Did Virginia's occasional-sale exemption apply when equipment moved from a liquidated company through an owner to a successor business?

Subject

Liquidation equipment transfers qualified as occasional sales when documented

Plain-English summary

Virginia removed four of five equipment items from a use-tax audit because the documented transfers qualified as occasional sales. A prior company transferred equipment to an owner during liquidation, reducing a shareholder loan. The owner then transferred the equipment to the taxpayer, increasing the shareholder loan.

Virginia treated the transfer of title and possession as a sale. But the owner had not used the equipment in an activity requiring a sales-tax registration, and the transfer fit the occasional-sale treatment applied in an earlier public document.

Documentation determined the outcome item by item. Four pieces could be matched to assets on the liquidated company's 2004 federal income tax return and were removed from the audit. The fifth could not be matched and remained taxable. Audit staff was directed to issue an updated bill with interest.

What this means for you

• A transfer made through a liquidation or shareholder-loan account can still be a sale for Virginia sales-tax purposes.
• A sale may nevertheless qualify for the occasional-sale exemption when the statutory conditions are met.
• Asset schedules and tax returns can be decisive evidence connecting transferred equipment to a predecessor.
• An exemption may apply to some documented assets without covering every item in the transaction.

Common questions

Did Virginia decide that liquidation transfers are not sales?

No. Virginia treated the transaction as a sale but found that it qualified as an occasional sale on the stated facts.

Why were only four items removed?

Those four could be matched to the predecessor's 2004 federal return. The fifth could not.

Was the entire assessment canceled?

No. Audit staff was instructed to adjust the assessment and issue an updated bill, with tax remaining on the unmatched item.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-609.10(2).
• Virginia Public Document 93-148.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-151

Original ruling text

July 28, 2010

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

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you peek correction of the retail sales and use tax assessment issued for the period May 2002 through April 2008. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer specializes in excavation, underground utilities, emergency hazardous materials and removal, demolition and clearing and grubbing. The Taxpayer contests the assessment of tax on five pieces of equipment transferred from * (the "prior company") to the Taxpayer. The Taxpayer contends it did not purchase the assets at issue on the date that the equipment was transferred from the prior company to the Taxpayer. The Taxpayer states that when the prior company was liquidated, the equipment was transferred to (joint owner of these properties with **) at fair market value. The Taxpayer states that it is not required to maintain evidence of the original purchase of the equipment at issue by the prior company. The Taxpayer maintains that prior company has been liquidated and the liquidation is beyond the statute of limitations.

DETERMINATION

Virginia Code § 58.1-602, defines sale, in pertinent part, as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, or tangible personal property . . . ."

Virginia Code § 58.1-609.10 2 provides, the retail sales and use tax does not apply to "[a]n occasional sale as defined in § 58.1-602."

Virginia Code § 58.1-602 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.

In Public Document (P.D.) 93-148 (7/12/93), the taxpayer requested a ruling regarding the application of tax on a contribution of equipment by the Parent to its Subsidiary in exchange for all of the outstanding shares of the Subsidiary's stock. The transfer of assets was considered a sale pursuant to the Va. Code § 58.1-602 definition of sale. The Parent did not use the equipment at issue in an activity for which it was required to register and hold a certificate of registration. Because the Parent did not expect to make three or more sales, including the contribution of equipment, during the calendar year in which it would contribute the equipment, the transfer of title and possession of the equipment from the Parent to the Subsidiary was considered an occasional sale.

In this instance, the prior company that owned the equipment at issue owed money to the owners. When the equipment was transferred from the prior company to the owner, it was recorded as a reduction of the shareholder loan on Form 1120S. When the equipment was transferred from the owner to the Taxpayer, the transaction was recorded as an increase in the shareholder loan on Form 1120S. The equipment was not used by the owner and is not used by the Taxpayer in an activity that required it to register and hold a certificate of registration. Based on the aforementioned references, the transaction at issue is a sale as considered in Va. Code § 58.1-602. However, based on the facts and in accordance with P.D. 93-148, the transfer of title and possession of the equipment from the owner to the Taxpayer is considered an occasional sale.

Based on this determination, line items 1-4 on the assets exceptions list will be removed from the exceptions list because they can be matched to the assets listed on the prior company's 2004 federal income tax return provided by the Taxpayer. Line item 5 will not be removed because it cannot be matched to the 2004 federal income tax return. The audit staff will make the necessary adjustments to the audit, and the Taxpayer will be issued an updated bill with interest accrued to date. The Taxpayer is given 30 days from the date of the bill to remit payment and avoid the accrual of additional interest. Please remit payment within 30 days from the date of the bill to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: * Post Office Box 27203, Richmond, Virginia 23261-7203.

The Code of Virginia sections and public document 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,

Linda Foster

Deputy Tax Commissioner

AR/1-3328243392.P