Were vehicles taxable in Virginia when a Virginia dealer prepared them before out-of-state delivery?

Plain-English summary

Virginia held that the utility-vehicle sales qualified for the interstate-commerce exemption even though the vehicles first went to a Virginia dealer for preparatory work. The seller retained title until delivery to the out-of-state Veterans Administration hospital under FOB-destination terms.

The purchase orders directed delivery to the hospital. The manufacturer, not the hospital, directed the Virginia dealer's preparatory work, reimbursed the dealer for that work, and paid the onward shipping cost. The hospital paid the manufacturer rather than the dealer. Virginia therefore found no sale or transfer of ownership in the Commonwealth.

The constructive-possession precedent cited by the auditor did not apply. In that earlier ruling, the out-of-state customer directed delivery to another Virginia company; here, the seller directed the temporary Virginia stop.

Virginia removed audit Exceptions List lines 10 through 13. It did not grant a full refund because other sales remained in the sample's measure of error, so the assessment would only be reduced and a partial refund issued after audit adjustment.

What this means for you

• Interstate-commerce treatment turns on where title or possession passes, not merely whether goods physically enter Virginia.
• FOB-destination terms should be supported by purchase orders, invoices, payment records, and shipping arrangements.
• A seller-directed Virginia stop for preparatory work is different from a buyer directing delivery to a Virginia recipient.
• Removing exempt transactions from an audit sample may reduce an assessment without eliminating all sampled error.

Common questions

Q: Did the Virginia dealer's possession make the hospital's purchase taxable?
A: No. The dealer acted at the manufacturer's direction before title passed to the hospital outside Virginia.

Q: Did the hospital constructively possess the vehicles in Virginia?
A: No. The hospital did not direct delivery to the Virginia dealer.

Q: Was the entire assessment refunded?
A: No. Virginia ordered removal of lines 10-13, but other sample errors remained, so only a partial refund was available.

Citations and references

• Va. Code § 58.1-609.10 4.
• 23 VAC 10-210-780.
• Virginia Public Document 96-63.

Subject

Interstate Commerce; Sales made outside of Virginia

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-52

Original ruling text

April 29, 2013

Re: § 58.1-1824 Protective Claim for Refund: Retail Sales and Use Tax

Dear *:

This letter is in response to the application for correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period of July 2008 through

March 2011. Based on the circumstances of this case, this request will be treated as a protective claim for refund. I apologize for the delay in responding to your inquiry.

FACTS

The Taxpayer, located outside of Virginia, manufactures golf, utility and transportation vehicles. The Taxpayer protests the assessment of the retail sales tax on several utility vehicles it states were sold to a Veteran's Administration Hospital (the "VA hospital") located in *. The auditor held the sales taxable in Virginia, asserting that constructive possession took place in Virginia because the vehicles were initially delivered to a Virginia dealer before they were delivered to the VA hospital. The auditor cites Public Document 96-63 (4/24/96) to support the assessment. The Taxpayer has paid the assessment and requests a full refund, asserting it was incorrectly assessed Virginia sales tax for sales made outside of Virginia.

DETERMINATION

Interstate Commerce

Virginia Code § 58.1-609.10 4 exempts the "Delivery of tangible personal property outside the Commonwealth for use or consumption outside of the Commonwealth...." Title 23 of the Virginia Administrative Code 10-210-780 further provides that "[t]he tax does not apply to the sale of tangible personal property in interstate or foreign commerce. A sale in interstate or foreign commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia." The regulation goes on to provide that a sale in interstate or foreign commerce has occurred when tangible personal property is delivered to the purchaser outside the state of Virginia in the seller's vehicle or by an independent trucker or contract carrier hired by the seller.

The Taxpayer sold utility vehicles to the VA hospital. The Taxpayer shipped the vehicles to a Virginia dealer for additional preparatory work before delivering the vehicles to the VA hospital. The vehicles were shipped by the Taxpayer under the terms "FOB (free on board) destination." Based on this designation, the Taxpayer retained title to the vehicles until they were delivered to the VA hospital.

In its appeal, the Taxpayer argues that, although it delivered the vehicles to the Virginia dealer for the additional work, there was no sale or transfer of ownership in Virginia. The Taxpayer states that the shipping terms apply to the * location of the VA hospital. The Taxpayer provides additional documentation to support its position.

The Taxpayer presents purchase orders issued by the VA hospital that indicate the shipping terms "FOB destination" and direct the vehicles to be shipped to the VA hospital. The Taxpayer also presents its sales invoices to the VA hospital that indicate the Virginia dealer's ship to address. However, the sales invoices direct the Virginia dealer to complete preparatory work on the vehicles for which the Taxpayer reimburses the Virginia dealer. The sales invoices also indicate that the VA hospital's payment for the vehicles is remitted to the Taxpayer and not the Virginia dealer. The Taxpayer reimburses the Virginia dealer for the cost of shipping the vehicles to the VA hospital.

Based on the foregoing, the Taxpayer clearly retains title to the vehicles until they are delivered to the VA hospital, where title passes. The Taxpayer directs and pays for the additional work performed on the vehicles in Virginia, as well as the shipping costs from Virginia to *. As such, there is no sale or transfer of ownership in the state of Virginia. Therefore, I find that the sales of the utility vehicles qualify for the interstate commerce exemption in accordance with the foregoing authorities.

Constructive Possession

The auditor argues constructive possession and cites Public Document (P.D.) 96-63 (4/24/96) as support. In the public document, the taxpayer, who is located in Virginia, sold goods to a company located in New Jersey. The taxpayer's customer directed that the goods be delivered to another company in Virginia. Although the customer did not take physical possession of the property, because it directed the goods to be shipped to another party located in Virginia, the customer was deemed by the Tax Commissioner to have taken constructive possession in Virginia.

The Taxpayer argues that, in the current instance, constructive possession did not take place in Virginia. The Taxpayer contends that, unlike P.D. 96-63, the VA hospital did not direct the Taxpayer to deliver the vehicles to a Virginia company. Sales invoices provided by the Taxpayer indicate the utility vehicles were shipped to a Virginia dealer for additional preparatory work at the direction of the Taxpayer, not the VA hospital.

The Taxpayer is on point in this instance. Although the vehicles sold to the VA hospital may have required additional preparatory work, the additional work took place in Virginia at the direction of the Taxpayer and not the VA hospital. Accordingly, the public document cited is not applicable in this instance.

Based on the foregoing, I will agree to remove the items on Lines 10-13 from the audit Exceptions List. While, the Taxpayer requests a full refund of the assessment, I am unable to grant such a refund. The protested sales were included in the sample period and the Taxpayer's measure of error. I will remove the protested sales from the audit. However, there are additional sales that remain in the measure of error. As such, the assessment may be reduced and the Taxpayer will receive a partial refund.

Based on this determination, the audit will be returned to the appropriate field audit staff to make the necessary adjustments to the assessment within 30 days of date of this letter. After the appropriate adjustments have been made, a refund will be issued to the Taxpayer.

The Code of Virginia section, regulation and public document cited are available on­line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. 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/1-4965468387.M