Tax Type
Retail Sales and Use Tax
Description
Sale of division; Requirements for occasional sale
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
01-08-1999
January 8, 1999
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ***********
This is in response to your letter in which you seek correction of a sales and use tax assessment issued to ***** (the "Taxpayer') for the period November 1994 through December 1995. The contested issue in this case concerns the sale of a business division to the Taxpayer by ***** (the "Seller'). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer manufactures injection molding plastic products primarily for the automotive industry. The Taxpayer was established and began its operations through the acquisition of the Seller's injection molding division. The assets acquired by the Taxpayer include production machinery, other tangible personal property, intangible property, and realty. The assets were used by the Seller, and continue to be used by the Taxpayer, in both Virginia and one other state. However, the Seller remains in business in Virginia through its vinyl sheeting division.
You maintain that the sale of the injection molding division was the sale of all or substantially all of the assets of a business. Therefore, you view the Taxpayer's purchase of the division to be an exempt ``occasional sale' as defined in Code of Virginia § 58.1-602. In the event that the department does not accept this view, you maintain that a majority of the assessed property is not taxable under other provisions of the Retail Sales and Use Tax Act
DETERMINATION
Code of Virginia § 58.1-609.10(2) provides an exemption from the tax for an occasional sale as defined in§ 58.1-602. That section defines an ``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 the assets of any business and the reorganization or liquidation of any business, provided such sale or exchange is not one of a series of sales and exchanges sufficient in number, scope and character to constitute an activity requiring the holding of a certificate of registration. (Emphasis added.)
The Tax Commissioner has previously determined that the sale of all or substantially all of the assets of a business division may qualify as an exempt occasional sale. Under this scenario, the business division must be engaged in totally separate and distinct activities based on such considerations as separate books which are separately maintained, separate bank accounts, separation of fixed assets, separation of employees, and the flow of economic advantage from one division of the organization to another. The Tax Commissioner found in Public Document 85-149 (7/11/85) that the sale of a business division qualified for the occasional sale exemption when the division which was sold was ``entirely separate and distinct' from another.
Based on the information before me, the Seller's injection molding division is not entirely separate and distinct. I understand that the injection molding division and the Seller's corporation shared the same payroll department, the same maintenance shop, and the same research and development lab. In addition to depending on the corporate office for these functions, I note the injection molding division did not have its own separate bank account and that only one general ledger existed for the entire corporation.
After the sale, the Taxpayer contracted with the Seller for various transition services, including accounting, human resource, management information, and certain transportation services. The injection molding division relied on the Seller's corporate office for these vital business services. This is further indication that the injection molding division did not operate as a separate and distinct entity within the Seller's corporate structure.
Accordingly, and based on the circumstances in this case, the Seller's transfer of its injection molding division does not qualify as an exempt occasional sale under Code of Virginia § 58.1-609.10(2).
This determination notwithstanding, you contend that many of the assets acquired by the Taxpayer through its purchase of the Seller's injection molding division are not subject to sales and use taxation because they are real property, inventory, or property used directly in industrial manufacturing. I agree that additional information on these issues is necessary before making a final determination.
Accordingly, the assessment will be returned to the audit staff who will contact the Taxpayer to schedule a review of the contested assets. The assessment will be revised as warranted. I will continue to suspend collection activity on the outstanding assessment pending this review. Further, I will certainly address any disputed issues that may arise on the application of the tax to specific assets.
If you have any questions regarding this letter, please contact ************ in the department's Office of Tax Policy at ********. Questions regarding the reaudit of the contested assets should be directed to Audit Supervisor **************** at ***************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12997I
Related Documents
Rulings of the Tax Commissioner