Were goods delivered to Virginia customer warehouses exempt because they were later shipped outside Virginia, and would the audit sample be reopened?

Subject

Audit sample was reopened, but Virginia warehouse deliveries remained taxable

Plain-English summary

Virginia reopened the audit sample for further review but rejected the claimed export exemption. The taxpayer produced large-format printing and displays and challenged both the sample projection and tax on goods first delivered to customers in Virginia.

On sampling, the taxpayer supplied evidence suggesting that the projected taxable sales measure might exceed the exempt sales originally deducted on its returns. The audit measure also included shipping and handling on taxable invoices. Virginia ordered audit staff to reevaluate the sample, determine what additional documentation was needed, and revise or expand the sample if warranted. Without timely records, the assessment would stand.

On delivery, the customers directed the goods to their own Virginia warehouses, held them boxed on skids, and later shipped them elsewhere. Their possession and storage in Virginia constituted taxable use. They were purchasers, not factors or export agents selling merchandise for the producer, so later out-of-state shipment did not qualify the original sale for the export-delivery exemption.

What this means for you

• A projected sample can be reopened when evidence suggests its taxable measure exceeds the underlying return population.
• Taxpayers must provide the detailed records requested during the reopened review.
• Delivery to a customer's Virginia warehouse creates a Virginia taxable event when the customer possesses or stores the goods there.
• Later export or interstate shipment does not erase an earlier Virginia use.

Common questions

Was the audit sample invalidated immediately?

No. It was reopened for documentation, possible expansion, and revisions as warranted.

Why were the warehouse deliveries taxable?

The customers exercised ownership through possession and storage in Virginia before the goods left the state.

Were the customers export agents?

No. The ruling defined a factor or export agent as a middleman or jobber selling merchandise for the manufacturer; these customers did not fit that role.

Citations and references

• Va. Code §§ 58.1-609.10(4), 58.1-604, and 58.1-602.
• 23 VAC 10-210-6030(A).
• Commonwealth of Virginia, Department of Taxation v. Miller-Morton Co., 220 Va. 852, 263 S.E.2d 413 (1980).
• Virginia Public Document 90-122.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-141

Original ruling text

September 29, 2009

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to the reconsideration request submitted on behalf of * (the "Taxpayer") in which you seek correction of the retail sales and use tax assessment issued for the period October 2003 through August 2006. I apologize for the delay in responding to your reconsideration request.

FACTS

The Taxpayer produces large format printing and displays. The Taxpayer requests reconsideration of the determination regarding the sales sample used in the audit, as well as the determination issued with respect to property delivered to the Taxpayer's customers in Virginia before being shipped outside the state. Each issue is addressed separately below.

DETERMINATION

Issue 1

The Taxpayer contends that it has additional documentation to support its assertions that the audit sample is flawed. The Taxpayer asserts that the block sample used in the audit resulted in a larger taxable amount than was actually deducted as nontaxable on its original tax returns filed with the Department. The Taxpayer contends that its initial review of the entire population of sales made during the audit period confirms that the amount of taxable sales was overstated. The Taxpayer has provided an example of the documentation to support its argument. The Taxpayer further contends that the possible disallowed amount may consist of sales to customers that self-assessed the tax. The Taxpayer indicates that it can confirm with certain customers that the tax was remitted to the Department.

Based on a review of the Department's audit report and the documentation provided by the Taxpayer in its reconsideration, it appears there could be an issue with the audit sample if it produces a taxable sales measure that is greater than the amount of exempt sales deducted from the Taxpayer's sales tax returns that were filed during the audit period. I note that the audit report indicates that the sales measure also includes shipping and handling charges for each taxable invoice where a freight amount was charged. Accordingly, the audit will be reopened for the purpose of reevaluating the sales sample and the associated sales measure.

The audit staff will contact the Taxpayer to discuss the Taxpayer's contention and to determine the type of documentation the Taxpayer would be required to provide in support of its argument. Based on a review of the documentation provided, the audit staff will determine whether the sales sample at issue needs to be expanded and will make revisions to the audit as warranted. The Taxpayer will be given 30 days from the date of such contact to provide the required documentation to the audit staff. If the documentation is not provided within the allotted time, the assessment will be upheld and become immediately due and payable.

Issue 2

The Taxpayer contends that the goods delivered to its customers' distribution centers were destined for foreign export to a factor or export agent and should be deemed to be delivery of goods for use or consumption outside of Virginia. The Taxpayer contends that the goods remain in boxed kits on skids until they are distributed out of the state.

Virginia Code § 58.1-609.10 4 provides that the retail sales and use tax shall not apply to the "[d]elivery of tangible personal property outside the Commonwealth for use or consumption outside of the Commonwealth. Delivery of goods destined for foreign export to a factor or export agent shall be deemed to be delivery of goods for use or consumption outside of the Commonwealth." Pursuant to Public Document (P.D.) 90-122 (7/23/90), "[t]he terms 'factor' and 'export agent' refer to a middleman or jobber who sells merchandise for a manufacturer." 'However, if a taxable event occurs in Virginia, "subsequent delivery of property outside this State does not immunize the taxable event." Commonwealth of Virginia, Department of Taxation v. Miller-Morton Company , 220 Va. 852, 263 S.E.2d 413 (1980).

Virginia Code § 58.1-604 imposes the use tax "upon the use or consumption of tangible personal property, in this Commonwealth." Virginia Code § 58.1-602 defines use 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." Title 23 of the Virginia Administrative Code 10-210-­6030 A interprets Va. Code § 58.1-604 and states, "The use tax applies to the use, consumption or storage of tangible personal property in Virginia when the Virginia sales or use tax is not paid at the time the property is purchased."

Based on the facts presented by the Taxpayer, its Virginia customers direct shipments of tangible personal property purchased from the Taxpayer to be delivered to their respective warehouses in Virginia. The customers' possession and storage of these items in Virginia prior to their transport out-of-state constitutes "use" as the term is defined for sales and use tax purposes. The subsequent delivery of these items outside of Virginia does not exempt the sale of these items to the Taxpayer's customers from the retail sales and use tax. Additionally, the Taxpayer's customers are not factors or export agents within the meaning of the regulation. For these reasons and based on the analysis in my prior determination, the tangible personal property at issue is subject to Virginia sales and use tax prior to being used by the Taxpayer's customers in other states or tax jurisdictions.

The Code of Virginia sections, public document and regulation cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2547273661P