Should a vehicle marketer charge Virginia sales tax on a direct-mail program's list price or the 50% discounted price actually billed?

Plain-English summary

Virginia sales tax applied to the 50% discounted amount billed to participating dealerships, not the undiscounted list price. The motor-vehicle marketer bought a direct-mail advertising program and resold it to independent dealerships. It absorbed the entire discount and received no reimbursement from another party.

Because Virginia's sales-price definition excluded a cash discount allowed and taken, the taxable amount was what the dealerships actually paid.

The marketer had been collecting tax on the higher list price. It could seek a refund only after refunding or crediting the excess tax to the dealerships. The ruling directed it to file amended sales-and-use-tax returns and deduct the erroneously collected amount. The request also had to be within three years from the return's due date.

What this means for you

• Identify the actual customer price before calculating sales tax.
• Determine whether the seller absorbs a discount or receives reimbursement from someone else.
• A dealer generally cannot keep tax collected from customers on a nontaxable amount.
• Preserve customer-refund proof and file amended returns within the limitations period.

Common questions

Q: Did tax apply to the direct-mail program's list price?
A: No. It applied to the discounted price actually charged.

Q: Could the seller receive the excess tax directly from Virginia?
A: Only after showing that the excess collected from customers had been refunded or credited to them.

Q: What was the refund deadline?
A: The ruling stated that refund requests had to be made within three years from the return's due date.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-625.
• 23 VAC 10-210-3040.

Subject

Taxpayer is eligible for a refund of erroneously collected tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-176

Original ruling text

October 21, 2011

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you request a ruling on the application of the retail sales and use tax to a discounted sales price. I apologize for the delay in responding to your correspondence.

FACTS

The Taxpayer is the exclusive United States marketer for a motor vehicle corporation. The Taxpayer purchases a direct mail advertising program from a third-party vendor. The Taxpayer resells the program to its customers (independent dealerships) in Virginia that choose to participate in the program. The end products of the program are service reminders and service coupon mailers. These products are mailed by the third-party vendor directly to customers and prospective customers of the participating dealerships. The objective of the mailers is to promote the dealership service business.

When the Taxpayer bills the dealerships for the direct mail advertising program, they sales price is discounted 50 percent from the list price. The Taxpayer states it completely absorbs the discount coupon credit and does not receive reimbursement from a third-party. The Taxpayer states it has been applying the tax on the total list price, not the discounted price, when making these sales to the dealerships. The Taxpayer questions whether it should apply the tax to the total list price or the discounted price. If it is determined that the Taxpayer has been applying the tax incorrectly to the total list price, the Taxpayer requests guidance on receiving a refund for the incorrectly applied tax.

RULING

Virginia Code § 58.1-602 defines sales price as:

The total amount for which tangible personal property or services are sold, including any services that area part of the sale, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser, consumer, or lessee by the dealer, without: any deduction therefrorn on account of the cost of the property sold, the cost of materials used, labor or service costs, losses or any other expenses whatsoever.

Virginia Code § 58.1-602 further provides, in pertinent part, that sales prices does not include "any cash discount allowed and taken ...."

Virginia Code § 58.1-625 provides, in pertinent part, "[a]ny dealer collecting the sales or use tax on transactions exempt or not taxable under this chapter shall transmit to the Tax Commissioner such erroneously or illegally collected tax unless or until he can affirmatively show that the tax has since been refunded pro the purchaser or credited to his account:.

Title 23 of the Virginia Administrative Code (VAC) 10-210-3040 provides:

A dealer may request a refund for taxes erroneously or illegally collected. The dealer must show that the tax erroneously or illegally collected was paid by him and not passed on to the consumer, or the tax was collected from the consumer as tax and subsequently refunded to the consumer. Refunds cannot be authorized unless the request is made within three years from the due date of the return. The amount refunded will be the net amount of state and local tax remitted to the state on the transaction(s) generating the refund. Thus, if a dealer filed a timely return and deducted dealer's discount for the period for which the refund is claimed, the amount of refund will be reduced by the dealer's discount taken ....

In this instance, because the Taxpayer is charging its customers a discounted price and absorbing the loss resulting from the discount, the Taxpayer should charge the retail sales and use tax based upon the discounted price for the program charged to its customers. Pursuant to Va. Code § 58.1-625 and Title 23 VAC 10-210-3040, the Taxpayer is eligible for a refund of erroneously collected tax, provided the Taxpayer can show that it has refunded its customers the erroneous amount of tax. The Taxpayer will need to file amended retail sales and use tax returns with the Department, and will take a deduction on the amended returns representing the erroneous amount of tax collected. Refunds can only be authorized for requests made within three years from the due date of the return.

I hope this responds to your inquiry. 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 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,

Craig M. Burns

Tax Commissioner

AR/1-4524070707P