain percentage of the Taxpayer's net profits and gross proceeds. The Taxpayer does not charge the sales tax on the sale of spices and sauces to Virginia customers but instead accrues the use tax based on the wholesale cost of the products sold. As a result of the department's audit, an assessment was made for untaxed sales of spices and sauces. The assessment was adjusted to reflect the use tax paid to the department on these products.
The Taxpayer contends that it solicits donations for the nonprofit organization and is, in turn, giving away the spices and sauces to the customer. The Taxpayer maintains that it is liable only for the use tax on the cost price of its products as provided under Virginia Regulation (VR) 630-10-85. Further, the Taxpayer maintains that an agreement was made between the Taxpayer and the department in 1985 that such transactions represent donations for the nonprofit organization and are not taxable. As such, the Taxpayer would pay the use tax based on the wholesale cost of the product.
DETERMINATION
Code of Virginia § 58.1-609.8(5) provides an exemption from the sales and use tax for tangible personal property withdrawn from inventory and donated to an organization exempt from taxation under § 501(c)(3) of the Internal Revenue Code (I.R.C.). VR 630-10-85 which interprets this Code section provides that "[D]onors of tangible personal property are the users or consumers of that property [and] their purchases are taxable...." This regulation further provides that "the tax applies to the cost price of property purchased originally for resale and later used as a gift."
The Taxpayer solicits orders for its products by representatives located within Virginia. Once the order is accepted, the representative delivers the products and collects from the customer the total sales amount. The sales receipt provided to the customer indicates that the buyer has the right to cancel, refuse delivery, or return the products and receive a full refund for the amount paid.
In this case, the Taxpayer is not donating tangible personal property withdrawn from its inventory to the nonprofit organization. This type of transaction is not within the scope of the above exemption, which was enacted to exempt gift transactions by businesses to nonprofit organizations and the Commonwealth. The retail sale transactions are not "donations" or "gifts" exempt under § 58.1-609.8(5).
Code of Virginia § 58.1-603, copy enclosed, imposes the sales tax upon "each item or article of tangible personal property...sold at retail... in this state." The term "sale" is defined in Code of Virginia § 58.1-602, copy enclosed, as "any transfer of title or possession... of tangible personal property... for a consideration..." Based on the above, the Taxpayer is making retail sales of spices and sauces to individuals in Virginia. Because there is no statutory provision to exempt these transactions from the tax, the total amount for which the spices and sauces are sold is subject to the tax.
While the Taxpayer mentions that it made an agreement with the department that these transactions represent donations to the nonprofit organization, the department has no prior knowledge of such agreement. Without documentation to support the Taxpayer's claim, the assessment is presumed correct as assessed.
Nevertheless, I will allow the Taxpayer another 30 days to produce the agreement. The use tax license provided is not sufficient because there is no proof under what circumstances it was obtained. If the documentation is not received within the specified time period, the Taxpayer will receive an updated notice of assessment.
If you have any questions regarding this letter, please contact ******* in my Office of Tax Policy at ********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11677T
Rulings of the Tax Commissioner