Tax Type
Corporation Income Tax
Description
Proceedings for the Collection of Tax
Topic
Collection of Tax
Date Issued
06-21-1999
June 21, 1999
Re: Sec. 58.1-1821 Application: Corporate Income Tax
Dear***
This will respond to your letter in which you protest an assessment of corporate income tax for the taxable year ending December 31, 1994, to ***** (the "Taxpayer'). I apologize for the delay in responding.
FACTS
The Taxpayer was audited for the 1994 taxable year and an adjustment was made to reclassify "Bill and Hold' sales as Virginia sales. In a typical arrangement of this type, a purchaser orders raw materials from the Taxpayer and instructs the Taxpayer to hold the materials awaiting further instructions when the materials are needed by the purchaser. The Taxpayer invoices the purchaser after a predetermined length of time. The Taxpayer ships the raw materials to the purchaser's manufacturing plant after receiving shipping instructions. These transactions make sure the purchaser always has a readily available supply of raw materials as needed.
The auditor reclassified this type of sale as a Virginia sale relying on example 5 as set forth in Title 23 of the Virginia Administrative Code (VAC) 10-120-220, copy enclosed. The Taxpayer contests this treatment and states that the facts set forth in example 5 do not accurately reflect the fact pattern of its Bill and Hold sales.
DETERMINATION
The Virginia sales factor is a fraction, the numerator of which is the total sales in Virginia during the taxable year. The denominator is the total sales of the corporation everywhere during the taxable year. Code of Virginia Sec. 58.1-415 and Title 23 VAC 10120-220 provide guidance in the determination of when sales of tangible personal property are deemed to be in Virginia.
Virginia assigns sales of tangible personal property to a taxing jurisdiction on a destination basis. Sales, for Virginia tax purposes, are therefore attributable to the state to which the tangible personal property is shipped or delivered to the purchaser. The question in the instant case is whether the "Bill and Hold' sales should be classified as Virginia sales or sales attributable to another state.
In example 5 of Title 23 VAC 10-120-220, the purchaser is considered to have received the tangible personal property at the Virginia manufacturing facility because the purchaser directs shipping to its customers and the shipping destination is unknown to the manufacturer. In essence two transactions occur. In the first, the manufacturer sells to the purchaser with the inventory held at the manufacturer's storage facility in Virginia. A second transaction occurs when the purchaser makes a sale to its customer and directs the manufacturer to ship the property to the customer.
The instant case is different in that there is only one sales transaction and the Taxpayer knows the shipping destination. The only sale that occurs is the one between the Taxpayer and the purchaser. At the time of the sale, the Taxpayer knows its product will be delivered out-of-state but doesn't know when the shipment will occur. Because the Taxpayer is only holding the inventory pending final delivery to the purchaser's out-of-state facility, the products are considered to be in transit to its ultimate destination. Thus, for the purposes of computing the sales factor, the Taxpayer's "Bill and Hold' sales will be attributed to the state where the products are delivered.
The assessment will be adjusted in accordance with this determination and a revised assessment will be forthcoming in due course. If you have any questions regarding this determination, you may contact ***** of the Office of Tax Policy ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP13894P
Re: Sec. 58.1-1821 Application: Corporate Income Tax
Dear***
This will respond to your letter in which you protest an assessment of corporate income tax for the taxable year ending December 31, 1994, to ***** (the "Taxpayer'). I apologize for the delay in responding.
FACTS
The Taxpayer was audited for the 1994 taxable year and an adjustment was made to reclassify "Bill and Hold' sales as Virginia sales. In a typical arrangement of this type, a purchaser orders raw materials from the Taxpayer and instructs the Taxpayer to hold the materials awaiting further instructions when the materials are needed by the purchaser. The Taxpayer invoices the purchaser after a predetermined length of time. The Taxpayer ships the raw materials to the purchaser's manufacturing plant after receiving shipping instructions. These transactions make sure the purchaser always has a readily available supply of raw materials as needed.
The auditor reclassified this type of sale as a Virginia sale relying on example 5 as set forth in Title 23 of the Virginia Administrative Code (VAC) 10-120-220, copy enclosed. The Taxpayer contests this treatment and states that the facts set forth in example 5 do not accurately reflect the fact pattern of its Bill and Hold sales.
DETERMINATION
The Virginia sales factor is a fraction, the numerator of which is the total sales in Virginia during the taxable year. The denominator is the total sales of the corporation everywhere during the taxable year. Code of Virginia Sec. 58.1-415 and Title 23 VAC 10120-220 provide guidance in the determination of when sales of tangible personal property are deemed to be in Virginia.
Virginia assigns sales of tangible personal property to a taxing jurisdiction on a destination basis. Sales, for Virginia tax purposes, are therefore attributable to the state to which the tangible personal property is shipped or delivered to the purchaser. The question in the instant case is whether the "Bill and Hold' sales should be classified as Virginia sales or sales attributable to another state.
In example 5 of Title 23 VAC 10-120-220, the purchaser is considered to have received the tangible personal property at the Virginia manufacturing facility because the purchaser directs shipping to its customers and the shipping destination is unknown to the manufacturer. In essence two transactions occur. In the first, the manufacturer sells to the purchaser with the inventory held at the manufacturer's storage facility in Virginia. A second transaction occurs when the purchaser makes a sale to its customer and directs the manufacturer to ship the property to the customer.
The instant case is different in that there is only one sales transaction and the Taxpayer knows the shipping destination. The only sale that occurs is the one between the Taxpayer and the purchaser. At the time of the sale, the Taxpayer knows its product will be delivered out-of-state but doesn't know when the shipment will occur. Because the Taxpayer is only holding the inventory pending final delivery to the purchaser's out-of-state facility, the products are considered to be in transit to its ultimate destination. Thus, for the purposes of computing the sales factor, the Taxpayer's "Bill and Hold' sales will be attributed to the state where the products are delivered.
The assessment will be adjusted in accordance with this determination and a revised assessment will be forthcoming in due course. If you have any questions regarding this determination, you may contact ***** of the Office of Tax Policy ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP13894P
Rulings of the Tax Commissioner