Tax Type
Retail Sales and Use Tax
Description
Nonprofit organizations, private schools, and churches; Inventory donated to schools outside Virginia
Topic
Taxability of Persons and Transactions
Date Issued
05-26-1998
May 26, 1998
Dear **************:
This is in reply to your letter of March 3, 1998, in which you seek a correction of the department's sales and use tax assessment issued to ***** (the "Taxpayer'), for the period February 1996 through September 1997.
FACTS
The Taxpayer is a manufacturer of computer software. Its primary customer base is kindergarten through grade 12 educational institutions located within and outside Virginia. Occasionally, the Taxpayer will donate software to schools located outside Virginia. The Taxpayer contends that the software donated to out-of-state schools is not subject to the tax. Alternatively, the Taxpayer contends that if the software is deemed taxable, the cost price is limited to the cost of the computer discs which contain the donated software programs.
Additionally, the Taxpayer states that during the audit period it accrued and paid use tax on the purchase of a computer system used solely in the Taxpayer's research and development activities. The Taxpayer contends that, based on Title 23 of the Virginia Administrative Code (VAC) 10-210-3072, the computer system should not have been subject to the tax remitted to the department in its May 1997 sales and use tax return. Consequently, the Taxpayer requests that the audit be adjusted for the software donations as well as a refund of the taxes erroneously paid on exempt equipment.
DETERMINATION
Code of Virginia Sec. 58.1-609.8(5) exempts tangible personal property withdrawn from inventory and donated to "(i) an organization exempt from taxation under Sec. 501(c)(3) of the Internal Revenue Code or (ii) the Commonwealth, any political subdivision of the Commonwealth, or any school, agency or instrumentality thereof.'
The foregoing specifically illustrates that tangible personal property held for sale in a retail sales inventory is not subject to the tax if withdrawn from that inventory for donation to a public school located within the boundaries of the Commonwealth. This same exemption, however, does not extend to withdrawals from inventory when donated to schools located outside the Commonwealth. There is no provision in the Code of Virginia for such an exemption. Accordingly, the auditor was correct in applying the tax to the donations.
Code of Virginia Sec. 58.1-604 imposes the use tax on "the use or consumption of tangible personal property in this Commonwealth. . . .' The term "use' is then defined in Code of Virginia Sec. 58.1-602 as, "the exercise of any right or power over tangible personal property incident to the ownership thereof. . . .' As the property in question is donated and not sold to schools outside of the Commonwealth, the Taxpayer has exercised a controlling use of the software within the Commonwealth. Accordingly, the provisions of VAC 10-210-490 are then applied in determining the cost price of the donated software.
The definition of "cost price' is addressed under the provisions of Code of Virginia Sec. 58.1-602, which states that:
During the audit, the Taxpayer was asked to provide federal income tax information which would allow the auditor to determine the value of the tax deduction taken for gifts. The guidelines set forth by the Internal Revenue Service require the donations to be based on the actual manufacturing costs of the product being donated.
I note that the requested information was not provided. Based on the only information available to the auditor, the retail sales price was used as the basis for applying the tax.
I will, however, allow the Taxpayer to present the information required by the auditor to properly compute the cost price of the donated property. Upon the presentation of this information, the audit will be adjusted to reflect the corrected amounts. Additionally, the Taxpayer should make available its information regarding its payment of the tax on equipment used directly in research and development in its May 1997 sales and use tax return. Upon verification by the auditor that the equipment is entitled to the exemption, the Taxpayer will be allowed to take a credit in one of its subsequent sales and use tax returns. If the Taxpayer does not present the requested information to the auditor within 30 days, the assessment will be presumed correct as issued and the balance will become due and payable.
If you should have any questions regarding this matter, please contact ***** of the department's Office of Tax Policy at *****.
Dear **************:
This is in reply to your letter of March 3, 1998, in which you seek a correction of the department's sales and use tax assessment issued to ***** (the "Taxpayer'), for the period February 1996 through September 1997.
FACTS
The Taxpayer is a manufacturer of computer software. Its primary customer base is kindergarten through grade 12 educational institutions located within and outside Virginia. Occasionally, the Taxpayer will donate software to schools located outside Virginia. The Taxpayer contends that the software donated to out-of-state schools is not subject to the tax. Alternatively, the Taxpayer contends that if the software is deemed taxable, the cost price is limited to the cost of the computer discs which contain the donated software programs.
Additionally, the Taxpayer states that during the audit period it accrued and paid use tax on the purchase of a computer system used solely in the Taxpayer's research and development activities. The Taxpayer contends that, based on Title 23 of the Virginia Administrative Code (VAC) 10-210-3072, the computer system should not have been subject to the tax remitted to the department in its May 1997 sales and use tax return. Consequently, the Taxpayer requests that the audit be adjusted for the software donations as well as a refund of the taxes erroneously paid on exempt equipment.
DETERMINATION
Code of Virginia Sec. 58.1-609.8(5) exempts tangible personal property withdrawn from inventory and donated to "(i) an organization exempt from taxation under Sec. 501(c)(3) of the Internal Revenue Code or (ii) the Commonwealth, any political subdivision of the Commonwealth, or any school, agency or instrumentality thereof.'
The foregoing specifically illustrates that tangible personal property held for sale in a retail sales inventory is not subject to the tax if withdrawn from that inventory for donation to a public school located within the boundaries of the Commonwealth. This same exemption, however, does not extend to withdrawals from inventory when donated to schools located outside the Commonwealth. There is no provision in the Code of Virginia for such an exemption. Accordingly, the auditor was correct in applying the tax to the donations.
Code of Virginia Sec. 58.1-604 imposes the use tax on "the use or consumption of tangible personal property in this Commonwealth. . . .' The term "use' is then defined in Code of Virginia Sec. 58.1-602 as, "the exercise of any right or power over tangible personal property incident to the ownership thereof. . . .' As the property in question is donated and not sold to schools outside of the Commonwealth, the Taxpayer has exercised a controlling use of the software within the Commonwealth. Accordingly, the provisions of VAC 10-210-490 are then applied in determining the cost price of the donated software.
The definition of "cost price' is addressed under the provisions of Code of Virginia Sec. 58.1-602, which states that:
-
- "Cost price' means the actual cost of an item or article of tangible personal property computed in the same manner as the sales price as defined in this section without any deductions therefrom on account of the cost of materials used, labor, or service costs, transportation charges, or any expenses whatsoever. (Emphasis added).
- "Cost price' means the actual cost of an item or article of tangible personal property computed in the same manner as the sales price as defined in this section without any deductions therefrom on account of the cost of materials used, labor, or service costs, transportation charges, or any expenses whatsoever. (Emphasis added).
During the audit, the Taxpayer was asked to provide federal income tax information which would allow the auditor to determine the value of the tax deduction taken for gifts. The guidelines set forth by the Internal Revenue Service require the donations to be based on the actual manufacturing costs of the product being donated.
I note that the requested information was not provided. Based on the only information available to the auditor, the retail sales price was used as the basis for applying the tax.
I will, however, allow the Taxpayer to present the information required by the auditor to properly compute the cost price of the donated property. Upon the presentation of this information, the audit will be adjusted to reflect the corrected amounts. Additionally, the Taxpayer should make available its information regarding its payment of the tax on equipment used directly in research and development in its May 1997 sales and use tax return. Upon verification by the auditor that the equipment is entitled to the exemption, the Taxpayer will be allowed to take a credit in one of its subsequent sales and use tax returns. If the Taxpayer does not present the requested information to the auditor within 30 days, the assessment will be presumed correct as issued and the balance will become due and payable.
If you should have any questions regarding this matter, please contact ***** of the department's Office of Tax Policy at *****.
Rulings of the Tax Commissioner