Who had to collect Virginia sales tax when the supplier billed and collected from large retailers but paid distributors to service the accounts?

Subject

Taxpayer must charge and collect tax from the large retailer without resale exemption certificate.

Plain-English summary

A Pennsylvania food-products supplier had to collect Virginia sales tax from large retailers it billed directly unless those retailers provided resale exemption certificates. Independent Virginia distributors bought inventory and normally billed their own customers, but the large accounts used a different structure.

For those accounts, the supplier recorded the sale to the retailer and collected the retailer's receivable. It reduced the distributor's receivable by the sale amount and paid the distributor a 20% discount for servicing the account, reported on Form 1099.

The supplier called this an administrative convenience and argued that the distributor made the retail sale. Virginia looked at the actual transaction and found a sale from the supplier to the large retailer. Because all sales were presumed taxable until supported by an exemption certificate, the supplier had to charge, collect, and remit tax when the retailer supplied no resale certificate.

What this means for you

• Contract labels and internal accounting descriptions do not override who actually records and collects the sale.
• A servicing commission does not necessarily make the distributor the seller.
• Obtain the exemption certificate from the party treated as the purchaser in the actual transaction.
• Direct out-of-state suppliers can have Virginia collection duties on Virginia retail sales.

Common questions

Who collected payment from the large retailer?

The Pennsylvania supplier.

What did the Virginia distributor receive?

A 20% discount for servicing the large retail account.

When could the supplier avoid charging tax?

When it received a valid resale exemption certificate from the large retailer.

Citations and references

• Va. Code §§ 58.1-602, 58.1-603, and 58.1-623(A).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-195

Original ruling text

August 31, 2010

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of your client (the "Taxpayer"), in which you request a ruling on the application of the retail sales and use tax to certain sales of food products by the Taxpayer. I apologize for the delay in the Department's response.

FACTS

The Taxpayer is located in Pennsylvania. The Taxpayer sells food products to Virginia distributors for resale to Virginia customers. The Virginia distributors are independent contractors and are billed for all inventory purchases by the Taxpayer. The Virginia distributors bill the Virginia customers for sales from its inventory, with the exception of certain large retail customers. For sales to the large retail customers, the Taxpayer records the sale to the retailer and collects the accounts receivable from the retailer. At the same time, the accounts receivable from the Virginia distributors is reduced by the amount of the sale to the retailer. The distributor is paid a 20% discount for servicing the large retail accounts and the payments are reported on Form 1099 at the end of each year. The Taxpayer considers these sales to be sales to the distributors and not sales to the large retailers.

RULING

Virginia Code § 58.1-602 provides, in pertinent part, that "[s]ale means any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration ......

Virginia Code § 58.1-603 imposes a tax upon "upon every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth . . . ."

Pursuant to Va. Code § 58.1-623 A, "All sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter."

The Taxpayer considers the transactions between it and the large retailers to be an administrative convenience and not a sale of tangible personal property. The Taxpayer considers the sales of tangible personal property to take place between the Virginia distributors and the large retailers.

The transaction that takes place between the Taxpayer and the large retailer is a sale as defined by Va. Code § 58.1-602. Accordingly, pursuant to Va. Code § 58.1-­603, the sale is subject to the Virginia retail sales and use tax, unless the Taxpayer takes from the large retailer a resale exemption certificate as described at Va. Code § 58.1-623. If the Taxpayer makes sales to a large retailer without being provided a resale exemption certificate, the Taxpayer must charge and collect the tax from the large retailer and remit such tax to the Department.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections 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,

Craig M. Burns

Acting Tax Commissioner

AR/1-3090638686.P