Did inventory owned at Virginia fulfillment centers require an out-of-state online seller to register and collect Virginia sales tax?

Subject

Sales and use tax collection responsibilities for online retailer located outside Virginia, with a warehouse located in Virginia .

Plain-English summary

An out-of-state online seller owned inventory stored at Virginia fulfillment centers. The centers packed and shipped Virginia orders, never took ownership of the inventory, and allowed the seller to increase or withdraw stock.

Virginia held that this inventory created nexus under the amendment effective June 1, 2017. Owning goods for sale located in Virginia was sufficient activity even without Virginia offices, employees, agents, contractors, or seller-owned warehouses.

The seller had to register, collect tax on all Virginia customer sales, file the out-of-state dealer return, and allocate local tax based on delivery location. The ruling treated June 1, 2017 as the prospective start date on the facts provided.

What this means for you

• Seller-owned inventory at a third-party warehouse can create physical nexus.
• Retaining ownership and the power to adjust inventory supports the connection.
• Fulfillment-center shipping does not insulate an online seller from registration.
• Current sellers must also evaluate later economic-nexus and marketplace laws.

Citations and references

• Va. Code §§ 58.1-603, 58.1-612 B 3 and C 9, and 58.1-602.
• House Bill 2058 and Senate Bill 962, 2017 Acts of Assembly, Chapters 51 and 808.
• Virginia Tax Bulletin 17-3.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-104

Original ruling text

June 21, 2017

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you request a ruling as to whether * (the “Taxpayer”) has sufficient activity with Virginia to require registration for the collection and remittance of the Virginia retail sales and use tax on sales made to Virginia customers. I apologize for the delay in responding to your request.

FACTS

The Taxpayer is an out-of-state company in the business of selling tangible personal property. The Taxpayer maintains no offices, employees, agents, independent contractors, business locations, or warehouses in Virginia. The Taxpayer maintains an inventory of its products in warehouses located in Virginia (hereinafter “Fulfillment Centers”). On-line sales made by the Taxpayer to Virginia customers are packed and shipped directly to the Virginia customer by the Fulfillment Centers. The Taxpayer maintains ownership of the product located at Fulfillment Centers in Virginia and may withdraw or increase its inventory at its own discretion. The Fulfillment Centers never take ownership of the Taxpayer's inventory.

The Taxpayer has been advised by the Fulfillment Centers that it may have established nexus with Virginia and may be required to collect and remit the Virginia sales and use tax on Virginia sales. The Taxpayer requests clarification of its nexus requirements with Virginia and the requirement to register to collect and remit the Virginia sales and use tax on sales made to Virginia customers. In the event the Taxpayer does have nexus with Virginia, the Taxpayer requests prospective treatment for the collection and remittance of the Virginia sales and use tax based on a Voluntary Disclosure Agreement with the Department of Taxation.

RULING

Virginia Code § 58.1-603 imposes the retail sales and use tax on every person “who engages in the business of selling at retail or distributing tangible personal property.” The tax is collected by all persons who are “dealers” as defined in Va. Code § 58.1-612. Pursuant to subsection B 3 of this statute, the term “dealer” includes any person who:

Sells at retail, or who offers for sale at retail, or who has in his possession for sale at retail, or for use, consumption, or distribution, or for storage to be used or consumed in this Commonwealth, tangible personal property.

A “sale at retail” is defined as “a sale to any persons for any purpose other than for resale in the form of tangible personal property or services.” A “sale” is defined as “any transfer of title 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.” See Va. Code § 58.1-602.

Based on the information provided, the Taxpayer clearly qualifies as a dealer for purposes of the Virginia retail sales and use tax. What needs to be determined is whether the Taxpayer has sufficient activity within Virginia to require registration as a dealer for collection and remittance of the Virginia retail sales and use tax. You represent that the only presence the Taxpayer has in Virginia is the storage of resale inventory in a fulfillment center located in Virginia.

During its 2017 session, the Virginia General Assembly passed House Bill 2058 and Senate Bill 962 (2017 Acts of Assembly , Chapters 51 and 808) to amend Va. Code § 58.1-612 C. Virginia Code § 58.1-612 C sets forth those activities that a dealer may be engaged in that establish nexus with Virginia and require the dealer to register for the collection of the Virginia retail sales and use tax. Subdivision 9 of § 58.1-612 C was amended to provide a dealer shall have sufficient activity to require registration if the dealer:

Owns tangible personal property that is for sale located in this Commonwealth , or that is rented or leased to a consumer in this Commonwealth, or offers tangible personal property, on approval, to consumers in the Commonwealth. [Emphasis added.]

The amendment is effective June 1, 2017.

Based on the nexus requirement set forth above in Va. Code § 58.1-612 C 9 and the fact the Taxpayer owns tangible personal property for sale located in a fulfillment center in the Commonwealth of Virginia, the Taxpayer has sufficient activity in Virginia to require it to register for the collection and remittance of the Virginia retail sales and use tax on all sales to Virginia customers. As an out-of-state dealer, the Taxpayer would be required to file a monthly Form ST-8, Out-of-State Dealer's Sales Tax Return, along with Form ST-8A, Schedule of Local Sales and Use Taxes, allocating the local tax to localities where the Taxpayer's products are delivered. For a more detailed explanation of the law change, see Virginia Tax Bulletin 17-3 (5/3/17).

With respect to your request for prospective compliance, I would note that based on the specific information provided the collection and remittance requirement applicable to the Taxpayer became effective June 1, 2017.

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

The Code of Virginia sections and Tax Bulletin cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you should have any additional questions about this ruling, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/699