Did a hotel's purchase of assets from a special-purpose affiliated LLC qualify for Virginia's occasional-sale exemption?

Subject

What purchases qualify for the occasional sale exemption (Va. Code § 58.1-609.10 2.).

Plain-English summary

Virginia could not determine from the existing record whether a hotel's furniture, fixtures, equipment, and other tangible assets qualified for the occasional-sale exemption. The hotel was developed and furnished by a parent company, then transferred through an affiliated LLC to the buyer.

The auditor had denied the exemption partly because the LLC was not separate from its parent and the parent regularly built and furnished hotels for sale. Virginia rejected that premise: an LLC was a separate legal entity for sales-tax purposes, so the parent's regular business did not automatically control the LLC's status.

That did not establish the exemption. The record did not show whether the parent or LLC had purchased the transferred assets, or whether the LLC's hotel transfer was one of a series of sales significant enough to require dealer registration. Those facts determined whether the transfer was an exempt occasional sale or a taxable dealer sale.

The Department referred the matter back to the auditor. The buyer had 30 days after the auditor's contact to provide invoices and other records. If the documents were not supplied, the assessment would be upheld; if supplied, the audit could be adjusted as warranted.

What this means for you

• Affiliated LLCs are analyzed as separate legal entities for Virginia sales tax.
• A one-time asset transfer may qualify, but repeated sales can create dealer status.
• Asset-purchase invoices and evidence of who acquired and held the property are essential.
• The ruling was a remand for factual review, not a final exemption determination.

Common questions

Did the parent's hotel-development business automatically make the LLC's sale taxable?

No. The LLC was treated as a separate legal entity.

What facts were missing?

Who bought the furniture, fixtures, and equipment, and whether the LLC engaged in a significant series of similar sales.

Did the buyer win the exemption?

Not yet. The buyer received a final opportunity to prove it during the auditor's review.

Citations and references

• Va. Code §§ 58.1-602, 58.1-609.10(2), and 58.1-612.
• Virginia Public Document 98-157.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-197

Original ruling text

August 30, 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 seek correction of the retail sales and use tax assessment issued for the period June 2006 through February 2008. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a full service hotel. As a result of the Department's audit, the Taxpayer was assessed use tax on the purchase of assets included in the purchase of the hotel from * (the "LLC"). The hotel was developed by the LLC. The parent company, *** (the "Parent"), built and furnished the hotel. The LLC treated the transfer of the hotel and its tangible assets to the Taxpayer as an exempt occasional sale. The auditor denied the occasional sale exemption on the basis that the LLC did not operate as a separate and distinct division from the Parent, and because the Parent is regularly engaged in the building and furnishing of hotels and conference centers for sale.

The Taxpayer contests the use tax assessed on the asset purchases and claims the LLC has remitted the sales tax on the contested purchases to the Department. The Taxpayer would like to schedule a time for the auditor to review the documentation that verifies the payment of the sales tax.

DETERMINATION

Sale of Property Between Affiliated Companies

The Tax Commissioner addressed the treatment of affiliated companies for sales and use tax purposes in Public Document (P.D.) 98-157 (10/20/98). The Tax Commissioner ruled that a Limited Liability Company or a Qualified Subchapter S Subsidiary is considered a separate legal entity for sales and use tax purposes. In addition, the Tax Commissioner determined that the taxpayer is a dealer when it leases tangible personal property for a consideration to an affiliated company pursuant to Va. Code § 58.1-612. As a dealer, the taxpayer was required to register with the Department for a certificate of registration and collect and remit the tax on its taxable sales, leases, or rentals.

In this instance, the Parent formed the LLC for the purpose of transferring the hotel and its tangible assets to the Taxpayer. Based on P.D. 98-157, the LLC is considered a separate legal entity for sales and use tax purposes. Therefore, the fact that the Parent is regularly engaged in the building and furnishing of hotels and conference centers for sale has no bearing on the treatment of the LLC for sales and use tax purposes. Pursuant to Va. Code § 158.1-612, the LLC is a dealer and the sale of tangible personal property in the transfer of the hotel is subject to the sales tax unless the transaction qualifies for exemption under the law.

Occasional Sale Exemption

Virginia Code § 58.1-609.10 2 provides that the retail sales and use tax is not imposed on an occasional sale, as defined in Va. Code § 58.1-602. The statute defines 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 of any 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 significant in number, scope and character to constitute an activity requiring the holding of a certificate of registration.

In this instance, there is insufficient documentation to determine if the Taxpayer's purchase of the hotel qualifies for the occasional sale exemption. For example, it is not clear if the Parent or the LLC purchased the fixtures, furniture, and equipment that were transferred to the Taxpayer in the sale of the hotel. Further, it is not clear if the sale of the hotel and its tangible assets by the LLC is one of a series of sales and exchanges significant in number, scope and charter to constitute an activity requiring the holding of a certificate of registration. Without this information, I cannot determine if the occasional sale exemption is applicable. Therefore, the transaction will need to be reexamined to determine if the sale of the hotel and its tangible assets qualifies for the occasional sale exemption under Va. Code § 58.1-609.10 2.

CONCLUSION

Based on the foregoing, I am referring this matter to the auditor for further review. The auditor will contact the Taxpayer within 30 days of the date of this letter to set an appointment to review the purchase invoices and other documentation necessary to determine if the contested purchases qualify for the occasional sale exemption under Va. Code § 58.1-609.10 2.

The Taxpayer is given 30 days from such contact to provide the necessary documentation. If such documentation is not received within the allotted time, the assessment will be upheld. At such time, the Taxpayer will be issued an updated bill with interest accrued to date. The bill should be paid within 30 days of the bill date to avoid the accrual of additional interest. If the documentation is provided, the auditor will review the information and adjust the audit as warranted.

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 determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda D. Foster

Deputy Tax Commissioner

AR/1-13161661152.T