Tax Type
Retail Sales and Use Tax
Description
Occasional sales, including mergers; Sale of corporate division
Topic
Taxability of Persons and Transactions
Date Issued
02-26-1998
Februart 26, 1998
Dear***********:
This is in reply to your letter of January 22, 1998, in which you seek correction of the department's sales and use tax assessment issued to ***** (the ``Taxpayer'), for the period September 1994 through July 1997.
FACTS
The Taxpayer's operations primarily involve the refining of petroleum which results in the production of heating oil and gasoline as end products for sale or resale. The Taxpayer found that quality control was a critical factor in the production of its product and, as a result, formed its laboratory division in 1994 to perform the quality control functions. Subsequently, in 1996, the Taxpayer ceased its laboratory operations, selling its interest to a third party. The department's audit assessed tax on the sale of tangible personal property to the third party.
The Taxpayer contends that the contested sale is a transfer of substantially all of the assets of its laboratory operations, and should be considered either (1) an occasional sale, or (2) a sale of assets not held or used by the seller in an activity for which it was required to hold a certificate of registration. Accordingly, the Taxpayer seeks an abatement of the assessment.
DETERMINATION
Code of Virginia Sec. 58.1-609.10(3) provides an exemption from the tax for an occasional sale of tangible personal property. Code of Virginia Sec. 58.1-602 then defines ``occasional sale' as:
In previous decisions by the department, the occasional sale exemption was granted to organizations whose sales of internal divisions were completely independent from the remainder of the business. P.D. 91-290,11/18/91, addressed such issues and provided, in detail, the criteria upon which the sale of a division would be considered an exempt occasional sale. I note that the Taxpayer was provided with a copy of this determination. With the foregoing in mind, I will address the requirements previously established in relation to the Taxpayer's sale of assets:
Each division must have a completely separate set of books which are separately maintained; Separate bank accounts must be maintained
While the laboratory division had separate checks with its own logo, the actual checking account is the same checking account owned by the corporation. Funds drawn on or deposited to the checking account affect the cash balance available to the laboratory as well as the corporation. Financial reports were prepared by the laboratory; however, the laboratory's financial information was incorporated into the total financial report for the corporation's primary business.
The liquidation of the laboratory's assets was not total, as some of the equipment was retained by the corporation. Additionally, the auditor indicates that after the asset transfer, the asset account reflects a reduction of the overall assets of the corporation, and not just those of the laboratory.
Employees must be active in only one division
The manager of the laboratory, while a separate manager from the remainder of the corporation, answered to the executive management of the corporation. The executive management of the corporation maintained decision making power regarding the laboratory's direction and expenditures, and made the decision to sell the laboratory division.
Divisions must be separately housed
The laboratory was located in a separate area of the corporation's facility.
Each division must have its own fixed assets which are not used interchangeably
The assets, while not used interchangeably with the corporation, were used as an integral part of the corporation's business in performing quality control functions in testing octane levels, and soil samples. To date the corporation continues to use the remaining equipment to perform these same functions.
Lastly, the foregoing points must be considered together in determining the extent of independence in the laboratory's operations. Based on the information before me, I note that while the laboratory division does perform some independent functions, it shares various accounting, administration and financial activities with the corporation.
Sale of assets not held or used by the seller in an activity for which it is required to hold a certificate of registration
As the laboratory operations are not separate and distinct from the corporation, I also find that the assets in question were inextricably linked to the production process of the Taxpayer. The laboratory's assets, given the highly specialized nature of the corporation's product, were used to perform an integral quality control function in the corporation's production process. This enabled the corporation to produce a marketable product, for which the Taxpayer was required to hold a registration certificate.
I note that the Taxpayer was given several rulings related to the foregoing issues, as well as the applicable regulations under Title 23 of the Virginia Administrative Code (VAC) 10-210-1080. Based on the strict construction of all exemption statutes as confirmed by the Virginia Supreme Court in Winchester T.V. Cable Company v. State Tax Commissioner, 216 Va. 286, 217 S.E. 2d 885 (1975), I find that the transfer of assets to the third party purchaser is not the transfer of all or substantially all of the corporation's assets. Also, I do not concur that the assets were not held or used by the seller in its activity for which it is required to hold a certificate of registration. Accordingly, I find no basis for correction of the assessment.
Please return your payment for the balance of the assessment totaling ***** to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 30 days. If payment is not received within that time, interest will accrue on the balance due. 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 January 22, 1998, in which you seek correction of the department's sales and use tax assessment issued to ***** (the ``Taxpayer'), for the period September 1994 through July 1997.
FACTS
The Taxpayer's operations primarily involve the refining of petroleum which results in the production of heating oil and gasoline as end products for sale or resale. The Taxpayer found that quality control was a critical factor in the production of its product and, as a result, formed its laboratory division in 1994 to perform the quality control functions. Subsequently, in 1996, the Taxpayer ceased its laboratory operations, selling its interest to a third party. The department's audit assessed tax on the sale of tangible personal property to the third party.
The Taxpayer contends that the contested sale is a transfer of substantially all of the assets of its laboratory operations, and should be considered either (1) an occasional sale, or (2) a sale of assets not held or used by the seller in an activity for which it was required to hold a certificate of registration. Accordingly, the Taxpayer seeks an abatement of the assessment.
DETERMINATION
Code of Virginia Sec. 58.1-609.10(3) provides an exemption from the tax for an occasional sale of tangible personal property. Code of Virginia Sec. 58.1-602 then defines ``occasional sale' as:
-
- a sale of tangible personal property not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration, including the sale or exchange of all or substantially all of the assets of any business .... (Emphasis added).
- a sale of tangible personal property not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration, including the sale or exchange of all or substantially all of the assets of any business .... (Emphasis added).
In previous decisions by the department, the occasional sale exemption was granted to organizations whose sales of internal divisions were completely independent from the remainder of the business. P.D. 91-290,11/18/91, addressed such issues and provided, in detail, the criteria upon which the sale of a division would be considered an exempt occasional sale. I note that the Taxpayer was provided with a copy of this determination. With the foregoing in mind, I will address the requirements previously established in relation to the Taxpayer's sale of assets:
Each division must have a completely separate set of books which are separately maintained; Separate bank accounts must be maintained
While the laboratory division had separate checks with its own logo, the actual checking account is the same checking account owned by the corporation. Funds drawn on or deposited to the checking account affect the cash balance available to the laboratory as well as the corporation. Financial reports were prepared by the laboratory; however, the laboratory's financial information was incorporated into the total financial report for the corporation's primary business.
The liquidation of the laboratory's assets was not total, as some of the equipment was retained by the corporation. Additionally, the auditor indicates that after the asset transfer, the asset account reflects a reduction of the overall assets of the corporation, and not just those of the laboratory.
Employees must be active in only one division
The manager of the laboratory, while a separate manager from the remainder of the corporation, answered to the executive management of the corporation. The executive management of the corporation maintained decision making power regarding the laboratory's direction and expenditures, and made the decision to sell the laboratory division.
Divisions must be separately housed
The laboratory was located in a separate area of the corporation's facility.
Each division must have its own fixed assets which are not used interchangeably
The assets, while not used interchangeably with the corporation, were used as an integral part of the corporation's business in performing quality control functions in testing octane levels, and soil samples. To date the corporation continues to use the remaining equipment to perform these same functions.
Lastly, the foregoing points must be considered together in determining the extent of independence in the laboratory's operations. Based on the information before me, I note that while the laboratory division does perform some independent functions, it shares various accounting, administration and financial activities with the corporation.
Sale of assets not held or used by the seller in an activity for which it is required to hold a certificate of registration
As the laboratory operations are not separate and distinct from the corporation, I also find that the assets in question were inextricably linked to the production process of the Taxpayer. The laboratory's assets, given the highly specialized nature of the corporation's product, were used to perform an integral quality control function in the corporation's production process. This enabled the corporation to produce a marketable product, for which the Taxpayer was required to hold a registration certificate.
I note that the Taxpayer was given several rulings related to the foregoing issues, as well as the applicable regulations under Title 23 of the Virginia Administrative Code (VAC) 10-210-1080. Based on the strict construction of all exemption statutes as confirmed by the Virginia Supreme Court in Winchester T.V. Cable Company v. State Tax Commissioner, 216 Va. 286, 217 S.E. 2d 885 (1975), I find that the transfer of assets to the third party purchaser is not the transfer of all or substantially all of the corporation's assets. Also, I do not concur that the assets were not held or used by the seller in its activity for which it is required to hold a certificate of registration. Accordingly, I find no basis for correction of the assessment.
Please return your payment for the balance of the assessment totaling ***** to the department's Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880, within 30 days. If payment is not received within that time, interest will accrue on the balance due. 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