Did buying substantially all assets of a franchised motor-vehicle dealership qualify for Virginia's occasional-sale exemption?

Plain-English summary

Virginia exempted the purchase of substantially all assets of a franchised motor-vehicle dealership as an occasional sale. The seller or related parties simultaneously transferred the dealership assets and the real estate, buildings, and improvements.

The auditor had denied exemption because the seller retained a used-motor-vehicle operation. But the appeal showed that the used-car activity was opened in anticipation of the dealership sale, operated from a separate location, did not use the transferred assets, and had no shown economic activity with the franchised dealership. After the sale, the seller no longer owned a franchised dealership or sold new vehicles.

Virginia treated the dealership as a separate and distinct business. The transferred property therefore represented substantially all assets of that business even though the seller continued another vehicle-related operation.

The occasional-sale exemption applied, and the assessment on the acquired assets was abated in full.

What this means for you

• “Substantially all” can be tested at the level of a separate business activity, not necessarily the seller's entire enterprise.
• Separate locations, assets, employees, accounts, and economic flows support distinct-business treatment.
• Retaining a related line of business does not automatically defeat the exemption.
• The transaction must not be part of a series amounting to a taxable sales activity.

Common questions

Q: Did the seller continue selling vehicles?
A: It continued a separate used-vehicle operation but no longer owned a franchised dealership or sold new vehicles.

Q: Why were the businesses distinct?
A: They were separately housed, did not share the sold assets, and had no shown economic flow between them.

Q: Was the real estate part of the same closing?
A: Yes, related parties simultaneously transferred the site, buildings, and improvements.

Q: What was the result?
A: The asset assessment was abated in full.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-609.10 2.
• Virginia Public Document 01-75.

Subject

Purchase assets of a franchised motor vehicle dealership/ occasional sale exemption

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-107

Original ruling text

June 19, 2013

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 July 2011 through July 2012.

FACTS

The Taxpayer entered into an Asset Purchase Agreement with the Seller to purchase the assets related to a franchised motor vehicle dealership (the "dealership") owned by the Seller. Simultaneously with the closing of the Asset Purchase Agreement, the real property, buildings and improvements on which the motor vehicle dealership is located were sold by a related party of the Seller to a related party of the Taxpayer.

An audit by the Department resulted in the assessment of tax and interest on the tangible personal property purchased pursuant to the Asset Purchase Agreement. The Taxpayer appeals the assessment. Relying on the definition of "occasional sale" in Va. Code § 58.1-602, the Taxpayer maintains that the assets at issue were properly purchased exempt of the tax. The Taxpayer contends it purchased all or substantially all of the Seller's assets pertaining to the dealership. The Taxpayer requests that sales tax and interest assessed on the assets at issue be abated in full.

DETERMINATION

Virginia Code § 58.1-609.10 2 states that the retail sales and use tax does not apply to an occasional sale as defined in § 58.1-602. Virginia Code § 58.1-602 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 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.

The Tax Commissioner has previously addressed an analogous situation in a prior determination. In P.D. 01-75 (6/6/01), the seller owned five convenience stores and services stations that made retail sales of gasoline. The seller also operated a wholesale home heating fuel business and a propane home delivery business. The seller sold four of the convenience stores to the taxpayer. Pursuant to a Purchase Agreement, the seller sold to the taxpayer all of the tangible assets, intangible assets and inventory associated with the four locations. Additionally, the seller entered into a noncompetition agreement with the taxpayer with respect to owning and operating convenience stores and retail gasoline locations. The sale of assets did not include the sale of land and buildings owned by the seller. Relying on Va. Code §§ 58.1-609.10 2 and 58.1-602, the taxpayer maintained that the assessment of tax on the assets was incorrect and that the occasional sale exemption applied to the sales at issue. Based upon a review of the sellers multifaceted business activities, it was determined that the sale of the convenience stores represented the sale of a separate and distinct business activity. The following factors suggested that the convenience store activities were separate and distinct from the seller's other activities: (1) the assets of the convenience stores were not used in the operation of the seller's heating fuel and propane delivery operations; (2) employees were not interchanged between the seller's activities; (3) the seller used separate checking accounts for its convenience store activities; (4) there appeared to be no flow of economic activity between the convenience stores and the other operations; and (5) the convenience stores were housed separately from the other operations. Accordingly, it was found that the sale of the seller's convenience store operations was the sale of substantially all the assets of the business, and the tax assessment related to these assets was abated.

In this instance, the Seller's ownership of a used motor vehicle operation led to the determination in the audit that the sale of the dealership to the Taxpayer did not constitute the sale of substantially all of the Seller's assets, and the assets were held taxable in the audit. Based on the information provided in the Taxpayer's appeal, the Seller opened the used motor vehicle operation in anticipation of selling the dealership to the Taxpayer. The used motor vehicle operation is housed separately from the dealership. It does not appear that the assets sold by the Seller to the Taxpayer were used in the Seller's used motor vehicle operation. Additionally, there is no evidence that there was any economic activity between the dealership and used motor vehicle operation. Finally, the Seller no longer owns a franchised motor vehicle dealership and no longer sells new vehicles.

While the Taxpayer and the Seller both operate businesses that involve the sale of motor vehicles, it is clear that the dealership and the used motor vehicle operation are separate and distinct businesses. As such, the sale of the assets associated with the dealership represents the sale of substantially all the assets of the business to the Taxpayer. Accordingly, the occasional sale exemption is applicable, and the assessment related to the assets at issue will be abated in full.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5276153210.P