Tax Type
Corporation Income Tax
Description
Assessment and Payment of Deficiency
Topic
Collection of Tax
Royalties
Date Issued
10-26-1998
October 26, 1998
Re: Sec. 58.1-1821 Application: Corporate Income Tax
Dear *****
This will respond to your letter in which you seek correction of assessments of additional corporate income tax against ***** (the "Taxpayer') for the taxable years ending September 30, 1993 through 1995. I apologize for the delay in responding.
FACTS
Among several corrections made pursuant to an audit were adjustments to the Virginia foreign source income ("FSI') subtraction. You protest the adjustment to remove amounts classified as "technical fees', contending that these amounts qualify for the Virginia FSI subtraction. You also contest the department's computation of the expenses related to the Taxpayer's FSI.
DETERMINATION
Foreign Source Technical Fees
In the instant case, the Taxpayer has provided copies of contracts pertaining to technology and trademark licenses outside of the United States. The fees generated from the licensing of this technology and trademarks falls within the category of "royalties' and were properly included as a Virginia FSI subtraction.
These contracts also specified that the Taxpayer would provide the licensee with technical information and services which include know-how, technical literature, instructions, training materials, reports on financial and new product analysis, assistance in the installation and operation of manufacturing facilities, and marketing strategies and programs. All of the contracts are different and provide the licensee with differing amounts of technical information and services. For example, one contract may only provide a license of the Taxpayer's trademark, while another contract may call for the Taxpayer to provide technical information and know-how and marketing strategies and programs in addition to the license.
The determinative question is whether these services are incidental to the licensing agreement or whether they are for services which are separate from the licensing agreement. The services specified in most of these contracts were necessary in order for the foreign licensee to implement the Taxpayer's technology. Without these services, the license would have been worthless. All information was provided to assist the licensee in using the technology to produce and sell tangible personal property. Conversely, the Taxpayer would not have performed these services if there had not been an underlying agreement protecting its intellectual property rights. The consideration paid for these services, to the extent those services were performed outside the United States, clearly qualifies as "technical fees' incidental to the licensing of intangible property.
One contract, however, was a management agreement. This contract called for the Taxpayer to provide a manager to "perform overall management supervision,... internal audit, tax advise and guidance, human resources planning support, marketing and advertising support, treasury support and accounting support.' These services fall beyond the scope of being incidental to the licensing of the Taxpayer's technology, and thus do not constitute FSI as defined by Code of Virginia Sec. 58.1-302. Accordingly, with the exception of the one contract, technical fees have been included in the FSI subtraction.
Expenses Related to Foreign Source Income
The department calculated the Taxpayer's expense related to foreign source income by taking the ratio of the parent company's consolidated allocable and apportionable expenses to its foreign source income and applying this ratio against the Taxpayer's foreign source income. The Taxpayer contends their expenses related to foreign source income should be calculated on a by-entity basis.
Title 23 of the Virginia Administrative Code (VAC) 10-120-20 states that the federal procedure in Treasury Regulation Sec.1.861-8 is applied to allocate and apportion expenses to income derived from the U.S. and foreign sources. The auditor properly estimated expenses related to FSI based on the Taxpayer's consolidated Form 1118 because the Taxpayer failed to provide a breakdown by entity at the time of the audit. You have now provided a by entity breakdown of FSI and related expenses. As such, the expenses related to FSI have been recalculated based on the per entity ***** information.
The enclosed schedule shows the adjusted amount of tax and interest due. Please send the amount due to *****, Virginia Department of Taxation, Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23210-18809 within 30 days to avoid the accrual of additional interest. If you have any questions about this determination, you may contact ***** at *****
Sincerely,
Danny M. Payne
Tax Commissioner
Enclosures (5)
OTP/13137B
P.D. 98-172
Retail Sales and Use Tax
Collection of Delinquent Tax
October 26, 1998
Audit Procedure
P.D. 98-172
October 26, 1998
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer') for the period of January 1994 through December 1996. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is an out-of-state food processor who sells on the wholesale level to grocery stores and distributors throughout the country, including Virginia. The Taxpayer does not maintain a physical location in Virginia but employs salespeople who reside and work in Virginia. The auditor assessed tax on samples the Taxpayer sends to its Virginia salespeople for distribution to their Virginia customers. The Taxpayer did not pay the tax on the samples when they were withdrawn from the out-of-state inventory. The Taxpayer believes that the samples are not taxable because: (i) they manufacture the sample products, (ii) the sample products represent a cost of doing business, and (iii) the samples are not being consumed by the final consumer, but are consumed by the distributor. The Taxpayer is requesting that the samples be removed from the audit.
DETERMINATION
A dealer's withdrawal from inventory is addressed in Code of Virginia Sec. 58.1-623 which provides that:
If a taxpayer who gives a certificate under this section makes any use of the property other than an exempt use or retention, demonstration, or display while holding property for resale, distribution, or lease in the regular course of business, such use shall be deemed a taxable sale by the taxpayer as of the time the property or service 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).
The term "use' is 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, except that it does not include the sale at retail of that property in the regular course of business.' Furthermore, Title 23 of the Virginia Administrative Code (VAC) 10-210-490 (copy enclosed) explains that tangible personal property withdrawn from resale inventory for a promotional giveaway or other free distribution is subject to the tax at the time of withdrawal. The tax is based on the cost price of the property.
In the present case, the Taxpayer withdrew samples from a tax exempt inventory for free distribution for promotional purposes. The fact that the Taxpayer is the manufacturer of the product being given away does not render such transaction an exempt withdrawal from inventory. See Public Document (P.D.) 94-45 (3/9/94), (copy enclosed). Likewise, the fact that the samples are being given to the distributors and not the final consumer has no bearing on the taxable nature of the transaction. Based on the above, the Taxpayer made a taxable use of the samples when they were withdrawn from inventory and sent to the Taxpayer's Virginia distributors. Since the sample products were not taxed upon withdrawal from the out-of-state inventory, such samples are subject to the Virginia use tax at the time they are delivered to the Virginia distributors.
Accordingly, the assessment is correct as issued. You will shortly receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest. If you should have any questions, please contact *****, Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
Enclosures (2)
OTP/13635K
Re: Sec. 58.1-1821 Application: Corporate Income Tax
Dear *****
This will respond to your letter in which you seek correction of assessments of additional corporate income tax against ***** (the "Taxpayer') for the taxable years ending September 30, 1993 through 1995. I apologize for the delay in responding.
FACTS
Among several corrections made pursuant to an audit were adjustments to the Virginia foreign source income ("FSI') subtraction. You protest the adjustment to remove amounts classified as "technical fees', contending that these amounts qualify for the Virginia FSI subtraction. You also contest the department's computation of the expenses related to the Taxpayer's FSI.
DETERMINATION
Foreign Source Technical Fees
-
- Code of Virginia Sec. 58.1-302 defines foreign source income, in pertinent part, as:
-
- Rents, royalties, license, and technical fees from property located or services performed without the United States or from any interest in such property, including rents, royalties, or fees for the ***** use of or the privilege of using without the United States any patents, copy rights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like properties *****
- Rents, royalties, license, and technical fees from property located or services performed without the United States or from any interest in such property, including rents, royalties, or fees for the ***** use of or the privilege of using without the United States any patents, copy rights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like properties *****
In the instant case, the Taxpayer has provided copies of contracts pertaining to technology and trademark licenses outside of the United States. The fees generated from the licensing of this technology and trademarks falls within the category of "royalties' and were properly included as a Virginia FSI subtraction.
These contracts also specified that the Taxpayer would provide the licensee with technical information and services which include know-how, technical literature, instructions, training materials, reports on financial and new product analysis, assistance in the installation and operation of manufacturing facilities, and marketing strategies and programs. All of the contracts are different and provide the licensee with differing amounts of technical information and services. For example, one contract may only provide a license of the Taxpayer's trademark, while another contract may call for the Taxpayer to provide technical information and know-how and marketing strategies and programs in addition to the license.
The determinative question is whether these services are incidental to the licensing agreement or whether they are for services which are separate from the licensing agreement. The services specified in most of these contracts were necessary in order for the foreign licensee to implement the Taxpayer's technology. Without these services, the license would have been worthless. All information was provided to assist the licensee in using the technology to produce and sell tangible personal property. Conversely, the Taxpayer would not have performed these services if there had not been an underlying agreement protecting its intellectual property rights. The consideration paid for these services, to the extent those services were performed outside the United States, clearly qualifies as "technical fees' incidental to the licensing of intangible property.
One contract, however, was a management agreement. This contract called for the Taxpayer to provide a manager to "perform overall management supervision,... internal audit, tax advise and guidance, human resources planning support, marketing and advertising support, treasury support and accounting support.' These services fall beyond the scope of being incidental to the licensing of the Taxpayer's technology, and thus do not constitute FSI as defined by Code of Virginia Sec. 58.1-302. Accordingly, with the exception of the one contract, technical fees have been included in the FSI subtraction.
Expenses Related to Foreign Source Income
The department calculated the Taxpayer's expense related to foreign source income by taking the ratio of the parent company's consolidated allocable and apportionable expenses to its foreign source income and applying this ratio against the Taxpayer's foreign source income. The Taxpayer contends their expenses related to foreign source income should be calculated on a by-entity basis.
Title 23 of the Virginia Administrative Code (VAC) 10-120-20 states that the federal procedure in Treasury Regulation Sec.1.861-8 is applied to allocate and apportion expenses to income derived from the U.S. and foreign sources. The auditor properly estimated expenses related to FSI based on the Taxpayer's consolidated Form 1118 because the Taxpayer failed to provide a breakdown by entity at the time of the audit. You have now provided a by entity breakdown of FSI and related expenses. As such, the expenses related to FSI have been recalculated based on the per entity ***** information.
The enclosed schedule shows the adjusted amount of tax and interest due. Please send the amount due to *****, Virginia Department of Taxation, Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23210-18809 within 30 days to avoid the accrual of additional interest. If you have any questions about this determination, you may contact ***** at *****
Sincerely,
Danny M. Payne
Tax Commissioner
Enclosures (5)
OTP/13137B
P.D. 98-172
Retail Sales and Use Tax
Collection of Delinquent Tax
October 26, 1998
Audit Procedure
P.D. 98-172
October 26, 1998
Re: Sec. 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer') for the period of January 1994 through December 1996. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is an out-of-state food processor who sells on the wholesale level to grocery stores and distributors throughout the country, including Virginia. The Taxpayer does not maintain a physical location in Virginia but employs salespeople who reside and work in Virginia. The auditor assessed tax on samples the Taxpayer sends to its Virginia salespeople for distribution to their Virginia customers. The Taxpayer did not pay the tax on the samples when they were withdrawn from the out-of-state inventory. The Taxpayer believes that the samples are not taxable because: (i) they manufacture the sample products, (ii) the sample products represent a cost of doing business, and (iii) the samples are not being consumed by the final consumer, but are consumed by the distributor. The Taxpayer is requesting that the samples be removed from the audit.
DETERMINATION
A dealer's withdrawal from inventory is addressed in Code of Virginia Sec. 58.1-623 which provides that:
If a taxpayer who gives a certificate under this section makes any use of the property other than an exempt use or retention, demonstration, or display while holding property for resale, distribution, or lease in the regular course of business, such use shall be deemed a taxable sale by the taxpayer as of the time the property or service 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).
The term "use' is 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, except that it does not include the sale at retail of that property in the regular course of business.' Furthermore, Title 23 of the Virginia Administrative Code (VAC) 10-210-490 (copy enclosed) explains that tangible personal property withdrawn from resale inventory for a promotional giveaway or other free distribution is subject to the tax at the time of withdrawal. The tax is based on the cost price of the property.
In the present case, the Taxpayer withdrew samples from a tax exempt inventory for free distribution for promotional purposes. The fact that the Taxpayer is the manufacturer of the product being given away does not render such transaction an exempt withdrawal from inventory. See Public Document (P.D.) 94-45 (3/9/94), (copy enclosed). Likewise, the fact that the samples are being given to the distributors and not the final consumer has no bearing on the taxable nature of the transaction. Based on the above, the Taxpayer made a taxable use of the samples when they were withdrawn from inventory and sent to the Taxpayer's Virginia distributors. Since the sample products were not taxed upon withdrawal from the out-of-state inventory, such samples are subject to the Virginia use tax at the time they are delivered to the Virginia distributors.
Accordingly, the assessment is correct as issued. You will shortly receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest. If you should have any questions, please contact *****, Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
Enclosures (2)
OTP/13635K
Rulings of the Tax Commissioner